Glossary · Definition
Backdoor Roth IRA
The backdoor Roth IRA is a workaround for high earners above Roth income limits ($146-161K single, $230-240K joint in 2024). Process: contribute to a non-deductible traditional IRA, then convert to Roth. Tax-equivalent to direct Roth contribution if you have no other traditional IRA balance.
Definition
The backdoor Roth IRA is a workaround for high earners above Roth income limits ($146-161K single, $230-240K joint in 2024). Process: contribute to a non-deductible traditional IRA, then convert to Roth. Tax-equivalent to direct Roth contribution if you have no other traditional IRA balance.
What it means
Step 1: open or use existing traditional IRA. Contribute $7,000 (2024 limit) with after-tax money — no deduction since you’re above income limits. Step 2: a few days later (settled), convert the traditional IRA to Roth IRA. The conversion is taxable on any pre-tax money in your traditional IRA balance, and the IRS pro-rata rule treats your conversion as proportional to ALL your traditional IRA balances combined. If you have other traditional IRA money (pre-tax, like from rollovers), the conversion gets partially taxed. Workaround: roll any existing pre-tax IRA balance into a 401k first (if your 401k allows it), leaving only the new $7K to convert tax-free.
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Why it matters
Without the backdoor Roth, high-income workers (engineers, doctors, lawyers, executives) lose the tax-free-growth advantage of Roth. Over 30 years, $7K/year backdoor Roth contributions compound to ~$700K+ at 7% real return — all withdrawable tax-free. That’s a massive estate-planning advantage compared to a taxable brokerage equivalent. The mega-backdoor Roth (after-tax 401k contributions converted to Roth, allowing up to $46K/year additional) is even bigger but requires plan support — only some employers offer it.
Example
$300K-earning married couple: above $230K joint Roth limit. Each contributes $7K to a fresh empty traditional IRA, then converts to Roth same week. No tax owed (no pre-existing pre-tax balance). Result: $14K/year of Roth contributions despite being above the income cap.
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Frequently asked questions
What’s the pro-rata rule?
When converting traditional → Roth, the IRS treats the conversion as a proportional slice of ALL your traditional IRA balances combined (across all institutions). Pre-tax balances trigger tax on the conversion.
Is the backdoor Roth legal?
Yes — IRS Notice 2014-54 explicitly endorses it. Some politicians have proposed closing the loophole; it remains open as of 2024.
Can I do it for my spouse too?
Yes — spousal IRA rules apply. Each spouse’s contribution is independent up to the joint limit. Two-IRA households can backdoor $14K/year.
Related terms
- DefinitionRoth vs traditional IRARoth IRA: contributions are after-tax, withdrawals are tax-free. Traditional IRA: contributions are pre-tax (deductible), withdrawals are taxed as ordinary income. Pick Roth if you expect higher tax bracket in retirement than now; pick traditional if you expect lower.
- DefinitionCompound interestCompound interest is interest earned on both your original money AND the interest it's already earned. Over long periods, this 'interest on interest' effect is what turns modest monthly contributions into retirement-level balances.