For years now, the back-door Roth IRA contribution method has been discussed ad nauseam in the financial industry press. It’s been touted as a possibility, but always with a caveat: taking this course of action may ultimately be disallowed by the IRS. As of the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, all skepticism about this method should be removed.
Let’s back up a bit and talk about the back-door Roth. This is the action where you make a non-deductible contribution to your traditional IRA, followed later by a tax-free Roth conversion of that contribution. Folks often took these steps because they were above the income limits for a normal Roth IRA contribution. The problem was that the IRS had never weighed in on the concept. As such, there were many folks in the industry who took a conservative point of view with regard to this action. The IRS has ways to disallow such an action if they deemed that it was to work around the law. But that’s all over for now.
Tax Cuts and Jobs Act
The back-door Roth contribution is not specifically addressed in TCJA, but it was discussed on the record by the Conference Committee in their Explanatory Statement of the TCJA. In that document, the Conference Committee states in four places that “Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA…” (for full context, see the Joint Explanatory Statement of the Committee of Conference, footnotes 268, 269, 276, 277, beginning on page 114.)
This verbiage not only blesses the back-door Roth contribution technique currently and going forward, the matter-of-fact manner of the footnotes seems to declare that this has always been acceptable.
So – have at it with your back-door Roth contributions!
Sterling Raskie, MSFS, CFP®, ChFC®
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I’m a big fan of investing in Roth retirement vehicles, so I find it exceedingly annoying that the typical investor can only save up to $5500/yr (or $6500/yr if you’re over 50) in a Roth IRA – assuming you haven’t hit the income limits.
One way to get around this low contribution limitation is if your company offers a Roth 401K option. If so, you can contribute up to $23,500 in combined Roth dollars to your retirement plans (or $30,500 if you’re over 50). Once you leave your job, you can roll the 401K into your existing Roth IRA.
If you’re a hardcore saver, having the Roth 401K option can really help you invest a LOT more dollars out of reach of the tax man (and required minimum distributions).
Excellent points, Mike. I couldn’t agree more – if the income reduction isn’t as important to you, or if you’re simply looking much farther down the road, the Roth 401k option is a great way to go. That is, as long as the rules surrounding Roth accounts don’t change!
The only bummer with the Roth 401K is that sometimes the company won’t match in Roth dollars. But oh well, I guess we can’t always get everything we want :).
Interesting and timely. In the past, I’ve seen various recommendations on how long to hold the annual contribution to the Traditional IRA before doing the back-door conversion to Roth. These included recommendations anywhere from contribute in one month (e.g. January) and convert in the next month (e.g. February), so the Traditional IRA shows on your January month-end statement but the tax on gains is minimized; to holding for several months to a year…All these based on the concern that the IRS could challenge the conversion. From what you have shared here, are you now proposing this concern was/is unfounded and that folks should feel free to do the back-door? I had been planning to wait until next week to do my 2018 contribution and then convert in early Feb!
That’s been my (and most of the industry’s) take on it – that the back-door Roth contribution strategy is acceptable.
Good effort.
Thanks for sharing this.
You’re welcome – a much anticipated blessing for many!