What is a Backdoor Roth IRA?

A backdoor Roth IRA is a conversion method used by people that are not eligible to contribute to a Roth IRA.
Most people are familiar with a Roth Ira. When you fund a Roth Ira, you are taking money out of your bank account that has already been taxed and placing it in this new IRA.  The limit is $5500 ($6500 if 50 or over) but in order to do that, you need to have income below a threshold. For 2017, it begins phasing out at $118000 for singles. For a couple, the threshold is $186,000.  Which means if you are making more than that, Congress says you aren’t allowed to put money in to a Roth IRA.
The backdoor is a strategy for people that are over that limit. So, if you make too much money to contribute to a Roth IRA, there is a rule that says you can contribute money to what is called a non-deductible IRA.  It’s a type of IRA where you don’t get a tax deduction. There are no income limits for contributing to this type of IRA.  There is also a rule that says that you can convert that traditional IRA to a Roth IRA almost immediately.  There are no income limits for this conversion.  That’s why they call it a backdoor. You aren’t putting the money directly into the Roth, but you are placing the money into the non-deductible IRA and then moving it to the Roth. 
What holds up many people is that they may have other IRA accounts. There is another rule within the Internal Revenue Code that refers to a pro rata issue.  If you have money in other IRA accounts, any money you moved over to the Roth has to be proportionally taken from all your IRA accounts.  Frequently many people have money in other IRA accounts already. So when they are attempting to move this new account money, they can only move a small portion of it because they have to move an equal proportion of the other accounts which can trigger massive tax liabilities which is not in their best interest.   So this concept is only valid for a very small group of people. People with high income (ineligible for a Roth IRA), no other existing IRA accounts.  Which is an uncommon occurrence. 

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