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

A backdoor Roth IRA is a legal strategy that converts funds from a traditional IRA to a Roth IRA, allowing high-income earners to make contributions.

It offers tax-free growth and withdrawals during retirement, but comes with rules that investors will want to be aware of.

While there are benefits, you’ll want to be aware of the drawbacks before you incorporate one into your retirement strategy.

This article breaks down everything you need to know.

What is a Backdoor Roth IRA?

A backdoor Roth IRA is a legal loophole that allows high-income earners to contribute to a Roth IRA by making direct contributions to a traditional IRA and converting those funds to a Roth IRA. 

Doing so allows high-income earners to bypass the standard income restrictions that come with a traditional IRA.

This strategy is used by investors who want the long-term benefits of a Roth IRA without being blocked by income thresholds.

How does a backdoor Roth IRA work?

A backdoor Roth IRA converts after-tax contributions from a traditional IRA into a Roth IRA.

Investors use backdoor Roth IRAs because the IRS doesn’t allow high-income earners to make direct contributions to a Roth IRA. It does, however, allow Roth conversions. 

Let’s say you’re a software engineer making $175,000 per year. That’s too much to qualify for a Roth IRA. You can’t make a contribution to a Roth IRA but you can still make a non-deductible contribution to a traditional IRA.

Using your traditional IRA, you can transfer your contributions into a Roth IRA. The conversion uses after-tax contributions, making the entire conversion tax-free.  

If you have other IRAs funded with pre-tax dollars, you could owe taxes due to the pro-rata rule. This combines your IRA balances when calculating taxes owed on a conversion.

A backdoor Roth IRA is ideal for investors with little or no money in pre-tax IRAs.

How to do a backdoor Roth IRA conversion

A backdoor Roth IRA conversion is legal and easier than it sounds, but it’s important to do it correctly to avoid a headache come tax time.

Here are the steps you’ll need to follow: 

1. Open a traditional IRA. If you don’t already have one, open a traditional IRA account with your preferred brokerage or custodian.
2. Make a non-deductible contribution. Contribute up to the annual IRA limit ($7,000 in 2025, or $8,000 if you’re age 50 or older). You won’t take a tax deduction on this amount.
3. Transfer your traditional IRA contribution to a Roth IRA. Wait a few days for the funds to settle in your account. Then ask your custodian to transfer the funds from your traditional IRA into a Roth IRA. This is the actual “backdoor” process.

Report the conversion on your taxes. Use IRS Form 8606 to report the non-deductible contribution and conversion.

If done correctly, the conversion should not incur any taxes.

Eligibility Requirements & Rules

While anyone can technically use a backdoor Roth IRA, there are some rules and restrictions you’ll need to be mindful of:

• You must have earned income. Contributions to any IRA require earned income from a job or self-employment. Passive income from an investment doesn’t count.
• Your Modified Adjusted Gross Income (MAGI) is above the Roth IRA income limit. The backdoor strategy is designed for people who earn too much to contribute directly to a Roth IRA. For 2025, the income limit begins at $150,000 for single filers and $236,000 for joint filers.
• You must contribute after-tax dollars to a traditional IRA. You cannot take a tax deduction on your contribution.
• You must file IRS Form 8606. This tracks your non-deductible contributions and confirms you’re not being taxed twice.
• The pro rata rule applies if you have other IRA balances.  If you have pre-tax money in other IRAs like a SEP IRA or SIMPLE IRA, your conversion may be partially taxable. 

The five-year rule applies for backdoor conversions. You have to wait five years before withdrawing money you convert from a traditional IRA to a Roth IRA.

If you don’t, taxes and penalties may apply.

Backdoor Roth IRA Income Limits

The backdoor Roth IRA exists to help high income earners get around income restrictions on certain tax-advantaged retirement accounts.

If your income makes you ineligible to contribute to a Roth IRA directly, the backdoor offers you a loophole to still be able to make contributions to your retirement savings. 

