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We usually contribute to a Roth IRA, but our income is variable enough that sometimes our MAGI is over the limit. In this case I want to contribute the full amount (post-tax) to a traditional IRA and then immediately transfer to the Roth IRA. Is this a way around the MAGI limit? It seems like this is either not legal, or there is some other downside to doing this since it seems like I will have completely bypassed the limit. What am I missing?

Edit to clarify: If I am below the MAGI limit, I put $5,500 post-tax directly into a Roth. If I am above the limit, I put $5,500 post-tax into a traditional IRA. Then I immediately transfer it to a Roth. Since I move it right away, there is no gain, and therefore no tax. The effect appears to be the same. So, the question is: Why does the MAGI limit on the Roth exist if it can be bypassed by putting the money into a traditional IRA and then moving it immediately to a Roth? Is this a loop-hole, or is there a reason that one cannot or should not convert to a Roth immediately?

nguthrie
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The backdoor Roth IRA contribution has been possible for a few years now and is fairly widely known. The IRS hasn't said anything negative about it. An answer to my question here mentions that it could hypothetically be disallowed through the "step transaction doctrine", although that is the only time I have heard that possibility raised.

For some background, the income limit on Roth conversions was removed as a "revenue-offsetting provision" of the Tax Increase Prevention and Reconciliation Act of 2005. They want people who have deducted contributions in Traditional IRAs to convert to Roth and pay taxes now rather than waiting many years until retirement. Conversely, people performing the backdoor Roth IRA contribution have already paid taxes on that money and it's just preventing them from having to pay taxes many years later. It's easy to see how Congress would find this a satisfactory exchange.

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Craig W
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