What’s a Backdoor Roth?

If you’ve been around high earners, tax-savvy colleagues, or certain corners of the internet, you’ve probably heard someone mention a “Backdoor Roth.” It sounds like some elite financial loophole. For a lot of people, it might as well be.

But the concept is actually pretty simple once it’s broken down. The reason it sounds complicated is because no one ever explains the why behind it.

Let’s fix that.

Why the “Backdoor” Exists

There are income limits that prevent high earners from contributing directly to a Roth IRA. For 2024, you can’t contribute the full amount if your modified adjusted gross income is above $146,000 (or $230,000 for married couples filing jointly). That cutoff frustrates people who want the long-term, tax-free growth a Roth provides.

So someone figured out a workaround.

How a Backdoor Roth Works

Here’s the basic idea:

1. You make a non-deductible contribution to a traditional IRA.
2. You convert that money to a Roth IRA.

Because you didn’t deduct the contribution on your taxes, there’s little or no tax due when you convert. You end up with money in a Roth, even though your income is technically too high to contribute directly.

That’s the “backdoor.”

Sounds Clever. What’s the Catch?

There are a few.

The first is something called the pro-rata rule. If you already have pre-tax money in other traditional IRAs, the IRS looks at all of your IRA balances when calculating how much of your conversion is taxable. That can make the backdoor strategy messier – and more expensive – than it looks.

The second catch is paperwork. You have to report the non-deductible contribution using Form 8606. Skip it, and you’ll likely pay taxes twice on the same money. Most people don’t know that. Some advisors forget to mention it. The IRS doesn’t.

Third, the rules could change. There have been proposals to eliminate backdoor Roths entirely, though nothing has passed yet. It’s legal for now, but not guaranteed to stay that way forever.

Who Is This Really For?

This strategy is mostly useful for people who:

• Earn too much to contribute directly to a Roth IRA
• Don’t have existing pre-tax IRA balances that complicate the tax math
• Are comfortable filing extra tax forms and keeping clean records

If you’re in that group, it can be a great way to build long-term, tax-free retirement savings. If not, it’s probably not worth the headache.

What to Ask Before You Try It

If someone brings this up, or you’re tempted to try it on your own, pause and ask:

• Do I already have other IRA balances that would trigger the pro-rata rule?
• Am I clear on how to report this correctly on my taxes?
• Is this actually better than investing through a regular taxable account?

The backdoor Roth is a clever tool, not a magic trick. If you don’t fully understand how it works, it can backfire.