How to Establish a Backdoor Roth IRA

With a Roth IRA, you can make tax-free withdrawals at retirement. Vitalii Vodolazskyi/Shutterstock

A backdoor Roth IRA allows you to transfer nondeductible contributions from a traditional IRA into a Roth IRA.

With a Roth IRA, you can make tax-free withdrawals at retirement. This can be especially useful for affluent individuals who earn too much to directly contribute to a Roth IRA.

For 2024, the modified adjusted gross income limit to contribute anything to a Roth IRA is $161,000 for single filers and $240,000 for married people filing jointly. In 2025, the limit will be $165,000 for single filers and $246,000 for married people filing jointly.

So, if your income passes those levels, the IRS won’t allow you to directly contribute anything to a Roth IRA. You’d need to go through the “backdoor.”

But beware of potential pitfalls you may encounter if you go this route. It’s important to understand how backdoor Roth IRAs work and what the rules are.

What Is a Backdoor Roth IRA?

A backdoor Roth IRA isn’t a specific type of IRA. It’s the name given to the process of converting traditional IRA contributions—that you didn’t take tax deductions on—into a new Roth IRA. This strategy could allow you to make qualified tax-free and penalty-free withdrawals from your new Roth IRA as long as you are at least 59 1/2 and the Roth IRA has contained the conversion for at least five years.

And unlike a traditional IRA, Roth IRAs don’t require you to take required minimum distributions in your lifetime.

How to Open a Backdoor Roth IRA

To go through the backdoor Roth IRA process, follow these steps.

1) Open a traditional IRA. If you don’t have one, you can open a traditional IRA through most banks and brokerage firms. You generally need to provide some basic information such as your address and Social Security number. You may also need to link a financial account such as a checking account to fund your traditional IRA.

2) Make nondeductible contributions. These are contributions that you won’t claim tax deductions on. Some financial advisers recommend that you spend at least a few months making nondeductible contributions before making a transfer to a Roth IRA. You report nondeductible contributions on IRS Form 8606.

3) Open a Roth IRA. You can open a Roth IRA account through the same bank or brokerage where you opened your traditional IRA. But be sure to shop around. Other providers may have lower fees, wider investment options, and offer promotions for transferring your IRA funds.

4) Rollover or transfer. Your IRA administrator can provide you with the necessary paperwork and instructions for converting your funds.

5) Pay taxes. If you took any tax deductions based on your traditional IRA contributions, you’d typically need to pay taxes on these and any investment earnings.

Backdoor Roth IRA Tax Rules

To understand the potential tax consequences, you can start by gathering all your traditional IRAs and figuring out if you made any deductible contributions to your IRAs.

Any IRA contributions that you deducted from your taxable income for the year you made these, as well as investment earnings on both deductible and non-deductible contributions would be taxed under a Roth conversion as ordinary income at your marginal tax rate or higher.

The amount of the conversion that’s taxed depends on the ratio of deductible contributions and earnings to nondeductible contributions among all your traditional IRA accounts.

This is part of the IRA aggregation rule. For example, say you have combined traditional IRA assets of $100,000, and it’s made up of 90 percent deductible contributions and 10 percent nondeductible contributions. Plus, you want to convert the entire $100,000 into a Roth IRA. In this case, you’d pay your applicable tax rate on 90 percent of that conversion or $90,000.

Overall, this is why many financial experts recommend that you stick to making only nondeductible contributions to a traditional IRA before converting to a backdoor Roth IRA. Nondeductible contributions in a conversion generally won’t be taxable.

Transfer Rules

You can initiate a Roth IRA rollover in three different ways:

1) Trustee-to-trustee transfer: Your IRA provider sends your traditional IRA funds directly to your new Roth IRA account.

2) Rollover: Your traditional IRA provider sends you a check for funds and you have 60 days to transfer it into your Roth IRA account. Otherwise, you could face income taxes and possibly a 10 percent early withdrawal penalty if you’re under the age of 59 1/2.

3) Same trustee transfer: Your traditional IRA provider sends the funds directly to your Roth IRA held at the same institution.

Potential Backdoor Roth IRA Drawbacks

Remember, the backdoor Roth IRA strategy is typically taken by affluent individuals. So the tax burden can be especially high if you have made deductible contributions into any of your traditional IRAs before the transfer. And the transfer could push you into a higher tax bracket.

It’s also important to know whether you would need the funds in your Roth IRA immediately.

Keep in mind that in order to make tax-free and penalty-free qualified withdrawals from a Roth IRA, you need to be at least 59 1/2 and the account needs to have held the conversion for at least five years.

In any case, it’s a good idea to consult a tax expert and a financial adviser to help you understand how a backdoor Roth IRA would apply to you based on your specific circumstances.

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