Financial advisors and CPAs often bat around terms such as "workaround Roth IRA" or "Backdoor Roth IRA" referring to a controversial technique converting a non-deductible traditional IRA contribution into a Roth IRA. It's controversial because there are income limits to contribute to a Roth IRA but no limit to make a non-deductible IRA contribution. Then, as the rules allow, any amount in traditional IRAs can be converted to a Roth IRA on a pro rata basis.
There are lots of "ifs" that can be problematic but the biggest one, "is this even legal?" seems to be put to rest. First, in the Tax Cuts and Jobs Act Conference Report there is a footnote (pg 289) that reads:
"Although an individual with [adjusted gross income] exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."
And notably Donald Kieffer Jr., of the IRS Tax-Exempt and Government Entities Division, made favorable comments regarding the procedure in a webcast on July 10:
“I think the IRS’s only caution would be whenever we see words like ‘back door’ or ‘workaround’ or other step transactions that are putatively enabling a way to get around limits — especially statutory contribution limits — you generally find the IRS is not happy and prepared to challenge those... But in this one that we’re talking about, it’s allowed under the law.”
Of course this is not binding guidance from the IRS; however Kieffer did make the comment and congress specifically allowed it in the Jobs Act Conference Report. It appears that the IRS will not be challenging the arrangement but you still may not want to call it a "Backdoor Roth IRA" even if it is convenient.
Photo from 401kcalculator.org
