Back-door Roth Blessed by Congress

January 16, 2018

Back-door Roth Blessed by Congress

For years now, the back-door Roth IRA contribution method has been discussed ad nauseam in the financial industry press. It’s been touted as a possibility, but always with a caveat: taking this course of action may ultimately be disallowed by the IRS. As of the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, all skepticism about this method should be removed.

Let’s back up a bit and talk about the back-door Roth. This is the action where you make a non-deductible contribution to your traditional IRA, followed later by a tax-free Roth conversion of that contribution. Folks often took these steps because they were above the income limits for a normal Roth IRA contribution. The problem was that the IRS had never weighed in on the concept. As such, there were many folks in the industry who took a conservative point of view with regard to this action. The IRS has ways to disallow such an action if they deemed that it was to work around the law. But that’s all over for now.

Tax Cuts and Jobs Act

The back-door Roth contribution is not specifically addressed in TCJA, but it was discussed on the record by the Conference Committee in their Explanatory Statement of the TCJA. In that document, the Conference Committee states in four places that “Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA…” (for full context, see the Joint Explanatory Statement of the Committee of Conference, footnotes 268, 269, 276, 277, beginning on page 114.)

This verbiage not only blesses the back-door Roth contribution technique currently and going forward, the matter-of-fact manner of the footnotes seems to declare that this has always been acceptable.

So – have at it with your back-door Roth contributions!

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