Backdoor Roth IRA: What It Is and How It Works

If you're a high-income earner, saving for retirement with a Roth IRA can be tricky. The income limits on Roth contributions often shut out those making more than a certain amount. Fortunately, the backdoor Roth IRA strategy offers a solution.

Let’s break down how to do a backdoor Roth IRA, why it might make sense for you, and what you need to watch out for along the way.

What Is a Backdoor Roth IRA?

A backdoor Roth IRA isn’t a special type of account. It’s simply a legal method for high income earners to access Roth benefits despite earning too much to contribute to a Roth IRA directly.

The backdoor process involves two main steps:

• Make a nondeductible contribution to a traditional IRA.
• Then, convert the IRA to a Roth, completing a Roth IRA conversion.

By using this method, you can enjoy the key benefits of Roth IRAs—tax-free growth and tax-free withdrawals in retirement—even if your income exceeds the standard limits.

Understanding Backdoor Roth IRA Limits

In 2025, the standard Roth IRA income limits start phasing out at:

• $150,000–$165,000 for single filers
• $236,000–$246,000 for those married filing jointly

If your modified adjusted gross income (MAGI) is above these ranges, you cannot make a direct Roth contribution. However, the backdoor Roth IRA limits follow the same general rules as regular IRAs—you can contribute up to:

• $7,000 per year, or
• $8,000 if you are age 50 or older

It’s important to remember that your traditional IRA contribution must be nondeductible if your income is high.

How Does a Backdoor Roth IRA Work?

Here’s a step-by-step explanation of how a backdoor Roth IRA works:

1. Open a Traditional IRA Choose a trusted brokerage—including one with My Digital Money—where you can make your nondeductible contribution.
2. Make a Nondeductible Contribution to a Traditional IRA Deposit your after-tax dollars. You must use earned income (wages, salary, or self-employment income), and contributions are limited by the same cap as standard IRAs.
3. Convert the IRA to a Roth After funding the account, promptly convert the IRA to a Roth before significant earnings accumulate. Any gains from market growth before conversion could be subject to tax.
4. File IRS Form 8606 This form notifies the IRS that your contribution was nondeductible and should not be taxed again during conversion.

By following these steps carefully, Roth IRA conversions can be performed smoothly without triggering unnecessary taxes.

Watch Out for the Pro Rata Rule

One critical trap to avoid with the backdoor Roth IRA strategy is the pro rata rule.

If you have other IRA accounts (such as rollover IRAs or SEP IRAs) with pre tax contributions, the IRS considers all your IRAs as one when calculating taxes due. This can make part of your conversion taxable as ordinary income.

For example:

• If you have $90,000 of pre tax contributions and you add a $6,000 nondeductible contribution, the IRS calculates your tax bill based on the proportion of after-tax to pre-tax money across all IRAs.
• Instead of being fully tax-free, most of the conversion may be taxed at your regular ordinary income rates.

Quick tip:

• If you have large traditional IRA balances, consult a tax professional before proceeding.
• You may need to roll pre-tax IRA balances into a workplace retirement plan to avoid pro rata issues.

Mega Backdoor Roth: A Bigger Opportunity

While the standard backdoor Roth is a great tool, some high earners might also have access to a mega backdoor Roth option through their employer’s 401(k) plan. This method allows much higher contributions—potentially up to $69,000, including catch-up contributions in 2025—and automatic Roth conversions inside your retirement plan.

If available, it’s worth discussing with a tax professional to maximize your retirement savings potential.

When a Backdoor Roth IRA Makes Sense

This strategy works best if:

• Your adjusted gross income (MAGI) exceeds the direct Roth IRA contribution limits.
• You have no other existing IRA accounts (or can roll them into a 401(k)).
• You plan to leave the money invested long-term, maximizing the tax-free growth benefits.

Advantages include:

• Gaining access to Roth benefits even if you’re a high-income earner.
• Diversifying your retirement portfolio between tax-deferred and tax-free accounts.
• Reducing future taxable income in retirement.

When You Might Skip It

There are some cases where the backdoor Roth strategy may not be ideal:

• If you have significant pre-tax IRA assets and can’t avoid the pro rata rule.
• If you expect to need the funds within a few years, before tax benefits mature.
• If you aren’t comfortable managing the extra steps (like filling out Form 8606 each year).

In these cases, working closely with a tax professional is highly recommended.

The Bottom Line

For many investors, mastering how to do a backdoor Roth IRA can unlock powerful retirement benefits. Even with income limits in place, strategies like making a nondeductible contribution to a traditional IRA and completing the right IRA to a Roth conversion can help you stay on track toward a tax-efficient retirement.

With proper planning—and the right tax professional helping you navigate the details—the backdoor Roth IRA strategy can be a smart move for high earners building wealth for the future.

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