Backdoor Roth: Entry for HNW Investors

Above: Urbandale certified financial planner Adam Obrecht walks clients through the intricacies (and value) of the Backdoor Roth.


Roth IRAs are a great way to invest for retirement funding, since earnings are free of taxes. But a big drawback is that they’re not available to high net worth people (adjusted gross income of $135,000 for an individual taxpayer, or $199,000 for married filing jointly). Ah, but there is a backdoor that will allow you in. It actually is called a Backdoor Roth, and it allows someone with income above those levels to set up a Roth account as long as they transfer the funds in from somewhere else, e.g., a traditional IRA.

Congress did not tinker with Backdoor Roths when it passed the 2017 tax overhaul. That’s mainly a good thing; though they might have simplified matters, Urbandale-based certified financial planner Adam Obrecht, who operates AO Wealth Advisory, said input from an expert is vital.


“Having someone know your whole story before doing one is important,” he said. Do you have multiple tax-favored savings-investing plans, for instance? Do they bump up against IRS rules on aggregating these accounts?


Backdoor Roths combine two different pieces of tax code to allow contributions to Roth IRAs.


1. Nondeductible contribution to an IRA ($5,500 per person under 50 or $6,500 for people 50 and over).
]2. Conversion from an IRA to a Roth IRA (the money contributed).
“While anyone can make a nondeductible contribution to an IRA, only people that do not have other tax-deferred IRA assets would be considered for step 2 of converting money to a Roth, said Obrecht.

What a Roth owner will find if they qualify is the ability to transfer as much money as they have in their traditional IRA into the Backdoor version—there is no annual contribution cap. You just have to pay any applicable taxes. Nor is there a cap on the AGI of the account holder who is setting up the Backdoor. And there is no required annual distribution as there is with a traditional IRA (the year in which the account holder turns 70½). So you can accumulate wealth right up to your last moment on earth, should you be so inclined (there are required distributions after death).

As with a regular Roth account, we then have the beauty of accumulating profits from investments that can be tapped tax-free. On the flip side, of course, there is no deduction for any investment losses. But then, you’re not in this game to lose money, right?

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