Understanding the Backdoor Roth IRA: A Strategy for High Earners
You’re doing well financially.
You’ve worked hard, earned promotions, and built a solid income. But there’s a frustrating downside to success: you make too much money to contribute directly to a Roth IRA.
The income limits cut you off from one of the most powerful retirement savings tools available.
Or do they?
Enter the backdoor Roth IRA – a perfectly legal strategy that allows high earners to get money into a Roth IRA despite exceeding the income limits.
If you’ve never heard of this strategy, you might be missing out on years of tax-free growth.
What is a backdoor Roth IRA?
A backdoor Roth IRA isn’t a special type of account. It’s a two-step process that takes advantage of a quirk in the tax code.
While there are income limits for contributing directly to a Roth IRA, there are no income limits for converting a traditional IRA to a Roth IRA.
Here’s how it works:
Step 1:
You make a non-deductible contribution to a traditional IRA. Anyone can do this, regardless of income.
Step 2:
Shortly after making that contribution, you convert the traditional IRA to a Roth IRA.
You’ll owe taxes on any earnings that occur between the contribution and the conversion – usually minimal if the conversion happens quickly. Once the money is in the Roth IRA, it can grow tax-free forever.
The result?
You’ve effectively made a Roth IRA contribution even though your income technically disqualifies you from doing so directly.
Why bother with a Roth IRA at all?
If you’re a high earner, you might reasonably ask:
Why go through all this hassle? Why not just keep everything in my 401(k)?
Here’s why Roth IRAs are often worth the effort:
- Tax-free growth – Every dollar of growth in a Roth IRA is yours to keep
- Tax-free withdrawals in retirement – Roth withdrawals don’t increase your taxable income
- No required minimum distributions – You’re never forced to take money out, which can make Roth IRAs powerful estate-planning tools
- Tax diversification – Having both pre-tax and Roth accounts gives you flexibility to manage your tax bracket in retirement
Is a backdoor Roth right for you?
At Meriwether, we help high-earning clients evaluate and implement backdoor Roth strategies as part of a comprehensive retirement plan.
We look at the entire financial picture – your existing IRAs, tax brackets, future income, and long-term goals – and help you navigate the complexities of the pro rata rule.
We do this because thoughtful tax planning can add real value to your retirement. Often, it matters more than chasing an extra percentage point of investment return.
If you’re a high earner who’s been shut out of direct Roth IRA contributions, let’s talk about whether a backdoor Roth strategy could work for you.
This content is for educational purposes only and should not be considered personalized financial advice. Please consult with a qualified financial professional to discuss your specific situation and needs.