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Backdoor Roth IRA

February 25, 2025

Backdoor Roth IRA – A Smart Strategy for High-Income Earners

Tax-free growth even if you exceed Roth IRA income limits

Why use a Backdoor Roth IRA?

  • High-income earners face Roth IRA contribution limits due to income limits.
  • 2025 Income Limits:
    • $165,000 (Single filers)
    • $246,000 (Married filing jointly)
  • A legal workaround to access tax-free growth and withdrawals

How it works

Contribute to a Traditional IRA

  • Non-deductible Contribution: Make a non-deductible contribution to a Traditional IRA. No income limits for making non-deductible Contributions.
  • Example: Sarah earns $200K and contributes $6,500 to a Traditional IRA

Convert to a Roth IRA

  • Convert Traditional IRA to Roth IRA (a taxable event). You'll owe taxes on any pre-tax contributions and earnings.
  • Example: Sarah converts $6,500 to a Roth IRA
    • No earnings → No extra tax
    • Earnings present → Pay tax on earnings

Pay taxes on the conversion

  • Conversion amount is added to taxable income
  • Only earnings are taxed if the contribution was non-deductible
  • Example: If Sarah’s IRA grew from $6,500 to $7,000, she pays tax on $500 earnings

Key Benefits

Tax-Free Growth – Investments grow without tax

Tax-Free Withdrawals – After 5 years & age 59½

No Required Minimum Distributions (RMDs) – Unlike Traditional IRAs, Roth IRAs don’t require minimum withdrawals

Important Considerations

⚠️ Pro-Rata Rule – If you have other pre-tax IRAs, the taxable portion of the conversion is calculated proportionally

⚠️ Timing Matters – Convert quickly to avoid taxable earnings buildup

The Backdoor Roth IRA is a valuable strategy for high-income earners to maximize their retirement savings and take advantage of the tax benefits offered by Roth accounts.

Need help with your IRAs?
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