Long-time readers will know that I’m a big fan of funding our Roth IRAs through the proverbial backdoor. What I mean by this is circumventing the Roth IRA contribution limits by contributing to a traditional IRA and converting it to a Roth shortly thereafter.
For 2013, the ability to contribute to a Roth IRA phases out for married couples with MAGI between $173k-$183k (or for single filers with MAGI between $110k-$125k). Beyond those levels, you’re not allowed to contribute at all.
Then again… Ever since the income limits for Roth IRA conversions went away back in 2010, it’s been possible to make non-deductible contributions to a traditional IRA and then simply convert them into your Roth.
Of course, as I’ve written about in the past, there are added complexities if you have deductible contributions in a traditional IRA. Fortunately, it’s possible to avoid these problems by rolling that money into a solo 401(k) before using this strategy.
Anyway, shortly after New Year’s, my wife and I contributed $5.5k apiece to our traditional IRAs. And just this afternoon I logged into the Vanguard website and converted those funds into our Roth IRAs.
For the record, we intentionally left a bit over a month in between transactions rather than tempting fate if the IRS decides to question the legality of this maneuver. Will a month really help? Maybe, maybe not. But it’s better than doing contribution and conversion back-to-back.
As an aside, I should also point out that this is an excellent strategy for those who are unsure if they will end up exceeding the Roth income limit. This way you don’t have to worry about it… Just contribute and convert.