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I saw on the Robinhood website that they do IRA and Roth IRA now, and they have a 1% matching, but it says for the Roth IRA qualification for year 2023:

Anyone with a MAGI (modified adjusted gross income) under $153,000 if filing single or $228,000 if filing jointly

Is it true that if we are afraid the wage will be over the limit of $153,000, then we can first put, say, $3000 (up to $6500) into Traditional IRA, wait 5 to 7 days, and then "roll it over" to Roth IRA and we don't have to worry about the $153,000 limit?

(I just wonder why for our retirements, we have to do the backdoor to "go through the loophole" -- which Fidelity or Charles Schwab said many people are doing it and it is just the way it is -- and it is like our hands and feet tied up just to save some money for retirement?)

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    You don't have to do that "just to save some money for retirement". You have to do it to get the government to give you a tax advantage on the money you're saving for retirement.
    – glibdud
    Jan 4 at 16:47
  • to some degree... if I need to sell some QQQ to pay off my credit card, and I will buy some QQQ back in 6 months, I really don't understand why I need to pay the tax and hurt the retirement build up. Also, let's say if I sell some MSFT and buy some GOOG and is for retirement rather than immediate profits, I don't quite get it why it is "ok, you can ONLY do it for $6500 per year"
    – Stefanie Gauss
    Jan 4 at 20:53
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    When the government gives someone a tax break, it costs them money. So they only do it when there's a reason. In the case of IRAs, the reason is encouraging people to put money away for retirement, particularly those who have less disposable income. Why the limits are $6500 and $153,000 specifically are questions for the politicians.
    – glibdud
    Jan 4 at 22:51

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Is it true that if we are afraid the wage will be over the limit of $153,000, then we can first put, say, $3000 (up to $6500) into Traditional IRA, wait 5 to 7 days, and then "roll it over" to Roth IRA and we don't have to worry about the $153,000 limit?

Yes, but it's not just that.

When you convert your Traditional IRA to Roth IRA you need to prorate the deductible and non-deductible contributions across all of your IRA accounts. You need to do this calculation on form 8606 when you do your tax returns, and pay taxes on the deductible portion that you're converting. So the backdoor works best if you have $0 balance across all of your traditional IRA accounts other than the after tax contributions used for conversion.

The point is that you'll not just be "saving for retirement", you'll be getting a significant tax benefit: Roth IRA distributions are tax free, including the earnings and growth, when retired.

The reason for the backdoor is because the direct contribution is restricted to high earners (as you've noticed), but conversions from after tax Traditional IRA contributions are not.

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  • so you mean even if it is $3000 cash into Traditional IRA and then convert to Roth IRA with that same cash with no appreciation, I still need to file Form 8606 "to prorate the deductible and non-deductible contributions across all of your IRA accounts"... that sounds so complicated... the gov't is making it difficult for "high earners" except that salary is not really that much in San Francisco Bay Area. Plus, my agency is not giving me a good 401k investment options (e.g. cannot buy stocks) and has no matching, so it is not like I can rely on it that much...
    – Stefanie Gauss
    Jan 4 at 20:58
  • so with gov't and the company both finding ways to make it tough on me, I guess the only thing I can think of is if life really is to give me a lesson before I go to heaven or some where else, while they will make a lot of money and go to some where afterwards
    – Stefanie Gauss
    Jan 4 at 20:59
  • Yes, you need to file form 8606 if you have after tax traditional IRA contributions even if all your traditional IRA balance is being converted. This indeed seems quite unreasonable, especially considering that Roth means after tax contributions and for high earners tax rate at retirement is likely to be lower, but it is what it is. It's not all that complicated though, and every tax prep software knows how to handle this.
    – littleadv
    Jan 4 at 21:00
  • for simplicity, I might work 9 months as a software contractor and quit just to make sure my wages is not over $153,000. This is not my original intention for work, but I may have to adjust my work according to tax... and I suppose I have to be really careful because if my wages is $153,001 (1 dollar too much), that means my whole Roth IRA contribution is invalid
    – Stefanie Gauss
    Jan 4 at 21:02
  • (I also wonder what if I don't file Form 8606) and 20 years later when I retire, how will they treat it -- will they make everything taxable because I didn't file Form 8606. For example, I think Fidelity didn't tell me to file Form 8606 but I was talking to them about converting 401k pre-tax to Roth 401k)
    – Stefanie Gauss
    Jan 4 at 21:06

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