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Backdoor Roth IRAs

Earn too much for a Roth IRA? Get in through the “back door” with this loophole. But watch out for taxes.

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By

Cassidy Horton

Updated

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Backdoor Roth IRAs — also known as Roth conversions — are a type of investment strategy that lets high earners tuck away money in a Roth IRA, even if they earn too much to qualify for one. The biggest drawbacks are that you pay taxes on your conversion, and they can’t be reversed.

Backdoor IRAs defined

A backdoor Roth IRA is a loophole strategy where you contribute money to a traditional IRA, then convert those funds into a Roth IRA.

Who it’s forAnyone who exceeds the income limits for a Roth IRA but still wants to contribute.
What it offersTax-free growth and withdrawals into retirement
Why it’s appealingCan be a great way to save on taxes if you anticipate being in a higher tax bracket in retirement. Also helps you avoid required minimum distributions (RMDs) when you turn age 72.
What to watch out forYou pay taxes on your conversion in the year you do it. So, you need enough idle cash on hand to cover your tax bill.

Learn more: Traditional IRA vs. Roth IRA

2022 Roth IRA income limits

Wondering if you qualify for a Roth IRA? Here are the phaseout limits for 2022, based on your modified adjusted gross income (MAGI) and tax filing status:

  • For married couples filing jointly. You can contribute the full amount if you make less than $204,000 and a partial amount if you make between $204,000.01 and $213,999.99. You’re not eligible if you make $214,000 or more.
  • For single taxpayers and heads of household. You can contribute the full amount if you make less than $129,000 and a partial amount if you make between $129,000.01 and 143,999.99. You’re not eligible if you make $144,000 or more.
  • For married taxpayers filing separately. You can contribute a partial amount if you make less than $10,000. You’re not eligible if you make $10,000 or more.

How a backdoor Roth IRA works

A backdoor Roth IRA is not a financial account. Rather, it’s a type of retirement investment strategy. Here’s how it works:

  1. Open a traditional IRA and contribute money to it.
  2. Transfer those funds to a Roth IRA.
  3. Pay taxes on your conversion.
  4. Watch your money grow tax-free after that.

Backdoor Roth IRAs vs. mega backdoor Roth IRAs

Backdoor Roths and mega backdoor Roths both allow high earners to put aside money away in a Roth IRA. However, the main difference is how you fund the account.
A backdoor Roth IRA gets funded with money from a traditional IRA. A mega backdoor Roth IRA gets funded from an employer-sponsored 401(k) or 403(b). (It’s called “mega” because these employer-sponsored accounts have much higher contribution limits than traditional IRAs.)

Backdoor Roth IRAMega backdoor Roth IRA
Requires a traditional IRA to get startedRequires a 401(k) or 403(b) to get started
Note: Employer plan must allow after-tax contributions and in-service distributions
No contribution limitCan contribute up to $40,500 in after-tax dollars for 2022
Example: You contribute $6,000 to a traditional IRA, then convert that money into a Roth IRA.Example: You save $30,000 extra in your employer-sponsored 401(k), then convert that money into a Roth IRA.

4 benefits of backdoor Roth IRAs

For better or worse, backdoor Roth IRAs are a type of loophole that gives individuals with large incomes access to specific Roth IRA benefits:

  • Tax-free growth and withdrawals. You don’t pay any more taxes after your initial conversion, so the rest of your account gets to grow tax-free until withdrawal.
  • No RMDs. Roth IRAs don’t have required minimum distributions like traditional IRAs and 401(k)s do. So you won’t be forced to take out money at age 72.
  • Penalty-free withdrawals before age 59 1/2. Because you pay taxes on backdoor Roth IRAs up front, you can withdraw your contributions without penalty once your account is at least five years old.
  • No conversion limit. Unlike Roth IRAs, there’s no yearly cap on how much you convert into a backdoor Roth IRA.

4 things to what to watch out for

A lot of people argue that backdoor Roth IRAs give high earners unfair access to retirement benefits originally designed for middle-class families. Other drawbacks include:

  • Creates a taxable event. A conversion counts as taxable income for the year. So if you do a backdoor Roth IRA for $10,000, you’ll pay taxes on that amount when you file your return.
  • Can’t tap into funds for five years. Roth IRAs let you withdraw contributions without penalty before age 59 1/2. But your account must be at least five years old first.
  • May not lower your future tax burden. Backdoor Roth IRAs are beneficial if you think you’ll be in a higher tax bracket in retirement. But if your future tax bracket is actually lower, you may save money by keeping it in a traditional account.
  • Can’t be undone. Backdoor Roth IRA conversions are permanent, so consult a tax professional or financial adviser before starting one.

2 ways to kick-start your backdoor Roth IRA strategy

Backdoor Roth IRAs are easier to do than mega backdoor Roth IRAs. In most cases, you need two things to get started:

  1. A traditional IRA. If you don’t already have one, consider rolling over an old 401(k) balance or opening a new traditional IRA from scratch. Contribution limits for 2022 are $6,000 or $7,000 if you’re at age 50 or older.
  2. Money to spare for your tax bill. Ideally, you need enough idle cash on hand to cover the tax bill you get when you file your return.

Alternatives to a backdoor Roth IRA

If you don’t think a backdoor Roth IRA or a mega backdoor Roth IRA strategy is the right choice for you, you still have other options.

  • Roth 401(k). This is a type of employer-sponsored retirement plan that has the benefits of a Roth IRA. If your employer offers one, you can use it to chuck away after-tax money for retirement.
  • Brokerage account. An investment account can be a good way to save for retirement, a second home or other financial goals. You won’t get the tax benefits of a Roth IRA, but you gain the flexibility to withdraw funds without penalty.
  • Health savings account. HSAs are available to anyone with a high-deductible health plan (HDHP). Contributions are tax-deductible and can be withdrawn tax-free for medical expenses. Once you turn 65, you can use your HSA for anything.

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Bottom line

If you’re not eligible for a Roth IRA, a backdoor Roth IRA could be a good workaround. Just make sure you know the tax consequences ahead of time, because it’s not reversible.
A Roth IRA is just one way to save for retirement. For more information on how to prepare for your golden years, explore our guide to retirement planning.

  1. IRS announces changes to retirement plans for 2022, IRS.gov
  2. “How a middle-class retirement plan became a tax dodge for the rich,” CBS News, Sept. 30, 2021
  3. Instructions for form 8606, IRS.gov

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