The term “Backdoor Roth IRA” refers to a strategy employed by individuals with higher incomes who are ineligible to directly contribute to a Roth IRA due to specific income limits. Instead of making a direct Roth contribution, these individuals contribute to a non-deductible traditional IRA and subsequently convert it into a Roth IRA.

A Roth IRA is a widely used retirement savings account where contributions are made with after-tax dollars. If certain conditions are met, both the contributed amount and the earnings on the investment can be withdrawn tax-free in the future. This strategy may be attractive to those anticipating a higher tax bracket during retirement, given the tax-free growth aspect of a Roth IRA.

Income limits for contributing to a Roth IRA exist, with a phaseout occurring for modified adjusted gross incomes (MAGI) between $146,000 and $161,000 for single filers and $230,000 and $240,000 for joint filers in 2024. The Backdoor Roth IRA method allows individuals with incomes exceeding these limits to still benefit from a Roth IRA.

A Backdoor Roth IRA may not be suitable for everyone. If you have a balance in a traditional IRA and plan to convert, the “pro rata” rule must be considered, as it requires proportional distributions from pre-tax and after-tax sources.