United States: Tax Connections Newsletter – Summer 2019

The "Backdoor" Roth IRA Strategy

The Roth IRA is an attractive savings vehicle, offering tax-free retirement income and other significant benefits. Unfortunately, income limitations prevent many people from contributing to these accounts. But even if you cannot contribute directly, there is no limit on converting a traditional IRA into a Roth. This "backdoor Roth IRA" strategy allows anyone, regardless of income, to enjoy a Roth IRA's benefits.

Although some lawmakers proposed closing the back door, the Tax Cuts and Jobs Act (TCJA) preserved this option.

Would You Benefit?

Before considering a backdoor Roth IRA, first determine whether a Roth is right for you. The main difference between traditional and Roth IRAs is the timing of income taxes. Traditional IRA contributions are deductible — that is, they are made with pretax dollars — while withdrawals of both contributions and investment earnings are taxable. In addition, withdrawals of contributions or earnings before age 59-½ are subject to a 10% penalty.

Roth IRAs work in the opposite way: Contributions are taxed up front (they are nondeductible), but qualified withdrawals of contributions and earnings are tax and penalty-free. Generally, you can withdraw direct contributions anytime and backdoor contributions after a five-year waiting period. To avoid taxes and penalties on withdrawn earnings, however, you must be at least age 59-½ and the Roth IRA must be at least five years old.

From a tax perspective, a Roth IRA makes sense if you expect your tax rate to be higher in retirement: You are better off paying the tax upfront, when your rate is lower. If you expect your tax rate to be lower in retirement, a traditional IRA may be preferable.

Roth IRAs may also be advantageous if you want to allow the funds to continue growing tax-free, or continue making contributions, beyond age 70-½. With a traditional IRA, you must stop making contributions and begin taking required minimum distributions when you reach that age. A Roth IRA is particularly valuable if you wish to leave the account to your heirs income-tax-free.

Related Read: “Should You Convert Your Balance to a Roth IRA?

What Are the Contribution and Income Limits?

Currently, the maximum contribution to a traditional or Roth IRA is $6,000; $7,000 if you are 50 or older. Roth IRA contributions are phased out when your modified adjusted gross income (MAGI) reaches a certain threshold. This year, contributions for single filers are gradually reduced when MAGI tops $122,000, and eliminated altogether when it reaches $137,000. For joint filers and qualifying widows or widowers, the phase-out range is $193,000 to $203,000.

There are also income limits on the deductibility of traditional IRA contributions if you or your spouse are covered by an employer-sponsored retirement plan. But you can still make nondeductible contributions up to the amounts specified above.

How Does a Backdoor Roth IRA Work?

The backdoor technique works best if you do not have an existing traditional IRA and you are ineligible for deductible contributions. To make a backdoor contribution, you simply make a nondeductible contribution to a new traditional IRA and then convert it to a Roth IRA. Because your contribution is nondeductible, the conversion will not be taxable except to the extent there are any earnings in the account before you convert. If you convert quickly, the tax consequences of a backdoor contribution are virtually the same as a direct contribution.

If you have a traditional IRA with substantial pretax funds, the backdoor technique will come at a tax cost. That is because of the so-called "aggregation" rule. When you withdraw or convert funds from a traditional IRA, this rule treats all of your traditional IRAs as one big account and allocates the funds among those accounts on a pro-rata basis. (See "Aggregation Rule in Action.")

Should You Convert?

Now may be an ideal time to convert a traditional IRA into a Roth, since the TCJA reduced individual income tax rates through 2025. But beware: Depending on the size of your IRA and your other income, converting the account all at once could push you into a higher tax bracket. You may be better off converting the account gradually over several years. Talk to your tax advisor before taking any action.

Sidebar: Aggregation Rule in Action

Suppose you have an existing traditional IRA with a $24,000 balance, consisting entirely of deductible contributions and earnings, and you wish to make a backdoor contribution to a Roth IRA this year. To accomplish this, you make a $6,000 nondeductible contribution to a new traditional IRA and immediately convert it into a Roth IRA.

Under the aggregation rule, the conversion is treated as if the funds were withdrawn from all of your traditional IRAs on a pro-rata basis. In this case, you have $24,000 of pretax dollars in the existing IRA and $6,000 of after-tax dollars in the new IRA. In other words, 80% of your aggregate balance ($24,000/$30,000) is pretax.

The result? When you do the conversion, 80% of the converted amount ($4,800) is taxed as ordinary income.

Guidelines for Deducting Business Meals

The Tax Cuts and Jobs Act (TCJA) eliminated most tax deductions for business-related entertainment, beginning in 2018. It also created confusion over the continued deductibility of business meals. Late last year, the IRS issued a notice clarifying that taxpayers may continue to deduct 50% of eligible business meal expenses and providing temporary guidance on the subject. Businesses may rely on this guidance until proposed regulations become effective.

Five-Part Test

The notice sets forth a five-part test to determine whether business meal expenses are deductible. Taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary business expense;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee, is present;
  4. Food and beverages are provided to a current or potential business customer, client, consultant or similar business contact; and
  5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment or their cost is stated separately on one or more bills, invoices or receipts. The meal cost must also be reasonable; That is, you cannot circumvent the disallowance of entertainment deductions by inflating the charges for food and beverages.

The notice provides several examples to illustrate the deductibility of meal expenses at an entertainment event. For example, you invite a business contact to a baseball game. You buy the tickets and, at the game, treat your guest to hot dogs and drinks. Although the tickets are a nondeductible entertainment expense, the hot dogs and drinks, which are purchased separately, are 50% deductible.

Now, suppose that you and your contact attend the game in a corporate suite, which provides food and beverages. If the invoice for the suite covers the entire expense, without separately stating the cost of food and beverages, the entire amount is a nondeductible entertainment expense. But if the invoice separately states the cost of food and beverages, that cost is 50% deductible (provided it is reasonable).

Certain Expenses Remain Deductible

The IRS notice focuses on business meals and entertainment activities with current and prospective customers and other business contacts. But several other types of expenses remain deductible after the TCJA. For example:

  • Meal expenses while traveling on business continue to be 50% deductible;
  • Meal and entertainment expenses may be 100% deductible if they are treated as compensation to employees or income to nonemployees; and
  • Reasonable expenses for company recreational or social activities, such as holiday parties and picnics, continue to be deductible. You can deduct 100% of the cost of both meals and entertainment, as long as an activity primarily benefits employees other than officers, owners or highly compensated employees.

Previously, certain meals provided to employees were fully deductible, including meals provided so employees can work overtime and meals furnished on or near the employer's premises (including certain operating expenses for on-premises dining facilities). The TCJA imposes a 50% limit on these deductions through 2025, after which they are disallowed entirely.

Know the Rules

If you incur business-related meal and entertainment expenses, familiarize yourself with current rules on their deductibility and document your expenses carefully. And be sure to keep an eye on regulatory developments that may change the rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions