This time of year all types of tax related information/advice pops up all over the internet and print media. Some is actually quite helpful while other information is incomplete at best and dangerous at worst. Falling in the “incomplete” category is the advice that is so prevalent on what is called the “backdoor Roth IRA”. I am seeing this advice everywhere right now from personal finance magazines to nationally syndicated talk shows.
The scenario goes like this – Joe taxpayer’s household income is too high to make him eligible to contribute to a Roth IRA. Joe already maxes out his 401k and would like to make a Roth IRA contribution. No problem, says Joe’s financial advisor, just make a non-deductible traditional IRA contribution. Then, convert the non-deductible traditional IRA to a Roth with only the earnings on the non-deductible IRA being subject to income tax.
In the words of my favorite football commentator, Lee Corso, not so fast my friend… This strategy works as stated above ONLY if Joe does not have other traditional IRA, SEP or SIMPLE account balances. If Joe has other traditional IRA, SEP or SIMPLE account balances, then these balances get aggregated together with the non-deductible IRA account and a calculation must be made to determine how much of the non-deductible account’s conversion to the Roth is subject to income tax.
Bottom line – get professional advice on issues like this and don’t take at face value ideas or advice that sound too good to be true. Think about it, if it were this easy to get money moved over to a Roth IRA then why would Congress have all the intricate rules on income limits?