The Backdoor Roth IRA: How to Get Money Into a Roth When Your Income Is Too High

Mar 23

If your income is too high to contribute to a Roth IRA directly, there's still a way in. It's called a Backdoor Roth, and it's completely legal.

But it comes with a catch that can trip you up if you're not careful. Let me walk you through how it works, when it works well, and when it can get expensive.

First, Why You'd Need a Backdoor

For 2025, you can contribute directly to a Roth IRA only if your modified adjusted gross income (MAGI) is below $150,000 as a single filer or $236,000 married filing jointly. Above $165,000 single or $246,000 MFJ, you're completely locked out of direct contributions.

But here's the thing: there is no income limit on contributing to a Traditional IRA. You just can't deduct it if your income is too high. And there's no income limit on converting a Traditional IRA to a Roth.

So the strategy is simple: contribute to a Traditional IRA (non-deductible), then convert it to a Roth. Two steps. That's the backdoor.

How to Do It: Step by Step

Step 1: Contribute to a Traditional IRA. For 2025, the limit is $7,000 ($8,000 if you're 50 or older). You're making a non-deductible contribution — meaning you won't get a tax break for putting the money in. That's fine. The benefit comes later.

Step 2: Convert the Traditional IRA to a Roth IRA. You can do this immediately. Some people wait a day or two, some do it same-day. There's no required waiting period in the tax code.

Step 3: File IRS Form 8606 with your tax return. This is how you tell the IRS that your contribution was non-deductible. If you skip this form, the IRS may assume you took a deduction, and then they'll tax you on the conversion — meaning you'd get taxed twice on the same money.

That last step is critical. Form 8606 is the paper trail that makes the whole thing work. Make sure your CPA or tax preparer knows you did this.

The Pro-Rata Rule: This Is Where People Get Burned

If you have $0 in Traditional IRA balances before you do this, congratulations. It's clean. You put in $7,000 non-deductible, you convert $7,000 to a Roth, and zero tax is owed on the conversion. Done.

But if you have money sitting in a Traditional IRA from prior years — old rollovers from a 401(k), previous deductible contributions, whatever — the IRS won't let you just convert the non-deductible piece. They apply something called the pro-rata rule.

Here's how it works. The IRS looks at ALL your Traditional IRA money as one bucket. They don't care that you have one account with old 401(k) money and another with your new $7,000 contribution. It's all one pool.

Then they calculate: what percentage of your total IRA balance is non-deductible (after-tax) money, and what percentage is pre-tax money? That ratio determines how much of your conversion is taxable.

Let Me Show You the Math

Let's say you have $100,000 in a Traditional IRA from an old 401(k) rollover. All pre-tax money.

You contribute $7,000 non-deductible. Now your total IRA balance is $107,000.

You convert $7,000 to a Roth. You'd think only the non-deductible $7,000 is going over, right? The IRS doesn't see it that way.

They calculate: $7,000 (non-deductible) ÷ $107,000 (total balance) = 6.54%.

That means only 6.54% of your $7,000 conversion is tax-free. That's $458.

The other 93.46% — that's $6,542 — is treated as a taxable conversion. If you're in the 32% bracket, that's roughly $2,093 in federal tax on what was supposed to be a tax-free move.

Not exactly what you signed up for.

Important: The IRS Aggregates All Your IRAs

The pro-rata rule applies across all of your Traditional, SEP, and SIMPLE IRA accounts combined. It doesn't matter if they're at different custodians. The IRS adds them all up.

However — and this is a big however — employer plans like 401(k)s, 403(b)s, and 457 plans are not included in the calculation. Only IRAs.

And the IRS uses your IRA balances as of December 31 of the year you do the conversion. Not the date of the conversion itself. So if you convert in March but roll your old IRA into a 401(k) before year-end, that balance is no longer in the calculation.

How to Avoid the Pro-Rata Problem

The cleanest solution: have $0 in Traditional IRA accounts before doing the backdoor.

If you have old IRA money from a previous employer, check if your current 401(k) accepts incoming rollovers. Many do. Roll your Traditional IRA balance into the 401(k). Since 401(k) balances don't count in the pro-rata calculation, you've just cleared the deck.

If you don't have a 401(k) and you're self-employed, a Solo 401(k) can work the same way — open one, roll the IRA balance in, then do the backdoor conversion with a clean slate.

If none of those options work for you, you need to run the math with your CPA before converting. Sometimes the pro-rata tax hit makes it not worth it. Sometimes it still is, especially if you're thinking long-term.

Who This Is Best For

The Backdoor Roth works beautifully for people who:

• Earn too much to contribute to a Roth directly

• Have little to no balance in Traditional IRAs

• Want tax-free growth for decades to come

• Are disciplined enough to do it every year

It gets less attractive if you have large Traditional IRA balances and can't roll them into an employer plan. In that case, you may be paying more tax on the conversion than you'd save in the long run.

A Few More Things to Know

There's no income limit on conversions. Even if you make $5 million, you can convert. The income limits only apply to direct Roth contributions.

Do this every year. The Backdoor Roth isn't a one-time move. If you qualify, make it an annual habit. $7,000 per year growing tax-free adds up fast.

Both spouses can do it. If you're married, each spouse can do their own Backdoor Roth. That's $14,000 per year into Roth accounts ($16,000 if both are 50+).

Don't forget Form 8606. I can't emphasize this enough. This form is your proof that the contribution was non-deductible. File it every year you make non-deductible contributions, even if you don't convert that same year.

The Bottom Line

The Backdoor Roth is one of the best tools available for high earners who want tax-free growth. But it's not as simple as it sounds. The pro-rata rule can turn what looks like a smart move into an expensive mistake if you're not paying attention to your existing IRA balances.

Before you make the move, check your Traditional IRA balances. If they're at zero, you're golden. If they're not, talk to your CPA first.

And as always — plan ahead. The best tax strategies are the ones you execute before the deadline, not after.

I hope that helps.

Stay smart,

Jonathan Sussman CPA