For many high-income earners, saving for retirement in the most tax-efficient way can feel frustratingly limited. Roth IRAs are especially desirable retirement account vehicles because they allow your investments to grow tax-free, and your qualified withdrawals in retirement are also tax-free. However, Roth IRAs come with phase-out income limits, and if your income is above those thresholds, you’re normally prohibited from contributing directly into these retirement accounts. That’s where the backdoor Roth conversion can become an efficient tax strategy.
A backdoor Roth conversion isn’t a special type of account or a loophole in the tax code. In fact, the IRS is well aware of this tax-efficiency method. Instead, it’s a strategy that allows high-income earners to move money into a Roth IRA indirectly by using a traditional IRA as a pass-through account. The IRS allows Roth conversions regardless of income level, which is what makes this strategy possible.
What Are the Benefits and Limitations of a Roth?
Unfortunately, direct contributions into a Roth do not allow you to get an upfront tax deduction, as you would with a traditional IRA or pre-tax 401(k) & 403(b) contributions. Rather, contributions are made with already-taxed dollars; then your earnings appreciate income-tax-free.
The primary advantage of the Roth is that upon reaching age 59 ½, your Roth distributions are received income-tax-free, just as long as you’ve had the Roth open and funded for five tax years, effective January 1 of the year of your first contribution.
Another key advantage of the Roth is that you will never be required to take required minimum distributions (RMDs), unlike traditional IRAs and other pre-tax retirement plans such as 401(k) & 403(b) plans, where RMDs do apply.
One downside of a Roth IRA is that individuals and couples with a modified adjusted gross income (MAGI) above certain limits cannot make direct contributions. In 2026, single filers with a MAGI exceeding $168,000 and married couples filing jointly with a MAGI above $252,000 will be above the limits for direct Roth IRA contributions. So, for high-income earners to get around these limits and still contribute to a Roth, the backdoor Roth conversion comes into play.
How the Backdoor Roth Process Works
The backdoor Roth conversion consists of two steps. It is important that they be done correctly to achieve their intended purpose.
- Make a non-deductible contribution to a traditional IRA. High-income earners cannot make deductible contributions into a traditional IRA, but they can still make non-deductible contributions up to the maximum annual contribution limit. For 2026, the contribution limit is $7,500 and steps up to $8,600 for those aged 50 and older. Please make your CPA/tax preparer aware that you made a non-deductible traditional IRA contribution, as IRS Form 8606 must be filed each year this is done.
- Convert those assets from the traditional IRA into the Roth IRA. I recommend making this conversion immediately following the non-deductible traditional IRA contribution. Any growth or appreciation from the non-deductible contribution in the traditional IRA is taxable at the time of the conversion. The quicker the conversion, the less likely the contribution will experience any growth or appreciation.
I recommend considering a backdoor Roth conversion for those who have very few funds in their traditional IRA or in multiple traditional IRAs. This approach is essential given the pro-rata rule.
What Is the Pro-Rata Rule, and How Does It Apply to Backdoor Roth Conversions?
If there is any growth or appreciation in the traditional IRA between the date of the non-deductible contribution and the date of the conversion, you will owe taxes on that appreciation. The non-deductible contribution was made with after-tax dollars, and the appreciation is taxable. Pretty straightforward.
However, the calculation changes for individuals who execute a backdoor Roth conversion if they have one or more traditional IRAs funded with pre-tax dollars that have larger balances. In these instances, the IRS requires calculating the ratio of the after-tax non-deductible traditional IRA contribution to that of the total traditional IRA balance. I’ve provided an example below of a high-income earner, age 50, who has made an $8,600 backdoor Roth conversion while having pre-tax dollars in their traditional IRA.
Example situation of backdoor Roth conversion while having pre-tax dollars in a traditional IRA
- After-tax contribution = $8,600
- Pre-tax contributions = $241,400
- Total traditional IRA balance = $250,000
Pro-rata calculation of the taxable portion of the backdoor Roth conversion
- The $241,400 pre-tax contributions are divided by the total balance of $250,000 = 0.97. This means 97% of the portion of the conversion is subject to tax.
- The $8,600 conversion is then multiplied by the 0.97 pro-rata ratio = $8,342. This is the amount of the conversion that is taxed as ordinary income.
It is apparent that a backdoor Roth conversion becomes less appealing for those who have a traditional IRA, or multiple traditional IRAs, funded with pre-tax dollars. For individuals with large pre-tax IRA accounts, it may make sense to first explore whether rolling those assets into an employer retirement plan [such as a 401(k) or 403(b)] is appropriate, since those balances are not included in the pro-rata calculation.
As always, everyone’s tax situation is different. For high-income earners, the backdoor Roth strategy is worth exploring with your team at Clayton Wealth Partners.
