Q&A: Backdoor Roth Ira conversions

Dear Liz: I am 65, self-employed and have a SEP IRA as well as a Roth IRA. I’ve had a few low-income years, and I find myself in a very low tax bracket, most likely lower than when I begin to take distributions and collect Social Security in a few years. What are the steps for a “backdoor Roth” conversion? As a self-employed person, do I even qualify?

Answer: A backdoor Roth is a way for higher-paid people to get around the income limit for Roth contributions. If you’re in a low tax bracket, that limit likely isn’t a problem for you.

What you’re probably asking about is a basic Roth conversion, where you roll money from your pre-tax SEP IRA into a Roth and pay the resulting taxes. Such conversions can make sense if you expect to be in a higher tax bracket later and you don’t have to tap your account to pay the taxes, but they’re not a slam dunk.

A too-large conversion could push you into a higher bracket. or increase your Medicare premiums or both. (Higher Medicare premiums are imposed when modified adjusted gross incomes exceed $88,000 for singles or $176,000 for married couples filing jointly.)

Financial planners often recommend converting just enough to “fill out” a low tax bracket. Let’s say you’re single and currently in the 12% federal tax bracket, which ends at $40,525. If your income is $25,000, you might convert about $15,000 of your SEP to avoid being pushed into the next bracket, which is 22%.

A tax pro or fee-only financial planner could advise you about how to proceed.

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  1. Thanks for answering my question Liz. Awesome help.

  2. My daughter is nearly 17 years old, makes about $2K per month and has figured out how to pay for her own college through a Masters degree without family assistance, scholarships, roommates or student loans by participating in ROTC, joining the Reserves and then making a career of the military after she gets her Bachelors degree. We are a military family. She has already been in ROTC for three years, so this is a plan she has been working on for quite some time.

    Because she currently has a lot of extra money, she wants to establish a Roth IRA now to take advantage of being in a bottom tax bracket, plus 50 years or more of growth. She wants to put her money in an index fund or a exchange-traded fund.

    What advice to you have for her that can get this started at a minimal cost with the potential for the best return over such a long period? Also, is there an age restriction for starting an IRA?