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Backdoor Roth IRA

Investment

Backdoor Roth IRA Conversion

A workaround that lets high earners above the Roth IRA income limit contribute to a Traditional IRA and then convert it to a Roth, sidestepping the income cap.

Definition

A backdoor Roth IRA is a two-step move: contribute to a Traditional IRA (which has no income limit), then convert that balance to a Roth IRA shortly after. It exists because direct Roth contributions phase out at higher incomes, but Roth conversions don't have any income restriction at all.

The strategy only makes sense for people above the direct Roth contribution limit. If you qualify to contribute directly, there's no reason to take the extra conversion step. The 401(k) Calculator helps you see how much room you already have in tax-advantaged accounts before deciding this workaround is worth the paperwork.

Formula

There's no formula, it's a procedural strategy rather than a calculation. The only number that matters is the tax owed on conversion:

Taxable Amount on Conversion = Value at Conversion − After-Tax Contributions

Worked Example

Raj earns too much to contribute directly to a Roth IRA. He contributes $7,000 to a Traditional IRA (non-deductible, since he already has a workplace plan) and converts it to a Roth two weeks later, after it grew to $7,050.

  • Taxable portion: $7,050 − $7,000 = $50

That $50 is taxed as ordinary income, a small price for getting $7,050 into a Roth account that grows tax-free from that point forward.

Key Things to Know

  • Convert quickly to minimize taxable growth. The longer the money sits in the Traditional IRA before conversion, the more growth accumulates, and the more tax you'll owe on the conversion.
  • The pro-rata rule can complicate things. If you have other pre-tax IRA balances, the IRS averages them into the conversion calculation, potentially taxing more than just the new contribution's growth.
  • File Form 8606 every year you do this. This form tracks your non-deductible contributions so the IRS doesn't tax the same money twice down the line.
  • A mega backdoor Roth is a different, bigger version. That strategy uses after-tax 401(k) contributions instead of a Traditional IRA and can move much larger amounts, where the plan allows it.
  • Consider rolling old 401(k)s away from Traditional IRAs first. Moving pre-tax IRA money into a current employer's 401(k) (if allowed) can clear the pro-rata problem before you start backdoor conversions.

Related Calculators

401(k) Calculator →Project your 401(k) retirement savings including employer match and investment growth. See your balance at retirement based on your salary and return.
Federal Income Tax Calculator →Calculate your 2024 US federal income tax owed, effective rate, and marginal bracket by filing status, with standard or itemized deductions.

Related Terms

Roth IRARoth Individual Retirement AccountTraditional IRATraditional Individual Retirement Account

Frequently Asked Questions

Is the backdoor Roth strategy legal?
Yes, the IRS has acknowledged it as an accepted practice, even though it exists because of a gap between the Roth contribution income limit and the fact that anyone can convert a Traditional IRA regardless of income. There's no dollar limit on conversions the way there is on direct contributions.
Do I owe tax on a backdoor Roth conversion?
Only on any growth between the contribution and the conversion, since the original contribution was made with after-tax dollars and wasn't deducted. If you convert quickly, that growth, and the tax owed, is usually minimal.
What is the pro-rata rule and why does it matter here?
If you have other pre-tax money sitting in Traditional IRAs, the IRS treats your conversion as a proportional mix of pre-tax and after-tax funds, not just the new contribution. This can trigger unexpected tax on the converted amount, so check your existing IRA balances before doing a backdoor Roth.
Can I do a backdoor Roth every year?
Yes, there's no restriction on repeating the strategy annually as long as you contribute to a [Traditional IRA](/glossary/traditional-ira/) and convert it each time, subject to the usual pro-rata considerations if you carry other IRA balances.
Why would someone bother with this instead of just contributing to a 401(k)?
A [Roth IRA](/glossary/roth-ira/) offers tax-free growth and more investment flexibility than most 401(k) plans, and high earners often max out their 401(k) already. The backdoor route is simply the only path left to get money into a Roth once you're above the direct contribution limit.