“My income is too high to contribute to a Roth IRA so I don’t have one”.
This is a common response I receive when I ask if someone is familiar with the benefits of contributing to a Roth IRA.
While there are income limitations to contribute directly to a Roth IRA, the backdoor Roth IRA is an attractive retirement savings strategy no matter how much income you make.
For high-income earners, there are a few additional steps to take to properly fund a Roth IRA.
Income Limits
The IRS has rules for who is eligible to contribute directly to a Roth IRA based on their income. For 2025, the income limitations start at $236,000 for couples filing a joint tax return ($150,000 for individuals filing as single on their tax return). If your income is above these limits, you’ll need to pursue the backdoor Roth IRA strategy.
Contribution Limits
In 2025, you are able to contribute up to $7,000. For individuals over the age of 50 by December 31, you can contribute an extra $1,000) to a Roth IRA or backdoor Roth IRA. It’s important to note that the IRS requires you to have earned income up to the amount you contribute to a Roth IRA. There is one exception to this rule – you can make a spousal IRA contribution on behalf of a non-working spouse.
Implementing a Backdoor Roth IRA
If your income exceeds the limits to contribute directly to a Roth IRA, you’ll need to pursue a few additional steps.
- Step 1: Establish both a Traditional and Roth IRA – The money needs to first deposited into the Traditional IRA and then the funds are subsequently converted to your Roth IRA.
- Step 2 – Contribute Funds to a Traditional IRA – You should make a “non-deductible” contribution, up to the annual limit, from your bank or brokerage account into a Traditional IRA. It’s important to note that this deposit can only be made in the form of cash.
- Step 3: Transfer Funds from your Traditional IRA to your Roth IRA – The best practice is to let the funds sit within your Traditional IRA for a few days prior to converting the funds to your Roth IRA. This is the “backdoor” mechanism of funding your Roth IRA.
- Step 4: Invest the Cash within your Roth IRA – Waiting to invest the cash in the IRA avoids any earnings being taxed on the Roth conversion.
- Step 5: File a Form 8606 on your tax return – When it comes time to file your tax return, it’s important to report the non-deductible contribution on your tax return. This indicates to the IRS you are not claiming a tax deduction for the IRA contribution and it establishes the “basis” for your account.
Deadline to Fund a Backdoor Roth IRA
The deadline to contribute to a backdoor Roth IRA is the tax filing deadline, April 15th, of the following year to complete your contribution up to the annual limit.
Watch out for the Pro-Rata Rule
This is a rule to be aware of so you don’t incur adverse tax consequences upon executing a backdoor Roth IRA.
You do not want to have money in pre-tax IRAs when pursuing the backdoor Roth IRA. This includes a rollover IRA from a previous employer’s 401k plan.
Why does this matter?
The IRS does not allow you to only convert the non-deductible IRA dollars. They take into account your total IRA balance and prorate the conversion amount based on your IRA balance across all IRAs. This includes Traditional IRAs, IRA Rollovers, SEP IRAs, and SIMPLE IRAs.
For example, let’s say you have an IRA rollover with a balance of $63,000. If you attempted to do the backdoor roth with the $7,000 contribution this year, the pro rata rule would kick in.
$7,000 / $70,000 (Non-Deductible / Total IRA balance) = 10% of your total IRA balance is after-tax, therefore, $700 would be considered “basis” and the other $6,300 would be taxable as ordinary income in the year of the conversion. Not ideal!
You may notice that 401k’s are not included in this list. This is because a 401k is an employer-sponsored retirement plan, not an Individual Retirement Account (IRA).
So, if you have access to a 401k plan through your current employer and you also have IRAs with pre-tax money, you could transfer these pre-tax IRA accounts into your 401k plan. This would clear out your IRA balance, which would enable you to pursue the backdoor Roth strategy without being subject to the pro-rata rule.
The pro-rata rule is based on your total IRA balance on December 31st of the year in which you do a Roth conversion. So if you intend to transfer your IRA into your 401k plan, you want to make sure this is completed before the end of the year.
Overall, I believe a Backdoor Roth IRA can be a great method for high-income earners to build up a tax-free retirement account. However, it’s important to understand the rules of how to execute this strategy correctly so you don’t encounter any unexpected tax consequences. If you’d like to see how a backdoor Roth IRA strategy could benefit you this year, I’d love to chat with you!