Despite its questionable name, a “backdoor Roth IRA” is a completely legal way to minimize personal taxes. It’s mostly recommended for people with incomes too high to qualify for a Roth IRA. Many financial advisors use the backdoor Roth as a powerful tax-planning tool for clients who can benefit the most. There are 230 tax-planning experts right here within my network, and I’ll share some insights about how they leverage this strategy. You can then decide if working with a financial advisor to execute this strategy is the right move for you.
Traditional IRAs have no income limits, but Roth IRAs do. High-income earners are typically ineligible to contribute to a Roth IRA due to these strict income restrictions. The backdoor Roth IRA is a “workaround” that allows high earners to fund a Roth IRA by first contributing after-tax money to a traditional IRA, then converting it to a Roth IRA. You can also contribute after-tax money to an existing traditional IRA and convert that account to a Roth. This strategy allows future withdrawals to be tax-free, which can result in significant savings for many high-earners.
Mark Feldser, CPA is one of our tax-focused advisors and explains that a backdoor Roth IRA is a simple two-step process that conceivably lets you convert several thousand dollars from a traditional IRA into a Roth IRA each year. While the amounts may seem small at first, advisors in my Wealthramp network can demonstrate to their clients the powerful impact of compounding returns over time.
How It Works
David Kudla, MBA, a money manager often heard on Bloomberg radio and a member of our Wealthramp network, highlights two main types of Roth conversions in a Forbes article. The first involves converting pre-tax savings into a Roth, which is a “taxable event.” After years of contributing pre-tax money to a qualified retirement account, such as a traditional IRA, now may be the right moment to consider realizing some of the taxable burden in exchange for growing additional funds a Roth IRA, which can offer tax-free growth. An added benefit of this strategy is the potential to lower your future required minimum distributions (RMDs).
The second type of Roth conversion is the backdoor Roth. Since there are no limits on how much you can convert to a Roth account, this method uses a traditional IRA to bypass the strict income limits on Roth contributions (which will increase to $165,000 for singles and $246,000 for married couples filing jointly in 2025). It also allows you to bypass the annual contribution limits of $7,000 for individuals under 50 and $8,000 for those 50 and older. However, you need to know that the amount you convert to the Roth will be considered ordinary income for the current tax year, potentially resulting in a big tax bill. This is why you’ll want to plan ahead and ensure you have enough funds to cover those taxes out of pocket.
Avoid These Mistakes
While the backdoor strategy can be a financial game-changer, it's also important to be aware of potential tax implications and the intricate rules that come with it. Navigating these complexities is crucial before proceeding with any conversions.
Mark Feldser notes that, although the backdoor Roth IRA seems straightforward, investors should be aware of some administrative burdens and mild complexities of this process. Josh Duncan, CFP®, another financial advisor in our network, prefers to handle those details for his clients to ensure everything stays within the rules. Josh emphasizes one critical factor: making sure his clients do not have an existing tax-deferred IRA (pre-tax traditional IRA or rollover IRA) balance. That’s because, regardless of how many IRAs someone has, the IRS views all IRAs in a single “bucket” when it comes to distributions or conversions. Josh explains that if someone has an empty IRA at one custodian and a tax-deferred balance at another, they cannot perform a clean backdoor Roth conversion by simply isolating the transactions within the empty IRA.
If you already have a traditional or rollover IRA balance, don’t worry. To clear out an IRA, roll that balance into an employer-sponsored retirement plan, like a 401(k). If you’re self-employed, consider a Solo 401(k). Once your IRA accounts are emptied, the backdoor Roth IRA becomes an option again.
Every advisor I spoke with highlighted the importance of understanding what’s called the “Pro Rata Rule”. David Kudla explains that this rule applies when an investor has both pre-tax and after-tax money in a traditional IRA. When converting funds from an IRA with mixed contributions, you cannot choose to convert only the after-tax portion. Instead, the Pro Rata Rule is used to determine the ratio of pre-tax and after-tax money in the conversion.
Rachael DeCosta, CDFA, says that for many of her clients, a backdoor Roth is worth considering, but she cautions, “Since these conversions can be complicated, it’s critically important to make those calculations ahead of time.” Rachael adds that from an estate planning standpoint, the backdoor Roth is a great way to pass wealth to your heirs because it has no RMDs and offers flexibility to implement at any age.
Backdoor Roth Examples In Real-Life
The IRS uses a tax formula that includes the value of all your non-Roth IRAs as the basis for conversion calculations. For example, let’s say you earn above the income thresholds for a Roth IRA contribution and have $93,000 of pre-tax money already in a traditional IRA. You decide to make a backdoor Roth contribution of $7,000. First, you would make a non-deductible traditional IRA contribution of $7,000, bringing your total balance up to $100,000. If you didn’t read this article and know the rules, you might think you can simply convert the $7,000 after-tax portion to the Roth IRA. However, the Pro Rata Rule would apply and 93% of your $7,000 conversion ($93,000 pre-tax portion divided by the $100,000 total) would be taxable. Only 7% of the $7,000 conversion would be tax-free. Additionally, this would leave $6,510 (93% of $7,000) of after-tax funds in your traditional IRA, complicating future conversions.
There are a couple of options for removing only the pre-tax portion of your IRA to improve your Pro Rata Rule ratio. If your employer’s 401(k) plan allows for a reverse rollover, you can roll only the pre-tax portion or your IRA into your 401(k) account. Another option is a Qualified Charitable Distribution (QCD), which would pull only the pre-tax amounts from your IRA.
The good news is that IRAs are inherently personal, meaning that even if you file a joint tax return, your IRA remains separate from your spouse’s IRA when it comes to the Pro Rata Rule.
Additionally, since the Pro Rata Rule is calculated based on your IRA balances as of December 31 of the current year, you won’t know the taxable percentage until the year has ended. This means a Roth conversion made early in the year could be impacted by a later rollover, potentially triggering the Pro Rata Rule.
How a Fiduciary Financial Advisor Can Help
The backdoor Roth is straightforward as long as you follow the rules, but the nuances can create complications if overlooked. I recommend considering this strategy within the context of your overall investment plan and talking it over with one of the tax-focused advisors in our network. Beyond their knowledge and experience, these advisors are also legally held to the fiduciary standard. I created Walthramp to help you find the right fee-only advisor. I encourage you to take our short survey, and I’ll match you with up to three vetted fiduciaries who align with your needs and priorities.
