Is the Back-Door Roth IRA Strategy Still Viable?

By Beverly DeVeny and Sarah Brenner
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This week’s Slott Report Mailbag answers a college student’s question on qualifying income for a Roth IRA contribution and discusses the still viable “back-door Roth” strategy. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link. 

1.

Hello,

I’m a sophomore college student with an internship this summer. I’m exempt from paying federal tax on my pay during the summer, and I was wondering if that money still qualifies to be put into a Roth IRA.

Thank you,

Greg

Answer: 
Generally, only taxable income can be used to make either IRA or Roth IRA contributions. An exception is made for military combat pay, which is not taxable.

2.

Hi Ed –

Great article about the ways self-directed IRAs can backfire. Your insight and analysis was spot on. Your website is also very robust with information.

Do you have a point of view or recommendation for high-income individuals that are using the strategy of making a non-deductible traditional IRA contribution and then immediately converting it to a Roth using the conversion loophole to get around the Roth IRA income limits?

I haven’t seen much lately in the press about that strategy and if it may be opening up clients to audit headaches and hassles that may not be worth it.

Any insight or links to other articles is appreciated.

Answer:
The strategy is still around and is still a viable one in our opinion. Just remember that a conversion is subject to the pro-rata rule for income tax purposes when there are tax-deferred funds as well as after-tax funds in any of a client’s traditional, SEP, or SIMPLE IRAs. You cannot convert the after-tax funds only. Here is a detailed guide on the “back-door Roth.”