Backdoor Roth IRA

[ramanibala]

I have contributed through my employer for 401(K). I now would like to know if I can do a backdoor ROTH IRA for the tax amount owed. If so how much is the tax implication and how to do it.  With whom do I open a traditional IRA?

[ThomasM125]

A backdoor Roth IRA conversion by itself would not have any tax consequences in the current year. You make a non-deductible contribution to a traditional IRA and then roll it over to a Roth IRA. It is done to allow someone who can't make a Roth IRA contribution because their income is too high to be able to do it.

I think you may mean you want to withdraw money from your 401-K plan and then transfer it to a Roth IRA. In that case, you would pay tax on the distribution amount and when you transfer it to the Roth IRA it would not be deductible.

If you are trying to save money in the current year, a contribution to a traditional IRA would be your only option, assuming you are able to do that since you have an employer plan. As such, it may be limited due to your income. You can open up the IRA with a bank or investment company.

[ramanibala]

Thanks for your reply.  I am not allowed to do a direct contribution to ROTH IRA due to salary limitations. However, can I not do a contribution to non deductible IRA and convert that to ROTH IRA and claim for 2024?

I do not want to withdraw from my 401K. Thanks Ramani

[Opus 17]

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@ramanibala wrote:

Thanks for your reply.  I am not allowed to do a direct contribution to ROTH IRA due to salary limitations. However, can I not do a contribution to non deductible IRA and convert that to ROTH IRA and claim for 2024?

I do not want to withdraw from my 401K. Thanks Ramani

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Yes, that is the concept of a backdoor Roth.  If you are not directly eligible for a Roth IRA contribution due to your income and participation in a workplace plan, you can contribute non-deductible funds to a traditional IRA and then convert it to a Roth.

However, for this to work, you can't have any prior deductible funds in a traditional IRA.  If you do, the conversion will be pro-rated and things get more complicated.

Note that this works because IRAs and 401ks are controlled by different laws, and how much you contribute to a 401k plan does not change your eligibility to contribute non-deductible funds to a traditional IRA. 

[ramanibala]

Thanks for your answer. Helps me.