Backdoor Roth, Is it right for you?

Backdoor Roth, Is it right for you?

March 21, 2024

A "backdoor Roth IRA" is just a name for a strategy of converting nondeductible contributions in a traditional IRA to a Roth IRA. The strategy can be helpful for those who earn too much to contribute directly to a Roth IRA. While Roth IRAs can come with certain advantages, it's important to understand that converting to a Roth is a taxable event.

Perhaps you'd like to be saving for retirement in a Roth account, but you earn too much to contribute directly to a Roth IRA. Maybe you don't have access to a Roth 401(k) plan at work. In that case, you may want to learn more about the strategy called a backdoor Roth IRA.

What is a backdoor Roth IRA?

A backdoor Roth IRA isn't a different kind of IRA. It's a "backdoor" way of moving money into a Roth IRA, which is accomplished by making nondeductible contributions—or contributions on which you do not take a tax deduction—to a traditional IRA and then converting those funds into a Roth IRA. It's different from a traditional Roth conversion, which is the transfer of tax-deductible contributions in a traditional IRA to a Roth IRA. While a traditional Roth conversion would be fully taxable to you in the year of conversion, a backdoor Roth conversion could have some important tax differences.

A backdoor Roth IRA strategy could be useful to high earners as they may not be able to fully deduct IRA contributions, and they may not be able to contribute directly to a Roth IRA—i.e., via the "front door"—due to income limits on contributing. If you earn $153,000 or more as a single taxpayer, or $228,000 or more as a married-filing-jointly taxpayer, then you can't contribute anything directly to a Roth IRA for the 2023 tax year. (These amounts increase to $161,000 and $240,000 respectively for the 2024 tax year.)

A backdoor Roth IRA can be a way for these high earners to access the benefits of Roth accounts. Once your money is in the Roth account it can grow tax-free, and qualified withdrawals of the converted amount in retirement are also tax-free.1 Another potential benefit of Roth IRAs is that, unlike with traditional IRAs, you don't have to take required minimum distributions (RMDs) from the accounts.

How the backdoor Roth strategy works

The process behind a backdoor Roth strategy can be fairly simple. Set up a new traditional IRA and make a nondeductible contribution to it, and then go through the process of converting the contribution to a Roth IRA. There are no income or age requirements when making a conversion. You can also contribute nondeductible funds to an existing traditional IRA and convert the funds to a Roth IRA. (In either case, converting the funds to a Roth IRA could trigger IRA aggregation rules, described below.)

If you're evaluating the strategy, it's always a good idea to consult with a tax professional to discuss the timing, the potential tax impact, and the individual steps involved in a backdoor conversion.

Backdoor Roth IRA tax considerations

Where the process can get complicated is in figuring out the taxes you may owe on a conversion. Taxes resulting from a backdoor Roth IRA conversion can be significant, and they can also be complex. That's especially true if you have more than one traditional IRA.

If you have anything other than nondeductible contributions in your IRA(s), it's important not only to understand what the tax consequences will be, but also to have a plan for where you'll find the cash to pay the taxes due upon your tax filing.

Any deductible contributions (contributions that are deducted from your taxable income for the year in which the contributions were made) or investment earnings both on deductible and nondeductible contributions are always taxable as ordinary income in a Roth conversion at your marginal tax rate or higher.

If you have more than one traditional IRA, you must first figure out what kind of contributions are in your accounts. There could be 2 types: deductible contributions and any earnings, and/or nondeductible contributions. (The nondeductible contributions are tracked separately each year on IRS Form 8606, and it might be a good idea to check with your tax professional to make sure it's filed.) In a conversion, deductible contributions and any earnings will generally be taxable, while nondeductible contributions generally won't be.

However, you don't get to cherry pick and only choose to convert your nondeductible contributions. Instead, the tax liability on a conversion will be based on the ratio of deductible contributions and earnings to nondeductible contributions across all your traditional IRA accounts. (It does not include spousal or inherited IRAs.) That's because the IRS uses something called the IRA aggregation rule when calculating taxes owed on a conversion, which means it views all your traditional IRAs as a single tax entity. If you have 5 different traditional IRAs, the IRS considers them as 1 entity that you are converting from.

So, for example, suppose you have combined traditional IRAs worth $50,000, which is composed of 10% in nondeductible contributions and 90% in deductible contributions. If you want to convert $5,000 to a Roth IRA, then 90% of the money you decide to convert would be taxable. You'd pay your applicable tax rate on $4,500, or 90% out of the $5,000.

In your tax planning, remember that you'll also need to consider state and potentially local taxes in addition to taxes owed at the federal level.

