The Backdoor Roth IRA Strategy

Saving for retirement is an essential part of any financial plan—but for high-income earners, accessing the benefits of a Roth IRA can be frustrating due to IRS income limits. Fortunately, there’s a legal workaround known as the Backdoor Roth IRA strategy.

This approach allows individuals who earn too much to contribute directly to a Roth IRA to still enjoy the powerful tax-free growth and withdrawals that Roth accounts offer. By leveraging a little-known IRS loophole, high earners can strategically move money into a Roth IRA using one of two methods: a non-deductible Traditional IRA contribution followed by a Roth conversion, or a conversion of an existing Traditional IRA, often timed for a low-income year.

Let’s break down how the Backdoor Roth strategy works, who can benefit, and how to stay compliant with IRS rules.

What Is the Backdoor Roth IRA Strategy?

Under current tax law, individuals above certain income thresholds cannot contribute directly to a Roth IRA. However, there are no income limits for:

• Contributing to a Traditional IRA

• Converting a Traditional IRA to a Roth IRA

The Backdoor Roth strategy takes advantage of this loophole. It allows you to:

• Make a non-deductible contribution to a Traditional IRA (with after-tax dollars)

• Convert that contribution to a Roth IRA

• Pay little or no tax, depending on the makeup of your IRA accounts

With careful execution, this gives high-income earners access to the long-term benefits of Roth accounts—tax-free growth, tax-free withdrawals, and no required minimum distributions (RMDs).

Option 1: Make a Non-Deductible IRA Contribution and Convert

This is the classic “backdoor” method. Here’s how it works:

Step 1: Contribute to a Traditional IRA

• Use after-tax dollars (a non-deductible contribution)

• For 2025, you can contribute up to $7,000, or $8,000 if you’re age 50 or older

Step 2: Convert to a Roth IRA

• Initiate the conversion shortly after the contribution

• Since the contribution was made with after-tax dollars and there are no pre-tax IRA funds, the conversion is typically tax-free

Step 3: File IRS Form 8606

• This form reports your non-deductible contribution and documents the Roth conversion

• Filing ensures you avoid being taxed again on those already-taxed dollars

Option 2: Convert an Existing Traditional IRA

If you already have money sitting in a Traditional, SEP, or SIMPLE IRA—and want to take advantage of Roth benefits—you can convert those funds directly into a Roth IRA.

This strategy works well in a low-income year, such as:

• A sabbatical or career change

• A business loss year

• Retirement before Social Security begins

Heads-up: Unlike the non-deductible strategy, converting pre-tax IRA funds means you’ll pay income tax on the amount converted. But if done strategically during a low-income year, you may pay tax at a significantly lower rate than you would in retirement.

Watch Out for the Pro Rata Rule

If you have multiple IRA accounts with both pre-tax and after-tax funds, the IRS applies the pro rata rule to determine how much of your conversion is taxable. This means:

Even if you’re only converting the non-deductible portion, a percentage of the conversion could still be subject to income tax.

To minimize tax consequences:

• Aim to complete this strategy when you have no pre-tax IRA balances

• Consider rolling pre-tax IRA funds into a 401(k), if available, to isolate non-deductible contributions

Documentation and Compliance

Proper paperwork is crucial to keep this strategy clean in the eyes of the IRS. Be sure to:

• Track all non-deductible IRA contributions

• File IRS Form 8606 every year you make a non-deductible contribution or conversion

• Keep detailed records of all IRA transactions

Final Thoughts

The Backdoor Roth IRA is one of the few remaining tools high-income earners can use to create tax-free retirement income. While the strategy is legal and effective, execution and timing are critical—especially if you have other IRA assets or are considering a large conversion.

Have questions about Roth conversions or IRA planning?
Talk to the experts at DrillDown Solution. We’ll help you determine if this strategy makes sense for your situation and guide you through the process—step by step.