As the tax filing deadline approaches, many individuals take the time to review their finances, maximize tax-efficient strategies, and ensure they’re making the most of their retirement savings opportunities. For high-income earners, one challenge is navigating Roth IRA income limits, which can prevent them from contributing directly. However, there is a legal workaround known as the Backdoor Roth IRA, which allows individuals to take advantage of tax-free growth and withdrawals in retirement.
If your income exceeds the Roth IRA contribution limits, you might wonder whether this strategy is right for you. Here’s what you need to know.
IRA Contribution Limits and Income Restrictions
Individual Retirement Accounts (IRAs) come in two primary forms: Traditional IRAs and Roth IRAs. Both offer tax advantages, but they function differently in terms of tax treatment and withdrawal rules.
- Traditional IRAs may allow for tax-deductible contributions and tax-deferred growth, but withdrawals in retirement are taxed as ordinary income. Additionally, Required Minimum Distributions (RMDs) begin at age 73.
- Roth IRAs are funded with after-tax dollars, and in exchange, they offer tax-free growth and withdrawals in retirement, provided certain conditions are met. They also do not have RMDs, making them attractive for long-term wealth planning.
For 2025, direct Roth IRA contributions are phased out for individuals with Modified Adjusted Gross Incomes (MAGI) above these thresholds:
- $165,000 for single filers
- $246,000 for married couples filing jointly
Because of these restrictions, high-income earners often look for alternative ways to benefit from a Roth IRA—leading to the use of the Backdoor Roth IRA strategy.
How the Backdoor Roth IRA Works
A Backdoor Roth IRA is not a separate type of retirement account but rather a two-step process that allows individuals to contribute to a Roth IRA even if their income exceeds the eligibility limits. Here’s how it works:
1. Contribute to a Traditional IRA
a. You can contribute up to $7,000 in 2024 (or $8,000 if you’re 50 or older).
b. This contribution is made with after-tax dollars since high-income earners typically do not qualify for tax-deductible IRA contributions.
2. Convert to a Roth IRA
a. After making the contribution, you convert the funds from the Traditional IRA to a Roth IRA.
b. Ideally, this conversion happens soon after the contribution to minimize potential taxable earnings.
Once converted, the funds grow tax-free and can be withdrawn tax-free in retirement, provided you follow the five-year rule (more on that below).
Who Should Consider a Backdoor Roth IRA?
We generally only recommend this strategy for individuals who have little to no existing pre-tax IRA balances. This helps avoid unintended tax consequences that arise when converting pre-tax IRA funds to a Roth IRA.
Additionally, a Backdoor Roth IRA may be beneficial for individuals who:
✔ Exceed the income limits for direct Roth IRA contributions
✔ Have the cash available for a contribution
✔ Want to avoid required minimum distributions (RMDs) and keep funds growing tax-free
Final Thoughts
The Backdoor Roth IRA can be a powerful tool for tax-efficient retirement planning, but it’s not the right fit for everyone. Before implementing this strategy, we recommend consulting with your private wealth advisor to ensure it aligns with your broader financial goals.
If you’re interested in exploring whether a Backdoor Roth IRA makes sense for your situation, feel free to reach out for personalized guidance.
Nadine Thibault | Director, Advice Team, Private Wealth Advisor | CFP®, BFA™ | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.