When you make a nondeductible contribution to a traditional IRA and you immediately convert it to a Roth IRA, 100% of the conversion is nontaxable, right? Not necessarily.
You may be asking yourself, how it could be taxable since you didn’t get a tax deduction for the contribution to your IRA. What about the backdoor Roth IRA conversion strategy?
Before I get too far ahead of myself, let me back up and review some basics about taxation of deductible versus nondeductible IRA contributions and taxation of Roth IRA conversions that is relevant to this discussion.
Deductible vs. nondeductible IRA contributions
In 2013, the maximum you can contribute to all of your traditional and Roth IRAs is the lesser of a $5,500 or b your taxable compensation for the year. If you’re 50 or older, the limit is $6,500. You can make contributions to a traditional IRA until age 70-1/2.Without getting into details, the ability to take a deduction for part or all of a contribution to a traditional IRA is dependent upon three things:
- Whether you’re covered by a retirement plan at work
- Tax filing status
- Amount of modified adjusted gross income “MAGI”