Backdoor Roths Are Retirement Plans that Offer Benefits to High Earners
Backdoor Roths aren’t an “official” type of retirement fund. Also known as Roth conversions, they constitute a strategy that allows high-earning workers to enjoy some of the tax benefits available to other wage earners.
Traditional IRAs allow taxpayers to deduct their contributions from their income, paying taxes instead when they withdraw the funds in retirement. Roth IRAs use after-tax dollars, but the original investment and its earnings are withdrawn tax-free in retirement. Unfortunately, both types of retirement accounts have earnings limits: $168,000 or more if you’re single, $252,000 or more if married filing jointly.
A backdoor Roth IRA is a legal, two-step financial strategy. It involves making a non-deductible contribution to a traditional IRA, followed by a conversion of those funds into a Roth IRA. That in turn allows tax-free growth and tax-free retirement withdrawals.
You do not pay tax on the principal contribution, but you will pay taxes on any earnings that accrued in the traditional IRA before conversion.
Backdoor Roths Rules
Pro-Rata Rule: If you own other pre-tax IRAs (SEP or SIMPLE IRA), the IRS requires that you calculate taxes based on the ratio of all pre-tax/after-tax assets, which may trigger unexpected taxes.
Reporting: Must be filed with the IRS using Form 8606 to document the non-deductible contribution and conversion.
Five-Year Rule: Converted funds must be held for five years to avoid a 10-percent penalty on early withdrawals if you are under age 59½.
The IRS allows annual contributions of up to $7,500 (or $8,600 for those aged 50 or older in 2026). You can perform a backdoor Roth conversion every year.
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This article discusses the drawbacks to backdoor Roths.
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