What Is a Backdoor Roth Contribution?
Explore the strategy that allows high earners to fund a Roth IRA indirectly. Learn how it works and why existing IRA balances impact the tax outcome.
A backdoor Roth IRA is not a formal type of retirement account but rather a strategy used by high-income earners. Its purpose is to allow individuals whose income exceeds the government-set limits for direct Roth IRA contributions to move money into a Roth account. This is accomplished by first making a contribution to a Traditional IRA and then converting those funds to a Roth IRA, accessing benefits such as tax-free growth and withdrawals in retirement.
The strategy exists because there are no income limitations on converting a Traditional IRA to a Roth IRA, only on direct contributions to a Roth IRA. This distinction in the rules permits the two-step process. By navigating the regulations in this way, savers can effectively fund a Roth IRA indirectly.
Understanding Roth IRA Contribution Limits
The primary reason the backdoor Roth IRA strategy is utilized stems from income restrictions imposed by the Internal Revenue Service (IRS). The ability to contribute directly to a Roth IRA is determined by a taxpayer’s Modified Adjusted Gross Income (MAGI). MAGI is calculated from the Adjusted Gross Income (AGI) found on a tax return, with certain deductions added back.
Each year, the IRS publishes specific MAGI phase-out ranges for different tax filing statuses. For the 2025 tax year, the ability for a single filer to contribute begins to phase out at a MAGI of $150,000 and is completely eliminated at $165,000. For those who are married and file a joint tax return, the phase-out range is $236,000 to $246,000. Individuals whose MAGI falls within these ranges can only make a reduced contribution, while those with a MAGI above the upper threshold cannot contribute at all.
These income caps create a barrier for high-income individuals. Since there is no corresponding income limit on making non-deductible contributions to a Traditional IRA or on converting a Traditional IRA to a Roth, the backdoor strategy becomes a viable alternative for those otherwise disqualified.
Information and Accounts Needed
Before initiating a backdoor Roth IRA, you must have both a Traditional IRA and a Roth IRA open with a financial institution. If these accounts do not already exist, they must be established. The Traditional IRA will serve as the initial destination for the contribution, and the Roth IRA will be the final destination for the funds after the conversion.
A contributor must also have sufficient earned income. IRA contributions can only be made from compensation such as wages, salaries, tips, commissions, or self-employment income. The amount contributed cannot exceed the total earned income for the year, up to the annual contribution limit. For 2025, this limit is $7,000, with an additional $1,000 catch-up contribution allowed for individuals age 50 and over.
A preparatory step is to assess all existing pre-tax IRA assets. This involves identifying the total value of any funds held in Traditional IRAs, SEP IRAs, and SIMPLE IRAs. The total balance of these pre-tax accounts on December 31 of the year the conversion is made is necessary information for determining the tax consequences of the process, which are dictated by the pro-rata rule.
The Backdoor Roth Contribution Process
The first action is to fund the Traditional IRA. This is done by making a non-deductible contribution, meaning the contribution will not be claimed as a tax deduction on your income tax return. The amount contributed should be up to the annual IRA contribution limit for which the individual is eligible.
The second step is to convert the funds from the Traditional IRA to the Roth IRA. After the contribution has settled in the Traditional IRA, you will instruct the financial institution to move the assets to the Roth IRA. It is recommended to perform this conversion shortly after the contribution is made to minimize the potential for the funds to generate investment earnings, as any earnings that accrue before the conversion would be taxable.
After the conversion is requested, the brokerage firm will handle the transfer of assets from the Traditional IRA to the Roth IRA. The firm will later issue tax forms reflecting both the initial contribution and the subsequent conversion.
Tax Reporting and the Pro-Rata Rule
Completing the backdoor Roth IRA process necessitates specific tax reporting using IRS Form 8606, Nondeductible IRAs. This form must be filed for any year a non-deductible contribution is made to a Traditional IRA or a conversion to a Roth IRA occurs. Part I of the form is used to report the non-deductible contributions, establishing basis, and Part II calculates the taxable amount of any Roth conversion.
The pro-rata rule is a tax principle designed to prevent individuals from selectively converting only their non-deductible (after-tax) contributions to a Roth IRA to avoid taxes. The rule requires that if an individual has any pre-tax funds in any Traditional, SEP, or SIMPLE IRAs, any conversion to a Roth IRA will be considered a proportional distribution of both pre-tax and after-tax dollars. The calculation aggregates the value of all such IRAs as of December 31 of the conversion year.
To illustrate the calculation, consider an individual with $93,000 in an existing pre-tax SEP IRA. They make a new $7,000 non-deductible contribution to a Traditional IRA, bringing their total IRA value to $100,000. Of this total, $93,000 (93%) is pre-tax money and $7,000 (7%) is after-tax basis.
If they then convert the $7,000 from the Traditional IRA to a Roth IRA, the pro-rata rule dictates that 93% of that conversion, or $6,510, is considered a taxable distribution of pre-tax funds. Only 7%, or $490, is treated as a tax-free return of their non-deductible contribution. This taxable amount must be reported as ordinary income on their tax return.