Backdoor Roth IRA: What It Is and How to Set One Up

What is a backdoor Roth IRA?

A backdoor Roth IRA is a conversion that allows high earners to open a Roth IRA despite IRS-imposed income limits.

Basically, you put money you’ve already paid taxes on in a traditional IRA, then convert your contributed money into a Roth IRA, and you’re done. Even though you didn’t qualify to contribute to a Roth, you get to go in the back door anyway, no matter what your income.

That's good news, because your money grows tax-free — and that's a pretty sweet perk when it comes time to take your money out in retirement.

Roth IRA income limits

For 2023, the income limit for Roth IRAs increased to $153,000 for single filers and $228,000 for married individuals filing jointly^[0]

» Learn more: Roth IRA income limits and contribution limits

How to open a backdoor Roth IRA

Here’s a step-by-step guide on how to do a backdoor Roth IRA conversion:

1. Put money in a traditional IRA account. You might already have an account, or you might need to open one and fund it. » Ready to get started? See our list of the best IRA providers

2. Convert your contribution to a Roth IRA. Your IRA administrator will give you the instructions and paperwork. If you don’t already have a Roth IRA, you’ll open a new account during the conversion process. If you'd rather have someone take on this work for you, some financial advisors offer support in handling backdoor Roth conversions for their clients.

3. Prepare to pay taxes. Only post-tax dollars go into Roth IRAs. So if you deducted your traditional IRA contributions and then decide to convert your traditional IRA to a backdoor Roth, you’ll need to give that tax deduction back. When it comes time to file your tax return, be prepared to pay income tax on the money you converted to a Roth. And see below for details on the pro-rata rule, which plays a big part in determining your tax bill.

» Want some help? See our picks for best financial advisors

Backdoor Roth IRA rules

Keep these rules in mind to avoid penalties:

Types of transfers allowed

The conversion needs to be one of the following:

• A rollover, where you receive the money from your traditional IRA and deposit it into the Roth IRA within 60 days.

• A trustee-to-trustee transfer, where the traditional IRA provider sends the money directly to your Roth IRA provider.

• A "same trustee transfer," where your money goes from the traditional IRA to the Roth at the same financial institution.

The pro-rata rule for backdoor Roths

The IRS requires rollovers from traditional IRAs to Roth IRAs to be done pro rata. Here's how it works: When determining your tax bill on a conversion from a traditional IRA to a Roth IRA, the IRS is going to look at all of your traditional IRA accounts combined.

If all of your traditional IRAs combined consist of, say, 70% pre-tax money and 30% after-tax money, that ratio determines what percentage of the money you convert to a Roth is going to be taxable. In this example, no matter how much money you convert or which IRA account you pull the money from, 70% of the amount you convert to the Roth will be taxable. You can't choose to convert only after-tax money; the IRS won't allow it.^[0]

And a word about timing: the IRS applies the pro-rata rule to your total IRA balance at year-end, not at the time of conversion.

Is a backdoor Roth IRA worth it?

A backdoor Roth IRA is probably a bad idea if ...

• The only way you can pay the taxes due is with money from your IRA withdrawal. Not only are you sacrificing any future investment growth on that money, there's also the risk that, if you're under age 59-1/2, you'll owe the 10% early withdrawal penalty on that money^[0]

  IRS. Retirement Topics - Exceptions to Tax on Early Distributions. Accessed Apr 8, 2022.

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• You'll need the money in five years or less. Money converted from an IRA to a Roth IRA falls under a Roth five-year rule: If you don't wait five years to withdraw it, you could owe taxes and a 10% penalty.

• The withdrawal from your IRA will push you into a higher income tax bracket. It's generally a good idea to convert just enough that you're not pushed into paying a higher tax rate that year.