Everyone who can afford to should contribute to a Roth IRA. If you’re married, both you and your spouse should do this, as you’re each entitled to an individual account.
In 2019, if your MAGI is higher than $122,000 if single or $193,000 if married filing jointly, then you will be unable to contribute the full $6,000 (or $7,000 if 50 years or older) directly to a Roth IRA account. Therefore, for high-income earners, a backdoor Roth is essentially a no-brainer. (In fact, for not so high-income earners, a backdoor Roth can still be done. This is important to know for those who have an unpredictable income year-to-year. If you aren’t sure whether you’ll run afoul of the income limits, just do the backdoor Roth.)
Here’s a simple how-to guide:
- Do NOT have any money in a traditional IRA (which includes a rollover IRA) account by December 31 of the tax year in which you do the conversion. If you don’t have an account, don’t start one. If you do, then roll it into a 401k. Or convert the amount you have and pay tax on it. (You can convert more than $6,000/$7,000 in a year. You just can’t contribute more than that to an IRA in the year.)
- Put money in a traditional-type IRA account (up to $6,000/$7,000 per person per year). This money is non-deductible and is after-tax. Do not purchase stocks with this money. Just fund the account. Do this as early as possible in the year since time in the market beats timing the market. However, note that you can do it as late as Tax Day of the following year (for example, April 15 of 2020 for tax year 2019).
- Wait a day. Or don’t. (The Step Transaction Doctrine doesn’t seem to be an issue with the backdoor Roth.)
- Convert the account to a Roth IRA. You do this by filling out a form to move the money from that account into a Roth IRA account. (If you have an existing Roth IRA account at the financial institution, you can just move the money from the traditional to the Roth account. If not, you will have to open a Roth IRA first.)
- Make sure to complete tax form 8606 and include it with your 1040 tax filing so that you don’t get dinged on the move from traditional to Roth. See here and here for some how-to tutorials on properly completing the form. If you’re married and your spouse did this also, then complete the same form for xir. Double check the form even if your accountant does it for you. They make mistakes more frequently than you’d probably like…
- Do this every year. We recommend having some money in traditional retirement accounts and some in Roth, no matter how high your income is.
- If your spouse doesn’t work, xe can still do this. You will just contribute money on xir behalf. There’s no age limit to do this, unlike with a traditional IRA.