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In a nutshell
A backdoor Roth IRA lets you convert a traditional IRA into a Roth IRA, even if your income is too high to contribute directly to one.
- Roth IRAs offer tax-free growth and tax-free withdrawals in retirement, and there are no required minimum distributions (RMDs) during the account owner's lifetime.
- For 2024, you can contribute to a Roth IRA if your income is $161,000 or less as a single filer or $240,000 or less if you're married filing jointly.
- Backdoor Roth IRAs must be reported on your federal tax return and may trigger taxes.
Backdoor Roth IRAs: The basics
A backdoor Roth IRA is a legal way to bypass the income limits that make high earners ineligible to contribute to a Roth IRA. Before going into the details, it’s helpful to review a few details about IRAs.
What is an IRA?
An IRA, or individual retirement account, is a personal retirement savings account that offers tax benefits. The account itself isn't an investment; it holds investments that you choose, such as stocks, mutual funds and exchange-traded funds (ETFs). You can open an IRA through a bank, brokerage, investment company or insurance firm.
Related: What is a Roth IRA and how does it work?
Traditional IRA vs. Roth IRA
Traditional IRAs and Roth IRAs both let you save for retirement, and they have the same annual contribution limits: $7,000 (or $8,000 if you're 50 or older).
The biggest perk of a Roth IRA is that you can make tax-free withdrawals in retirement. You don’t pay income tax on money you contribute to a traditional IRA until you withdraw it, but Roth IRAs work in the opposite way. Roth IRAs are funded with after-tax dollars, but Roth IRAs grow tax-free, and withdrawals in retirement are tax-free as well. For this reason, Roth IRAs can offer years or even decades of tax-free investment growth.
Another benefit is that, unlike traditional IRAs, Roth IRAs aren't subject to RMDs. Unless you need the money, it continues compounding, making a Roth IRA an excellent wealth-transfer tool.
Here are the key differences between traditional and Roth IRAs:
| Traditional IRAs | Roth IRAs | |
|---|---|---|
Funded with | Pretax dollars | After-tax dollars |
Tax break | Now: Contributions may be tax-deductible | Later: Qualified withdrawals are tax-free |
Income limits | None | $161,000 or less as a single filer; $240,000 or less if married and filing jointly |
Required minimum distributions (RMDs) | Mandatory starting at age 73 | Not required during the account owner’s lifetime |
Why you might want to create a backdoor Roth IRA
A backdoor Roth IRA allows high earners to take advantage of a Roth account despite the income limits set by the IRS. Remember, Roth IRAs offer tax-free growth and tax-free withdrawals in retirement, which can be an enormous financial benefit following years or decades of compounding interest. There are also no RMDs during the account owner's lifetime, so you can leave your Roth IRA alone and let it grow for your heirs if you don't need the money in retirement.
Why you might not want to pursue a backdoor Roth IRA
You shouldn't use a backdoor Roth IRA if you can contribute to a Roth IRA directly. Also, the strategy might not make sense if you plan to withdraw the money within five years. That's because money converted from a traditional IRA into a Roth falls under the Roth five-year rule. So, if it's been fewer than five years since you first contributed to your Roth IRA, withdrawals are considered nonqualified distributions and you might owe taxes, a 10% penalty or both.
Eligibility and income requirements for a backdoor Roth IRA
Anyone with earned income, which includes wages, salaries, tips, commissions, bonuses and net earnings from self-employment, can contribute to an IRA. Roth IRAs have income limits that prevent high earners from over contributing. However, traditional IRAs don't have these limits, so you can contribute to a traditional IRA — and use the backdoor Roth IRA strategy to convert those funds to a Roth — no matter your earned income amount.
How to set up a backdoor Roth IRA
Setting up a backdoor Roth IRA is a relatively straightforward process, but it's essential to consider the potential costs and tax liabilities. Consulting with a tax professional or financial advisor can help you avoid mistakes. Here are the general steps that you'll follow:
Contribute to a nondeductible IRA: A nondeductible IRA is a traditional IRA that doesn't receive the upfront tax break. It's funded with after-tax dollars, so you don't deduct the contribution from your income taxes.
