What Is This “Backdoor Roth IRA” and Is It For Me?

The first quarter of the year is a time for organization—reflecting on the previous year personally and professionally, setting goals for the year ahead, and taking action toward achieving them. Tax forms are becoming available, and contributing to retirement accounts is a key focus. Many households are reviewing their previous year’s income to determine whether they should contribute to a Traditional IRA or a Roth IRA. Sometimes, the conversation turns to whether a Backdoor Roth IRA is a viable option. So, what exactly is a Backdoor Roth IRA?

IRA Basics

First, let’s discuss the basics. Both Traditional IRAs and Roth IRAs are retirement savings vehicles that have no age limits for contributors, have IRS-set contribution limits, and allow contributions from minors and non-working spouses under specific income rules. However, they differ in terms of eligibility based on income and tax filing status.

For 2024, Roth IRA income limits are $161,000 or less for single filers and $240,000 or less for married couples filing jointly. Additionally, the maximum contribution limit for the 2024 tax year is $7,000, with an extra $1,000 allowed for those aged 50 and older. Contributions can be made at any point during the year, with the deadline for the 2024 tax year set for Tuesday, April 15, 2025.

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Traditional vs. Roth IRAs

There are two key differences between Traditional and Roth IRAs. A Traditional IRA grows tax-deferred, meaning investment earnings accumulate tax-free until the investor takes a distribution, at which point the amount is taxed as income. Additionally, Traditional IRAs (including Rollover, Inherited, SEP, and SIMPLE IRAs) require minimum distributions starting at age 73.

In contrast, a Roth IRA allows for tax-free and penalty-free withdrawals of earnings once the account holder reaches age 59½ and the account has been open for at least five years. Roth IRAs do not have required minimum distributions unless inherited. Financial advisors often refer to these benefits as the Roth IRA’s “triple threat”: tax-free investment growth, tax-free withdrawals, and no required minimum distributions during the account holder’s lifetime.

Backdoor Roth IRA

One potential strategy that investors and advisors frequently discuss is the Backdoor Roth IRA. This tax strategy allows investors to contribute to a Traditional IRA and immediately convert those funds to a Roth IRA. It can be particularly beneficial for high-income earners who are ineligible to contribute directly to a Roth IRA but still want to take advantage of its key benefits.

Consider these Caveats

Does this strategy sound too good to be true? Perhaps. However, there are important caveats to consider when executing a Backdoor Roth IRA or Roth conversion.

First, converting funds from a Traditional IRA to a Roth IRA requires paying taxes on the converted amount at the individual’s marginal tax rate. This amount is reported on the tax return for the year of conversion. For example, if you complete a Backdoor Roth IRA in February, March, or April 2025, it will be reported on your 2025 tax return, even if the contribution is attributed to the 2024 tax year.

Second, while annual contributions to a Roth IRA are limited to $7,000 (or $8,000 for individuals over 50), there is no limit on the amount that can be converted from a Traditional IRA to a Roth IRA. However, this requires careful tax planning, and consulting with a financial professional is strongly recommended.

Another key consideration is that once funds are converted from a Traditional IRA to a Roth IRA, they must remain in the Roth IRA for at least five years. Withdrawing the funds before meeting this requirement could result in additional taxes and penalties.

Does a Backdoor Roth IRA Make Sense for You?

This strategy is ideal for individuals who do not plan to retire for at least five years, have extra cash to cover the tax bill, anticipate being in a higher tax bracket in retirement, and prefer to avoid required minimum distributions. It can also be a valuable tool for estate and legacy planning. However, every investor’s situation is unique.

Please contact us if you want to learn more about how a Backdoor Roth IRA may fit into your financial plan. We’re happy to help.

Source: IRS.gov

This is intended for informational purposes only and should not be construed as personalized investment advice. Please consult your investment professional regarding your unique situation

Jonathon D. Merickel Portfolio Advisor CFP®, MBA

Jonathon has been involved in the financial services industry since 2002. He earned a bachelor of science degree from Syracuse University and an MBA from Le Moyne College.