If you earn too much to fund a Roth IRA directly, you've probably heard about the "backdoor" workaround.
Here's the catch: a rule tucked into recent tax law changes is quietly reshaping how that maneuver works, and a lot of people are still running the old playbook.
You contribute to a traditional IRA, then convert that money to a Roth.
Since Roth contributions have income limits but conversions don't, high earners use this two-step move to get tax-free growth they'd otherwise be locked out of.
If you hold any pre-tax money in a traditional IRA on December 31 of the conversion year, the IRS taxes a proportional slice of your conversion.
That surprises people who assume their new after-tax contribution converts cleanly.
A $7,000 contribution sitting next to $50,000 of old rollover money can trigger a tax bill you didn't plan for.
For 2024, you can put up to $7,000 into an IRA, or $8,000 if you're 50 or older.
The income phase-out for direct Roth contributions starts well below what many dual-income households earn, which is exactly why the backdoor stays popular.
The fix most advisors recommend is consolidating.
If your employer's 401(k) accepts incoming rollovers, you can move that old traditional IRA money into the workplace plan before December 31.
With the pre-tax balance out of the way, your conversion becomes mostly tax-free.
One more wrinkle: the IRS clarified that Roth conversions aren't subject to required minimum distributions, and Roth IRAs never have RMDs for the original owner.
That's a meaningful perk for people who want to let the account compound untouched.
A conversion done in a down market can be a bargain, since you're moving depressed assets into a tax-free bucket.
But you owe income tax on the converted amount, so run the numbers before pulling the trigger.
If you've already made a mess of a prior conversion, it's not fatal.
You can recharacterize certain contributions, though conversions themselves can no longer be undone.
Talking to a tax pro before year-end is cheaper than fixing it in April.
Final Thoughts
The takeaway: the backdoor Roth still works, but it rewards people who plan their IRA balances in advance rather than scrambling in December.