The Backdoor to Making a Roth IRA Contribution

Backdoor Roth IRA

Here’s a little secret…there’s a backdoor.

If you decide to read this, get ready to have Aerosmith and Van Halen song lyrics running through your head all day. You’ve been warned.

Contributing to a Roth IRA directly is a privilege reserved for those below a certain income level. (Those darn politicians and their tax breaks for the middle class.)

The Roth IRA income limitations state that if you made over $125,000 as a single filer, or over $183,000 as a married filing jointly filer then you can’t contribute to a Roth IRA…or can you?

Roth IRA Conversions Left the Backdoor Open

Something changed in 2010 that allows those with incomes exceeding the limits above to contribute indirectly to a Roth IRA each year. What changed was the income limitations on Roth IRA conversions. Starting in 2010 you can convert a traditional IRA to a Roth IRA regardless of how much income you have. Why convert? Well, some consider the Roth IRA a better retirement vehicle since it allows tax-free growth of your investments.

So the idea now is that you,

  1. contribute funds to a non-deductible traditional IRA, and then
  2. convert that IRA over to a Roth IRA.

Your broker or mutual fund company should be able to handle all of this for you with a couple of phone calls. You’ll also need to keep track of your moves though for tax reporting.

An Example of the Backdoor Roth IRA Contribution

The annual contribution limit on your IRAs is $5,000. So let’s say you attempt this backdoor move and first contribute the max, $5,000, to a non-deductible traditional IRA.

This can be done fairly quickly these days. Simply send a check or bank transfer to your broker or mutual fund company and ask them to use the money to setup a non-deductible traditional IRA. Once the transaction is complete, wait a day, week, or as long as you want, then call them up again and request a conversion to a Roth IRA.

Getting Around the Pro-Rata Rule

Where this gets tricky apparently is in the conversion. When you make a conversion, you have to consider all the money in all of your traditional IRAs as being in one bucket. So, regardless of your current year non-deductible traditional IRA contributions, you may have to pay taxes on your conversion if you have ever made deductible traditional IRA contributions.

For example, let’s say I have $15,000 in a deductible traditional IRA. I made these contributions a few years back when I didn’t have access to a company 401K. Now, this year, I’ve decided to try to complete the backdoor Roth IRA.

First I’d contribute my $5,000 to the non-deductible IRA. Then I’d go to make the conversion. When I convert my $5,000 I’ll have to consider all $20,000 ($15,000 + $5,000) in the move. Since 75% of my balance is tax advantaged, I’ll have to pay taxes on 75% of my conversion. So, $3,750 of my current year conversion will be taxed as income.

This requirement on the conversion makes the decision a bit tougher for people who already have traditional IRA account balances. But according to there is a way around this “pro-rata” rule.

“So how do you remove the pretax IRA from the equation? Transfer it to a 401K. Many employer plans allow “roll-ins” of IRA money to 401Ks.”

Ah, sneaky, sneaky. I actually just opened a solo 401K with Vanguard so I may look into doing one of these roll-ins with my old traditional IRA, even if a backdoor Roth IRA contribution isn’t in my future.

More reading: Dodging The Income Limits on Roth Contributions – Strategy Or Abuse?

What about you, have you been doing these backdoor Roth IRA conversions the past couple of years? Do you see it as something you’ll use in the next couple of years?

Image by Marco Bellucci

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About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.


    Speak Your Mind


  1. HonoluluAunty says

    Aloha PT, I am glad to be able to say that we have been rolling over our traditional SEP IRAs into Roths, and contributing to our SEP IRAs for several years in a row.  This has worked out beautifully for us since the SEP IRA is a tax write-offible event and the rollover is a tax incurring event, and the two result in a “wash”. 
    The beauty of this strategy is that we are not limited by the normal income limits of a Roth or IRA. 
    I don’t quite understand how to use the Roth 401K and recently closed ours because we were paying high administrative fees.  Sometimes, simple is better.  Especially for me.
    Mahalo for the info!!

    • Philip Taylor says

      @HonoluluAunty Thanks so much for sharing, Aunty. Aloha to you too! That’s a great strategy you’ve got going.  I agree that simple is better too.

  2. Hey Phil,
    You can still get into a Roth and avoid taxes. You would just have to open a new non-deductible IRA account and then covert the $5k to a Roth IRA. Just leave your existing traditional IRA in place (keep the Traditional IRA pots separate) and you will not have to pay any taxes.
    What matters is if you’ve had earnings on the IRA. When you open a new IRA and convert, your gains are zero.
    I’ve been maxing out a Roth IRA since I was 18. When I got married I couldn’t contribute directly anymore. Luckily, it was the same year the conversion income limits also expired, so I’ve been opening a traditional and converting the entire amount every year since. No taxes.

    • Philip Taylor says

      @Long Pham I’m under the assumption that the rule applied across all of your accounts, similar to annual contribution limits… i.e. the pot is all of your traditional IRAs. I will look into this further.

  3. @URFinanceSimple thanks for sharing my post. Btw, love your videos. #jealous

  4. WomackFinancial says

    @ptmoney @MichaelKitces @ashleaebeling I like the ‘roll-in’ tactic, in order to avoid the pro-rata rule. Good post!

  5. The Military Guide says

    Thanks for the classic-rock earworm, PT!  Oh, and good post, too.
    The removal of the Roth conversion limit was a big help.  Spouse and I can look down the road a few years to see that RMDs from a conventional IRA (and our Thrift Savings Plan) would immediately bounce us into the 25% income tax bracket.  (Admittedly this is a good “problem” to have).  To avoid that, we’ve spent nearly a decade doing Roth conversions a little at a time– paying taxes now (up to the top of the 15% bracket) instead of later (at 25%).  
    We still have a few years to go to get rid of our conventional IRAs, and I’m hoping to finish the process before Congress wises up and “locks the back door”.