How to do a backdoor Roth IRA with Carry

If your income exceeds the income limits, you can still get money into your Roth IRA by doing a backdoor Roth IRA. This involves making contributions to a Traditional IRA first (since it has no contribution restrictions based on income levels), and then immediately rolling over the funds into your Roth IRA.

Since the Roth IRA’s income limits only applies to contributions, and not rollovers, this backdoor conversion allows high income earners to put money into their Roth IRAs, regardless of their income levels.

It's recommended to do your contribution and conversion in the same year. The Pro Rata Rule (explained below) has a deadline of December 31.

Here’s how it works in Carry.

Make a contribution into your Traditional IRA if you don’t have any funds in your account already. As a reminder, the IRA contribution limit for 2024 and 2025 is $7,000 if you’re under 50 years old, and $8,000 if you’ll reach at least 50 years of age by December 31 of the tax year.

Go into your Traditional IRA and click "Transfer or Withdraw"

Then, click "Convert to Roth IRA". Make sure that you have a Carry Roth IRA open in order to proceed through the following steps.

While IRAs have a limit on how much you can contribute, there is no limit on how much you can transfer into the account from other plans. Determine how much you'd like to convert and enter it in the Amount field.

Note that assets (such as holdings in stocks and ETFs) cannot be transferred. You must sell your positions in any securities in your Traditional IRA before moving the funds to your Roth IRA.

Once you’re ready to transfer the funds, click Continue to review your transfer, then submit your request.

Once you’re done, you’ll see the confirmation screen. It will take around 1-2 business to process the transfer, and the funds should settle in your account in around 5 business days.

You'll likely need to work with your accountant or tax filing software to add Form 8606 to report the non-deductible Traditional IRA contribution, as well as report the conversion amount.

A traditional IRA is funded with pre-tax income and a Roth IRA is funded with after-tax income. Therefore, a backdoor Roth IRA transfer from your Traditional IRA to your Roth IRA is a taxable event. The amount you transfer over is required to be added to your gross income for the tax year you make the transfer.

PRO-RATA RULE CONSIDERATIONS

Make sure to account for the pro-rata rule when determining your taxable amount from the conversion.

While a traditional IRA doesn’t have income limits that prevent high earners from contributing, it instead has a tax-deduction limit. If your modified adjusted gross income (MAGI) is over $83,000 for 2023 or $87,000 for 2024, you’re still allowed to contribute to your traditional IRA but you won’t receive any tax deductions. In other words, your contribution would be a post-tax contribution. If you had pre-tax funds in your traditional IRA, you would now have both post-tax and pre-tax money in the account, which would trigger the pro-rata rule when you do a backdoor Roth conversion.

The pro-rata rule applies whenever you have both post-tax and pre-tax income in your traditional IRA. You’re not allowed to choose only the post-tax portion when doing a Roth conversion. Instead, the pro-rata rule is used to determine the ratio that should be used to determine how much should be a pre-tax conversion and how much should be a post-tax conversion.

For example, if you have $100,000 in your non-Roth IRAs with a split of 90% pre-tax funds and 10% post-tax funds, this gives you a ratio of 9:1. In this case, your backdoor conversion would consist of 90% pre-tax funds and only 10% post-tax funds, and you would need to pay taxes on the amount of pre-tax funds being rolled over.

To avoid complicated tax situations when you file your taxes, it’s a good idea to ensure you have no other pre-tax IRA dollars across all your non-Roth IRAs. A clean solution for this is to rollover all your non-Roth IRA funds to your Carry Solo 401k first, which is fast and is not a taxable event. Once your non-Roth IRAs have a balance of zero, you can use it to make contributions into your traditional IRA and immediately rollover the funds to your Roth IRA, avoiding any occurrences where you have both pre-tax and post-tax funds in your accounts.

Click here to learn more about the backdoor Roth IRA.