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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