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Is a Backdoor Roth IRA Right for You?

March 12, 2018 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Is a Backdoor Roth IRA Right for You?

You’ve probably heard that Roth IRAs are a great way to save for retirement. And there’s a reason that financial planners and tax accountants sometimes gush about these accounts: You can contribute up to $5,500 a year (or $6,500 if you’re 50 or older), then withdraw those contributions any time without paying taxes or penalties.

You can also withdraw your earnings tax-free in retirement. You don’t get an up-front tax deduction, as with a Traditional IRA. But Roth IRAs are a great choice if you expect to be in a higher tax bracket when you retire or if you don’t currently have a high tax bill to offset.

There’s a caveat: You can only contribute to a Roth IRA if your income falls below a certain limit. If your contribution is for 2017, that maximum is $118,000 for a single person or $186,000 for a married couple filing jointly (based on modified adjusted gross income ). Though, if you make slightly more than that, you may qualify to contribute a reduced amount.

Want to contribute to a Roth IRA, but have an income that exceeds the limits? Good news: There’s another option. It’s called a backdoor Roth IRA.

While we at SoFi can’t offer up tax advice (you’ll have to contact a tax pro for that), we can walk you through this strategy and help you decide if it might be something you should consider. Here’s what you need to know.

What is a Backdoor Roth IRA?

If you aren’t eligible to contribute to a Roth IRA outright because you make too much, you can do so through what’s called a “backdoor Roth.” This involves converting funds in a Traditional IRA into a Roth IRA. (What’s the difference between the two? Here’s a breakdown.)

The government allows you to do this, as long as you pay income taxes on any contributions you deducted on your taxes (and any profits you made) when you convert. Unlike a normal Roth IRA, there is no income limit for doing the conversion, nor is there a ceiling to how much you can convert.

When is a Backdoor Roth right for you?

As with a typical Roth IRA, a backdoor Roth might make sense when your taxes are lower today than you expect them to be in retirement. This method is likely your only option to contribute to a Roth IRA if you exceed the income limits.

A backdoor Roth can be a particularly good choice if you have put money into a Traditional IRA but have not deducted those funds on your taxes. This can happen if you or your spouse have a 401(k) or other company-sponsored plan, which blocks you from deducting IRA contributions if you make a certain income. In this case, because you’ve already paid taxes on the contributions, you can convert the Traditional IRA to a Roth IRA without paying any extra taxes.

Keep in mind that if you have money you’ve deducted in any IRA account, including SEP or SIMPLE IRAs, the government will assume a Roth conversion represents a portion of all the balances. For example, say you contributed $5,000 to an IRA that you didn’t deduct and another $5,000 that you did deduct. If you then converted $5,000 to a Roth IRA, the government would consider $2,500 of the conversion taxable. A conversion can also put you into a higher tax bracket, so try to do one when your income is lower than normal.

And we know: This can get complicated. So be sure to check with a tax preparer to confirm if and when a backdoor IRA makes sense for you. You can also explore SoFi’s IRA Calculator to help you make an informed decision about your IRA contributions.

How to Open a Backdoor Roth IRA

If you have no other Traditional IRAs, here’s how you can make a backdoor Roth IRA happen with SoFi:

Open both a Traditional IRA and a Roth IRA with SoFi Invest®.

• Send an email to [email protected] before you contribute, explaining that this is a backdoor Roth so SoFi doesn’t invest your contribution. Otherwise, you might have to pay tax on any profits you convert into your Roth (but you can’t deduct any losses).

• Make a non-deductible contribution to the Traditional IRA by the tax deadline (April 17 in 2018). The maximum allowable yearly contribution is $5,500 (or $6,500 if you’re 50 or older). Make sure the funds are deposited by the tax deadline. Allow at least 5 days for the account to be opened and the money to move from your bank.

• Send an email to [email protected] once you have made your contribution to the Traditional IRA.

• SoFi will send you a form to transfer the money into your Roth IRA. Sign and return it.

• Once the funds are in your Roth IRA, SoFi will invest them in the portfolio you’ve chosen. The funds will grow tax-free!

If you have any questions or want some help as you go through the process, schedule a complimentary appointment with one of our licensed financial advisors. SoFi Invest is all about empowering you and your financial future, and we’re here to help.

Set up a complimentary IRA consultation


SoFi Wealth, LLC does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
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