Backdoor Roth IRA
Quick Definition
A strategy allowing high-income earners who exceed Roth IRA income limits to contribute indirectly by converting traditional IRA contributions.
Key Takeaways
- Allows high-income earners to fund Roth IRAs despite income limits
- Involves non-deductible traditional IRA contribution followed by Roth conversion
- Pro-rata rule can create tax complications if pre-tax IRA balances exist
- Mega backdoor Roth uses after-tax 401(k) contributions for larger Roth conversions
- 2026 Roth income limits: $165,000 single, $245,000 married filing jointly
What Is Backdoor Roth IRA?
A backdoor Roth IRA is a legal strategy that allows high-income individuals who exceed the Roth IRA income limits ($165,000 for single filers, $245,000 for married filing jointly in 2026) to fund a Roth IRA indirectly. The process involves making a non-deductible contribution to a traditional IRA (which has no income limit for contributions) and then converting those funds to a Roth IRA. If done immediately with no investment gains, the conversion incurs little or no tax. However, the pro-rata rule can create tax complications if the individual has existing pre-tax IRA balances — the conversion is taxed based on the ratio of pre-tax to after-tax money across all traditional IRAs. The "mega backdoor Roth" strategy involves contributing after-tax dollars to a 401(k) beyond the standard limit and converting those to a Roth, potentially allowing over $40,000 in additional Roth contributions annually.
Backdoor Roth IRA Example
- 1A couple earning $300,000 used the backdoor Roth strategy by each contributing $7,500 to traditional IRAs and immediately converting to Roth IRAs, paying minimal taxes on the conversion.
- 2An employee used the mega backdoor Roth strategy to contribute an additional $46,000 in after-tax 401(k) contributions and convert them to a Roth account.
Related Terms
Traditional IRA
A tax-advantaged individual retirement account where contributions may be tax-deductible and earnings grow tax-deferred.
Required Minimum Distribution (RMD)
The minimum amount that must be withdrawn annually from tax-deferred retirement accounts starting at age 73.
Tax-Deferred
An investment or account where taxes on earnings are postponed until funds are withdrawn, typically in retirement.
Qualified Distribution
A withdrawal from a tax-advantaged retirement account that meets IRS requirements and avoids penalties.
Marginal Tax Rate
The tax rate applied to the last dollar of income earned, determined by the taxpayer's tax bracket.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
Expand Your Financial Vocabulary
Explore 130+ financial terms with definitions, examples, and formulas
Browse Personal Finance Terms