What is a Backdoor Roth IRA? Income Limits, Taxes, and Rules

A backdoor Roth IRA is a strategy that allows high-income investors to access the benefits of a Roth IRA even if their income exceeds the limits for direct Roth contributions. The strategy involves contributing after-tax money to a traditional IRA and then converting those funds to a Roth IRA. Roth conversions aren't subject to the same limits as direct Roth IRA contributions, which provides a workaround to move money into a Roth account.  

If you're wondering how a backdoor Roth IRA compares with a traditional IRA or Roth IRA, here's a look at some of the key differences between these retirement accounts.  

While Roth IRAs have tax advantages, they're only available to investors whose modified adjusted gross income (MAGI) is below certain limits.

1. Open a traditional IRA and make after-tax contributions to it. For 2025, you're allowed to contribute up to $7,000 (plus a $1,000 catch-up contribution, if you're 50 or older) per year. For 2026, the contribution limit is $7,500 (plus an $1,100 catch-up contribution, if you're 50 or older) per year.
2. Convert the assets from the traditional IRA to a Roth IRA. You can make this transfer (known as a Roth conversion) at any point after contributing to your traditional IRA.
3. Report the conversion on your tax return. Make sure you file IRS Form 8606 every year you do this. 

A backdoor Roth IRA may offer several potential benefits: 

• Tax-free growth potential: Contributions are made with after‑tax dollars, but any potential earnings can grow tax‑free over time.
• Tax-free qualified withdrawals: Distributions in retirement are generally federal income tax‑free if you're age 59½ or older and the account has been open for at least five tax years.
• No required minimum distributions (RMDs): Roth IRAs aren't subject to RMDs, which may be appealing if you want to leave the money to heirs. 

While the backdoor Roth IRA can offer tax advantages, the conversion process may also create tax consequences depending on your financial situation.  

• Taxes on investment growth: If the assets in your traditional IRA grow between the date you fund the account and the date you convert them to a Roth, you may owe taxes on the growth and earnings. If this is your first and only IRA account and the contribution was made with after-tax dollars, generally only the growth and earnings will be taxable.
• State tax treatment: Depending on your financial situation and existing IRA balances, taxes may apply at the time of the conversion process. State tax treatment of Roth conversions may also vary, so it's important to work with a tax advisor or wealth manager to consider your specific circumstances.
• The pro rata rule: If you have any IRA accounts with pre-tax contributions within them, the IRS pro rata rule can affect the taxable portion of a Roth conversion. Under this rule, the IRS generally considers all of your traditional IRA balances together when determining how much of the conversion is taxable. 

If you withdraw money converted to a Roth before age 59½ and before the account is at least five years old, you may owe a 10% penalty on the entire distribution, plus income tax on any earnings. The IRS allows some exceptions to early withdrawal penalties and taxes on distributed earnings, but they are narrow and limited. 

After age 59½, you can withdraw converted funds without a 10% penalty. But you must have held assets within a Roth IRA for at least five years to avoid taxes on the earnings portion of your withdrawal.  

A separate 5-year rule applies to each Roth conversion you do. 

Backdoor Roth IRAs may make the most sense for high-income earners who exceed IRS income limits for Roth IRA contributions, especially those who expect their income to stay high or rise over time.