Hi Reader,

What Is a Backdoor Roth IRA?

A backdoor Roth IRA is a strategy that allows high income earners to fund a Roth IRA even when their income is too high to contribute directly.

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The strategy generally involves two steps:

1. Make a nondeductible contribution to a Traditional IRA.
2. Convert those funds to a Roth IRA.

While Roth IRA contributions are subject to income limits, Roth conversions are not. This creates a “backdoor” for getting money into a Roth IRA.

It sounds simple, but there is an important catch.

If you already have money in a Traditional, Rollover, SEP, or SIMPLE IRA, the Pro Rata Rule can make part of the conversion taxable.

We’ll explain how that rule works in our next email.

David N. Waldrop, CFP® Owner of Bridgeview Capital Advisors, Inc. a Registered Investment Advisor.