The Backdoor Roth IRA: A Smart Strategy for High Earners
The Backdoor Roth IRA: A Smart Strategy for High Earners
If you’ve been told you make too much money to contribute to a Roth IRA, you’re not alone. Roth IRAs are one of the best tools for tax-free growth and withdrawals in retirement, but income limits prevent high earners from contributing directly.
Fortunately, there’s a solution: the Backdoor Roth IRA. This strategy allows you to legally move money into a Roth IRA, even if your income exceeds the limits.
At Asempa Wealth Advisors, we help high earners implement smart, tax-efficient investment strategies like the Backdoor Roth IRA to optimize long-term financial growth.
Here’s how it works and why it might be worth considering.
Why a Roth IRA?
Roth IRAs offer major benefits for long-term wealth accumulation:
✅ Tax-Free Growth: Unlike taxable investment accounts, all gains inside a Roth IRA grow tax-free.
✅ Tax-Free Withdrawals: After age 59½, you can withdraw funds tax-free, provided the account has been open for at least five years.
✅ No Required Minimum Distributions (RMDs): Unlike Traditional IRAs, Roth IRAs do not require withdrawals at any age, allowing assets to grow for longer.
The challenge? In 2025, if you earn more than $165,000 as a single filer or $246,000 as a married couple filing jointly, you’re not eligible to contribute directly to a Roth IRA.
This is where the Backdoor Roth IRA comes in.
How the Backdoor Roth IRA Works
The Backdoor Roth is a two-step process that allows high earners to fund a Roth IRA despite the income limits.
Step 1: Contribute to a Traditional IRA
- You contribute up to $7,000 per year ($8,000 if you’re 50 or older) to a Traditional IRA.
- Since you earn too much to deduct the contribution, it is considered non-deductible, meaning you won’t receive an upfront tax break.
- It’s best to leave this contribution in cash rather than investing it immediately to avoid taxable gains before conversion.
Step 2: Convert to a Roth IRA
- Soon after funding the Traditional IRA, you convert the balance into a Roth IRA.
- Because you didn’t deduct the contribution, there’s little to no tax owed on the conversion.
- Once in the Roth IRA, the money grows tax-free and can be withdrawn tax-free in retirement.
Example: How It Works in Practice
Dr. Smith, a 45-year-old surgeon earning $750,000 per year, wants to maximize tax-free retirement savings. Because his income is too high, he can’t contribute directly to a Roth IRA.
Instead, he does a Backdoor Roth IRA:
1️⃣ He contributes $7,000 to a Traditional IRA (non-deductible).
2️⃣ He immediately converts it to a Roth IRA (since there’s no gain yet, there’s no tax due).
3️⃣ His money grows tax-free, and he owes zero tax when withdrawing in retirement.
This process can be repeated annually to build a tax-free retirement portfolio.
A Key Consideration: The Pro-Rata Rule
If you have existing pre-tax money in a Traditional IRA, the IRS will require you to pro-rate the taxes when converting. This means that instead of converting only the new non-deductible contribution, the IRS will treat all IRA balances as a mix of pre-tax and after-tax dollars, potentially triggering a tax bill.
How to Avoid the Pro-Rata Rule:
- If you have pre-tax IRA balances, consider rolling them into a 401(k) plan before doing a Backdoor Roth.
- Employer-sponsored 401(k) plans do not count toward the pro-rata calculation, allowing for a clean conversion.
Is the Backdoor Roth IRA Right for You?
This strategy is an excellent fit for high-income earners who:
✔ Want to maximize tax-free retirement savings
✔ Are already maximizing their 401(k) and other tax-advantaged accounts
✔ Have no existing pre-tax IRA funds (or can roll them into a 401(k))
✔ Want to reduce taxable income in retirement
However, because tax laws can change, and the pro-rata rule can complicate things, it’s important to coordinate with your CPA before executing a Backdoor Roth.
Final Thought: A Strategy Worth Considering
The Backdoor Roth IRA is one of the best ways for high earners to access the benefits of a Roth IRA without income limitations. When done correctly, it provides a powerful tool for tax-free retirement savings.
Before proceeding, ensure this strategy aligns with your overall financial plan and that you’re coordinating with your CPA to avoid any unintended tax consequences.
Important Disclaimer:
Investment returns are not guaranteed, and all investing involves risk, including the potential loss of principal. The strategies mentioned may not be suitable for everyone. It's essential to consult with a qualified estate planning attorney, CPA, and financial advisor to tailor a plan that fits your specific circumstances and to understand the legal and tax implications involved.