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Backdoor Roth IRA: What it is and how to set it up

What is a backdoor Roth IRA? Explore the process, benefits, and steps to utilize backdoor Roth IRAs for maximizing your retirement savings.
8 minute read   •   July 31, 2025
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What is a backdoor Roth IRA?

"Backdoor Roth IRA" is a term that describes a strategy used by high-income earners who can't contribute to a Roth IRA because their income is above certain limits. Rather than contributing directly to a Roth, the backdoor strategy calls for contributing to a traditional IRA and then converting it to a Roth.

Roth IRAs are attractive because of their unique tax advantages. With a Roth IRA, you contribute after-tax dollars, and as long as you meet certain requirements, you can withdraw both the invested money (principal) and any earnings tax-free in the future. While you contribute the same dollar amount to the Roth IRA as you would a traditional IRA, the Roth can be more powerful over time because the entire balance—including all investment gains—can be withdrawn tax-free in retirement. Withdrawals on traditional IRAs, on the other hand, are taxed as ordinary income, which can be as high 37% at the federal level.

Plus, unlike traditional IRAs, Roth IRAs don't have required minimum distributions (RMDs), which gives you greater flexibility in retirement and potentially lowers your tax liability over your lifetime.

The challenge is that income limits prevent many high earners from contributing directly to a Roth IRA. A backdoor Roth IRA provides a workaround through a 2-step process: First you make a nondeductible contribution to a traditional IRA, meaning you don't get a tax break up front. Then you convert that contribution to a Roth IRA, in which future growth and qualified withdrawals can be tax-free.

This strategy works because while there are income limits for direct Roth contributions, anyone can convert a traditional IRA to a Roth IRA regardless of income level. Since the initial contribution is made with after-tax dollars, you typically won't owe additional taxes on the conversion (as long as you don't have other pre-tax traditional IRA assets, which would be taxable if converted). However, you will owe taxes on any gains that occur between making the contribution and the conversion. Those gains will be taxed as income when you convert. This strategy can be especially attractive for high earners who want to access tax-free growth, which they typically don’t have access to due to income limits on direct Roth contributions.

A nonworking spouse can also use the backdoor Roth IRA strategy subject to the income limits based on the working spouse's income.


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Backdoor Roth IRA income limits

There are no income limits for backdoor Roth IRAs, but direct Roth IRA contributions are subject to income limits that phase out your ability to contribute as your modified adjusted gross income (MAGI) increases. The table below shows the 2025 contribution limits based on filing status and income level.

Filing status Modified Adjusted Gross Income (MAGI) Roth IRA Contribution Limit (2025)
Single, married filing separately (if you didn't live with your spouse at any point during the year), or head of household Less than $150,000 $7,000 ($8,000 if  age 50 or older)
$150,000 - $164,999 Reduced contribution based on your income
$165,000 or more $0
Married, filing jointly,
surviving spouses		 Less than $236,000 $7,000 ($8,000 if age 50 or older)
$236,000 - $245,999 Reduced contribution based on income
$246,000 or more $0
Married filing separately (if you lived with your spouse during the year) Less than $10,000 Reduced contribution based on income
$10,000 or more $0

Source: Internal Revenue Service.


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How to set up a backdoor Roth IRA

There are 2 ways to set up a backdoor Roth IRA:

 

Option 1: Contribute to a traditional IRA and then convert it to a Roth IRA

For this strategy to work, you should contribute to a traditional IRA with no balance. If you already have money in any traditional IRA accounts, the "pro rata" rule will apply and could create unexpected tax consequences.

The pro rata rule requires any IRA conversion to be treated as coming proportionally from all traditional IRA accounts combined, including both pre-tax and after-tax contributions.1 For example, if you have $93,000 in a pre-tax traditional IRA and make a $7,000 nondeductible contribution (giving you $100,000 in total IRA assets), 93% of your conversion will be considered taxable income, even if you're only converting the $7,000 contribution. This significantly reduces the tax efficiency of the backdoor IRA strategy.

You can convert the assets to a Roth IRA once the funds settle. Any money earned due to market performance before the conversion takes place is subject to taxes. You report the nondeductible contributions on IRS Form 8606 when you file your tax return. This form tracks your after-tax basis and ensures you're not taxed on the money again later. Note: There may be a 7-day hold before allowing conversions. Check your custodian’s policy for details.

 

Option 2: If your 401(k) plan allows, consider a mega backdoor Roth conversion

Some 401(k) plans permit automatic Roth conversions, allowing you to make after-tax contributions that automatically convert to Roth within your accounts.

A mega backdoor Roth IRA conversion takes advantage of the IRS's total 401(k) contribution limit. While your regular 401(k) contributions are capped at $23,500 in 2025 ($31,000 if you’re 50 or older), the IRS allows total annual contributions—including employee deferrals, employer matches, and after-tax contributions—of up to $70,000 total ($77,500 if 50 or older).2

This creates a "mega" opportunity because if your 401(k) plan allows it, you can make large after-tax contributions through payroll deductions that far exceed the $7,000 IRA limit. To take advantage of this strategy, your plan must allow after-tax contributions and conversions. Check with your plan administrator.


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How to convert to a Roth IRA

The process of converting to a Roth IRA involves several key steps. It's important to pay close attention to the details to avoid unnecessary taxes and penalties.

While the most common strategy is to convert a traditional IRA to a Roth IRA, it's worth noting that you can also convert 401(k) funds to a Roth IRA—typically through a rollover process when you leave an employer.

