There ’ s a significant limitation on backdoor Roth conversions , however : the “ pro rata rule .” This applies if you have other traditional IRA assets besides the after-tax IRA contributions you wish to convert . It requires that a proportional amount of both pretax and after-tax funds be converted to a Roth IRA , taking into account the total balance of all the account holder ’ s IRAs .
This requirement can force a contributor into a taxable conversion on the traditional portion of their portfolios , reducing the tax-free benefit of the conversion . Therefore , the backdoor Roth strategy is most suitable for investors who have only Roth accounts and no traditional IRAs .
To avoid the pro rata rule , investors must ensure they aren ’ t holding deductible , pretax funds in traditional IRA accounts at the time of conversion . If they are , they should consider converting those traditional IRA accounts into Roths before starting the backdoor Roth strategy . Alternatively , if the investor has access to an employer-sponsored retirement plan like a 401 ( k ) that allows rollovers from traditional IRAs , they should consider rolling over any pretax traditional IRA funds into those employer plans .
The contribution limits for a backdoor Roth IRA are the same as those for traditional and Roth IRAs . In 2024 , individuals under 50 can contribute up to $ 7,000 annually , and those 50 and older can contribute up to $ 8,000 . The deadline for making a nondeductible IRA contribution typically aligns with the federal income tax return filing deadline for that tax year , usually April 15 of the following year . There is no deadline for converting nondeductible IRA contributions to the Roth IRA .
The Mega Backdoor Strategy
The mega backdoor Roth IRA strategy allows individuals to make additional after-tax contributions to their employer-sponsored retirement plans , exceeding the 2024 employee contribution limit of $ 23,000 , with an additional $ 7,500 catchup contribution for those over age 50 . The 2024 mega Roth contribution amount is $ 46,000 of post-tax dollars , which means
The 2024 mega Roth contribution amount is $ 46,000 of post-tax dollars , which means individuals can make a total after-tax contribution of up to $ 69,000 , or $ 76,500 if they are over age 50 .
individuals can make a total after-tax contribution of up to $ 69,000 , or $ 76,500 if they are over age 50 . However , not all employers allow these contributions , so it is crucial for clients to check their employer ' s plan before considering this strategy .
The SECURE 2.0 Act Of 2022
This law added even newer wrinkles for those wishing to take advantage of Roth IRAs .
529 plans . One change is that starting in 2024 , taxpayers may roll over up to $ 35,000 from overfunded 529 plan accounts into Roth IRAs — if the 529 accounts have been held for at least 15 years and the rollover is for the same beneficiary . The annual rollover amounts would be subject to Roth IRA contribution limits , and contributions made within the last five years are ineligible for the rollover .
Catch-up contributions are required to be Roths . When originally passed , the SE- CURE 2.0 Act said that employees earning $ 145,000 or more had to make their catch-up contributions to qualified retirement plans as post-tax Roth contributions beginning in 2024 . However , this requirement was delayed for two years by the Internal Revenue Service ( in Notice
2023-62 ), which pushed back the implementation until January 1 , 2026 . Additionally , starting in 2024 , the catch-up amount will be indexed for inflation annually . Beginning in 2025 , those aged 60 to 63 will be able to contribute an additional catch-up contribution of $ 10,000 to 401 ( k ) s and similar plans each year .
No mandatory RMDs from Roths . The SECURE 2.0 Act also eliminated the requirement that savers take minimum distributions from their workplace 401 ( k ), 403 ( b ) or 457 ( b ) plan Roth accounts . Plan participants who are already subject to Roth required minimum distributions may discontinue distributions in 2024 .
The allowance of Roth contributions for matching or non-elective contributions . Effective immediately upon the passage of SECURE 2.0 , participants in employer-sponsored 401 ( k ), 403 ( b ) and 457 ( b ) plans can now designate some or all matching contributions and non-elective contributions as Roth contributions . Previously , employer matches had to be allocated to an employee ’ s pretax account .
Political Backlash One of the most famous Roth accounts belongs to PayPal co-founder Peter Thiel ,
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