What is a Backdoor Roth IRA Conversion? - Medicare Life Health (2024)

FAQs

What is an example of a backdoor Roth IRA conversion? ›

EXAMPLE: backdoor Roth (multiple IRAs)

His total IRA balance is now $10,000, of which $5,000 (50%) is after-tax. The other 50% of his account is pre-tax, so a conversion of $5,000 is therefore 50% taxable. Tony will owe income tax on $2,500 of the converted amount ($5,000).

Roth conversions require you to understand the potential effect it has on your Medicare premiums. When funds are converted, the IRS sees this as income that has come out of the traditional IRA, which can raise your MAGI past a certain level, thereby increasing the premiums you pay for Medicare B and D.

Cons: All or part of a backdoor Roth IRA conversion could be a taxable event. You may have to pay federal, state, and local taxes on converted earnings and deductible contributions. Conversions could kick you into a higher tax bracket for the year.

So, does a Roth conversion count as income for Obamacare? Yes, it does! You need to decide if the future tax savings from Roth conversions make up for the loss of Obamacare tax credits.

By this method, you open a traditional IRA, make your desired contribution, and then, at a later date, convert the funds to a Roth IRA. Could it really be that easy to sidestep restrictions that have kept many investors from enjoying a Roth IRA's tax advantages?

A backdoor Roth can be created by first contributing to a traditional IRA and then immediately converting it to a Roth IRA to avoid paying taxes on any earnings or having earnings that put you over the contribution limit.

While there's no prohibition or disadvantage to a Roth conversion based on your age at 65, converting the entire $1.2 million all at once will burden you with a larger tax bill than you may want to pay in a single year.

Roth conversions won't affect the calculation of your Social Security benefit that you're eligible to receive, but they can impact whether you pay taxes on your benefit – and how much.

Money that you'll need soon isn't a good candidate for conversion because your assets may not have time to recoup the taxes you would have to pay. You're currently receiving Social Security or Medicare benefits.

Backdoor Roth IRA income limits

The phaseout occurs between $146,000 and $161,000 for single filers and $230,000 and $240,000 for joint filers in 2024. The backdoor method allows those with higher incomes who can't contribute in the typical manner to still take advantage of a Roth IRA.

Do you get taxed twice on backdoor Roth? ›

You won't pay double taxes with a backdoor Roth, but you may end up paying some taxes depending on your financial situation. Talk with your financial advisor before making this move to minimize taxes and maximize retirement benefits.

Whether it is worth it to do a backdoor Roth IRA depends on your financial situation. If, for example, you are in the 22% federal marginal income tax bracket (or under), you should do a Roth IRA to diversify your retirement funds. If your federal income tax bracket reaches 24%, you are at a neutral state, more or less.

Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.

There is no loophole to make the conversion not count as part of your Modified Adjusted Gross Income. The thing you can do, if you are having to pay back a large amount, is apply for a payment plan to not have to pay it all at once.

Failing to report income changes in a timely manner may have a negative impact on your taxes if you are receiving a tax credit. When you file your income tax return you may end up with an unfortunate tax liability. Additionally, there is a possibility you may have to repay the full amount of the subsidy you received.

For example, say you're under 50 and contribute the maximum of $23,000, and your employer kicks in $7,000. Because the total limit is $69,000, you could contribute up to $39,00 more ($69,000 – $23,000 – $7,000) for 2024 using the mega backdoor Roth.

A Roth conversion is the process of repositioning your assets in a Traditional IRA or an eligible distribution from your qualified employer sponsored retirement plan (QRP), such as a 401(k), 403(b), or governmental 457(b) to a Roth IRA.

Use Form 8606 to report: Nondeductible contributions you made to traditional IRAs. Distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs. Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs.

The Roth IRA five-year rule says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account. This five-year rule applies to everyone who contributes to a Roth IRA, whether they're 59 ½ or 105 years old.