Backdoor Roth IRA
A two-step strategy of contributing to a non-deductible traditional IRA and converting it to Roth, used by high-income earners who exceed direct Roth IRA contribution limits.
Detailed Explanation
High-income earners cannot contribute directly to a Roth IRA (phase-out at $150K-$165K single, $236K-$246K joint for 2025) but can make non-deductible traditional IRA contributions and convert them. The pro-rata rule under IRC Section 408(d)(2) prorates the conversion across all traditional IRA balances (traditional, SEP, SIMPLE), so taxpayers with significant pre-tax IRA balances face partial taxation on the conversion. Strategies to mitigate: roll pre-tax IRA balances into a 401(k), then execute the backdoor. Reported on Form 8606. Mega backdoor Roth uses after-tax 401(k) contributions converted to Roth, typically permitting much larger amounts.
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Learn about Tax Planning & StrategyRelated Terms
Solo 401(k)
A retirement plan for self-employed individuals and small business owners with no full-time employees, allowing both employee deferral and employer profit-sharing contributions.
SEP-IRA
A simplified employee pension IRA allowing self-employed individuals and small business owners to contribute up to 25 percent of net earnings to a traditional IRA structure.
Adjusted Gross Income (AGI)
Adjusted Gross Income is your total gross income reduced by specific above-the-line deductions, used as the starting point for calculating your federal taxable income.
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