These are the 2025 income limits for Roth IRA eligibility:

Filing Status	Contribution Limit	Ineligibility
Single	$150,000	$165,000
Married Filing Jointly	$236,000	$246,000
Married Filing Separately	$0	$10,000

Benefits & Drawbacks

Backdoor Roth IRAs offer unique advantages for high earners but they come with some trade-offs you’ll want to be mindful of.

Benefits

• Access to tax-free retirement growth. Even if you exceed income limits, a backdoor Roth IRA gives you access to tax-free retirement savings.
• No required minimum distributions. Unlike traditional IRAs, Roth IRAs don’t force you to withdraw funds once you reach age 73.
• More flexibility in retirement. Qualified Roth withdrawals don’t count as income. This can help you during retirement while you’re also managing Medicare premiums and Social Security taxes.
• Can reduce your future tax burden. Contributing through a backdoor Roth IRA now can help you shift money out of a taxable retirement account now before tax rates rise later.

Drawbacks

• Pro-rata rule applies which could trigger taxes. If you have other pre-tax IRA balances, part of your conversion could be taxed. Depending on your finances, this could make a backdoor Roth IRA conversion unnecessarily complex. 
• Five-year rule to avoid penalties. Once you do the conversion, you’ll need to wait five years before you can make tax-free withdrawals. You’ll want to make sure you time your conversion correctly so you can access your funds in retirement.

Backdoor Roth IRA vs. Mega Backdoor Roth IRA

Both a backdoor Roth IRA and mega backdoor Roth IRA allow high earners to access the tax benefits of a Roth IRA.

While a backdoor Roth IRA uses contributions made to a traditional IRA, a mega backdoor Roth IRA pulls from a 401(k) plan.

Feature	Backdoor Roth IRA	Mega Backdoor Roth IRA
Annual Contribution Limit	$7,000 (under 50 years old) $8,000 (age 50 or older)	$23,500 (under 50 years old) $31,000 (age 50 or older)   $34,750 (age 60 to 63, includes a special $11,250 catch-up contribution)
Account Type	Traditional IRA to Roth IRA	401(k) to Roth 401(k) or Roth IRA
Requires Employer Plan	No	Yes and it must allow after-tax contributions and in-plan conversions
Income Limits	There are income limits for direct Roth IRA contributions but not to a conversion	There is no income limit, but employer plan must permit a conversion
Requires Expertise	Anyone can do a conversion	Requires coordination with employer and advisor
Best For	High income earners without access to an employer-sponsored 401(k) plan	High income earners with a permissible employer-sponsored 401(k) plan

How to Set Up a Backdoor Roth IRA

Setting up a backdoor Roth IRA isn’t terribly difficult. Here are the steps you’ll need to follow to set up a backdoor Roth IRA:

1. Confirm your income exceeds the Roth IRA limits. Make sure you’re ineligible to make direct Roth contributions. 
2. Open IRA accounts if you don’t already have them. You’ll need a traditional IRA and a Roth IRA in order to complete the conversion.
3. Make a non-deductible contribution to your traditional IRA. You can contribute up to $7,000 ($8,000 if you’re 50 or older). When you make your contribution, elect not to take the deduction.
4. Allow your funds to settle in the account. Give your accounts a few days for everything to fully process.
5. Transfer your funds. Ask your custodian to move the contribution you made from your traditional IRA to your Roth IRA.
6. File Form 8606. Report the conversion on your taxes so you aren’t taxed twice.

Is having a backdoor Roth IRA a good idea?

A backdoor Roth IRA can be part of a retirement strategy for high-income earners who want tax-free growth and greater flexibility in retirement. This allows you to save more for retirement while still accessing the tax benefits that come with a Roth IRA.

While a conversion is rather straightforward you’ll want to be mindful of other IRA accounts you have. If there are pre-tax balances in those accounts there may be some tax implications to consider.

If you think a backdoor Roth IRA aligns with your financial goals, consider working with a tax professional to ensure a smooth transfer between your traditional IRA and Roth IRA.

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