Congress imposes income limits for making Roth IRA contributions
Congress imposes income limits for making Roth IRA contributions (see our IRA Contribution Deadlines commentary), however, for those who can make a contribution to a traditional IRA, you can make your traditional IRA contribution and then convert it to a Roth IRA and effectively accomplish a Roth IRA contribution.
This has been commonly referred to as a “back-door Roth” and both Congress and the IRS agree that it’s a viable planning strategy.
The funds in the Roth IRA are considered “converted funds” and not contributions. And the one-rollover-per-year rule does not apply to Roth conversion. It only applies to IRA-to-IRA or Roth IRA-to-Roth IRA distributions.
While this strategy works great for folks with non-deductible/after-tax IRAs, proceed with caution as there is a catch.
Roth IRA conversions are subject to the “pro-rata rule”. If you have any other IRA accounts funded on a pre-tax (deductible) basis, then a portion of your conversion will be taxable!
Form 8606 will need to be filed with your tax return. Form 8606 is used to report any after-tax contributions to your IRA, to determine the “pro-rata calculation”, to determine the tax on your distributions, and to report a Roth conversion to the IRS.
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