A Roth IRA is one of the most powerful and popular tools to help you save for retirement. It allows you to contribute after-tax money and then avoid taxation on your retirement savings moving forward. You will not be subject to taxes as the money grows in your account, nor will you pay taxes on your withdrawals during retirement.

But there is one catch: The IRS imposes an income limit on Roth contributions, meaning if your income is too high, you may not be able to contribute.

That is where a backdoor Roth IRA comes in. It allows you to take advantage of the benefits of a Roth IRA, even if your income exceeds the limits set by the IRS.

In this guide, you will learn how backdoor Roth IRAs work, the steps to do a backdoor Roth IRA, and how to know if a backdoor Roth IRA is worth it for you.

What is a backdoor Roth IRA?

A backdoor Roth IRA is a strategy that high earners can use to contribute to a Roth IRA despite income limits. This strategy involves making non-deductible contributions to a traditional IRA and then converting those dollars into a Roth IRA. Though it requires one more step than simply contributing to a Roth IRA directly, it allows you to enjoy all the benefits of a Roth IRA, even with a high income.

While there is an income limit on contributing to a Roth IRA, no such limit exists for Roth conversions. Therefore, anyone can technically access a Roth IRA through this backdoor channel.

A key component of the backdoor Roth IRA strategy is that your traditional IRA contributions should be non-deductible (after tax). If you deduct these contributions, then you will have to pay income taxes on your conversion, which further complicates the process. During the conversion, you will also have to pay income taxes on any investment earnings that have not been taxed.

Roth IRA vs. Traditional IRA

To gain a greater understanding of backdoor Roth IRAs, it is important to understand the difference between the two most common types of individual retirement accounts: Roth IRAs and traditional IRAs.

With a Roth IRA, you contribute after-tax (non-deductible) dollars, your money grows tax-free, and you can make tax- and penalty-free (qualified) withdrawals after 59 ½.

With a traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxes as ordinary income. Withdrawals before 59 ½ are subject to 10% penalty in addition to income taxes.  Pre-tax contributions are deductible from current income.

The key difference between these accounts is their tax advantage. The traditional IRA has an upfront tax advantage, while the Roth IRA has a delayed benefit.

If you anticipate a higher tax rate in the future, the Roth IRA might be the best option.  However, for those currently in their peak income earning years and expecting a lower tax rate in retirement, the traditional IRA may be the better choice.

Who needs a backdoor Roth IRA?

You may need a backdoor Roth IRA if your income exceeds the IRS income limit for Roth IRA contributions.

If you are single, your allowed Roth IRA contributions will begin to phase out when your income reaches $146,000 and will phase out entirely when your income reaches $161,000. If you are married filing jointly, contributions will begin to phase out when your income reaches $230,000 and will phase out entirely when your income reaches $240,000.

If your income is lower than these limits, you can still use a Roth conversion to move previous traditional IRA contributions to a Roth IRA, but new contributions can be made to your Roth IRA directly.

Three simple steps to execute a backdoor Roth IRA

Executing a backdoor Roth IRA is a relatively straightforward process. Here is a step-by-step guide to help you take advantage of this retirement savings strategy.

Step 1: Make a non-deductible traditional IRA contribution

The first step of a backdoor Roth IRA is making a non-deductible contribution to a traditional IRA. In 2024, you can contribute up to $7,000, with an additional $1,000 contribution allowed for workers ages 50 and older.

If you do not already have a traditional IRA, you will have to open an account first. You can open a traditional IRA in just a few minutes online.

Step 2: Convert your contributions to a Roth IRA

Once you have completed your traditional IRA contribution, you can convert the entire amount (or only a portion of it) to your Roth IRA. Depending on your brokerage firm, you may be able to do this easily through your online account. You can also contact your broker’s customer service department for help completing the process.

Pro Tip: To ensure there are no tax implications for your backdoor Roth IRA, complete your Roth conversion as quickly as possible. If you leave your contributions in your traditional IRA, they may result in investment earnings, which you will have to pay taxes on.

If you are unsure about how to complete the Roth conversion or whether there will be tax implications for you, consider speaking with a financial professional who can make sure you are doing everything openly.

Step 3: Repeat annually

You can continue using the backdoor Roth IRA for as long as it remains appropriate for your financial situation. If your income is near or above the Roth IRA income limit, a backdoor Roth IRA can help you access these tax advantages without getting in trouble with the IRS.

