You Can Still Do A Backdoor Roth After the Tax Cuts and Jobs Act

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Your ability to contribute to a Roth 401(k) or Roth 403(b) is not limited by your income, but your ability to contribute to a Roth IRA is restricted as your income goes beyond a certain threshold.

In 2018, you are not allowed to make full contributions to your Roth IRA if your Modified Adjusted Gross Income (MAGI) is over $189,000. You are not allowed to make any contribution if MAGI is over $199,000.

Although you cannot receive a deduction for traditional IRA contributions with a high income, you are still allowed to contribute to a nondeductible IRA. Your contribution is put in after taxes.

When nondeductible IRAs are converted into Roth IRAs, only the earnings portion is taxed. The rest, because it was taxed on the way in, is converted free of tax.

If you have any other IRA money, the IRS looks at all of the assets when calculating your conversion tax. Rather than tracking the precise dollars to see that these are nondeductible IRA dollars, they blend all the IRAs together and tax you the pro-rata amount which has not been taxed.

But if your have no other IRA money, a backdoor Roth is equivalent on your taxes to funding your Roth IRA directly in the first place.

If you are married, your assets and your spouse’s assets are evaluated separately. One spouse may be able to do a backdoor Roth contribution without tax consequences while the other spouse may have to compute the prorated amount of IRA assets in their name which has not yet been taxed.

In late 2017, Congress passed the Tax Cuts and Jobs Act, changing several features of the tax code. Luckily, backdoor Roth contributions remain unchanged.

To perform a backdoor Roth, you make a nondeductible contribution to your IRA and convert it to Roth IRA. Under the Tax Cuts and Jobs Act, you are still allowed to make nondeductible contributions and still allowed to convert IRA assets to Roth IRA.

We are big proponents of Roth IRAs. Almost everyone can benefit from funding their Roth IRA, even when they cannot afford it. If you make enough earned income to fund your Roth, you probably should. If it requires a backdoor Roth to do it, you should take the time to see if you can benefit.

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine