The 'Ole Roth IRA Switcheroo

You can do what I call the 'Ole Roth IRA Switcheroo If you are over the income limits for Roth IRA contributions. You may be able to sneak contributions to a Roth IRA through "the back door," regardless of your high income. It sounds sneaky and underhanded, but it’s actually perfectly legit.

Who’s Magi?

No, Magi wasn’t Jonny Quest’s sidekick. It stands for modified adjusted gross income, and is your adjusted gross income with some minor modifications. I'll let the nice folks at the IRS explain how to find your modified adjusted gross income, then use the table below to determine your status:


Single, *Married Filing Separately, or Head of Household

Full Contribution


Partial Contribution


No Contribution


Married Filing Jointly or Qualified Widower





Single, *Married Filing Separately, or Head of Household

Full Contribution


Partial Contribution


No Contribution


Married Filing Jointly or Qualified Widower




*… and you did not live with your spouse at any time during the year. If you did live with your spouse at any time during the tax year, no contribution allowed if magi≥$10,000]

MAGI Below Income Limits

If you’re under the limits, you can make up to a $5,500 direct contribution ($6,500 if your age 50 or older) to your Roth IRA. After making the contribution, you can take out that contribution for any reason at any time without penalty or tax. Take it out next week if you like. You don’t need to be age 59 1/2, or even have a good reason. I find a lot of folks don’t know this.

As far as earnings go, those monies do need to stay in your Roth IRA until you’re age 59 1/2 if you want to take them out tax and penalty free.

Making these contributions early on have many advantages, so try and make this contribution each year while you’re still under the limits, even if you have a retirement plan at work (but not at the expense of forfeiting a match).

MAGI Above Income Limits

If your modified adjusted gross income is above the income limits for a Roth IRA, any direct contributions to your Roth IRA are prohibited. Time for the ‘ole Roth IRA switcheroo.

Important Note: The Roth IRA switcheroo has two big caveats. See “Pro-Rata Rule” and “Step Transaction Doctrine” below.

The Roth IRA switcheroo can be done two different ways (or both): A traditional IRA switcheroo and a 401k-type plan switcheroo.

Traditional IRA Switcheroo

Make a non-deductible contribution to a traditional IRA, then convert the non-deductible contribution (plus associated earnings, if any) to your Roth IRA.

Anyone, regardless of income, can make a non-deductible contribution to a traditional IRA. This contribution alone has limited tax advantages (which is why we are going to convert it). The only tax advantage is tax deferred earnings -- there is no tax deduction on the contribution.

As of 2010, there are no income limits for conversions. Once the conversion is complete, your earnings are now accruing tax free rather than tax deferred. That's why we do the switcheroo!

Beware the Pro Rata Rule

If you already have a traditional IRA, SEP IRA, or SIMPLE IRA with pre-tax contributions, things get more complicated because of the pro-rata rule, and you may want to rethink this strategy. This IRS rule states you have to convert a proportional amount of pre-tax and post-tax amounts from all of your traditional, SEP, and SIMPLE IRAs.

That means if you previously made deductible traditional IRA contributions or rolled over a 401(k), 403(b), 457 or other pre-tax employer-sponsored plan to a traditional IRA, those funds have to be counted in the conversion ratio. Pre-tax money still in employer-sponsored plans like 401(k)s do not count.

A conversion still could make sense, even if you have to include a portion of your deductible contributions. Just make sure you have all the facts.

Example 1: Last year you rolled over $6,000 from your former employer’s 401(k) into a traditional IRA. This year you want to do the Roth IRA switcheroo with a $6,000 non-deductible traditional IRA contribution because you’re over the magi limit. 50% (6,000/12,000) of the $6,000 conversion, or $3,000, would be subject to ordinary income tax.

Example 2: Last year you rolled over $194,000 from your former employer’s 401k into your traditional IRA. This year you want to do the Roth IRA switcheroo with a $6,000 non-deductible traditional IRA contribution because you’re over the magi limit. 97% (194,000/200,000) of the $6,000 conversion, or $5,820, would be subject to ordinary income tax.

