The Bogleheads' Guide to Investing

The Tax Increase Prevention and Reconciliation Act, signed into law in 1996, removed the modified gross income limitation on rollovers from a traditional IRA (TIRA) to a Roth IRA. Because of this change in the law, high-income individuals who are not eligible to contribute to a Roth IRA can now directly do what’s become known as a back-door Roth. Here’s how it works. If the investor doesn’t have an existing TIRA because they weren’t eligible to contribute to one due to the income limitations, they would first contribute to a nondeductible IRA and then immediately convert that to a Roth IRA, effectively working around the income limits on a direct Roth IRA contribution. Now you understand why it’s called a “back-door Roth.” Roth IRAs The Roth IRA, like the traditional IRA, is also a personal saving plan, but operates somewhat in reverse. For instance, contributions to a Roth IRA are not tax deductible, while contributions to a traditional IRA may or may not be deductible. For both IRA types—traditional and Roth—securities that remain in the account are not taxed. However, when money is withdrawn, traditional IRA withdrawals will be fully taxed, nondeductible IRA withdrawals will be partially taxed, and Roth IRA withdrawals will not be taxed at all.