Don’t let your wealthy clients sit on the Roth IRA sidelines.

Kevin Cloud, VP Product Actuary

The Roth IRA is a great deal, maybe the best deal in personal finance. Contribute after-tax dollars, and, as along as you follow some basic rules, distributions of both contributions and gains are tax-free. This is such a great deal, in fact, that congress put some significant rules around who can contribute and how much those contributions can be.

For 2023, an individual can contribute up to $6,500 to a Roth IRA (up to $7,500 if you’re 50 or over) IF their Modified Adjusted Gross Income (MAGI) is $138,000 or less. If MAGI is above $138,000 but less than $153,000, an individual may make a partial contribution. Above $153,000? Sorry, no contribution for you. If you’re married and filing jointly, those limits are at $218,000 and $228,000, and each spouse is allowed to make a contribution.

So, if your client is a high earner, does that mean they’re forced to sit on the Roth sidelines, watching their lesser-earning friends enjoy this remarkable tax-savings vehicle? Not so fast. Thanks to the miracle of the Roth conversion, your wealthier clients may be able to enjoy nearly the same benefits using a maneuver commonly known as a back-door Roth contribution.

First things first: What is a Roth conversion? A Roth conversion is the process of taking funds from a traditional IRA and putting them into a Roth IRA. In the conversion, any previously un-taxed amounts (either pre-tax contributions or gains) in the IRA are taxed as ordinary income in the year that the conversion is made. This is not considered a distribution, and no penalties are assessed in a conversion like they might be when taking an early IRA distribution.

The other essential element of a back-door Roth conversion is a traditional AFTER TAX IRA contribution. Anyone, regardless of income level may contribute to a traditional IRA, subject to an annual limit per individual. For the purposes of a Roth conversion, the contribution should be after-tax (i.e. don’t take a tax deduction for the contribution). Because the contribution is made with after-tax funds, the IRA consists of 100% basis (amounts already taxed) and 0% gain or pre-tax contributions.

Connecting the dots, a back door Roth conversion is done by making an after tax-tax contribution to a traditional IRA, then performing a Roth conversion on those funds. The Roth conversion creates a taxable event, but only on gains. Because there are no gains or other untaxed amounts, there is nothing to be taxed on, and your wealthy client has effectively made a Roth contribution.

Sounds pretty great, right? Yes, but there are a few catches, like most events involving taxation.

CATCH 1: The IRA Aggregation Rule. Anytime a Roth conversion is conducted, the IRS requires the taxpayer to consider ALL IRA balances as one big balance, and thus combining all pre-tax and post-tax amounts together. Any conversion is then considered to be a proportional amount of pre and post-tax funds. Let’s look at an example to clarify:


  • The Client makes a $5,000 after-tax contribution to an IRA.
  • The Client has no other IRA funds
  • The Client performs a Roth conversion on the $5,000 after-tax contribution. The client has no pre-tax IRA funds anywhere, and no taxes are paid as a result of the conversion.


  • The Client makes a $5,000 after-tax contribution to an IRA.
  • The Client has another IRA with a balance of $45,000, the entirety of which is pre-tax
  • The Client has an aggregate IRA balance of $50,000
    • $45,000 of which is pre-tax (90% of the total IRA balance), and
    • $5,000 of which is post-tax (10% of the total IRA balance)
  • The Client performs a conversion in the amount of $5,000
    • Because of the aggregation rule, 90% of the conversion amount ($50,000 × 90% = $4,500) is considered to be pre-tax funds, and
    • 10% of the conversion ($50,000 × 10% = $500) is considered to be post-tax
    • Thus, the conversion in this example creates a taxable event, creating $4,500 of ordinary income in the year the conversion is made, versus $0 in the other example.
    • After the conversion, the pre and post-tax amounts in the IRA are reduced by the respective amounts converted

NOTE: The aggregation Rule ONLY applies to IRA funds and not other retirement accounts, such as a 401(k), 403(b), or a non-qualified annuity.

NOTE: The contribution limit for 2023 is $6,500 (or $7,500 if you’re 50+). This example uses a $5,000 contribution to make the math easier.

So, can having significant pre-tax funds in an IRA can significantly hinder a back-door Roth conversion?


However, there may be a solution. Some 401(k) providers allow plan members to roll IRA balances into their 401(k). If your client has an IRA with significant pre-tax amounts, but they want to execute a back-door Roth contribution, see if they can roll those IRA funds into their 401k. If they can execute this roll-over, then they should be able to conduct a back-door Roth conversion as shown in Example A, without taxable consequence, as their would be no IRA funds to aggregate, and 401(k) funds are not considered in the aggregation calculation.

CATCH 2: The Step Transaction Doctrine. The Step Transaction Doctrine allows the IRS to look at multiple transactions as a single transaction if there is no substantial reason to consider them separate. As it relates to the back-door Roth contribution, if the two steps are made in quick succession: an after-tax traditional IRA contribution closely followed by a subsequent Roth conversion, the IRS may conclude that the two transactions were really just one transaction, and that the tax payer has just made an impermissible Roth IRA contribution.

So, does this really mean that the back-door Roth conversion is impermissible? Nope. However, it does mean that care must be taken to separate the transactions. Most experts agree that the key consideration is time. Make the non-deductible contribution to a traditional IRA, then wait to proceed with the conversion. How long to wait? Good question. There is no consensus among experts, but the most conservative suggest waiting at least a year to perform the conversion. This adds a slight wrinkle, and your after-tax contribution is likely to accumulate some gains over that time, and those gains will be taxable (but not penalized!) in the eventual conversion. This is a small price to pay, however, for the value of funding a Roth IRA, and the gains likely further legitimize the separation of the two transactions. It would also be advisable NOT to maintain any records indicating that the plan of the contribution was ultimately to convert.

This article is informational only and does not constitute tax advice. Please consult a tax, legal, or accounting professional before engaging in any transaction.

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