Step 1. Open a non-deductible traditional IRA account
As long as you have earned income, doesn't matter how high your income is, you can make a non-deductible contribution to a traditional IRA.
The annual contribution limit could change every year as well as change with your age, see our previous blog post.
Step 2. Wait a While
The law does not impose any waiting period between a contribution and a conversion. However, as we have discussed previously, there is a step transaction doctrine, which implies the best wait time is to convert prior year's non-deductible IRA to current year's Roth IRA.
For the money sits inside the non-deductible traditional IRA account, if it has unrealized gains at the time of conversion, it will be taxed at your income tax rate, rather than the typically lower capital gain tax rate. A good strategy is to keep the money in cash format, because out of your entire portfolio, it's wise not to put 100% of your money into investment, so you will have enough ammunition in case of a market crash! This is a good place to park that cash, and avoid any potential higher income tax.
Step 3. Convert to Roth IRA
Call your traditional IRA provider how to do this, some could do it for you over the phone, some require you to sign a form. There is no income limit for the conversion. Because your money is from the after-tax traditional IRA account, except on the unrealized gains, there should be little tax on the conversion.
In our next blog post, we will discuss the tax treatment of backdoor Roth IRA conversion at the time of filing your tax.