The Backdoor Roth IRA Guide for High Earners
For high earners that have contributed the maximum to tax-deferred accounts such as 401(k)s, additional savings that can grow tax-free may make sense, even if they don’t reduce taxes in the year in which you contribute. The Roth IRA isn’t usually associated with high earners, but there is a way to provide the advantages of tax-free growth and tax-free withdrawals in retirement, even if you are over the income limits. An IRS loophole that allows for investment account conversions means that even those who exceed the income limits for a Roth IRA can convert traditional IRA contributions into a Roth IRA.
Using a backdoor Roth IRA strategy can be a powerful way to create additional retirement savings, but first, let’s understand what it looks like and when it makes sense to use it.
The Advantages of a Roth IRA
Since you pay taxes on the funds before they are contributed to the Roth IRA, no further taxes are due on withdrawal if you make qualified withdrawals. This means your money has the potential to grow tax-free.
Another advantage of investing in a Roth IRA is that it is not subject to required minimum distributions (RMDs). This allows for more control over the income stream in retirement, ensuring that income stays under the levels that would trigger taxes on Social Security benefits or the Medicare Part B and Part D surcharge.
What is a Backdoor Roth IRA?
A "Backdoor Roth IRA" is a term applied to making a non-deductible contribution to a Traditional IRA account and immediately converting those funds to a Roth IRA. It gives high earners, who otherwise exceed the statutory income limits for direct contributions, a completely legal mechanism to save additional, tax-free funds for retirement.
In 2026, the ability to contribute directly to a Roth IRA begins to phase out once your Modified Adjusted Gross Income (MAGI) hits $153,000 for single filers or $242,000 for those who are married and file jointly. Direct contributions are completely disallowed once MAGI reaches $168,000 (single) or $252,000 (joint). However, with a backdoor Roth IRA, you can convert a Traditional IRA (which doesn’t have income limits) into a Roth IRA.
How Does the Conversion Work?
The process is simple. You open a non-deductible, Traditional IRA and contribute up to the 2026 maximum amount of $7,500 ($8,600 for age 50 and older), and then immediately convert it to a Roth. In this scenario, the original amount is contributed to the IRA with after-tax dollars, and no further taxes are due. However, if it is allowed to sit in the Traditional IRA account and it grows, taxes will need to be paid on the growth before it can be converted to a Roth IRA.
The Watch Out
If you have a traditional IRA funded for a few years, the investments have grown, or you’ve deducted contributions, or all the above, the rules around the taxation can be a little tricky. The IRS doesn’t allow an investor to single out non-deductible contributions within a traditional IRA when doing a Roth conversion.
Starting January 1, 2026, if you earned more than $150,000 in FICA wages in the previous tax year from the employer sponsoring your workplace retirement plan (such as a 401(k) or 403(b)), the IRS now requires that your age-50+ catch-up contributions be made on a Roth (after-tax) basis.
The Drawbacks of Roth Conversions
There are a few things to consider before using the Backdoor Roth IRA strategy. While you can typically withdraw direct contributions tax-free at any time, funds moved via a backdoor conversion generally must sit in the account for five years to avoid a 10% early withdrawal penalty if you are under age 59½. Furthermore, to withdraw the account's earnings entirely tax- and penalty-free, you must be at least age 59½ and your first Roth IRA must have been open for at least five years.
Also, even though the Roth IRA can provide many benefits, if your tax bracket in retirement ends up being significantly lower than it is right now, paying taxes on the conversion today won’t be as mathematically impactful as it would be for someone whose tax rate increases in retirement.
The Takeaway
Backdoor Roth IRAs are a powerful tool when used correctly and can provide tax advantages that other retirement accounts can’t. However, many different factors play a role in deciding whether to do a backdoor Roth IRA, so it’s recommended to talk with a CPA or financial advisor about your specific situation and run the numbers before committing to a conversion.
Your Basepoint Wealth financial advisor can help you determine whether a backdoor Roth IRA fits into your overall financial plan. By coordinating retirement planning, tax strategies, and investment decisions, we can help you maximize tax-efficient wealth building and create greater flexibility in retirement.
Basepoint Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation. This content not reviewed by FINRA
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