The Backdoor Roth: Is It Right for You?

Roth IRAs can be a great way to save for retirement since they can provide income tax free growth and qualified withdrawals are income tax free. However, strict income caps on contributions restrict many higher-income earners from contributing to these accounts directly.

With a Roth IRA, you get no up-front tax deduction, as you would with a traditional IRA, 401(k) retirement plan, or other tax-deferred account. Instead, you contribute after tax dollars to the account, your earnings accumulate income tax free, and after age 59½ your withdrawals are also income tax free, so long as you've had a Roth for five tax years.

Another perk of a Roth account is that you'll never be required to take distributions—unlike with a traditional IRA or 401(k)—which could appeal to those wanting to leave the money to heirs.

The downside, however, is that Roth IRAs technically are available only to those whose modified adjusted gross income (MAGI) is below certain limits.

In 2025 those limits are:

• $246,000 for married couples filing jointly
• $165,000 for single filers

In 2026 those limits are:

• $252,000 for married couples filing jointly
• $168,000 for single filers

To get around these limits, some investors opt to convert their way into a Roth account using a two-step process. It works like this:

1. Open a traditional IRA and make after-tax contributions to it. For 2025, you're allowed to contribute up to $7,000 ($8,000 if you're age 50 or older) per year. For 2026, the contribution limit increased to $7,500 ($8,600 if you're age 50 or older) per year. Make sure you file IRS Form 8606 every year you do this.
2. Rollover the assets from the traditional IRA to a Roth IRA. You can make this transfer (known as a Roth conversion) at any point in the future.

If the assets in the traditional IRA appreciate between the date you fund the account and the date you convert it, you will owe taxes on the appreciation (as the appreciation would have accrued on a tax-deferred basis). If this is your first and only IRA account, figuring out your tax obligation should be simple. The contribution was made with after-tax dollars, and so only the appreciation should be taxable.

However, if you have other IRA accounts with pre-tax contributions in them, the situation becomes a bit more complicated thanks to the "pro rata rule." In such cases, the IRS requires you to calculate the value of your after-tax IRA contributions relative to your total pre-tax IRA assets. Then, you use the resulting ratio to determine how much of your conversion is taxable. Spoiler alert: The more pre-tax assets you have, the larger the tax bite could be when you do a Roth conversion.

Here's an example: Say you make a $7,000 after-tax contribution to a traditional IRA,¹ and you want to convert that $7,000 to a Roth account. But you also have another traditional IRA holding $93,000 in pre-tax contributions, which means the pro rata rule kicks in and a portion of the conversion will be taxable. Here's how you assess the potential tax impact:

Info you need to know:

• After-tax contribution = $7,000
• Pre-tax contributions = $93,000
• Total IRA assets = $100,000

Calculation of the taxable portion of Roth conversion:

• $93,000 of pre-tax contributions is divided by $100,000 of total IRA assets = 0.93 (this is the portion of your conversion subject to tax)
• $7,000 conversion amount is multiplied by 0.93 = $6,510 (this amount of the conversion that will be taxed as ordinary income)

Because of the pro rata rule, the IRS sees the Roth conversion as a mix of pre- and after-tax dollars. And in this example, the pro rata rule results in $6,510 of additional taxable income leaving only $490 of the conversion as non-taxable.

That may diminish the appeal somewhat, but once the account has been converted, potential earnings compound tax-free. Distributions from the Roth IRA are income tax free as well, so long as you are 59½ and at least one Roth account has been open and funded for five tax years. If you're not 59½ or older, a 10% penalty may apply and any distributed earnings from the conversion will be taxable as ordinary income. There are some exceptions to early withdrawal penalties and taxes on distributed earnings, but they are narrow and limited. To learn more, see "Must-Ask Questions: Roth IRA Withdrawals."

And don't forget, you can't undo a Roth conversion. Once you convert, there's no going back. Also, a separate 5-year rule applies to each conversion. To learn more about the 5-year rules, see "What to Know About the Five-Year Rule for Roths."

Although this strategy has existed for many years, the IRS hasn't provided formal guidance on whether it violates the "step-transaction rule." (When applied, this rule treats a multi-step transaction as if it was a single transaction for tax purposes.) The lack of a definitive ruling means there is some risk involved. So, bottom line, if you use this backdoor Roth strategy solely to sidestep the earnings limits on Roth IRA contributions, you should be aware of the risks and seek the counsel and support of a tax professional.