What is a backdoor Roth IRA and how does it work?
A backdoor Roth IRA lets high earners (over $161k single / $240k married in 2024) contribute to a Roth IRA despite income limits. You contribute to a Traditional IRA (non-deductible), then immediately convert to Roth. It's legal, IRS-approved, and costs nothing in taxes if done correctly with no existing Traditional IRA balances.
Formula
Contribution: $7,000/year (2024). Tax owed: $0 if no existing pre-tax IRA balance. If pre-tax exists: tax = conversion amount × (pre-tax balance ÷ total IRA balance).
Example
Earn $250k (over Roth limit). Contribute $7k to Traditional IRA → convert to Roth same week. No existing Traditional IRA balance → $0 tax owed. Do this annually for 20 years at 7% → $287,000 in tax-free Roth money.
How it works in detail
The steps: (1) Contribute $7,000 to a Traditional IRA (non-deductible, since you're over the income limit), (2) Convert the entire balance to Roth IRA within days, (3) Pay tax only on gains between contribution and conversion (usually $0–$5 if done quickly). The catch: the 'pro-rata rule.' If you have existing pre-tax Traditional IRA money, the conversion is taxed proportionally. Example: $93k pre-tax Traditional + $7k after-tax contribution = $100k total. Converting $7k means 93% is taxable. Solution: roll all pre-tax IRA money into your 401k first, leaving only the after-tax contribution. Mega backdoor Roth (through after-tax 401k contributions) allows $46,000+ additional Roth savings if your plan allows it.
Calculate the long-term value of backdoor Roth contributions
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Should I choose Roth or Traditional IRA?
Choose Roth if you expect higher taxes in retirement (younger, income will grow, or tax rates rise). Choose Traditional if you're in a high bracket now and expect lower taxes later. For most accumulating workers under 50 in the 22–24% bracket, Roth is preferred because of tax-free growth and no Required Minimum Distributions.
When should I do a Roth conversion?
Convert Traditional IRA/401(k) to Roth during years when your income is unusually low — early retirement before Social Security, sabbaticals, or gap years. Fill up the 10% and 12% brackets ($0–$47,150 single in 2024) with conversions, paying minimal tax on money that then grows tax-free forever.
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