It may also be worth re-evaluating your financial situation each year to decide whether the backdoor Roth IRA is still the right choice. A financial professional can take an unbiased look at your personal finances to advise whether a Roth IRA is the best option or whether you may be better off using a traditional IRA or another retirement savings tool.

Key considerations for a backdoor Roth IRA

We have talked about the process of completing a backdoor Roth IRA, but there are some other important considerations to consider before doing so.

Are backdoor Roth IRAs allowed?

The Build Back Better Framework, introduced in 2021, called for the removal of the backdoor Roth IRA. This provision would have made Roth IRAs entirely inaccessible for high earners. However, the bill did not gain the support necessary to pass. So, the short answer is that, yes, backdoor Roth IRAs are currently still legal.

Tax implications of backdoor Roth IRAs

In many cases, a backdoor Roth IRA will not result in any tax implications. This is the case if you immediately convert your non-deductible traditional IRA contributions to your Roth IRA.

However, some backdoor Roth IRAs may still result in tax liability. If you deducted your traditional IRA contributions and then decided to convert your traditional IRA to a Roth IRA, you will need to pay taxes on the pre-tax assets. Additionally, if you convert any investment earnings from your traditional IRA to your Roth IRA, you will have to pay taxes on them.

The pro-rata rule for backdoor Roth IRAs

One of the most important rules relevant to the backdoor Roth conversion is the pro-rata rule.  This is an IRS rule that determines what amount is subject (or not) to taxes when you convert IRA dollars from a traditional IRA to a Roth IRA.

Under the pro-rata rule for Roth conversions, the IRS looks at the proportion of pre-tax versus after-tax dollars in all your traditional IRAs. This is the percentage that will be taxable when you make a backdoor Roth conversion.

For example, let's say you have $95,000 of pre-tax funds in a traditional IRA(s), and you contribute another $5,000 of non-deductible money. You might think that you could just convert the $5,000 of non-deductible money and avoid owing any additional taxes. Instead, thanks to the pro rata rule, the IRS considers 95% of each dollar you convert as taxable (total* pre-tax amount ($95,000) / non-deductible amount ($100,000)). Only $250 of your $5,000 conversion in this instance is tax-free while the rest is taxed as income.

*The IRS looks at all your IRAs in aggregate.

The five-year rule for backdoor Roth IRAs

This IRS rule states that to make a qualified distribution from a Roth IRA, five years must have passed since the beginning of the first tax year you contributed to the account. In the case of Roth conversions, this rule works a bit differently.

Unlike in the case of other Roth dollars, each Roth conversion is subject to its own five-year holding period. The period starts on the first day of the tax year of the conversion. For example, if you do a Roth conversion in 2024, you can safely withdraw those dollars starting in 2029. If you do another conversion in 2025, you will not be able to touch those dollars until 2030.

Rules for Roth IRA conversions

There are a few different options you can use to convert your traditional IRA dollars to a Roth IRA. Here are the types of conversions you can do:

• A rollover, where you receive funds from your IRA and deposit the money into the Roth account within 60 days
• A trustee-to-trustee transfer, in which the IRA provider sends your funds directly to the Roth IRA provider
• A “same trustee transfer,” in which both the traditional and the Roth IRA are with the same financial institution

In the case of both trustee-to-trustee transfers and same trustee transfers, you can take a hands-off approach since your brokerage firms will take care of the transfer.

However, if you choose a rollover where you receive the funds from your IRA, it is critical that you deposit them within the 60-day window. If you fail to do so, the IRS will consider it a withdrawal, and you will be subject to income taxes and a 10% early withdrawal penalty.

Asset allocation, diversification, and/or rebalancing do not ensure a profit or protect against loss.

Is a backdoor Roth IRA worth It?

A backdoor Roth IRA can be a worthwhile investment strategy, especially for high-income earners who exceed the income limits for contributing directly to a Roth IRA.

It may not be a promising idea if:

• Your federal income tax bracket is 32% or higher.
• You need to withdraw money in five years or less.
• You can only pay the taxes due with money from your IRA withdrawal.

