The Backdoor Roth IRA: The Power Move for High Earners
Those over both the traditional IRA deduction income threshold and the Roth contribution income threshold should consider The Backdoor Roth IRA.
Here’s how it works:
1. Make a Non-Deductible Contribution to a Traditional IRAAnyone with earned income (or a spouse with earned income) can do this—income doesn’t disallow this contribution.
2. Convert to a Roth IRAI wrote a blog post detailing my thoughts on how long to take between steps 1 and 2.
This tactic allows high-income earners to access the tax-free growth of a Roth IRA even if they’re locked out of direct contributions.
Just remember: For those with other traditional IRA balances, the Pro Rata Rule applies.
🔗 Related:
Backdoor Roth IRAs for Beginners
Beware the Pro Rata Rule!
For those with existing pre-tax money in traditional IRAs (from rollovers or old accounts), the Backdoor Roth gets complicated.
The IRS uses a formula called the Pro Rata Rule:
- It treats all traditional IRA money as one big pot.
- So if 80% of an IRA is pre-tax, and 20% is after-tax, any conversion is 80% taxable.
- That can lead to surprise tax bills.
How to Navigate the Pro-Rata Rule:
I did a blog post on the Pro-Rata Rule.The Backdoor Roth IRA is not for everyone. For those who cannot use the tactic efficiently, there are other good options, including investing for retirement through taxable brokerage accounts.