Sunday, February 10, 2013

Backdoor Roth IRA

I learned an interesting loophole to save more money into retirement account recently.

To get either the tax deduction for a traditional IRA or to be able to contribute to a Roth IRA, the modified adjusted gross income needs to be at a certain level or less.  You can see all the different limits at this IRS website.  If you like contributing into a Roth IRA, then according to the IRS site, it would appear you are out of luck if you make over certain income.

It turns out that Congress created a loophole in 2010 that would allow you to fund a traditional IRA and then convert it into Roth IRA, no matter what your income is!  As this Forbes site explains (and jests that Bill Gates could also do this), there is no income limit to funding a traditional Roth IRA -- you just can't deduct the funding of traditional Roth IRA if you are over the certain income level set by IRS.  Currently, however, there is no income limit to converting traditional  IRA's into Roth IRA's.  That means you can fund a traditional IRA and then immediately convert it into Roth IRA -- Bogleheads blog explains this as funding the Backdoor Roth IRA.

It's a pretty interesting loophole and rather amusing that Congress created it, probably unintentionally.