Backdoor Roth IRA

What is a Backdoor Roth IRA?

When saving for retirement, you want to make sure you don’t pay more tax than you need to. However, if you earn a high income, you might not qualify for certain tax-saving options available to lower-income earners. Specifically, Roth IRAs (which allow you to grow and withdraw your money tax-free) have income limits that prevent higher earners from contributing directly. A strategy to work around these limitations is known as a "backdoor Roth IRA."

• This strategy lets high-income earners contribute to a Roth IRA even if they earn more than the usual income limits.
• It works by depositing money into a Traditional IRA, then quickly transferring those funds into a Roth IRA.
• The IRS has given the green light to the "backdoor Roth IRA" strategy, so you can rest easy.

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How a Backdoor Roth IRA Works

A backdoor Roth IRA isn’t a type of retirement account. Rather, it’s the name given to a strategy that helps high-income earners work around the usual income limits that prevent them from contributing to a Roth IRA.

Here’s how a backdoor Roth IRA works:

1. First, you contribute after-tax money into a Traditional IRA. It must be an IRA funded only with after-tax contributions; if it contains pre-tax funds, converting to a Roth IRA may trigger taxes.
2. Then, you convert the Traditional IRA into a Roth IRA as soon as possible. This process can be repeated each year, allowing you to grow your Roth IRA balance over time, making the strategy more beneficial for high earners.

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Acting quickly is key, as any growth in your Traditional IRA before conversion to a Roth IRA will be taxed when converted. The Backdoor Roth IRA 2025 maximum annual contribution limit is $7,000, plus an additional $1,000 if you’re 50 years old or older. This strategy lets you indirectly fund a Roth IRA, unlocking the benefits of tax-free growth and withdrawals in retirement. Just be sure to keep in mind the tax implications of the conversion and the contribution limits for each account.

A Strategy for High-Income Earners

The backdoor Roth IRA strategy is designed for high-income earners who make too much to contribute directly to a Roth IRA.

For 2025, you cannot make a full Roth IRA contribution unless your Modified Adjusted Gross Income (MAGI) for the year is within the following limits. If your income is below these limits, you can simply contribute directly to a Roth IRA (up to $7,000 or $8,000 if over 50 for catch-up contributions) - no backdoor needed!

Single Filers (2025):

• MAGI below $150,000: Eligible for the full Roth IRA contribution limit.
• MAGI between $150,000 and $165,000: Eligible for partial Roth IRA contributions limit.
• MAGI above $165,000: Not eligible to make Roth IRA contributions (except through a backdoor Roth IRA strategy).

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Married Couples Filing Jointly (2025):

• MAGI below $236,000: Eligible for the full Roth IRA contribution limit.
• MAGI between $236,000 and $246,000: Eligible for partial Roth IRA contributions limit.
• MAGI above $246,000: Not eligible to make Roth IRA contributions (except through a backdoor Roth IRA strategy).

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Married Couples Filing Separately (2025): 

• MAGI less than $10,000: Eligible for partial Roth IRA contribution limit.
• MAGI more than $10,000: Not eligible to make Roth IRA contributions (except through a backdoor Roth IRA strategy).

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‍Note: Modified Adjusted Gross Income or (MAGI) is your income after subtracting certain allowed deductions and penalties. Learn more about MAGI here.

Backdoor Roth Conversions Are Typically Used By

• High-income professionals like doctors, tech workers and executives
• Dual-income households earning more than the Roth IRA limits
• People who’ve already maxed out their employer retirement plans
• Those wanting tax-free withdrawals in retirement

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What is the 5-year Rule for Backdoor IRAs?

The 5-year rule says you need to wait five tax years after your first Roth IRA contribution before you can withdraw earnings tax-free. Each backdoor Roth IRA conversion has its own 5-year waiting period before you can withdraw the converted amounts without penalty. If you're under age 59 1/2, though, you may still incur an early withdrawal penalty. Keep this in mind when planning your retirement withdrawals to avoid any surprises. However, you can always withdraw your original contributions to a Roth IRA at any time, tax- and penalty-free.

