What is a Roth conversion (aka a "backdoor Roth")?

Learn what a Roth conversion is and who's eligible for this.

First, what is a Roth IRA?

A Roth IRA provides incredible tax incentives to invest for the long term: 100% of the gains from Roth IRA investments can be withdrawn after age 59½, tax-free. That means that all of the income you may accumulate for years in a Roth IRA is yours—the IRS gets none of it. However, if you make more than $140,000 (or $208,000 as a married couple filing jointly), then you're not eligible to contribute to a Roth.

What is a Roth conversion?

A Roth conversion—also known as a "backdoor Roth"—offers the ability for Alto account holders, whose income is too high, to fund their Roth IRA and receive tax-free distributions at retirement. The Roth "conversion" is the reportable movement of assets from a traditional IRA, including SEPs, to a Roth IRA. There are no eligibility restrictions; however, to convert a traditional IRA to a Roth, you'll just need to declare the investment gains from your prior traditional IRA contributions that you deducted. In other words, pay the tax now on your traditional IRA balance to let that balance grow tax-free until retirement.   

Who is eligible for a Roth conversion, and what are the rules for being able to do this? 

Here are the basic rules for converting to a Roth (in addition to paying taxes on your current IRA gains):

  • If you are younger than age 59½, an early withdrawal penalty may apply to any amount distributed from your IRA and not converted to a Roth IRA within 60 days. 
  • Distributions that represent required minimum distributions (RMDs) paid to an IRA owner or beneficiary may not be converted.
  • You are responsible for maintaining records of your Roth IRA conversions in order to properly complete your federal tax return. 
  • Withdrawals of money from the conversion of a traditional IRA or 401(k) to a Roth IRA are subject to a five-year waiting period to avoid a penalty.
  • Roth IRA owners must irrevocably designate in writing at the time of the conversion deposit that the contribution is to be treated as a conversion.

For more information on how to do a Roth conversion at Alto, view our step-by-step guide here.