Backdoor Roth IRA

A Backdoor Roth IRA is a strategy for individuals who want to contribute to a Roth IRA, but whose income exceeds the IRS's income eligibility limits.

Traditional Roth IRAs have income-eligibility restrictions, meaning that high-income earners are not allowed to contribute directly to them. However, there are no income limits for converting a Traditional IRA to a Roth IRA. This is where the "backdoor" method comes in.

The Backdoor Roth IRA strategy involves two steps:

1. Contribute to a Traditional IRA: A person who earns too much to contribute directly to a Roth IRA can still contribute to a Traditional IRA, which has no income limits for making nondeductible contributions.
2. Convert the Traditional IRA to a Roth IRA: The IRS allows people to convert Traditional IRAs into Roth IRAs, regardless of income. This process is often tax-free, especially if the conversion is done shortly after the contribution before any earnings accrue.

The term "backdoor" refers to the roundabout method of getting money into a Roth IRA. This strategy essentially allows individuals to bypass income restrictions, thus enabling high earners to enjoy the benefits of a Roth IRA, including tax-free growth and tax-free withdrawals in retirement. However, there are potential tax implications and complexities involved in this strategy, so it's often advised to consult with a financial advisor or tax professional before proceeding.