  1. Establish a traditional IRA if you don't already have one.
  2. Make a nondeductible contribution to that account. If your income is above the IRS limit and you’re covered by a workplace retirement plan, you won’t be eligible for a tax deductions. But you can still contribute to a traditional IRA and then convert it to a Roth.
  3. Wait for the funds to settle, which typically takes a couple of days.
  4. Convert your IRA to a Roth IRA. Convert the full balance to avoid future tax complications. If you have other pre-tax IRAs, the pro rata rule could make part of the conversion taxable.
  5. Receive and file the necessary tax forms. You'll get Form 1099-R, which you'll need when filing your taxes.
  6. Complete the conversion as a soon as possible after making the contribution to minimize the chances that the money in the traditional IRA will appreciate, as any earnings would be subject to taxes.

For detailed guidance on this process, see our comprehensive guide on how to convert to a Roth IRA.

Backdoor Roth IRA tax implications

It's important to understand the tax implications of a backdoor Roth IRA so you can avoid unintended penalties and taxes.

When you execute a backdoor Roth IRA strategy, you'll need to file IRS Form 8606 to properly report your nondeductible traditional IRA contribution and subsequent Roth conversion.

Typically, you will not owe taxes on the conversion itself. However, any earnings that accrue between your contribution and conversion are taxable. Some investors choose to keep the contribution in cash during the short window to help avoid unexpected gains. But be aware that leaving funds uninvested too long can mean missing out on market growth.

Additionally, if you have existing traditional IRA balances from previous years, the pro rata rule comes into play. This rule requires that any conversion be treated as coming proportionally from both pre-tax and after-tax sources across all your traditional IRAs.

Consider working with a tax professional to ensure proper reporting and to understand how a backdoor Roth conversion fits into your overall tax strategy.

Backdoor Roth IRA pros and cons

The backdoor Roth IRA can be a powerful tool for high earners, but it requires careful monitoring due to its complexity and potential tax implications.

Understanding the trade-offs of a Roth IRA conversion can help you decide if this approach makes sense for you.

Pros:

  • Allows high-income earners to access Roth IRA benefits despite income restrictions.
  • Provides tax-free growth potential for retirement savings.
  • Imposes no RMDs during your lifetime.
  • Permits tax-free withdrawals in retirement if certain conditions are met.
  • Enables contributions to be withdrawn penalty-free after 5 years, assuming IRS holding period requirements are met.

Cons:

  • Requires attention to tax planning and documentation.
  • May trigger taxes if you have existing traditional IRA balances, because of the pro rata rule.
  • Converted amounts are subject a 5-year holding period to avoid a 10% penalty if you’re under age 59 ½; earnings are always subject to a separate 5-year rule for tax-free withdrawal.
  • Is subject to potential legislative changes that could eliminate its use.

When should you not consider this strategy?

A backdoor Roth IRA doesn't make sense for everyone. If you're able to make a direct Roth IRA contribution, then you don't need to use the backdoor method.

If you have a balance in a rollover IRA, you may not want to make a backdoor Roth conversion because of the pro rata rule. This rule requires all IRA distributions to be taken proportionally from your pre-tax and after-tax contribution sources, which could limit the tax benefits you'd receive from a Roth conversion.

Also, if you plan to withdraw the converted money within 5 years, the backdoor IRA may not be worthwhile, as you won't have enough time to fully benefit from the Roth's tax advantages.3

FAQs

The difference is the way you make your contribution. High-income earners use the backdoor technique to establish a Roth IRA since they're unable to contribute in the standard way because of the Roth IRA income limits.

If you contribute money to an investment that accrues earnings before you complete the conversion, then you'll have to pay taxes on those earnings. Once the money is in a Roth IRA, your withdrawals will be tax-free if you meet certain requirements. If you're subject to the pro rata rule, all your traditional IRAs, SEP-IRAs, and SIMPLE IRAs are treated as one combined account for tax reporting. When you convert or withdraw funds, the taxable and non-taxable portions are calculated based on the ratio of pre-tax and after-tax amounts across all your IRA assets. 

It's best to sit down with an advisor who can help you determine if a backdoor Roth IRA would be beneficial in your situation.

As of 2025, backdoor Roth IRAs remain a legal and viable strategy for high-income earners. While there have been periodic legislative proposals to eliminate this strategy, no changes have been enacted into law. However, tax laws can change, and it's important to stay informed about potential legislative developments.

You can contribute up to $7,000 ($8,000 if age 50 and older)4 to a traditional IRA for backdoor Roth conversion purposes in 2025, regardless of your income level. However, your contribution can't exceed your earned income for the year. This is the same annual limit that applies to direct Roth IRA contributions for those who qualify based on income.

If your income exceeds the IRS limits and you don't want to use a backdoor Roth IRA conversion, consider investing in taxable accounts. Other alternatives include maximizing employer-sponsored retirement plans and contributing to health savings accounts (HSAs) if eligible.

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1IRS. Rollovers of After-Tax Contributions in Retirement Plans. Accessed July 1, 2025.

2IRS. 2025 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living. Accessed July 1, 2025 (PDF).

3The 5-year holding period for Roth IRAs starts on the earlier of: (1) the date you first contributed directly to the IRA, (2) the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or (3) the date you converted a traditional IRA to the Roth IRA. If you're under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you're required to keep track of the 5-year holding period for each conversion separately.

4Vanguard. 2025 Roth IRA income and contribution limits. Accessed July 1, 2025.

 

All investments are subject to risk, including the possible loss of the money you invest.

Withdrawals from a Roth IRA are generally tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.)

The information contained herein does not constitute tax advice, and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about their individual situation.