Retirement Planning: Backdoor Roth IRA

Written by Chad Conner, March 2025

A Backdoor Roth IRA is a strategy for high-income earners to contribute to a Roth IRA, even if their income exceeds the IRS limits for direct Roth IRA contributions. Normally, if you earn above a certain threshold, you're not allowed to contribute directly to a Roth IRA. A Backdoor Roth circumvents this by allowing you to contribute to a traditional IRA and then convert those funds to a Roth IRA.

Why You Might Need a Backdoor Roth IRA

1. Tax-Free Growth: Roth IRAs offer tax-free growth and withdrawals in retirement. This is advantageous if you expect to be in a higher tax bracket later in life.

2. No Required Minimum Distributions (RMDs): Roth IRAs do not have required minimum distributions, so your money can continue growing tax-free as long as you want.

3. Diversified Tax Strategy: If you already have a lot of tax-deferred assets (like in a 401(k)), having tax-free income sources in retirement, like a Roth IRA, can provide more tax flexibility.

How to Do a Backdoor Roth IRA

Here's a step-by-step guide on executing a Backdoor Roth IRA:

1. Contribute to a Traditional IRA:

   • Make a non-deductible contribution to a traditional IRA (up to $6,500 for 2023 if you're under 50; $7,500 if you're 50 or older).

   • This contribution will be after-tax since your income disqualifies you from taking the deduction.

2. Wait for the Contribution to Settle:

   • Some advisors suggest waiting a few days to let the funds settle. This is not required, but it helps avoid any issues during the conversion process.

3. Convert to a Roth IRA:

   • Contact your financial institution and initiate a Roth conversion of the entire amount in the traditional IRA to a Roth IRA.

   • If you have no gains in your traditional IRA at the time of conversion, the tax implications are minimal since you've already paid taxes on the initial contribution.

4. Tax Considerations:

   • Be aware of the pro-rata rule. If you have pre-tax funds in any other traditional IRAs, SEP IRAs, or SIMPLE IRAs, you’ll owe taxes based on the proportion of after-tax to pre-tax assets in all your IRA accounts.

5. Report the Conversion on Your Tax Return:

   • You’ll need to file IRS Form 8606 with your tax return to report the conversion and any tax owed.

This process can be repeated annually as long as your income exceeds the Roth contribution limits.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.