What Is a Backdoor Roth IRA?
A Backdoor Roth is a strategy to create an after-tax investment account that allows potential investment growth to be tax free when income levels exceed the current IRS limits.
The idea of a Backdoor Roth IRA is a simple two-step process:
1. You contribute to a Traditional IRA (non-deductible).
2. You convert those funds to a Roth IRA.
In theory, it’s that simple, however there are many rules and considerations to see if this strategy is right for you. If done correctly, a Backdoor Roth may help people who earn too much to contribute directly to a Roth IRA get around these income limitations and take advantage of tax-free potential growth.
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Why do I care about Backdoor Roths?
A Backdoor Roth is useful for the following reasons.
- Good for high-earners, as there are no income limits for Backdoor Roth contributions (Roth IRA limit is $150,000 for individuals in 2025)
- Potential investment growth is tax-free once inside the Roth IRA
- If withdrawn after 59.5
- If it has been 5 years or more since the first contribution
- Contributions can be withdrawn tax free at any time
- Money in your Roth IRA will not be taxed upon withdrawal (traditional IRAs are taxed as ordinary income)
- No Required Minimum Distributions are required from a Roth IRA (unless inherited), unlike a Traditional IRA
- If the Roth IRA is inherited, RMDs may still apply if not rolled into beneficiary’s Roth IRA account.
Step-by-Step: How to Do a Backdoor Roth IRA (Safely)
Before we go through the steps to complete Backdoor Roth, here is a quick note. Nothing in this article may be interpreted as tax or financial advice specific to any one individual. For guidance specific to your personal situation, please consult a professional.
Here is a simple outline of the steps you would take when setting up a Backdoor Roth IRA.
- Confirm you have enough earned income. You need income to contribute to an IRA, Roth or not, however if you are looking to do a Backdoor Roth, this strategy may only make sense if you make over the income limits for Roth contributions. Otherwise, contributing directly into a Roth IRA would make more sense for your situation.
- Ensure you have no pre-tax IRA money. If you do, roll it into a 401(k) to keep pre-tax and post-tax contributions separate and avoid the “IRA aggregation rule.” More on that below.
- Contribute to a Traditional IRA. Make a non-deductible IRA contribution (limit: $7,000 in 2025, or $8,000 if age 50+).
- Your IRA must be converted by December 31st of the target year.
- Invest the funds. Keep the money invested while you wait to convert, ideally for at least one statement cycle (or longer if you want to be more cautious).
- Convert to a Roth IRA. Move the funds into your Roth IRA. If no gains occurred, there's no tax. If gains did occur, you'll pay tax only on the earnings.
- Repeat yearly. This is a rinse-and-repeat strategy to build long-term tax-free (once in the Roth account) wealth.
You happen to be making separate investing decisions, not exploiting a known loophole.
Common Pitfall: The IRA Aggregation Rule
If you have other pre-tax IRA balances (including SEP or SIMPLE IRAs), the IRS looks at all of your IRAs as one big pot. For this reason, you should proceed carefully. Here’s what to be aware of.
Example:
James has $200,000 in existing pre-tax IRAs. He makes a $7,000 non-deductible IRA contribution and tries to convert just that.
Here’s the issue…
The IRS says:
$7,000 / $207,000 = 3.38% is non-taxable.
That means 96.62% of his conversion would be taxed as income. Not good.
Workaround:
1. Roll existing IRA funds into a 401(k), where the aggregation rule doesn’t apply.
2. Now the only IRA balance is your new non-deductible contribution, clean slate for conversion.
Step Transaction Doctrine: Don't Get Tripped Up
If you contribute to a Traditional IRA and convert to a Roth the next day, the IRS could say you willfully intended to bypass the income limits, which could trigger penalties.
Example:
Betsy earns $250,000 per year. She makes a non-deductible IRA contribution on July 1 and converts on July 2. The IRS could call this a "step transaction" and disallow it.
How to Avoid It:
- Wait at least one statement cycle (some advisors recommend a full year)
- Invest the funds in the meantime
- Don’t note that you're “doing a backdoor Roth” in anything reviewable by the IRS
Who Should Consider a Backdoor Roth?
If you are wondering if a Backdoor Roth is right for you, here are some situations where we generally see it as a good fit.
This is not advice specific to any one person. Let’s set up a time to talk if you are curious if this is truly right for you.
- High-income professionals making more than the Roth IRA income limit
- Individuals with no (or 401k-rolled) pre-tax IRA balances
- Long-term savers who want tax-free growth
- Individuals that have a longer time horizon until they need to make withdrawals (young people)
When properly executed, the Backdoor Roth IRA may be a great way to get around Roth IRA income limits. To do it correctly:
- No pre-tax IRA money (or roll it to a 401(k))
- Wait between the contribution and conversion for a statement cycle up to a full year
- Don’t write down that you’re “doing a backdoor Roth” in notes viewable by the IRS
Done right, it’s one of the cleanest, most impactful retirement strategies for high-income earners.
Ready to See If You Can Use the Backdoor Roth Strategy?
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