Backdoor Roth IRAs – What they are and how can I set one up?

Roth IRAs are a powerful investing tool, but income limits make them inaccessible to particularly high-earning households. By using a backdoor Roth IRA, you can take advantage of all the tax benefits of a Roth IRA while maintaining an income in excess of the IRS’ limits for these accounts.

Key Takeaways

• Backdoor Roth IRAs rely on the ability to convert traditional IRA accounts to Roth IRAs after a nondeductible contribution is made.
• As long as no capital gains are realized on the assets in the traditional IRA, the conversion takes place tax-free.
• Backdoor Roth IRA conversions are primarily used by high-income earners whose household income exceeds the IRS limits on who can make Roth IRA contributions.

What is a backdoor Roth IRA?

A backdoor Roth IRA is a tax loophole high income households can use to take advantage of the tax advantages of a Roth IRA in cases where household income exceeds the limits typically assigned to these types of retirement accounts. Funds are first deposited into a traditional IRA account, and then that account is converted to a Roth IRA the same year the funds are deposited.

Who should consider a backdoor Roth IRA?

Backdoor Roth IRA deposits are typically only used by individuals or couples who exceed the income threshold for Roth IRA deposits. There are a number of other considerations for who should use these types of deposits and when they should be used, but when done correctly these types of contributions can provide major tax benefits for high income earners.

Backdoor Roth vs. Roth IRA vs. Traditional IRA

To understand a backdoor Roth IRA contribution, it’s critical to first understand IRAs, or Individual Retirement Accounts, and one of the most popular forms of IRA: the Roth IRA.

Traditional IRAs

A traditional IRA is one of the most common types of retirement investment accounts among investors of all ages and income levels. Contributions made to a traditional IRA are tax-deductible, meaning investors can put more of their money directly into their investment account without having to pay taxes on them the year the income is earned. 

The money in a traditional IRA can be accessed at any time, but withdrawing money from the account before the age of 59½ carries financial penalties. After that age, funds can be withdrawn from the account and income taxes are paid on the funds withdrawn just like any other earned income.

There are some regulations on how much money can be invested into certain types of IRAs, and who can use them. A traditional IRA carries the following guidelines:

• Income Limits – There is no maximum income limit for investing in a traditional IRA but there may be limits on the deductibility.

• Contributions – Each year, you are allowed to contribute up to a total of $7,500 to your IRAs. This includes all traditional IRAs and Roth IRAs you own. If you are over 50 years old you can add another $1100 as well.

• Withdrawals and Earnings – Early withdrawals from a traditional IRA (prior to age 59½) incur a 10 percent penalty, and after the age of 73 or 75 investors are required to withdraw the amount specified by your Required Minimum Distribution.

Roth IRAs

While contributions to traditional IRAs are tax exempt on the way in, Roth IRA contributions are taxed when they’re first deposited and then allowed to grow tax-free until retirement. When the funds are finally withdrawn, they are tax-exempt.

There are more restrictions on who can use these types of accounts and how, however. In 2026, the following restrictions apply to Roth IRAs:

• Income Limits – Individuals making less than $153,000 or couples earning under $242,000 can contribute the maximum amount to their Roth IRAs this year. Individuals making between $153,000 and $168,000 or couples earning between $242,000 and $252,000 can make partial contributions, while households exceeding these limits are not allowed to contribute funds directly to a Roth IRA.

• Contributions – The $7,500 annual limit plus $1,100 catch up for over 50 years old for IRA contributions applies to Roth IRAs as well, meaning your combined contributions to both types of IRA cannot exceed this amount.

• Withdrawals and Earnings – Roth IRAs are also subject to the same age restrictions as traditional IRAs, and have the additional requirement that funds must be held in the Roth IRA for at least five years before they can be withdrawn. Unlike a traditional IRA, there are no required minimum distributions for Roth IRAs.

Backdoor Roth IRAs

As opposed to the previous two types of IRAs, a backdoor Roth IRA is not an actual retirement account. Rather, it is a way to take advantage of the benefits of a traditional IRA and a Roth IRA without having to worry about the income restrictions of a Roth IRA. Funds are first deposited into a traditional IRA through a nondeductible contribution, meaning taxes are paid on the way in, and then the traditional IRA account is converted to a Roth IRA to avoid paying taxes on the funds when they’re withdrawn in retirement.

• Income Limits – Because contributions are made into a traditional IRA account, there are no maximum income restrictions on these types of investments. And, because the contribution is nondeductible, the tax-free contribution restrictions based on income level are immaterial.

