Join the conversation and feel free to submit a question to our experts.Submit a question
Stay up to date and have the STA Weekly Report and 401k Plan Manager emailed to you.Subscribe
Read STA's Featured ArticlesRead More
INSIDE THIS EDITION:
What You Should Know About Tariffs and Potential Trade War
Weekly Technical Comment
IRS Finally Says Back Door Roths Are OK
401k Plan Manager
STA Wealth participates in the Ed Slott Elite IRA Advisor Program. As part of that access, we get up to date information on all updates related to market and regulatory changes. We just got word that the IRS has now formally accepted the “Back-Door Roth IRA” as an effective strategy.
The “backdoor” Roth method — which involves contributing to a traditional IRA and then converting to a Roth IRA — is allowed under the law.
– Donald Kieffer Jr., tax law specialist (employee plans rulings and agreements), IRS Tax-Exempt and Government Entities Division, said July 10 on a Tax Talk Today webcast, reported by Tax Notes.
Yes, it’s official. The long-running debate on whether a back-door Roth is legal is over. It’s legal.
Actually, it was over when the Congressional Conference Report for the Tax Cuts and Jobs Act said four times that the so called “back-door Roth” was fine by them. Here is one of those statements:
Congressional Conference Report on the law:
“Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA.”
Remember that the IRS is there to interpret the tax law as written by Congress. This was a gray area before only because it was not spelled out that the transaction was legal. That led some (not me!) to say the IRS would call this a step-transaction and thus it would be illegal. Well, now that Congress spoke back in December 2017, the IRS has officially approved the back-door Roth. They won’t challenge it, so it’s full steam ahead for those who qualify.
It turns out that IRS just didn’t like the words “back-door” or “workaround” when it comes to tax law. Those words are red flags for IRS.
“I think the IRS’s only caution would be whenever we see words like ‘back door’ or ‘workaround’ or other step transactions that are putatively enabling a way to get around limits — especially statutory contribution limits — you generally find the IRS is not happy and prepared to challenge those,” Kieffer said. “But in this one that we’re talking about, it’s allowed under the law.”
Back-Door Roth IRA Basics
To review, the reason the back-door Roth evolved was because of the income limits for making a contribution to a Roth IRA. Since there are no income limits on Roth conversions or on contributions to traditional IRAs, the strategy was to first contribute to a traditional non-deductible IRA and then convert those funds to a Roth IRA, bypassing the Roth IRA contribution limits. The funds actually go into the Roth as a Roth conversion, not as a Roth contribution.
Also, not everyone qualifies for the back-door Roth. You still have to be eligible to make a contribution to a traditional IRA, which is the first step in the back-door Roth process. Qualifying for a traditional IRA contribution means having earned income (except for a non-working spouse if filing a joint return with a spouse having the earned income) and not being over age 70½, since traditional IRA contributions cannot be made for the year one turns age 70½ or later years. In addition, keep in mind that the pro-rata rule applies, which means that part or all of the back-door Roth conversion might be taxable if there are other traditional IRA funds, including SEP and SIMPLE IRA funds. The once-per-year 60-day IRA rollover rule does not apply to Roth IRA conversions.
For more on Back-Door Roth IRAs, check out Ed Slott’s Definitive Guide to Back Door Roth IRAs.
Ed Slott, CPA, is a recognized retirement tax expert and author of many retirement focused books. For more information on Ed Slott, Ed Slott’s 2-Day IRA Workshop and Ed Slott’s Elite IRA Advisor Group, please visit www.IRAhelp.com. Mr. Slott will be a keynote speaker at Financial Advisor’s Inside Retirement conference in Las Vegas on September 27.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.
Financial Planning and Investment Advice offered through STA Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice
Whether you are looking for someone to partner with you in protecting and growing your assets, or you are an experienced financial advisor interested in joining the STA team, we want to hear from you. Please call us or email us, and we’ll be in touch as soon as possible!
281.822.8800 (HOUSTON AREA)
800 Town & Country Boulevard, Suite 410
Houston, TX 77024
For directions to our offices, click here.