Because of the nature of tax-free growth and distributions, Roth IRAs are one of the more valuable savings tools available. The one major hurdle to these accounts is the income limitation when making direct contributions. In 2018, for single filers contributions to a Roth IRA are phased out for people with Modified Adjusted Gross Income (MAGI) above $120,000 and completely phased out above $135,000. For married filing jointly, the MAGI limits are $189,000 to $199,000. These limits restrict the number of people who can take advantage of Roth IRAs.
A solution to work around this was to make a non-deductible contribution to an IRA, then convert it to a Roth IRA (this strategy is better known as the “Back-Door Roth Contribution”).
This “Back-Door Roth” strategy has always been legal, but there had been discussions that the IRS would challenge these sorts of transactions in the future. The IRS, however, recently came out and said they officially approve of the contribution and subsequent conversion, and that they would not challenge these transactions as a violation of the step-transaction doctrine.
October 10, 2018