Backdoor Roth IRA: A Smart Strategy for High Earners

A Backdoor Roth IRA is a legal strategy that allows high-income earners to contribute to a Roth IRA, even if they exceed the income limits. This method takes advantage of the fact that there are no income limits for converting a traditional IRA to a Roth IRA.

How It Works

  1. Contribute to a Traditional IRA – Since traditional IRA contributions are allowed regardless of income, you start by making a non-deductible contribution.

  2. Convert to a Roth IRA – Shortly after contributing, you convert the funds from the traditional IRA to a Roth IRA.

  3. Pay Taxes (if applicable) – If there are no gains, there’s typically little to no tax owed. However, if you have pre-tax funds in other traditional IRAs, the pro-rata rule may apply.

Benefits of a Backdoor Roth IRA

  • Tax-Free Growth – Once in a Roth IRA, your money grows tax-free, and withdrawals in retirement are also tax-free.

  • No Required Minimum Distributions (RMDs) – Unlike traditional IRAs, Roth IRAs do not require withdrawals at a certain age.

  • Ideal for High Earners – Since direct Roth IRA contributions have income limits, this workaround allows high-income individuals to benefit from a Roth.

Is a Backdoor Roth IRA Right for You?

If you earn too much to contribute directly to a Roth IRA but want tax-free growth and withdrawals, the Backdoor Roth IRA can be a powerful tool. However, it’s essential to understand the tax implications, especially if you have existing traditional IRAs.

 

If you would like to learn more about Backdoor Roth IRAs, please contact your wealth advisor to discuss whether it is an appropriate solution for you.

Rebecca Stevenson