401k-Type Plan Switcheroo

If your employer's retirement plan allows what are known as after-tax non-Roth contributions, you are one lucky employee.

Keep in mind this strategy is only relevant if you want to invest more than the $18,000 maximum allowable limit ($24,000 if your age 50 or older). If you’re planning to contribute under the limit, this strategy makes no sense. However, if you want to contribute more than the $18,000/$24,000 limit, read on.

What I call an after-tax non-Roth contribution (your employer may use a slightly different name) is not the same as a regular Roth contribution, which most employers now offer, giving you a choice between pre-tax and (regular) Roth contributions. The after-tax non-Roth is a third type of contribution where, if you leave it in your 401k-type plan, the earnings accrue tax deferred, not tax free like a “regular” Roth contribution.

Most employer retirement plans allow conversions of these non-Roth after-tax contributions and associated earnings to a Roth IRA even if you’re not yet age 59 1/2. Not so with your traditional and/or Roth contributions that count toward the $18,000/$24,000 maximums: they’re locked up until you separate from service (or reach age 59 1/2 if your employer allows in-service withdrawals from the plan).

The beauty of the employer retirement plan Roth IRA switcheroo is you can contribute well beyond the contribution limits allowed in IRAs ($5,500/$6,500 for 2017). I’ve seen some plans that allow contributions of this type all the way up to the yearly maximum allowed for defined contribution plans, which is $54,000 in 2017 ($59,000 if you’re age 50 or older).

MAGI between Income limits

If you’re between the income limits for Roth IRA, I suggest making as much of a direct contribution as the law allows.

What’s the difference between a direct contribution and a converted contribution? That direct contribution is immediately accessible to you for any reason without penalty or tax, while the converted contribution must remain in your Roth IRA for five years before it’s accessible tax and penalty free (unless you’re age 59 ½ or older).

If you do a switcheroo every year, remember that each conversion has its own 5 year window.

Calculating your allowable direct contribution amount is a simple ratio computation. For example, if you’re magi is right in the middle of the income limits for Roth IRA, you could contribute exactly ½ of the allowable yearly contribution limit. Here’s another example:

Jane’s magi is $184,000, her contribution limit for the year is $6,500, and the income limits for Roth IRA for her filing method are $178,000≤magi≤$188,000. Jane could make a direct contribution of $2,400 (Jane is 6,000 over the 10,000 total threshold, leaving 4/10 * 6,500 = $2,600).

If Jane is smart, and I know she is, she’ll do a switcheroo on the remaining $3,600 contribution if she wants to maximize her retirement savings.

The Step Transaction Doctrine

There is one more caveat to consider before you execute a Roth IRA switcheroo, and that’s the IRS’s step transaction doctrine.

The step transaction doctrine states that if you do several legal steps (1. Make a non-deductible IRA contribution to a traditional IRA 2. Convert money from a traditional IRA or pre-tax Employer contribution to a Roth IRA) that result in something you are prohibited from doing (contribute money to a Roth IRA cause you’re over the limits), the IRS could disallow the transaction.

You are vulnerable to the Step Transaction Doctrine if you immediately convert the money, which is desirable to limit the amount of taxable earnings in the traditional IRA or 401k-type plan; However, the IRS claims this makes your intent pretty obvious.

That’s why you need to delay conversions made in one calendar quarter till the next calendar quarter. That keeps you on the IRS's good side. If you want, you can delay the conversion longer, but you stand the chance of racking up more taxable earnings.

Keep the money you plan to convert in a money market or other super-save account. That will not only limit your earnings until you convert but limit your losses due to any market volatility.

MAGI Limits Don’t Really Matter

Even though it’s a little sneaky, now just about everyone – regardless of the income limits for Roth IRA – can enjoy tax free earnings. Who knows how long the ‘ole Roth IRA switcheroo will be around before Congress decides to change the rules, so take advantage of it while you can!