What Is the Rich Man’s Roth and How Does It Work?

The “Rich Man’s Roth” is a financial strategy allowing high-income earners to fund a Roth IRA even when their earnings exceed government limits. This method is not a special account but a procedural approach known as a “backdoor” Roth IRA. The strategy is a two-step process where an individual first makes a non-deductible contribution to a traditional IRA and shortly thereafter converts those funds into a Roth IRA. This bypasses income restrictions, offering a legitimate path to the tax-free growth and withdrawal benefits of a Roth IRA.

Core Concepts of the Backdoor Roth IRA

The backdoor Roth IRA strategy exists because the IRS places income limitations on direct contributions to Roth IRAs. For 2025, a single filer’s ability to contribute phases out with a Modified Adjusted Gross Income (MAGI) between $150,000 and $165,000. For married couples filing jointly, the range is $236,000 to $246,000. Individuals with incomes above these thresholds cannot make direct contributions.

A principle governing Roth conversions is the pro-rata rule, which applies if an individual holds pre-tax funds in other IRAs. The IRS treats all traditional, SEP, and SIMPLE IRAs as a single account for tax purposes. This rule dictates that any conversion is a proportional distribution of both pre-tax and after-tax funds from the aggregated IRA balance, preventing individuals from selectively converting only non-deductible contributions to avoid taxes.

The taxable portion of the conversion is determined by the ratio of pre-tax money to the total value of all applicable IRAs. For example, consider an individual with a pre-existing traditional IRA holding $93,000 in pre-tax funds. They execute a backdoor Roth by contributing $7,000 in non-deductible funds to a new traditional IRA, bringing their total IRA value to $100,000. Of this total, 93% is pre-tax money, so if they convert the $7,000 to a Roth IRA, 93% of that conversion ($6,510) is treated as taxable income.

Executing the Backdoor Roth IRA Conversion

The first step is to assess your existing IRA holdings to see if the pro-rata rule will apply. To achieve a tax-free outcome, you must confirm you have no pre-tax balances in any traditional, SEP, or SIMPLE IRAs.

If you have no pre-tax IRA funds, the next step is funding a traditional IRA. You will need to open a new account if you do not have one. You then make a non-deductible contribution up to the annual limit, which for 2025 is $7,000, or $8,000 for those age 50 and over. This contribution must be designated as non-deductible.

After the contribution is made, the funds must settle in the traditional IRA. While the IRS has not specified a required waiting period, a short delay of a few days or a statement cycle helps establish the contribution and conversion as two separate events.

Once the funds have settled, you instruct your financial institution to move the funds from your traditional IRA to your Roth IRA. If you have no pre-existing pre-tax IRA funds and convert quickly to prevent investment gains, the entire amount should be tax-free. Any earnings that accrue in the traditional IRA before the conversion would be subject to income tax.

Reporting the Conversion on Form 8606

You must document a backdoor Roth IRA conversion with the IRS by filing Form 8606, Nondeductible IRAs, with your annual tax return. This form tracks the basis of after-tax money in your traditional IRAs and calculates the taxable amount of any Roth conversions. Failing to file this form can result in penalties.

In Part I, you report your non-deductible contributions to a traditional IRA for the tax year, which establishes your after-tax basis. The form also asks for the total value of all your traditional, SEP, and SIMPLE IRAs at year-end to be used in the pro-rata calculation if needed.

Part II is where you report the conversion itself. You will enter the net amount converted from your traditional, SEP, or SIMPLE IRAs to a Roth IRA. The form then walks you through the calculation to determine the taxable portion, which should be zero if you had no pre-tax IRA funds.

Your IRA custodian will also issue a Form 1099-R showing a distribution from your traditional IRA. This form may indicate the distribution is taxable. However, Form 8606 provides the correct context to the IRS, demonstrating that the distribution was part of a non-taxable conversion of after-tax funds.

Exploring the Mega Backdoor Roth

A less common strategy is the “Mega Backdoor Roth,” which uses an employer-sponsored 401(k) plan instead of an IRA. It allows for significantly larger amounts of money to be moved into a Roth account. The viability of this strategy depends entirely on the rules of an individual’s 401(k) plan.

To execute a mega backdoor Roth, the 401(k) plan must permit two features. First, it must allow participants to make after-tax contributions, which are different from Roth 401(k) contributions. Second, the plan must permit in-service distributions or conversions, allowing an active employee to move money out of the 401(k) and into another retirement account.

The contribution limits for this strategy are governed by the overall limit for all 401(k) contributions. For 2025, this total limit is $70,000. This cap includes employee contributions, employer matching funds, and the after-tax contributions that are the foundation of the strategy. Individuals age 50 and over can contribute an additional $7,500 on top of this limit.

The process involves making the maximum allowed after-tax contributions to the 401(k). Shortly after, these funds are moved into a Roth IRA or a Roth 401(k). This conversion should be tax-free, as the contributions were made with after-tax dollars, enabling a substantial additional amount to be saved in a tax-advantaged Roth account.