A Backdoor Roth IRA is not an official type of individual retirement account. Instead, it is an informal name for a complicated method used by high-income taxpayers to create a permanently tax-free Roth IRA, even if their incomes exceed the limits that the tax law prescribes for regular Roth ownership. Brokerages and investment firms that offer both traditional IRAs and Roth IRAs provide assistance in pulling off this strategy, which basically involves converting a traditional IRA into the Roth variety.There are income limitations on who can make direct contributions to a Roth IRA – $118,000 for singles and $186,000 for married couples filing jointly in 2017. But there are no such restrictions on conversions from one type of account to another. So people whose incomes exceed those limits can use what's called a "backdoor" approach: they contribute money to a traditional IRA (which does not have any income limitations), then convert it immediately into a Roth account (whose contributions are limited only by income). This way they get all of the benefits of owning a Roth – including tax-free growth potential – without exceeding IRS contribution limits.The beauty of using this backdoor approach is that you don't actually have to do anything once you've made your initial contribution; your brokerage will take care of everything automatically when you ask them to switch your account over from Traditional -> Rollover ->Roth. And there's no need to worry about taxes either: since you're converting after contributing rather than before, it's all considered taxable income in the year that you do the conversion but because you're below IRS thresholds anyway, most people won't owe any extra taxes as result (assuming their other deductions outweigh their newly increased taxable income).
