The Money Muse

As a couple working toward financial independence, my partner and I are always looking for ways to maximize our investment options. We’re planning to get married next year, and with that comes the reality that our income will likely be over the annual income limit for Roth IRA contributions. This presents a bit of a challenge, as the Roth IRA has been one of our favorite investment vehicles due to its tax-free growth and retirement benefits. But fortunately, there’s a strategy that allows high-income earners like us to contribute to a Roth IRA – it’s called the backdoor Roth IRA.

So, what exactly is a backdoor Roth IRA, and how does it work?

Understanding the Roth IRA Contribution Limits

A Roth IRA offers great benefits: contributions are made with after-tax money, and qualified withdrawals in retirement are tax-free. This makes it a popular choice for investors who want to benefit from tax-free growth.

However, Roth IRAs have income limits that prevent high earners from contributing directly to them. For 2025, the income limits for Roth IRA contributions are:

• Single filers: The income limit is $165,000 for the 2025 tax year.
• Married couples filing jointly: The income limit is $246,000 for the 2025 tax year.

If you and your partner’s income exceeds these limits, you can no longer contribute directly to a Roth IRA, which may feel like a missed opportunity. But that’s where the backdoor Roth IRA comes into play.

What is a Backdoor Roth IRA?

A backdoor Roth IRA is a strategy that allows individuals to contribute to a Roth IRA, even if they exceed the income limits. The process involves three steps:

1. Contribute to a Traditional IRA: The first step is to contribute to a traditional IRA. There are no income limits for making contributions to a traditional IRA, so regardless of your income, you can contribute up to the annual limit. For 2025, the contribution limit is $7,000 per person ($8,000 if you’re 50 or older). This limit applies per person, so if you’re married, both you and your partner can contribute to your own traditional IRAs.
2. Convert the Traditional IRA to a Roth IRA: After contributing to your traditional IRA, you can then convert the funds to a Roth IRA. While there are no income limits for conversions, it’s important to remember that the traditional IRA’s contribution limits still apply. You and your partner can each convert the amounts contributed to your traditional IRAs, but the conversion is taxable, as traditional IRA contributions are typically pre-tax. Essentially, you’ll pay taxes on the amount you convert, but you won’t face income limits for converting to the Roth IRA.
3. File IRS Form 8606: To properly report the conversion, you’ll need to file IRS Form 8606 with your tax return. This form tracks non-deductible contributions to traditional IRAs and Roth IRA conversions. If you’re converting pre-tax funds, you’ll owe taxes on the converted amount. The form ensures that you’re not taxed again on money you’ve already paid taxes on.

Why Use a Backdoor Roth IRA?

There are a few reasons why the backdoor Roth IRA is a popular strategy, especially for those with higher incomes:

• Tax-free growth: By contributing to a Roth IRA, you can benefit from tax-free growth on your investments. While contributions to traditional IRAs are tax-deferred, Roth IRA withdrawals are tax-free in retirement, making them a great choice for long-term growth.
• Flexibility in retirement: Roth IRAs offer more flexibility in retirement, such as not requiring minimum distributions during your lifetime, unlike traditional IRAs, which require you to start withdrawing at age 73.
• No income limits for conversions: While direct Roth IRA contributions have income limits, Roth IRA conversions don’t. This means you can still access the benefits of a Roth IRA, even if your income exceeds the standard limits.
• Estate planning benefits: Since Roth IRAs don’t require RMDs, they can be an excellent vehicle for passing wealth to heirs without forcing them to pay taxes on the withdrawals.

Things to Keep in Mind

While a backdoor Roth IRA is an excellent strategy, there are a few things to consider:

• Tax implications: If you have any pre-tax money in your traditional IRA, the IRS will treat your conversion as a pro-rata distribution. This means that a portion of your Roth conversion will be taxed at ordinary income rates. To avoid this, some people “clean up” their IRAs by rolling over pre-tax funds into a 401(k) before doing a Roth conversion. It’s best to consult with a tax advisor before making the conversion to avoid unexpected tax liabilities.
• Timing: Some investors convert their traditional IRA to a Roth IRA soon after contributing, while others let the funds grow before converting. If you have any investments that are likely to appreciate, the sooner you convert, the better, as it allows you to grow tax-free.
• Pro-rata rule: If you have both pre-tax and after-tax money in your traditional IRA, the IRS applies the pro-rata rule, which means you’ll owe taxes on the pre-tax portion when converting. This can complicate the backdoor Roth process if you already have other IRAs with pre-tax money.

Conclusion

A backdoor Roth IRA can be a powerful tool for high-income earners who want to take advantage of the benefits of a Roth IRA, such as tax-free growth and flexible retirement planning. By contributing to a traditional IRA and converting those funds into a Roth IRA, you can sidestep the income limits for Roth contributions and build wealth in a tax-advantaged way.

For me and my partner, a backdoor Roth IRA is a strategy we’re considering as we approach the income threshold for Roth IRA eligibility. This allows us to continue contributing to a valuable investment vehicle and working toward our long-term financial goals.

If you’re also looking to take advantage of a Roth IRA but are over the income limit, the backdoor Roth IRA could be a smart move for you as well. Be sure to consult with a financial advisor to understand the tax implications and how to make this strategy work best for your unique situation.