High-income taxpayers are often phased out of making direct Roth IRA contributions due to income limits (e.g., $161,000 for single filers and $240,000 for joint filers in 2024). Fortunately, the “backdoor Roth IRA” offers a legal workaround. The strategy involves making a nondeductible contribution to a Traditional IRA and then converting those funds to a Roth IRA. Since there are no income limits for making nondeductible Traditional IRA contributions or for Roth conversions, this approach provides Roth access for those otherwise locked out. You can contribute to a traditional or Roth IRA even if you participate in another retirement plan through your employer or business, however there are limits on deductible contributions.
Grow Wealth Tax-Free: Why the Backdoor Roth Is Worth It
The key benefit of a Roth IRA is tax-free growth: if you contribute $6,500 annually for 30 years and it grows between 8% and 12% annually, your $195,000 in contributions could grow to between $796,000 and over $1.76 million—with all future withdrawals completely tax-free. This makes the backdoor Roth strategy an exceptional long-term wealth-building tool for high earners. See IRA contribution limits for tax year 2025 on the IRS website here.
Eligible participants are typically high earners with no existing pre-tax balances in any Traditional, SEP, or SIMPLE IRAs. The process begins with contributing up to $6,500 ($7,500 if age 50+) to a Traditional IRA as a nondeductible contribution (reported on IRS Form 8606). After the contribution settles—often a few days—you convert it to a Roth IRA through a trustee-to-trustee transfer. The custodian will issue a Form 1099-R, and Form 8606 is used again to report the conversion and calculate any taxable income. Ideally, if the IRA held only nondeductible funds and no earnings accrued, the conversion is tax-free.
Caution must be taken when other IRA balances exist. Under the pro rata rule (IRC §408(d)(2)), all Traditional, SEP, and SIMPLE IRAs are aggregated for tax purposes, which can make part of the conversion taxable—even if you only intended to convert nondeductible amounts. For couples, each spouse must consider their own IRA balances separately. Timing the conversion soon after contribution reduces the risk of earnings accumulating, which could otherwise trigger tax on the earnings portion.
Key Takeaways
- There are no income limits for conversions, only for direct Roth contributions.
- Use Form 8606 to report both the nondeductible IRA contribution and the Roth conversion.
- Avoid tax surprises by planning around the pro rata rule—taxable income is calculated based on all IRA balances at year-end.
- Roth conversions are not subject to the 10% early withdrawal penalty, but distributions within 5 years of conversion may be.
Before initiating a backdoor Roth IRA conversion, schedule a tax planning consultation to evaluate how the conversion could affect your adjusted gross income, phaseouts, or potential estimated tax payments. Every situation is unique—and proactive guidance helps avoid unexpected tax consequences.