Things You Must Know About Backdoor Roth IRAs

A Roth Individual Retirement Account (IRA) is a good option for retirement planning. It gives you tax-advantaged growth, the potential for steady long-term returns, and the freedom to make tax-free withdrawals in retirement. You also get flexibility, since Roth IRA funds can be used for goals other than retirement. But not everyone is allowed to contribute directly to a Roth IRA.

If your income is above the Internal Revenue Service (IRS) limits, a regular Roth IRA is basically no longer an option for you. However, you can use a backdoor Roth IRA. This strategy allows high-income earners to contribute to a Roth IRA even if they do not qualify under the existing thresholds.

Before you jump in, though, it is important to understand how backdoor Roth conversions work, the rules you need to follow, the steps involved, and the potential pitfalls to look out for.

What is a backdoor Roth IRA?

In simple terms, a backdoor Roth IRA is an indirect way to contribute to a Roth IRA. Now you may wonder why you need to invest indirectly, rather than putting money directly into the account. Well, for this, you need to understand a few things about the Roth IRA.

The Roth IRA has income caps. If you fall under the income limit, you can contribute to the account. But if you earn too much, the IRS will not let you use the account.

Let’s look at the income limits set for Roth IRAs. For 2025, you can make a full Roth contribution only if your income is below $150,000 as a single filer, or below $236,000 if you are married filing jointly. If you are in the higher range, from $150,000 to $165,000 for single filers and $236,000 to $246,000 for joint filers, you are allowed to contribute, but only partially. Once your income crosses the upper threshold, the Roth IRA becomes inaccessible to you. For single filers with a Modified Adjusted Gross Income (MAGI) of $165,000 or more, and joint filers earning $246,000 or more, direct Roth IRA contributions are not allowed.

The limits have been slightly increased in 2026. It will be $153,000 for single filers and $242,000 for joint filers for full contributions, with partial contributions phased out above those amounts. And again, if your income crosses the top end of the phase-out range, which is $168,000 for singles, $252,000 for joint filers, you can’t contribute at all.

So, what do you do if you are over the limit? You can use the backdoor Roth IRA strategy. Here’s how it works:

• First, you contribute to a traditional IRA. Unlike Roth IRAs, traditional IRAs do not have income limits for making contributions. Anyone with earned income can use the account. The only catch is that, depending on your income, your contribution may not be tax-deductible.
• Then comes the next part, which is converting that contribution into a Roth IRA. In fact, this is why this strategy is called the backdoor strategy. This is because you essentially take the backdoor to the account by first going through the traditional IRA and then moving into the Roth IRA, even though you did not qualify to enter directly.
• Once your money lands in the Roth IRA, it behaves exactly like any other Roth contribution. It can grow tax-free for life. And when you finally retire and start taking withdrawals, the qualified withdrawals are also tax-free.
• Remember to file IRS Form 8606 after you convert your traditional IRA to a Roth IRA.

It is essential to understand that a backdoor Roth IRA is not the same as a regular Roth conversion. In a normal conversion, you usually move pre-tax money from a traditional IRA into a Roth IRA. When you do this, the entire converted amount is taxable in the year of conversion.

A backdoor Roth conversion, however, works differently because the contribution you made to the traditional IRA is non-deductible. Since you already paid taxes on that amount, you should not be taxed on it again when you convert it.

That said, things get a little more complicated if you have other traditional IRA balances that contain pre-tax money. In this case, your conversion can be taxable if you also have pre-tax IRA funds. A financial advisor can help you understand this in more detail, depending on how many IRAs you have and how the funds within them will be taxed.

Backdoor Roth IRA rules to know and remember

There are three main rules you need to know:

1. Be mindful of the backdoor Roth contribution limits

Whether you contribute to a Roth IRA directly or through the backdoor Roth strategy, the annual limits do not change for you. The IRS applies the same rules to everyone. For 2026, the total IRA contribution limit increases to $7,500, up from $7,000 in 2025. If you are age 50 or older, you also get a catch-up contribution allowance. That limit rises to $1,100 in 2026, compared to $1,000 in 2025. When you combine both, you can contribute up to $8,600 in 2026 if you qualify for catch-up contributions.

These numbers matter a lot. If you contribute more than the allowed limit, the IRS imposes a penalty on the excess amount. So, make sure you keep an eye on this, because penalties, if imposed, can eat into your retirement savings.

2. Understand the pro rata rule

The pro rata rule determines how much of your Roth conversion is taxable. It takes all of your traditional IRAs into consideration. If you have multiple IRAs, the IRS will make you calculate taxes based on the combined balances. So, if your traditional IRA contains a mix of pre-tax and after-tax contributions, the IRS will ensure that the conversion includes a proportional share of both pre-tax and post-tax amounts.

Many people assume they can simply put after-tax dollars into a traditional IRA and immediately convert them tax-free. But if you have old pre-tax IRA money sitting anywhere, the pro rata rule will apply. This can make a backdoor Roth strategy less attractive unless you plan properly. And, given how complex this rule can get, it is better to speak with a financial advisor or a tax professional before making a decision.