• Contributions – Just like any other IRA contributions, total investments into these types of accounts cannot exceed $7,500 each year. Or $8,600 if over 50.

• Withdrawals and Earnings – Once the conversion of the IRA account is done, the same restrictions on withdrawals and earnings apply as with any other Roth IRA account.

Backdoor Roth IRA income limits

Using a backdoor Roth IRA is only really useful for investors making more each year than the income restrictions on typical Roth IRAs. If your household income falls below the cut off for Roth IRA contributions, it’s much simpler to just use a standard Roth IRA contribution since your household can only contribute up to $7,500 or $8,500 to any combination of IRAs in a year.

For 2026, the income cap for Roth IRAs are as follows:

• Single – $168,000
• Married, filing jointly – $252,000

How to set up a backdoor Roth IRA

Setting up a backdoor Roth IRA contribution is a relatively simple process—funds are deposited into a traditional IRA account through a nondeductible contribution and taxes are paid when the funds are deposited just like they would be with a Roth IRA. Then, before they are invested and capital gains are realized, the account is converted to a Roth IRA account. The timing of the conversion is important, and there are some general guidelines to follow to help make the process occur smoothly and without tax complications.

Many people choose to make a contribution to a traditional IRA account on January 1, and do so in the full amount of the maximum IRA contribution for the year ($7,500 or $8,600). This reduces the amount of paperwork and simplifies the process of keeping track of contributions made year-after-year.

These funds are not invested until the account is converted to a Roth IRA, as any investment gains realized while the funds are in the traditional IRA account would be subject to income tax when the account is converted.

Once the funds are safely in a Roth IRA account, they can be invested as normal and withdrawn tax-free after retirement, just like any other Roth IRA. By moving the funds through a traditional IRA first, and by paying taxes when they’re deposited, high-income investors are able to use these two accounts in the same way a normal Roth IRA operates.

If you’re interested in setting up your own backdoor Roth IRA Horizons Wealth Management can help determine the best strategy to ensure your financial future. 

Pros of a Backdoor Roth IRA

There are a multitude of benefits to using Roth IRAs as a part of your investment strategy, and the use of a backdoor Roth IRA extends those benefits to investors whose incomes would normally disqualify them.

• Tax-free growth – Once investments are placed in a Roth IRA account, they are no longer subject to income tax when they’re withdrawn. If your investments perform well, your profits will be greater when it’s time to withdraw the funds.
• No RMDs – Unlike a traditional IRA, there are no required minimum distributions with Roth IRAs. All of your assets can remain in the account as long as you’d like, continuing to compound and generate wealth instead of being withdrawn starting at age 73.
• Estate planning – Inherited Roth IRAs are a powerful tool for creating generational wealth, as beneficiaries of inherited accounts can typically withdraw the funds tax-free rather than being subject to income tax on their earnings.

Drawbacks of a Backdoor Roth IRA

While a backdoor Roth conversion sounds appealing for most high-income households, there are always things to be cautious of when investing for your retirement.

One of the biggest concerns associated with a backdoor Roth IRA conversion has to do with what’s known as the pro rata rule. This rule comes into play in situations where a traditional IRA contains both nondeductible contributions and tax deferred contributions.

Say, for instance, your traditional IRA contains $100,000—$75,000 in pre-tax contributions, and $25,000 in nondeductible contributions you hope to convert to a Roth IRA. If you wish to convert the entire account to a Roth IRA, you would be required to pay taxes on an amount proportional to the pre-tax contributions in the account. In this case, that would mean you’re liable to pay taxes on 75 percent of your investments.

If you want to only convert $25,000 to a Roth IRA, however, the pro rata rule prohibits you from only converting the nondeductible portion of the account. You would still be required to pay taxes on 75 percent of the $25,000 you convert.

The pro rata rule treats all traditional IRAs as a single pool of money for the purposes of determining the ratio of pre-tax to after-tax money they contain, which can lead to exceedingly high, complicated tax bills when these types of contributions are mixed.

If you’re planning to make use of a backdoor Roth IRA conversion, it’s best to not muddy the waters with different types of contributions if at all possible, or spread out conversions over several years to reduce your tax liability if it’s unavoidable.

Bottom Line

While it’s only relevant to a small number of high-income investors, those who qualify for the benefits of a backdoor Roth IRA conversion stand to gain a great deal from using this powerful retirement investing tool.

Horizons Wealth Management offers a suite of services for those seeking to maximize their retirement accounts. Get in touch today to learn how you can grow your financial future. 

Backdoor Roth IRA FAQ