If you would like to contribute to a Roth IRA but exceed the income limitations, a backdoor Roth can be a useful strategy to access the benefits these retirement accounts can offer. This method is not to be confused with a traditional Roth conversion, which allows for the transfer of tax-deductible contributions from a traditional IRA to a Roth IRA. Rather, with a backdoor Roth, you simply make a new nondeductible contribution to a traditional IRA, and then convert the funds into a Roth IRA. It’s effectively a workaround to be able to contribute to a Roth, thus the term ‘backdoor’.
What is a Backdoor Roth?
If you earn $165,000 or more as a single taxpayer, or $246,000 as a married filing jointly taxpayer, you cannot make any direct contributions to a Roth IRA for the 2025 tax year. However, there is a workaround for these earners. A backdoor Roth is a strategy that may allow a taxpayer to bypass the income limit and contribute to a Roth IRA. The Internal Revenue Service permits this method and can offer significant tax benefits, including tax-free growth.
Some other advantages of using a backdoor Roth IRA can include:
- Tax-free withdrawals: Qualified distributions are tax-free in retirement if the converted funds were held in the new account for five or more years and you are 59 ½ or older.
- No lifetime RMDs: Unlike many other types of retirement accounts, there are no RMDs from a Roth IRA during your lifetime, which can be beneficial for retirement planning.
- Estate planning benefits: A spouse can inherit a Roth IRA and roll it into a Roth IRA in their name, treating the assets as their own. Qualified distributions from an inherited IRA may be tax-free for both spouses and non-spouses.
While there can be a number of benefits to using a backdoor Roth, it’s essential to be mindful of any potential tax implications. Even though the backdoor Roth conversion is generally not a taxable event as long as the initial contribution to the account was made with after-tax dollars, you may face tax consequences if you have pre-tax dollars in other traditional IRA accounts. This is called the ‘aggregation rule’. You would also be responsible for taxes on the growth of any investment earnings after making the nondeductible contribution.
How Does a Backdoor Roth Work?
A backdoor Roth isn’t a distinct type of account; it is a two-step process. You simply make a nondeductible contribution into a traditional IRA with no balance, and then shortly thereafter convert it to a Roth IRA. Importantly, as stated above, if you already have funds in the traditional IRA account, the pro-rata rule will apply, which can increase the taxable portion of the conversion. Any deductible contributions or investment earnings on both deductible and nondeductible contributions are taxed as ordinary income in a Roth conversion at your regular tax rate.
In addition, some 401(k) plans allow for “mega backdoor Roth” conversions. Although this strategy is not available to everyone, it allows for much higher contributions than the backdoor Roth by maximizing after-tax contributions in the 401(k) plan. Notably, while the contribution cap for an IRA is $7,000 (or $8,000 for those over 50) for the 2025 tax year, the total contribution limit for a 401(k) is $23,500 for those under 50. Due to the catch-up contribution limit, those over 50 may contribute up to $31,000.
Contact an Experienced Tax Professional
If you are considering a backdoor Roth, it’s important to consult with a knowledgeable tax professional to discuss the tax impact and the steps involved in the conversion. Based in Fairfield, Rolleri & Sheppard CPAs, LLP, provides a wide range of tax services to individual taxpayers, including high-income earners. Contact us online or call (203) 259-CPAS to schedule a consultation to learn how we can assist you.
