High earners who exceed annual income limits set by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) can’t make direct contributions to a 澳洲幸运5官方开奖结果体彩网:ꦕRoth individual retirement account (Roth IRA♓).

However, you can take advantage of a loophole to get around the limit and reap the tax benefits that 澳洲幸运5官方开奖结果体彩网:Roth IRAs offer. This strategy, known as a backdoor Roth IRA, allows those with high incomes to contribute indirectly by converting a 澳洲幸运5官方开奖结果体彩网:traditional IRA to a Roth IRA.

Roth IRA Income Limits

Roth IRAs provide unique tax advantages for retirement savers. You can make a contribution up until the 澳洲幸运5官方开奖结果体彩网:tax filing day of the following ൲year. Your contribution is made using after-tax dollars, meaning you get no upfront tax♉ benefit in the year of the c𒈔ontribution like other IRAs.

In return, you pay no taxes on withdrawals or 澳洲幸运5官方开奖结果体彩网:investment earnings when the account owner withdraws the money in retirement.

However, those with 澳洲幸运5官💞方开奖结果体彩网:modified adjusted gross incomes (MAGI👍s) above certain levels are limited in the amounts they can contribute or are 澳洲幸运5官方开奖结果体彩网:banned from Roth ownership altogether. The 澳洲幸运5官方开奖结果体彩网:income limits are updated annually.

For tax year 2025, single and head-of-household filers with MAGIs of $150,000 to $165,000 can contribute only limited amounts. The income phaseout range for married couples filing jointly is $236,000 to $246,000.

Taxpayers wit💧h incomes above the high end of the income range cannot contribute anything to a Roth IRA.

The Backdoor Roth IRA Strategy

The removal of a $100,000 MAGI limit for 澳洲幸运5官方开奖结果体彩网:Roth conversions in 2010 created a loophole in the tax code that allows high-income filers to legally make indirect contributions to Roth accounts using the backdoor Roth IRA strategy.

To use the backdoor Roth I🍷RA strategy, you’ll need to t✃ake the following steps:

1. Open a 澳洲幸运5官方开奖结果体彩网:traditional IRA with your IRA 澳洲幸运5官方开奖结果体彩网:custodian of choice. It is usually easiest, but not necessary, to use the same custodian that holds your Roth conversion IRA or where you plan to open your Roth.
2. Make a fully non-deductible contribution to your traditional IRA. For 2025, the contribution limit is $7,000, with a $1,000 catch-up contribution for those 50 and older. That means not reporting your traditional IRA contribution as a 澳洲幸运5官方开奖结果体彩网:deduction for MAGI on your 澳洲幸运5官方开奖结果体彩网:Form 1040, even if you otherwise might be eligible to deduct it.
3. Next, convert the 澳洲෴幸运5官方开奖结果体彩网:traditional IRA balance into a Roth IRA. Because the MAGI threshold for contributions does not apply to conversions, the income limitation does not apply.
4. Repeat this process every year that your MAGI is too high to allow you to contribute to your Roth IRA directly.

Tax Scenarios and Other Considerations

The backdoor strategy works best if you don’t already have a traditional IRA because it will leave you owing no taxes on your contribution. However, if you have a traditional IRA funded with deductible contributions, the 澳洲幸运5官方开奖结果体彩网:tax benefit will be reduced, a💖nd computing your taxes becomes more complicated.

Understanding this takes time, but it’s worth paying attention to or discussing with your 澳洲幸运5官方开奖结果体彩网:tax advisor for the following three situations:

Example 1: You Owe Zero Taxes

You are 40 years old and make $200,000 a year. You open a new IRA and make a non-deductible $7,000 contribut💜ion in 2025. You then convert this account with the $7,000 to a Roth I♏RA. You have no other traditional IRAs. Your tax bill for the conversion is zero because you did not deduct your contribution.

Exa🍬mple 2: Y💫ou Owe Taxes on All Previous IRA Balances

Your actions and circumstances are identical to the first situation, except you also have a traditional IRA rollover account funded entirely with deductible contributions. You got a 澳洲幸运5官方开奖结果体彩网:tax deduction when you made these contributions.