Open a Roth IRA: You can open a Roth IRA at your current brokerage or another IRA custodian. Or, if you already have a Roth IRA, you can use that one.
Contact your brokerage and initiate the conversion: The steps vary by brokerage, but you'll typically submit a form authorizing the conversion and specifying the assets you want to transfer.
Complete the conversion: Once your brokerage has the authorization form, it will manage the conversion. The process may take a week or two, but transfers within the same brokerage (i.e., trustee-to-trustee transfers) are generally quicker.
Robinhood IRA
Robinhood IRA
Backdoor Roth IRA rules
Backdoor Roth IRAs have rules regarding the types of transfers you can make. You can convert your traditional IRA into a Roth IRA in one of three ways:
- Rollover: You receive a distribution from your traditional IRA and contribute it to your Roth IRA within 60 days.
- Trustee-to-trustee transfer: Your traditional IRA custodian sends the funds directly to your Roth IRA custodian.
- Same trustee transfer: The money moves from your traditional IRA to your Roth IRA at the same custodian.
Tax implications of a backdoor Roth IRA
The tax consequences of a backdoor Roth IRA depend on whether you've made deductible contributions to a traditional IRA.
- If you’ve not made deductible contributions, you can convert a nondeductible IRA into a Roth IRA without owing any taxes.
- If you’ve made deductible contributions, converting nondeductible amounts into a Roth IRA will trigger taxes, per the IRS's pro-rata rule. The pro-rata rule requires you to count all of your assets not in a Roth IRA — including those funded with deductible and nondeductible contributions — to determine how much of the conversion is pretax versus after-tax. In other words, you can't choose only the after-tax portion when doing the conversion.
Another tax consequence to note: You'll owe taxes if your traditional IRA contribution generates earnings before you complete the conversion. That means you should complete the conversion as quickly as possible before earnings accumulate. Speak with your broker before initiating the conversion so you understand the process and timing.
Common mistakes to avoid when using a backdoor Roth IRA
The most common mistake with a backdoor Roth IRA strategy is calculating the tax incorrectly. The rules regarding deductible versus nondeductible contributions are complex, and it’s easy to inadvertently make the wrong calculation if you don’t understand the IRS’s pro-rata rule.
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A backdoor Roth IRA enables high earners to take advantage of the many benefits of Roth accounts. Still, the tax rules can be complicated with costly consequences if you make a mistake. Unless you thoroughly understand the inner workings of the backdoor Roth IRA strategy, hire an expert to guide you through the process. That way, you’ll likely avoid any surprises at tax time — and keep more of your money in your nest egg.
Frequently asked questions (FAQs)
Is a backdoor Roth IRA still legal?
A backdoor Roth IRA is a legal way to take advantage of a Roth IRA, even if your income is too high to contribute directly. Still, the IRS has yet to officially provide guidance on whether the strategy violates any rules, and experts have mixed opinions on whether the IRS will restrict these conversions in the future.
How does a backdoor Roth IRA work?
A backdoor Roth IRA lets you fund a Roth account even if your income is too high to contribute directly. The first step is to contribute to a nondeductible IRA. Next, you'll open a Roth IRA if you don't have one already. Then, you'll contact your brokerage, request the conversion and submit the required paperwork. The conversion can trigger taxes, so consult with a tax specialist or financial advisor to ensure you file the appropriate tax forms and avoid calculation mistakes.
What is the income limit for a backdoor Roth IRA?
There isn’t an income limit on backdoor Roth IRAs and they’re a popular tactic for high-income earners because they can be used regardless of income. The first step is contributing to a traditional IRA (a nondeductible IRA, specifically), which doesn't have income limits. You then convert the amount into a Roth IRA account, sidestepping the income limits in the process.
Do I need to report backdoor Roth on taxes?
When you file your annual income tax return, you'll use Form 8606 to report your nondeductible contribution to your traditional IRA and the conversion from your traditional IRA to your Roth IRA. Consult with a tax specialist to ensure you determine your tax bill and file your tax return correctly.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.