The Backdoor Roth IRA Strategy: How High Earners Can Get Tax-Free Growth
- Andrew Glavinic
- Mar 3
- 3 min read
If your income is too high to contribute directly to a Roth IRA, you might think you’re out of luck when it comes to tax-free retirement growth. But there’s a perfectly legal workaround: the Backdoor Roth IRA strategy.
This guide breaks down how it works, why it’s beneficial, and how to do it the right way to avoid costly IRS mistakes.
1. What Is a Backdoor Roth IRA?
A Backdoor Roth IRA is a tax loophole that allows high-income earners to bypass the income limits on Roth IRA contributions by first contributing to a Traditional IRA, then converting it to a Roth IRA.
✅ Why it’s useful:
Roth IRAs allow tax-free growth and tax-free withdrawals in retirement.
No required minimum distributions (RMDs), meaning you can leave money growing for longer.
A great strategy for high earners who exceed Roth IRA income limits.
📌 2024 Roth IRA Income Limits:
Single filers: Phase-out starts at $146,000 and eligibility ends at $161,000.
Married filing jointly: Phase-out starts at $230,000 and eligibility ends at $240,000.
If your income exceeds these limits, a Backdoor Roth IRA is your ticket to tax-free growth.
2. How to Execute a Backdoor Roth IRA (Step-by-Step)
Step 1: Open a Traditional IRA
Choose a brokerage like Vanguard, Fidelity, or Charles Schwab.
Fund your IRA with a non-deductible contribution (up to $7,000 for 2024; $8,000 if 50+).
Step 2: Convert the Traditional IRA to a Roth IRA
Contact your brokerage and request a conversion to a Roth IRA.
No income limits apply to Roth conversions—only contributions!
Convert the funds as soon as possible to avoid taxable growth in the Traditional IRA.
Step 3: Pay Any Taxes Owed
If your Traditional IRA balance only contains non-deductible contributions, there’s no tax owed.
If you have pre-tax funds in any Traditional IRA, the IRS applies the pro-rata rule (explained below).
Step 4: Report the Conversion on Your Tax Return
Use IRS Form 8606 to document the conversion.
Ensure your CPA or tax preparer correctly handles this to avoid tax penalties.
3. The Pro-Rata Rule (Avoid This Costly Mistake!)
If you have pre-tax money in any other Traditional, SEP, or SIMPLE IRA, the IRS requires you to pay taxes proportionally on the conversion.
📌 Example:
You contribute $7,000 to a non-deductible Traditional IRA.
You already have $93,000 in a pre-tax Traditional IRA.
Your total IRA balance = $100,000.
Only 7% of your Backdoor Roth conversion is tax-free, and the rest is taxed!
✅ How to Avoid This:
Roll over pre-tax IRA funds into a 401(k) before doing the conversion.
Many employer-sponsored 401(k) plans accept IRA rollovers and are not subject to the pro-rata rule.
4. Mega Backdoor Roth: A Next-Level Strategy
If you want to contribute even more to a Roth, some employers offer a Mega Backdoor Roth IRA through a 401(k) plan:
✅ Contribute after-tax dollars to your 401(k) (above the $23,000 pre-tax limit for 2024). ✅ Convert those funds into a Roth 401(k) or Roth IRA. ✅ You can contribute up to $66,000 (or $73,500 if 50+) when combining all sources.
📌 Check with your employer to see if this option is available!
5. Is a Backdoor Roth IRA Right for You?
✅ Best for: High-income earners who want tax-free retirement growth.❌ Not ideal for: Those with existing pre-tax IRA funds (unless they roll them into a 401(k) first).
When It Makes Sense:
You expect higher taxes in the future, making Roth tax-free withdrawals more valuable.
You want to leave tax-free money to heirs (Roth IRAs don’t have RMDs).
You can pay the taxes upfront if needed (for pro-rata situations).
Final Thoughts: Take Advantage of This Strategy
A Backdoor Roth IRA is one of the best ways for high earners to secure tax-free investment growth. But it must be done correctly to avoid unnecessary taxes.
If you’re confident in handling this yourself, great! But if you'd rather get expert tax guidance while focusing on your business (or watching the Lakers instead of IRS forms), I can help—https://www.glavinicfs.com/bookandrew.
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