Roth IRA income and contribution limits

A backdoor Roth IRA may be particularly appealing to those who earn too much to contribute directly to a Roth IRA. Here's how those contribution limits stack up for the 2023 and 2024 tax years. Note: A contribution using this backdoor Roth IRA strategy must be made by December 31 of the tax year in which a conversion happens.

Roth IRA income requirements

2023

Filing statusModified adjusted gross income (MAGI)Contribution limit
Single individuals< $138,000$6,500
≥ $138,000 but < $153,000Partial contribution (calculate)
≥ $153,000Not eligible
Married (filing joint return)< $218,000$6,500
≥ $218,000 but < $228,000Partial contribution (calculate)
≥ $228,000Not eligible
Married (filing separately) *Not eligible$6,500
< $10,000Partial contribution (calculate)
≥ $10,000Not eligible

2024

Filing statusModified adjusted gross income (MAGI)Contribution limit
Single individuals< $146,000$7,000
≥ $146,000 but < $161,000Partial contribution (calculate)
≥ $161,000Not eligible
Married (filing joint return)< $230,000$7,000
≥ $230,000 but < $240,000Partial contribution (calculate)
≥ $240,000Not eligible
Married (filing separately) *Not eligible$7,000
< $10,000Partial contribution (calculate)
≥ $10,000Not eligible

Internal Revenue Service Publication 590 and Internal Revenue Service, November 1, 2023

*Married (filing separately) can use the limits for single individuals if they have not lived with their spouse in the past year.

Good to know: People who are 50 or older are entitled to an additional catch-up contribution amount of $1,000.

Backdoor Roth IRAs: pros and cons

Here are some of the trade-offs to consider as you're evaluating whether a backdoor Roth IRA is the right strategy for you.

Pros:

  • Once the funds are in a Roth IRA you can take withdrawals in retirement tax-free.1
  • You will have no RMDs from your Roth IRA during your lifetime (unlike many other retirement accounts), which can help with your retirement planning.
  • A Roth can also be an important estate-planning tool. Among other options, spouses can roll an inherited Roth IRA into a Roth IRA in their own name and treat the assets like their own. If the original account was a Roth IRA and the assets were in the account for 5 years or more, distributions could be tax-free. (Learn about the rules for Roth IRAs inherited from spouses and Roth IRAs inherited from non-spouses.)

Cons:

  • All or part of a backdoor Roth IRA conversion could be a taxable event. You may have to pay federal, state, and local taxes on converted earnings and deductible contributions.
  • Conversions could kick you into a higher tax bracket for the year.
  • You must observe a 5-year aging rule in order to be eligible for tax-free distributions.

Some more details on that last point: Generally, in order to be eligible for tax-free distributions from the account, you must be at least 59½ and have kept your converted funds in the new account for at least 5 years. Note that the aging rules for Roth conversions are different from those for direct Roth IRA contributions. With direct Roth IRA contributions, you can generally withdraw contributions penalty-free and tax-free at any time, while only earnings are subject to the 5-year restrictions. For Roth conversions, the converted amount is subject to its own 5-year restriction and is independently calculated for each conversion. Any withdrawals that include the converted amount, taken within the 5 years, are subject to a 10% penalty, unless there is an existing exception to the penalty that applies. (Turning age 59½ is among those exceptions.)

How to set up a Roth IRA to make a backdoor contribution

The steps for setting up a backdoor Roth IRA are relatively straightforward:

  1. If you don't already have a traditional IRA, set one up and fund it with after-tax contributions. (If you have an existing IRA, consider how the IRA aggregation rule, mentioned above, will affect the conversion.)
  2. If you don't have a Roth, set one up and initiate the conversion of the after-tax contribution using instructions from the IRA administrator. File Form 8606 each year to track your basis.
  3. Pay taxes on any converted earnings or deductible contributions. Remember, a conversion must be completed by December 31 to be included in the current year's taxable income. Consider reviewing the potential tax impact of a backdoor Roth IRA with a tax professional.

Is a backdoor Roth a good idea?

A backdoor Roth IRA contribution can be a useful strategy for high earners who want to access the potential benefits of a Roth account. High earners who haven't maxed out their 401(k) contributions for the year may also consider contributing to a Roth 401(k), if one is offered by their employer, but there are differences between a Roth 401(k) and Roth IRA.

Both traditional 401(k) and Roth 401(k) accounts have RMD requirements. However, in order to avoid RMDs the participant would have to roll their Roth 401(k) into a Roth IRA. (Note: Starting January 1, 2024, RMDs from Roth 401(k)s are no longer required, due to changes in the Secure Act 2.0.)