Advantages include:

• Tax-Free Growth ~ Once the money is in a Roth IRA, it grows tax-free, and qualified withdrawals are also tax-free.
• No RMDs (Required Minimum Distributions) ~ Unlike traditional IRAs, Roth IRAs do not require you to take RMDs during your lifetime.
• Estate Planning Benefits ~ Roth IRAs can be passed on to heirs, potentially providing them with tax-free income.

In addition to diversifying retirement tax benefits, a backdoor Roth IRA might be suitable for those who have maxed out other retirement savings options, such as workplace 401(k) plan, or if you are not eligible to deduct your traditional IRA contributions. The IRS imposes an income limit on being able to deduct contributions to a traditional IRA if you participate in a workplace retirement plan. Keeping in mind the fact that you will have to leave the funds in the account for five years.

The backdoor Roth IRA is not right for everyone. If you can meet your savings goals via your workplace retirement accounts, without needing more, the backdoor Roth IRA may be unnecessary.

If you have a high income today but expect it to be lower during retirement, you may prefer to enjoy the upfront tax benefit, even if it means paying taxes on your retirement withdrawals.

If you have various traditional IRAs with pre-tax money, you will have to follow the IRS’s pro-rata rule and pay income taxes on the portion of your conversion that is equal to the pre-tax share of your traditional IRAs. While you may decide you are comfortable with that, it is another consideration.

​​Suggested next steps for you

Backdoor Roth IRA contributions can equate to significant tax savings over time, as Roth IRA distributions, unlike traditional IRA distributions, are not taxable. Here are the next steps to take if you are considering this retirement savings strategy:

1. Assess your eligibility: While there is no income limit to using a backdoor Roth IRA, there are some criteria that make someone a better candidate for this strategy than others. It is worth exploring the pros and cons to determine if it is the right fit for you.
2. Evaluate the tax benefits: Roth IRAs come with long-term tax savings, but at the expense of the upfront savings offered by a traditional IRA. Consider using an online Roth conversion calculator to determine whether this strategy will result in tax savings for you.
3. Consult a tax professional: Even if you have thoroughly researched the topic, tax consequences and benefits can be confusing, and the rules and limits change frequently. It may be worth seeking guidance from a qualified financial advisor or tax professional to eliminate uncertainty and ensure you are making the best decision.

Backdoor Roth IRA FAQ

What is the difference between a Roth IRA and a backdoor Roth IRA?

Roth IRA: A regular Roth IRA allows direct contributions but has income limits.  Contributions are made with after-tax dollars and qualified withdrawals are tax-free.

Backdoor Roth IRA: A backdoor Roth IRA is a strategy for high-income earners who exceed Roth IRA contribution income limits.  It involves making non-deductible contributions to a traditional IRA and then converting those funds into a Roth IRA.  This allows high allows high earners to take advantage of Roth IRA benefits.

What is a mega backdoor Roth IRA?

A mega-backdoor Roth is a special type of 401(k) rollover strategy used by people with high incomes to deposit funds into a Roth IRA or Roth 401(k). To build a mega-backdoor Roth IRA, you will need to make after-tax 401(k) contributions and make in-service distributions to a Roth IRA.  The maximum mega backdoor Roth IRA conversion limit for 2024 is $69,000 for total 401(k) contributions ($76,5090 if 50 or older).

You can only perform a mega backdoor Roth conversion under the following conditions.

• You participate in a 401k plan at work that allows after-tax contributions. Regular 401k contributions are made on a pre-tax basis. Fewer than half of 401k plans allow after-tax contributions, so check with your benefit plan administrator before moving forward.
• The 401k plan allows in-service distributions to a Roth IRA or transfer of funds out of the after-tax portion of the account into a Roth 401k. If it doesn’t, you will have to wait until after you leave the company to perform a mega backdoor Roth.

Is a mega backdoor Roth worth it?

Whether the mega backdoor Roth strategy is worth it in your situation can depend on a range of factors. Some issues to consider include:

• Whether it is allowed under your workplace retirement plan
• How much you are currently saving for retirement and how much you already have saved
• What other financial goals you have and how much you have saved towards these goals
• Your current tax rate vs. Your potential tax rate in retirement
• How a Roth conversion would impact your taxes for the year in which you convert

In addition to those financial considerations, there can be practical ones.  The mega backdoor Roth can be a complex strategy.  Consider whether you have the time and interest to learn the rules and stay on top of the administrative legwork it can take to make the strategy work.  Consulting with your Tax Advisor is highly recommended.