For the last few years folks disqualified from making Roth IRA contributions because of too much income have been able to contribute to their Roth IRA’s through a back door method. This involves making a non-deductible contribution to a traditional IRA and immediately converting that contribution to a Roth IRA. This only works if you have no other traditional IRA’s otherwise those traditional IRA’s will be aggregated together to determine the taxable amount of the Roth conversion.
Here is a link that a client sent along for an article that does a nice job of explaining the concept and the application of the same. We’ve been using this technique with this client and he wondered if he was subject to the “pro-rata” rule. Because he had no other traditional IRA’s (which would have to be aggregated in order to determine the taxable amount of the Roth conversion) but instead had only 401k’s, this rule didn’t apply.
If you have no IRA’s that contain pre-tax contributions, would like to contribute to a Roth IRA and are disqualified from making a direct Roth contribution because your income exceeds the allowable amount, this strategy might be helpful. As always, please consult with your planning professional regarding your specific situation and remember you have until April 15th to make a 2013 IRA contribution.