There are two different types of Individual Retirement Accounts (IRAs) – traditional and Roth. With a traditional IRA, you will usually qualify to get a tax deduction in the current year for any IRA contributions you make during the year. When you retire and begin using the IRA, you’ll be taxed on any money you take out of that IRA, as well as any earnings on that money. A Roth IRA works in reverse. You do not get any tax deductions for money contributed to a Roth account. But when you take the money out in retirement, you’ll be able to do so tax-free (if you meet certain requirements).
Because of the uncertainty of what tax rates will be in the future, the tax-free nature of Roth distributions is appealing to many taxpayers. Unfortunately, there are income limits in place which prevent higher-income taxpayers from taking advantage of contributions directly to a Roth.
Luckily, there is still a way that higher-income earners can contribute to a Roth. The strategy consists of making a nondeductible contribution to a traditional IRA and then converting that money to a Roth IRA. It is informally known as a “backdoor Roth” and is widely used by taxpayers today.
Entering a backdoor Roth contribution in FreeTaxUSA requires a few more steps than if you were able to contribute to a Roth IRA directly, but we can help you enter it in the software quickly and accurately.
If you did a backdoor Roth and need to report it on your tax return, please click on the article below that applies to your situation. For most people, the top article for the basic backdoor Roth scenario will be the one to use.
(below are clickable links to 3 other articles)
Reporting a Backdoor Roth – Basic Scenario
Reporting a Backdoor Roth – Conversion After December 31st
Reporting a Backdoor Roth Plus a Recharacterization