Everything you need to know about backdoor Roth IRAs 

If you earn too much to contribute directly to a Roth IRA, then backdoor Roth IRAs may be a good bet for you.  

A backdoor Roth IRA is a strategy of converting non-deductible contributions in a traditional IRA to a Roth IRA. While Roth IRAs come with certain advantages, there are some things you need to know.  

In this article, we will talk about backdoor Roth IRAs, who is eligible, what the benefits are, and what the disadvantages are.  

Here is everything you need to know about backdoor Roth IRAs. 

Backdoor Roth IRAs: an overview 

Backdoor Roth IRAs are a strategy that allows high-income clients to move funds to Roth IRAs. Unlike traditional IRA contributions, Roth IRA contributions have income limits. Backdoor Roth IRAs, however, allow funds to be moved to Roth IRAs even if income exceeds the Roth IRA limits. 

In 2023, individuals could not make a Roth IRA contribution if their income exceeded $228,000 (married, filing jointly) or $153,000 (single). 

Backdoor Roth IRAs are a work-around that lets people move funds to a Roth IRA even if they fail to qualify for a Roth contribution due to income limits. They can make a non-deductible contribution to a traditional IRA and then convert that contribution to a Roth IRA. (Remember: that is if they qualify. They must have earned income.) 

Roth IRAs have their benefits, but there are still some good reasons to keep funds in a traditional IRA. 

Is backdoor Roth still allowed in 2024? 

Yes. Backdoor Roth IRAs are still allowed in 2024. However, there has been talk of eliminating the backdoor Roth in recent years. And the future is, of course, difficult to predict.  

Currently, backdoor Roth IRAs are still a legal way to get around the income limits in place, in terms of being able to contribute directly to a Roth IRA. Backdoor Roth IRAs are not considered a tax dodge by the IRS, despite what some may believe.  

If you have concerns over the legality of this technique, you should contact a knowledgeable legal or tax advisor.  

Is it worth it to do a backdoor Roth IRA? 

Whether it is worth it to do a backdoor Roth IRA depends on your financial situation. If, for example, you are in the 22% federal marginal income tax bracket (or under), you should do a Roth IRA to diversify your retirement funds. 

If your federal income tax bracket reaches 24%, you are at a neutral state, more or less.  

If your federal income tax bracket is 32% or more, you should avoid backdoor Roth IRAs. It is unlikely you will make more money and be in a higher tax bracket in retirement.  

Having tax-free funds you can withdraw from in retirement is a great thing. And diversifying your retirement income sources is also great. However, it is important to be realistic about how much money you are going to make in retirement.  

Who is eligible for backdoor Roth IRA? 

Your financial situation will dictate whether you are eligible for—or will benefit from—backdoor Roth IRAs. Before moving forward, you must carefully consider the implications.  

In this section, let’s look at who is eligible for backdoor Roth IRAs and who is not.  

Backdoor Roth IRAs: who is eligible 

The following are eligible for backdoor Roth IRAs: 

• high earners who fail to qualify to contribute under Roth IRA rules 
• retirees looking to avoid required minimum distributions (RMDs) 
• anyone who can afford the additional taxes involved in a Roth conversion. Additionally, people who want to take advantage of future tax-free growth 

Backdoor Roth IRAs: who is ineligible 

The following do not qualify for backdoor Roth IRAs: 

• anyone whose annual income makes them eligible for regular Roth IRA contributions 
• investors who must use Roth IRA funds within five years. Remember: the five-year rule applies to Roth conversions. That means there could be a penalty for anyone under 59 ½ years of age who need to access converted funds in those first five years 

What are the disadvantages of backdoor Roth IRA? 

While backdoor Roth IRAs can be beneficial for those who are eligible, there are also disadvantages. In this section, let’s look at some cautions when it comes to using backdoor Roth IRAs. 

Clients must have earned income 

Clients must have earned income like self-employment income or wages. Otherwise, they do not qualify to make a non-deductible IRA contribution, which is the first step in the process. 

For married couples filing a joint return, backdoor Roth IRAs benefit can be doubled by having the non-working spouse also do this. Spouses with little or no income may qualify even though they do not meet the earned income requirement. However, they must file a joint tax return and the working spouse must have sufficient earned income to cover the contributions for the non-working spouse.  

Must be under 70 ½ years of age 

Backdoor Roth IRAs do not work if the client is 70 ½ years of age or older. There are age limits for making traditional IRA contributions. You cannot make a traditional IRA contribution (deductible or non-deductible) for the year you turn age 70 ½ or later.  

Roth IRAs have no age limit. However, this will not help since the actual IRA contribution is being made to a traditional IRA, not a Roth IRA. 

Pro rata rule applies 

The pro rata rule will apply. All owned IRAs, including SEP and SIMPLE IRAs, are included in the pro rata calculation. However, this only means that some of the conversion may be taxable.  

Converted funds, not Roth IRA contributions 

In other words, the funds that end up in the Roth IRA through a backdoor conversion are converted funds, not Roth IRA contributions. This discrepancy makes a difference for those under 59 ½. In that case, one must wait five years for penalty-free access to the funds.  

If the funds went in as Roth IRA contributions, they would be accessible immediately, tax- and penalty-free. 

What is the income limit for a backdoor Roth IRA? 

In 2023, the income limit for a backdoor Roth IRA was between $218,000 and $228,000 for joint filers. For single filers, the limit was between $138,000 and $153,000.  

In 2024, however, the income limit for married couples filing jointly is between $230,000 and $240,000. For single filers, meanwhile, that limit is between $146,000 and $161,000.  

Key considerations for backdoor Roth IRAs 

If you are thinking of using a backdoor Roth IRA strategy, you should crunch the numbers and carefully consider your financial situation. There is no question that it has its advantages, especially for high earners. Because Roth IRAs do not have RMDs, you can hold them forever and pass them on to your heirs. There may also be significant tax savings.  

To find out more about backdoor Roth IRAs, get in touch with one of the financial advisors that we highlight in our Awards & Recognition section. Here you will find the top-performing financial advisors across the USA.       

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