Pros and Cons of a Backdoor Roth IRA

Pros

• Gives high-income earners access to Roth IRA benefits despite income limits
• Provides tax-free growth and withdrawals in retirement
• No required minimum distributions (RMDs) during your lifetime
• Can be good for estate planning as your heirs get tax-free distributions

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Cons

• Requires tax reporting and may trigger taxable events, especially with pre-tax funds. Learn more from the IRS.‍
• Needs to be completed quickly to avoid taxes on earnings 
• Could be limited by future legislation. The Biden administration proposed restricting it for high-income earners, while the Trump administration’s tax cuts made it more advantageous. 
• Could kick you into a higher tax bracket for the year

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Is a Backdoor Roth IRA Worth It?

Whether a Backdoor Roth IRA works for you depends largely on whether you expect your taxes to be higher now (when contributing) or later (when withdrawing). If you anticipate being in a lower tax bracket now, contributing to a Traditional IRA and then converting to a Roth IRA can be an effective strategy. However, if you expect your tax rate to be higher in retirement, the conversion could push you into a higher tax bracket now, making it less beneficial.

If you’re a high-income earner, a backdoor Roth IRA could be worth the effort. This is especially true if you:

• Don’t have existing pre-tax IRA accounts 
• Can afford to pay taxes that may be due on the conversion
• Plan to leave the money invested for many years
• Want to have both tax-free and taxable income options during retirement (this gives you more flexibility in managing your taxes when you withdraw funds)

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That said, if you have a substantial amount in an existing Traditional IRA or are close to retirement, the tax implications could quickly turn into a bigger drawback than a benefit. The IRS’s proto-rata rule might result in a larger-than-expected tax bill, especially if you have significant pre-tax funds. This could reduce the long-term advantages of a backdoor Roth IRA

Help Secure Your Financial Future with PensionBee

Whether you’re considering a backdoor Roth IRA or looking at other options, having a clear retirement strategy with a provider you trust is key. At PensionBee, we help you rollover your old 401(k)s and IRAs into a new, easy-to-manage account. Track your savings, manage transfers, and stay updated on your performance. Every customer gets a personal rollover manager, called BeeKeepers, who guide you through a simple, stress-free process, so you can feel confident about your retirement.

Frequently Asked Questions (FAQs)

What’s the Contribution Limit for a Roth IRA?

For 2025, you can contribute up to $7,000 per year to a Roth IRA, or $8,000 if you’re 50 or older. The same contribution limit applies when using a backdoor Roth IRA strategy. 

What’s the Income Limit for Backdoor Roth IRAs?

There isn’t one! That’s the magic of the backdoor Roth IRA, you’re putting money into a Traditional IRA which has no income limit, then converting it to a Roth IRA. This bypasses the usual income limit that you’d face if you directly contributed to a Roth IRA.

When’s the Backdoor Roth IRA Deadline?

You need to make contributions to your Traditional IRA by the tax filing deadline for the year (usually April 15 of the following year). You can convert the Traditional IRA to a Roth IRA anytime, but it’s best to do it sooner rather than later to minimize the amount of growth that can be taxed while your money’s still in the Traditional IRA.

When Did the Backdoor Roth IRA Start?

The backdoor Roth IRA strategy became possible in 2010 when income limits on Roth IRA conversions were removed. 

Is a Backdoor Roth IRA Legal?

Yes, the backdoor Roth IRA is legal! The IRS has confirmed that this strategy complies with tax law, and it was specifically addressed in the 2017 Tax Cuts and Jobs Act. The IRS also recognized the backdoor Roth IRA strategy as a valid option for high-income earners, as demonstrated by the use of IRS Form 8606 to report nondeductible contributions and Roth IRA conversions.

Are Backdoor Roth IRA Conversions Taxable?

A backdoor Roth IRA conversion can be tax-free if you convert non-deductible (already taxed) contributions quickly before they grow. You’ll have to pay taxes in two situations:

• You have existing pre-tax money in any Traditional IRAs
• Your Traditional IRA contribution grows between when you deposit it and when you convert it to a Roth IRA.