Are backdoor Roth IRAs worth it if I have only $6k–$12k to invest?

Key Points from 24/7 Wall St.

• A backdoor IRA gives you access to tax-free gains and income in retirement.
• It can be worth doing even for a small amount.
• Work with a professional to manage the financial impact.
• Also: Take this quiz to see if you’re on track to retire (Sponsored)

Some people will tell you that there’s no better retirement savings plan out there than the Roth IRA. Not only do these accounts let you grow your money tax-free, but distributions are tax-free during retirement, when you’d probably prefer to keep as much of your income as possible for yourself.

Plus, Roth IRAs don’t impose required minimum distributions. This gives you more control over your savings and gives you more flexibility in the context of estate planning.

One hiccup you might encounter, though, is earning too much money to fund a Roth IRA directly. In that case, the backdoor IRA can come to your rescue, allowing you to move funds from a traditional IRA into a Roth and simply cover the taxes at the time of the conversion.

That said, one Reddit user recently asked if a backdoor Roth IRA is worth it in a small amount. The answer? It certainly can be.

When you get some tax diversification

When many people talk about using the backdoor Roth IRA strategy, they’re talking about large sums of money. In this case, the Redditor asking the question is talking about moving $6,000 to $12,000 into a Roth IRA, which is a fairly modest amount.

But my take on this is that some amount of tax-free income in retirement is better than none. So if we’re talking about doing a one-time Roth conversion for $6,000 or $12,000, I’d still say it’s worth it. However, I’d encourage the Reddit user, and anyone else in a similar boat, to consider a follow-up conversion to funnel more money into a Roth IRA ahead of retirement. It’s okay to split a larger sum up into smaller conversions, though, to minimize the year-to-year tax hit. 

The good news is that the actual work involved in doing a Roth IRA conversion is pretty quick and simple. What’s less simple is the math involved. So you’ll need to understand what a backdoor Roth IRA means for you financially.

Ask a professional to help you run the numbers

The downside to doing a Roth IRA conversion is that you’ll owe taxes on the money you move over the year you do your conversion. If your income is high enough that you can’t fund a Roth IRA directly, it means you’re probably in a pretty high tax bracket. And so you could face a hefty tax hit for moving that money over.

The upside, of course, is knowing what tax rate you’ve paid on that money. We don’t know what tax rates will look like in the future. If you’re worried about them going up, then a Roth IRA makes a lot of sense.

Also consider the benefit of tax-free investment gains. Even if you’re forced to pay taxes on your Roth IRA conversion at a higher rate, many years of tax-free gains could more than compensate for that.

Ultimately, though, it’s a potentially complex decision, so I’d highly recommend consulting a tax professional or a financial advisor to not only help you run the numbers but walk you through the pros and cons. And to be clear, I suggest doing this no matter how large or small your Roth IRA conversion is looking to be. That should help you approach the decision more confidently.