Hire an Advisor

What We Do

Resources

About Zoe

Find an Advisor

Retirement Planning

Roth IRA Conversion - The Redhead Stepchild of Retirement Saving Strategies

Zoe Team

Oct 10, 2019

2 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

A Backdoor Roth IRA conversion lets you contribute to a Roth IRA even if your income exceeds federal direct contribution limits.
You contribute to a non-deductible Traditional IRA and immediately convert it to a Roth, bypassing income restrictions on conversions.
This strategy helps diversify your retirement tax allocation, creating a tax-free nest egg for the future.

Frequently Asked Questions

What is a Backdoor Roth IRA?

It is a method where you contribute to a non-deductible Traditional IRA and then immediately convert that amount into a Roth IRA.

Who should consider this conversion?

It is ideal for high earners who exceed federal income limits for direct contributions to a Roth IRA.

Are there taxes involved in this conversion?

You pay taxes on any earnings in the IRA during conversion, but if done quickly after contribution, the tax impact is usually negligible.

I love Roth IRAs. In fact, with Halloween right around the corner, I wish I could give them out as candy to kids that come to my door.

Though there are often a lot of questions (and debates) around the best ways to save for retirement and whether Roth (after-tax) or Traditional (pre-tax) retirement accounts are better, there is no doubt that having a mix of both taxable and tax-free accounts can be a good thing. In this blog, we’ll explain how you may be able to achieve Roth tax benefits that you thought were inaccessible.

If you find yourself in these two situations, then this blog is for you:

You don’t have access to an employer-sponsored plan that offers a Roth option

You make over the federal income limits to be able to contribute directly to a Roth IRA ($118k for single filers or $186k for married filing jointly).

These situations mean that you can’t directly contribute to a Roth IRA. Therefore, you might think you have no choice other than a Traditional IRA. That is of course unless you know about an often overlooked “loophole” called the Backdoor Roth IRA conversion.

In its simplest form, a Backdoor Roth IRA conversion is this:

You contribute to a traditional IRA or non-deductible IRA and immediately convert that into a Roth IRA as there are no income limit rules on conversions.

The benefit is that you will be able to build a tax-free nest egg for retirement.

You won’t be able to deduct any contributions to the Traditional IRA and you would also need to pay taxes on any earnings that are being converted that year. But, since ideally you would make that conversion a short time after your contribution, any tax on earnings would be negligible.

Moral of the Story:

If you are looking to diversify your tax allocation when you are over the federal income limit for direct Roth IRA contributions, the redheaded stepchild might become your favorite.

Converting a traditional IRA to a Roth IRA can be a really simple process, as long as you know what you’re doing and follow all of the rules. For more information on this and your situation, feel free to schedule a call with a Zoe Financial Planner - no cost, no obligation.

Note:

Traditional IRA - Not taxed up front, taxes are deferred, taxed on withdrawals

Non-deductible IRA - taxed up front, taxes are deferred, taxed on withdrawals

Roth IRA - taxed up front, taxes are deferred, tax-free withdrawals

Need an Advisor You Can Trust?

Connect with a vetted fiduciary, fee-only advisor and empower your future.

I love Roth IRAs. In fact, with Halloween right around the corner, I wish I could give them out as candy to kids that come to my door.

If you find yourself in these two situations, then this blog is for you:

You don’t have access to an employer-sponsored plan that offers a Roth option

You make over the federal income limits to be able to contribute directly to a Roth IRA ($118k for single filers or $186k for married filing jointly).

In its simplest form, a Backdoor Roth IRA conversion is this:

You contribute to a traditional IRA or non-deductible IRA and immediately convert that into a Roth IRA as there are no income limit rules on conversions.

The benefit is that you will be able to build a tax-free nest egg for retirement.

Moral of the Story:

If you are looking to diversify your tax allocation when you are over the federal income limit for direct Roth IRA contributions, the redheaded stepchild might become your favorite.

Note:

Traditional IRA - Not taxed up front, taxes are deferred, taxed on withdrawals

Non-deductible IRA - taxed up front, taxes are deferred, taxed on withdrawals

Roth IRA - taxed up front, taxes are deferred, tax-free withdrawals

Need an Advisor You Can Trust?

Connect with a vetted fiduciary, fee-only advisor and empower your future.

Disclosures: Zoe Financial, Inc. ("Zoe Financial") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Zoe Financial provides investment advisory services and access to independent registered investment advisers through its platform. The information provided by Zoe Financial is for educational and informational purposes only and should not be construed as personalized investment advice or as an offer to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Clients should consult with their own financial, tax, or legal professionals before making any investment decisions. The material presented by Zoe Financial is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Material presented has been gathered from sources believed to be reliable, however Adviser cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Past performance is no guarantee of future results. Zoe Financial does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. SEC Registration does not constitute an endorsement of Zoe Financial by the SEC nor does it indicate that Zoe Financial has attained a particular level of skill or ability. The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Before making any investment, each investor should carefully consider the risks associated with the investment, as discussed in the applicable offering memorandum, and make a determination based upon their own particular circumstances, that the investment is consistent with their investment objectives and risk tolerance. Lower expenses do not guarantee better investment performance. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements.

Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

Explore the Zoe Wealth Platform with AI

Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.

(646) 680-9244

support@zoefin.com

666 Third Ave, 6th Floor
New York, NY, 10017