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  1. Let's assume there are exactly $5500 in my Traditional IRA at the beginning of the year.
  2. Early during the tax year, I convert these $5500 to a Roth IRA. I will now owe taxes on these $5500.
  3. Later in the tax year, I make a (tax-deductible) contribution of $5500 to the (now empty) Traditional IRA. I now save taxes on $5500 of income.

Result at the beginning of the next tax year:

  • The Traditional IRA has again $5500 in it - no change
  • compared to not having done anything with IRAs, I do not owe any more or less taxes (+ 5550 - 5500 = 0) - no change
  • I have $5500 more in my Roth IRA, where they are now tax-free, including all future interest.

So basically, I manage to get $5500 income tax-free into a Roth IRA!?

Where did I go wrong? Or did I just pass "Get-rich-easily-101"?

I might even be able to make it better by doing 2. at a time where the market is down, and 3. at a time where the market is up.

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2 Answers 2

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Your talk of "saving" taxes resulted in you double-counting.

Step 3 saves you paying taxes on the $5,500 you are putting into the traditional IRA. You can't also count it as saving the taxes on the $5,500 you converted to Roth.

Let's step through your plan. Suppose you have $50,000 of income for the year, which normally would all be taxable.

When you do the conversion, you get an additional $5,500 of taxable income for the year. Your taxable income is now $55,500.

When you contribute to the traditional IRA (from your income), you get to deduct $5,500. Your taxable income is now $50,000.

Now, suppose you did the simpler thing, and just contributed money from your income directly to the Roth IRA. It isn't tax deductible, so you again have a taxable income of $50,000, and the result at the end of the year is the same: $5,500 each in your traditional and Roth IRAs.

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    @Nate_Elridge, that is correct. I should have mentioned that I am over the contribution limit for Roth; I am not allowed to contribute directly. Your answer is still very helpful, as it shows that the backdoor is really nothing else than a backdoor; it allows to do exactly what you are no longer directly allowed once you are over the income limits.
    – Aganju
    Commented Jul 24, 2016 at 23:21
  • +1 - I think offering a baseline example of income made for a better explanation than mine.
    – JTP - Apologise to Monica ♦
    Commented Jul 24, 2016 at 23:53
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    Looking at my question now, it seems rather dumb. Of course it is working that way; and that's why it is called 'backdoor'. Because I started with the (unmentioned) premise of not being able to use the direct approach, it never appeared to me. I'll not delete the question though, maybe others can take advantage from the answer too.
    – Aganju
    Commented Jul 25, 2016 at 0:12
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    @Aganju - the situation reminds me of the Bellhop Riddle. And a good example about how 'obvious' things are not so obvious.
    – JTP - Apologise to Monica ♦
    Commented Jul 25, 2016 at 11:40
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2 and 3 are unrelated. When you 2'd, you agreed to pay tax on $5500 of income and it ended the year in a Roth. When you 3'd, you deposited $5500 to a traditional IRA, pre tax.

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  • but putting 5500 in a traditional IRA saves me from paying taxes on them. They are different actions, but their effects even out exactly.
    – Aganju
    Commented Jul 24, 2016 at 22:22
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    No. You will still pay tax on the other $5500. I don't know what you mean by even out. Each $5500 has two places it can go so there are four different possibilities, really three as it doesn't matter which 5500 goes Roth and which goes traditional. You have chosen to put 5500 in the Roth and 5500 in the pretax, that's it. If you put it all in a pretax IRA there would be no tax due on the entire $11,000.
    – JTP - Apologise to Monica ♦
    Commented Jul 24, 2016 at 22:25
  • The 5500$ i convert are from previous year. They are already in the IRA. See 1. I only plan to move one time 5500$
    – Aganju
    Commented Jul 24, 2016 at 22:39
  • I understand. Do the math, the outcome is no different.
    – JTP - Apologise to Monica ♦
    Commented Jul 24, 2016 at 22:46

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