When should I consider a Backdoor Roth IRA?

Written by: Theresa Schultz and Angie Simaytis

Why do I want a Roth IRA?

Roth IRAs can be powerful retirement planning tools.  With a Roth IRA, contributions are funded with after-tax dollars.  Those dollars can grow tax-free and can be withdrawn tax-free, if certain requirements are met (qualified distribution). A qualified distribution needs to satisfy two requirements:

  1. Roth IRA must have been open for 5 or more years
    • Important note: each Roth conversion needs to satisfy the 5-year rule
  1. One of the following penalty exceptions
    • Roth IRA holder must be Age 59 ½ or older
    • Roth IRA holder is disabled
    • Roth IRA holder has died
    • Roth IRA holder is a first-time homebuyer

Other benefits of Roth IRAs include no Required Minimum Distributions (RMD) and providing tax-free income to your heirs.

However, some individuals are not eligible to contribute directly to a Roth IRA due to income restrictions.  If your modified adjusted gross income (MAGI) is above certain income limits, then the amount you can contribute to a Roth IRA is phased out. The phaseout occurs between $150,000 and $165,000 for single tax filers and $236,000 and $246,000 for joint tax filers in 2025.  If your income is over the phase out range, you are not eligible to contribute to a Roth IRA.

If you fall into this category, then a backdoor Roth may be for you.

What is a Backdoor Roth IRA?

A backdoor Roth IRA is a strategy used to move money to a Roth IRA by contributing to a Traditional IRA without taking a tax deduction on that contribution, and then immediately converting it to a Roth IRA. There are no income or age requirements when making a conversion. 

Steps to create a Backdoor Roth IRA

Open a Traditional IRA and make a nondeductible contribution. Next convert the nondeductible contribution to your Roth IRA. Then repeat the process annually if desired.

If you have existing Traditional IRAs, you can make a nondeductible contribution to one of them and convert that contribution to your Roth IRA. However, you should be aware this will trigger the Pro Rata Rule discussed below, as the IRS does not allow you to convert only that nondeductible contribution when you have existing Traditional IRAs.

What is the Pro-Rata Rule?

The pro-rata rule is used by the IRS to determine what amount if any is subject to taxes when converting money from a traditional IRA to a Roth IRA. When calculating the taxable portion of the conversion, the IRS will take into consideration all pre-tax and after-tax dollars across all pre-tax IRAs (Traditional, SIMPLE and SEP).

Example

  • Combined balance of all pre-tax IRAs = $350,000
  • After-tax contribution made to a Traditional IRA = $7,000
  • Tax-free portion of conversion = $140; $6,860 is taxable income 

So, if you do not have multiple pre-tax IRAs, then the full after-tax contribution ($7,000) is tax-free.

Is a Backdoor Roth strategy right for me?

This strategy can be right for you if you are not able to contribute directly to a Roth IRA due to income restrictions. 

Advantages:

  • Allows you to contribute to a Roth IRA if you are above the income phase out range.
  • Roth IRAs are not subject to RMDs.
  • Potential for long-term tax-free distributions, if the distribution meets the requirements for a qualified distribution referenced above.
  • Roth IRAs provide a way to give tax-free dollars to your heirs as long as the account was opened for 5 or more years. If the Roth IRA was not open for 5 or more years, prior to the IRA holder’s death, the beneficiary(ies) can finish satisfying the 5-year requirement.

Disadvantages:

  • If you make a nondeductible contribution to an existing Traditional IRA, a portion of the backdoor Roth conversion may be taxable.
  • Every time you make a conversion to a Roth IRA, the amounts converted are subject to their own 5-year rule. Example you convert money in 2025; the converted amount would not be tax free until 2030. You make another conversion in 2026, the converted amount would be tax free until 2031, etc.
  • Potential to move up to a higher tax bracket in the year the conversion is made.

If you are considering utilizing this strategy, consult your tax advisor about potential tax implications.