Roth IRAs, Conversions and “Backdoor” Contributions

The unique tax treatment of Roth IRAs presents a very compelling opportunity for investors. While income limits may prevent higher-earning individuals from making direct contributions to a Roth IRA, there are two other funding strategies worth serious consideration: Roth IRA conversions and so-called “backdoor” contributions.

Roth IRAs: A Refresher Course 

Created by the Taxpayer Relief Act of 1997, Roth IRAs offer investors the benefit of long-term, tax-free growth. Account holders can make tax- and penalty-free withdrawals once they reach age 59½ and have held the account for at least five years. In contrast, traditional IRA withdrawals are taxed as ordinary income. 

However, direct contributions to Roth IRAs are limited based on income, more specifically the modified adjusted gross income (MAGI): 

Single filers in 2025: 

• Full contribution ($7,000 under 50 / $8,000 age 50+) allowed if MAGI < $150,000
• Partial contribution if MAGI < $165,000

Married filing jointly: 

• Full contribution if MAGI < $236,000
• Partial contribution if MAGI < $246,000

Married filing separately: 

• Reduced contribution if MAGI < $10,000
• No contribution if MAGI > $10,000
  • Yes, you read this correctly. Under a Married Filing Separately status, the ability to contribute directly to a Roth IRA is severely restricted.

Another attractive feature of Roth IRAs is that they are not subject to required minimum distributions (RMDs) during the owner’s lifetime, which allows for more control over distributions in retirement. 

Additionally, Roth IRAs are often used in wealth transfer strategies. Because withdrawals are tax-free, beneficiaries can inherit these accounts without incurring income tax. For that reason, we frequently recommend preserving Roth assets as long as possible and using taxable or tax-deferred accounts first during retirement. 

Roth IRAs also play a key role in asset location strategies, helping to optimize long-term tax efficiency. Growth-oriented assets—those with high expected returns—are generally best suited for Roth accounts, maximizing the value of tax-free growth. 

Roth IRA Conversions: Turning Tax-Deferred into Tax-Free

Investors with traditional IRAs can elect to convert some or all of those balances into a Roth IRA. This essentially transforms future tax-deferred growth into tax-free growth—provided the conversion is done wisely. 

Here are key considerations: 

• Current vs. future tax brackets: If you expect to be in a higher bracket later, a conversion now might reduce your lifetime tax burden.
• Investment time horizon: Generally, a longer time frame (at least 5–10 years) is needed to make the tax cost of conversion worthwhile.
• Ability to pay taxes from outside assets: Paying the conversion tax with non-retirement funds helps preserve the full investment value of your Roth IRA.
• Low-income years as conversion windows: Retirees before RMDs or individuals between jobs may find this to be a prime opportunity to convert at a lower tax rate.

Backdoor Roth Contributions: A Smart Workaround for High Earners 

For individuals whose income exceeds Roth IRA contribution limits, backdoor Roth contributions offer a legal and effective workaround. Since 2010, when income limits on Roth conversions were removed, this strategy has become increasingly popular—but still misunderstood. 

Here’s how it works: 

• Contribute to a traditional IRA – typically a non-deductible contribution. Because this contribution is non-deductible, 100% of the contribution is deemed to be ‘basis.’
• Convert the traditional IRA to a Roth IRA, usually shortly thereafter, minimizing gains that could trigger taxes. If the individual’s balance in all IRAs was limited to their most recent contribution in bullet 1, taxable income on the conversion will result only if the value of the IRA exceeds their basis.

Why this works: The IRS does not restrict conversions based on income, only direct contributions. By contributing to a traditional IRA first, and then converting, high earners can fund a Roth IRA even if their income is well above the usual limits. 

Important Considerations:

• The strategy is most effective when you have no other traditional IRA assets. This is due to the pro-rata rule, which requires that all of your IRAs be considered when calculating the taxable portion of a conversion. For example, if you have pre-tax IRA balances elsewhere, only part of your backdoor conversion will be tax-free.
• It’s important that the traditional IRA contribution be non-deductible (i.e., you don’t claim a tax deduction), otherwise, you’ll owe taxes on the full converted amount.
• You can complete backdoor contributions annually, and many high-income investors do so as part of their yearly financial planning.

Pro Tip: To avoid confusion and mistakes, we recommend keeping detailed records of your traditional IRA contributions using IRS Form 8606. This form tracks non-deductible contributions and is critical to avoiding double taxation. 

Roth IRAs: Strategic But Not Always Simple

While Roth IRAs offer many advantages, they are not universally ideal. Your decision to convert, contribute, or use a backdoor strategy should align with your: 

• Current and future tax bracket
• Retirement time horizon
• Cash flow and liquidity
• Broader estate and legacy goals

Need Help Navigating the Options? 

If you’re considering a Roth conversion or backdoor contribution, we encourage you to discuss your specific situation with your advisor. The rules are manageable—but the consequences of getting them wrong can be costly. With a thoughtful approach, Roth IRAs can be a powerful part of your long-term financial plan.