Backdoor Roth IRA

The Backdoor Roth IRA is a workaround for high earners who exceed Roth IRA income limits but still want tax-free retirement growth.

Why It Exists: Roth IRA contributions phase out at high incomes (2025: $146,000-$161,000 single; $230,000-$240,000 married). But Traditional IRA contributions have NO income limits, and conversions to Roth IRA are always allowed.

How It Works:

1. Contribute $7,000 to a Traditional IRA (non-deductible)
2. Immediately convert the Traditional IRA to a Roth IRA
3. Pay taxes only on any gains between steps 1-2 (usually $0-$20)
4. Money now grows tax-free forever in Roth IRA

Pro Rata Rule Gotcha: If you have existing pre-tax Traditional IRA money (from old 401k rollovers), the conversion becomes partially taxable. You can't just convert the non-deductible portion.

Example Problem:

• You have $50,000 in a Traditional IRA from an old rollover
• You contribute $7,000 non-deductible and try to convert just that $7,000
• IRS says 87.7% of your conversion ($6,139) is taxable due to pro rata rule

Solution: Roll pre-tax IRA money into your current 401(k) first, leaving only non-deductible contributions.

Mega Backdoor Roth: Advanced strategy using after-tax 401(k) contributions (up to $70,000/year total) for high earners.

Is It Legal? Yes, fully endorsed by the IRS as of 2025.