3. Understand the types of rollovers allowed

Only certain types of transfers are allowed when you complete a backdoor Roth IRA conversion.

• The first option is a rollover where you take the money out of your traditional IRA yourself and then put it into your Roth IRA. If you choose this option, there will be a 60-day deadline. You will get 60 days from the day you receive the funds to deposit the full amount into your Roth IRA. If you do not complete the conversion within this window, the IRS will tax the withdrawal.
• The second method is a trustee-to-trustee transfer. If you select this option, your traditional IRA provider will send the funds directly to the institution that holds your Roth IRA.
• The third type is known as a same-trustee transfer. If both your traditional IRA and Roth IRA are housed at the same financial institution, the transfer can be done internally. In this case, the provider will move the money from one account to the other.

No matter which method you use, as long as you abide by the laid-down rules, your backdoor Roth conversion will be valid.

Why should you choose the backdoor Roth IRA strategy?

You can choose the backdoor Roth IRA strategy for the following reasons:

1. If you are a high-income earner

Once your income crosses a certain threshold, the IRS will not qualify you to make direct Roth IRA contributions. In this case, the backdoor Roth contribution is your only option. So even if your income is too high to qualify for a direct contribution, you can still get your money into a Roth IRA by contributing to a traditional IRA first and then converting it.

This can offer you many advantages, while keeping the income limitations in mind.

2. If you want to benefit from lower tax obligations in retirement

One of the most significant advantages of a Roth account is the future tax relief. Money inside a Roth IRA grows tax-free, and qualified withdrawals in retirement are also tax-free. You do not have to worry about paying taxes as your investments grow, nor do you pay any tax when you take money out later in life.

A Roth IRA offers tax-free compounding. It also offers another bonus, which is tax diversification. If most of your retirement savings are in tax-deferred accounts like a 401(k) or traditional IRA, adding a Roth account can give you more flexibility.

3. If you do not want the required minimum distributions in retirement

Another advantage of the backdoor Roth contribution strategy is that Roth IRAs do not come with required minimum distributions, unlike traditional accounts. Traditional IRAs and 401(k)s require minimum distributions. Once you reach a certain age, you have to withdraw money from your account, even if you do not want to. Roth IRAs do not force you to do this.

So, if you do not want to be forced into higher taxable income later in life, if you want your money to keep growing untouched, or if you want to leave behind a larger legacy for your children, a Roth IRA can give you that freedom with no mandatory withdrawals.

Are there any disadvantages to the backdoor Roth IRA strategy?

Yes, there are a few potential drawbacks you should be aware of before you jump in. The biggest challenge is the complexity of the tax system. The pro rata rule, in particular, can feel confusing if you are not familiar with how it works. It might seem like you will not owe any taxes during the conversion, but once the rule kicks in, things may change quite a bit.

If you have other traditional IRA accounts with pre-tax money in them, the conversion might trigger a tax bill you were not expecting. This is why speaking with a financial advisor is important. They can look at all your IRA balances together and help you understand exactly where you stand before you make the conversion.

Another drawback is that the backdoor Roth IRA process must be done correctly from start to finish. There are a few steps, and missing even one can create tax issues.

Making an informed decision about backdoor Roth IRAs

A backdoor Roth IRA can be suitable for high-income earners who want access to tax-free growth and greater flexibility in retirement. But it is important to remember that the strategy is not as simple as it looks. There are rules to follow, tax implications to consider, and a few potential pitfalls if you do not follow the rules correctly.

And since this is a significant financial decision that can affect you in more ways than one, understanding the process from every angle is important. This includes fully evaluating the benefits, the risks, and the steps involved. Talking to a financial advisor can help you avoid mistakes and make sure the strategy is actually right for you.

If you are not sure where to start, our financial advisor directory can connect you with a professional who can help you through the backdoor Roth conversion.

Frequently Asked Questions (FAQs) about the backdoor Roth IRA strategy

1. Are backdoor Roth conversions completely tax-free?

Not always. The conversion itself can trigger taxes depending on the type of money you already have in your traditional IRA. Because of the pro rata rule, if your IRA contains both pre-tax and after-tax contributions, a portion of the amount you convert may be taxable.

2. Can I handle the backdoor Roth conversion on my own?

Yes, you can. However, the rules can get tricky, especially if you have multiple IRA accounts or your accounts contain a mix of pre-tax and post-tax contributions. Working with a financial advisor can help you avoid missteps and unwanted tax liabilities.

3. What are the advantages of a backdoor Roth conversion?

You get several benefits, including tax-free growth, tax-free qualified withdrawals in retirement, no required minimum distributions, and greater tax diversification in your overall portfolio.

4. Should I convert my traditional IRA to a Roth IRA?

You might consider a conversion if you want long-term tax-free growth, tax-free withdrawals, and greater flexibility in retirement. The lack of RMDs is a major plus, too. That said, it is recommended to consult a financial advisor to determine whether a conversion is the right step given your financial needs.

For further information on creating a suitable retirement plan for your unique financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.