Hi,
My income is increasing and I won’t qualify for a ROTH IRA. Is there a way around this?
I have heard that there is "Backdoor ROTH IRA" method to do that. But, I am not sure how to do it.
Currently, I have a Traditional IRA account to which I have transferred my previous 401K money.
Would you help me? Particularly, how to pay taxes during the process.
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A backdoor Roth IRA allows you to get around income limits by converting a traditional IRA into a Roth IRA.
However, you can not use your existing IRA for a tax free conversion because 401k contribtions are pre-tax.
The first step to funding your ROTH IRA is to make a Non-Deductible contribution to a Traditional IRA. When you do this it will be reported on Form 8606 to the IRS so that they know you have basis in your Traditional IRA.
The second step is to convert the amount in the Traditional IRA to a ROTH IRA. You'll get a Form 1099-R the year you make the conversion. Your 1099-R will say code 2 in box 7 (or code 7 if your age is over 59 ½) . You should report your conversion for the year you receive this 1099-R. When you indicate that the 1099-R was a conversion it will once again be reported on the Form 8606 which will allocate available basis to reduce tax on the conversion.
The thing that may complicate your situation is you have a previously existing Traditional IRA. If your traditional IRA contains a mix of deductible and nondeductible contributions. The IRS doesn't allow you to choose which portion of the IRA you're converting, meaning you can't just roll over the nondeductible – and therefore nontaxable – part. The allocation of deductible versus nondeductible contributions is calculated on Form 8606 when the conversion is made. The conversion is still possible but a portion may be taxable. The long-term benefit is that any gains in the ROTH IRA will not be taxable upon distribution.
@hyunil96tax , great question!
For now, there is something called a "Backdoor Roth IRA".
This is considered to be a method used by some high-income taxpayers that are not able to contribute to their IRA because of income limits.
This method allows you to contribute to your IRA and then roll it over or convert it to a Roth IRA.
In order to create a Backdoor Roth IRA, you will want to discuss this option with your financial planner.
During the next tax year, you will receive documents from your brokerage account to help report and pay any taxes that might be owed when the transfer occurs.
Your financial planner should be able to help you to contribute to your IRA, and then roll over the money to a Roth IRA.
Feel free to review the following official TurboTax website for more information about a Backdoor Roth IRA, as well as for help on how to report this conversion on your tax return using TurboTax.
https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-...
Thanks!
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