If you try to convert the entire amount you have in IRAs—both your $7,000 non-deductible contribution and the rest of your IRA bala💧nce—you will have a tax bill. How much you owe depen🌃ds on how large that rollover IRA is and your current income.

This is because, under the 澳洲幸运5官方开奖结果体彩网:pro-rata rule, all your IRAs are treated as one communal IRA. The amount of your Roth IRA conversion that is taxable is proportional to your total IRA balance.

If you have one or more IRAs you funded with de🅠ductible contributions, even the backdoor strategy cannot 𝓰keep you from owing taxes on a Roth conversion. You can’t open a second IRA, roll over only that second account, and owe no taxes.

The Roth IRA will have just the $7,000 in it. Your other IRAs won’t be folded into it; they’ll just be included in the government’s tax calculations. The tax bill will be assessed 🐽rega♑rdless of whether a new or existing account is used.

Example 3: You Owe Taxes on Some IRA Balances

This is a more complex circumstance, but the math is fairly straightforward. Under the pro-rata rule, IRA conversions are taxed in proportion to the amount of taxable contributions across all your IRA balances.

Imagine you are the same age and have the same income as in the previous examples. You could have several IRAs funded partly with deductible contributions and partly with non-deductible contributions. For the sake of simplicity, though,ও imagine you have just two traditional IRAs, oܫne funded each way:

• IRA 1 ($60,000): Funded only with deductible contributions
• IRA 2 ($34,000): Funded only with non-deductible contributions

You open a third traditional IRA with a $7,000 non-deductible contribution and 澳洲幸运5官方开奖结果体彩网:convert that balance to a Roth IRA. The taxable proportion of your contribution is equal to the percentage of taxable contributions across all of your IRAs. Since 60% of your IRA balances were funded with pretax (deductible) contributions and 40% with 澳洲幸运5官方开奖结果体彩网:after-tax (non-deductible) contributions♐, 60% of your conve𒀰rsion will be taxable.

For a $7,000 conversion, $4,200 will be classified as income for the year of conversion. Depending on your annual income, that may move you to a higher 澳洲幸运5官方开奖结果体彩网:tax bracket.

The Backd🌠oor Strategy and Qualified Retirement Plans

If ꧃you or your spouse participates in a traditional qualified retirement plan at work that accepts rollovers of pretax (deductible) IRA balances, you have another way to avoid tax when you use the backdoor strategy to fund a Roth. Here’s how:

Roll over all your deductible IRAs into a traditional 401(k) at work before starting the conversion process. Then, open a new I🎃RA with a $7,000 non-deductible contribution and convert that amount into a Roth IRA. Your tax bill will be zero because the government doesn’t include qualified-plan balances in calculating the tax on a backdoor Roth conversion. However, not all 401(k) plans offer this benefit.

Contribute to a Roth 401(k) If You Can

The backdoor strategy is unnecessary if your employer offers a 澳洲幸运5官方开奖结果体彩网:Roth 401(k) and you are not making the maximum possible contribution. Roth 401(k) plans let you contribute up to $23,500 in 2025 in after-tax dollars that you can withdraw tax-free when you retire.

For example, if♊ you have only contributed $5,000 to your Roth account in the plan, it would be simplest to contribute the remaining $18,500 in 2025 before opening a backdoor IRA. Moreover, if you are 50 or older, you can contribute an additional $7,500 to a Roth 401(k).

One possible exception to this rule could be if you are unhappy with the 澳洲幸运5官方开奖结果体彩网:investment choices in the plan and wi💧sh to explore alternative options elsew🅷here.

The Bottom Line

High earners can circumvent contribution limits to Roth IRAs by using the backdoor strategy. You save the most if you do not have pre-exis🥂ting traditional IRA balances that must be factored into your tax bill or i🎐f your employer’s qualified plan allows rollovers of deductible IRA balances.