For many investors, Roth IRA benefits are hard to ignore: Tax-free withdrawals in retirement, no required minimum distribution, and more flexible access to account funds. However, unlike Traditional IRAs, Roth IRAs have income-based contribution rules that may make it impossible for high-earning investors to contribute to the account. 

A backdoor Roth IRA gives those otherwise barred from Roth IRA contributions the ability to leverage the benefits of a Roth IRA as long as they have a traditional IRA account. Here’s how backdoor Roth IRAs work and how to get started.

What Is a Backdoor Roth IRA?

A backdoor Roth IRA isn’t a type of retirement account but a strategy that allows you to leverage the benefits of a Roth IRA even if your income exceeds the limits for Roth account contributions. 

The strategy involves opening and contributing to a Traditional IRA and then transferring all or a portion of the funds to a Roth IRA. The transfer of funds, also known as a rollover, is not considered a direct contribution and, therefore, not subject to excess contribution penalties. 

Who Is Eligible for a Backdoor Roth IRA

To leverage the backdoor Roth IRA strategy, you must be eligible for a Traditional IRA. Traditional IRAs have only one barrier to entry: you must have an earned income. This makes them very accessible. Non-working spouses can also open and contribute to a Traditional IRA as long as they file their taxes jointly. 

Benefits of a Backdoor Roth IRA

The primary benefit of a backdoor Roth IRA is that it allows you to bypass Roth IRA income limits. Since rollovers are not considered direct contributions, they are not subject to IRA contribution limits. By using this type of investment strategy, you unlock some of the primary benefits associated with a Roth account: 

• Tax-free withdrawals. Roth IRAs are funded with after-tax dollars and withdrawals are tax-free. Even though your funds will be taxed when you convert them from the Traditional account to the backdoor Roth account, this tax-free withdrawal structure can be beneficial if you think you’ll be in a higher tax bracket during retirement. 
• No required minimum distributions (RMDs). If you have a Traditional IRA, you must take RMDs by April 1 the year following your 73rd birthday. For instance, if you turn 73 on December 3, 2024, you would need to take your first RMD by April 1, 2025. 

Taking RMDs, which are based on an IRS life-expectancy calculation, can decrease your account growth potential by lowering your account balance and, therefore, compound interest and reinvestment opportunities. 

Roth IRAs are not subject to RMD rules. 

• Estate planning. Because Roth accounts don’t require RMDs and allow for tax-free withdrawals, they are often the preferred account structure for transferring wealth to heirs. 

How to Set Up a Backdoor Roth IRA

Setting up a backdoor Roth IRA account is simple. 

1. Open a Roth IRA account.  If you already have a Traditional IRA or similarly structured retirement account, the first step is to open a Roth IRA. You can do so with the same financial organization or an alternative one if you’d prefer to have your accounts managed by two separate entities.  

Note: If you don’t already have a Traditional IRA, you must open and fund the Traditional IRA before you can open the backdoor Roth IRA. 

2. Transfer funds from your traditional account to the new Roth IRA. Work with your account administrator to move funds from the Traditional account to the new Roth account. This typically requires a minimal amount of paperwork and can be completed quickly.

3. File the appropriate tax forms and prepare to pay taxes. Since Traditional IRAs are funded with pre-tax dollars, you’ll need to pay taxes on the amount of money you move between the two accounts. The converted amount will be considered taxable income in the year in which it was moved to the Roth account. As such, it’s wise to consider how the transfer will affect your income tax bracket.

If you think the transfer will push you into a higher tax bracket for that year, you may want to consider transferring the desired amount over time instead of all at once.  Speaking to a financial advisor or tax professional can help you determine the best move. 

Backdoor Roth IRA Rules, Limitations, and Contribution Limits

Roth income limits

Though you likely are opening a backdoor Roth IRA because you’re aware of income limits, it’s worthwhile to keep them in mind.  The IRS periodically updates both income limits and contribution limits. 

As such, make it a point to check the latest IRS Roth income limits and reevaluate your ability to contribute, especially if you’ve had a change of employment or income. 

See 2024 IRA contribution and income limits.

Roth five-year rule

Once your funds are in the Roth IRA, any withdrawal from earnings will be penalized at 10% if withdrawn from the account before the 5-year anniversary of your first contribution. As such, if you think you may need funds prior to those five years, a backdoor Roth IRA conversion may not be worth it, as you’ll pay both an income tax and the penalty on earnings. 

Pro-rata rule

If you have both pre-tax and after-tax contributions in a Traditional account, converted funds will be subject to the pro-rata rule. In this case, the IRS will look at the combined total of all your IRAs and use a calculation to determine what portion of the converted amount is taxable based on the total balance of pre-tax and after-tax contributions.  

For instance, if 30% of the balance consists of after-tax dollars, you’d be taxed on the 70% that consists of pre-tax dollars. 

No conversion reversals

Once you convert your traditional IRA to a Roth IRA, you cannot reverse the conversion.  As such, it’s imperative that you fully understand the tax implications as well the effects the conversion will have on your investments. Speaking to your account custodian as well as a financial advisor can ensure you determine the effects of a backdoor Roth IRA and whether it’s the best move for your goals.

FAQs

What are the tax implications of a backdoor Roth IRA?

There are two primary tax implications to consider when leveraging a backdoor Roth IRA.

• You’ll need to pay taxes on the converted amount. Traditional IRAs are funded with pre-tax dollars, but Roth IRAs are funded with after-tax dollars. The converted amount is considered taxable income during that year.  If your Traditional IRA contains both pre-tax and after-tax contributions, the pro-rata rule will apply, and the IRS will determine your tax obligation based on the total balance of pre-tax and after-tax contributions.
• Once funds are in the Roth IRA, they can be withdrawn tax-free. As such, a backdoor Roth IRA is worth considering if you’ll be in a higher tax bracket in retirement.  However, remember withdrawals from earnings are only tax and penalty-free if made after the 5-year anniversary of the first account contribution. 

Can I do a backdoor Roth IRA if I already have other IRAs?

Yes, you can use the backdoor Roth IRA approach if you already have other IRAs. There is no limit to the amount of IRAs you can have, though the annual contribution limits apply across all IRAs, not on an individual basis. 

Are there income limits for a backdoor Roth IRA?

All Roth IRAs have income limits that affect your ability to make direct contributions to the account. However, a backdoor Roth IRA is funded via a conversion from a Traditional IRA to a Roth IRA, and that transfer does not count as a direct contribution. In other words, there are no income limits on the transfer of funds, but there are income limits on normal Roth IRA contributions.