After Tax Contributions to IRA | Ed Slott and Company, LLC

After Tax Contributions to IRA

Can anyone make an after tax contribution to an IRA regardless of income or available employer plan, then convert those contributions to a Roth or are there certain limits?

Earned income is required up to the amount of the contribution, and taxpayer must not have reached the year they turn 70.5. There is no upper income limit for non deductible contributions. The IRA can be converted to a Roth tax free up to the amount contributed as long as there are no other pre tax IRA balances in any other non Roth IRAs. If there is a pre tax balance, then a pro rated amount of the conversion will be taxable.

I understand the earned income part and am aware of that.  please clarify the "pro rata" part.  My understanding of the whole "back door" aspect to the Roth is that this method allows for a higher income earner, who otherwise wouldn't qualify to contribute to a Roth IRA, to get money into a Roth by simply making the after-tax contribution and then converting that contribution (since it was after-tax), to a Roth.  Thanks

  • Any Roth conversions are subject to pro-rata taxation with any pre-tax balances in all traditional, SEP and SIMPLE IRA accounts on 12/31 of the year of those conversions.
  • In order to do a Backdoor Roth with little to no tax liability. You must rollover any such balances to a 401k, 403b or 457b plan that accepts such rollovers prior to 12/31. If you are unable to do so and you have significant pre-tax IRA balances a majority of any Roth conversion will be taxable.
  • Since there is no longer any ability to recharacterize Roth conversions. You really should rolllover any pre-tax IRA balances prior to doing the Roth conversion.
  • Make a non-deductible traditional IRA contribution (can be prior to the above rollover) shortly followed by a Roth conversion of 100% of the balance. There may be some minor earnings that have accumulated, but not posted that will be taxable.
  • P.S. While they are technically after-tax contributions. They are usually referred to as non-deductible contributions. You should use that term so as not to be confused with employer plan employee after-tax contributions.
 

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