Supercharge Your Roth Part 1: Mastering the Backdoor

April 23rd, 2025 by Blake Pinyan

Roth Money

Roth money is undoubtedly a valuable component of a well-diversified financial portfolio, thanks to the fact that qualified withdrawals are completely tax-free. These funds are typically held within retirement accounts such as the Roth Individual Retirement Account (IRA) and the Roth 401(k).

Contributions to Roth accounts are made with after-tax dollars, meaning there’s no tax deduction at the time of contribution. However, because no tax benefit is received upfront, withdrawals—assuming certain conditions are met—are entirely tax-free. Specifically, the account must have been open for at least five years, and the account holder must be at least 59½ years old at the time of withdrawal.

This contrasts with Traditional (or pre-tax) retirement accounts, where contributions reduce taxable income in the year they are made, but distributions are taxed as ordinary income upon withdrawal.

Having a pool of investments that grows tax-free and can be withdrawn tax-free is incredibly appealing, especially to individuals in higher tax brackets. And the IRS knows this. That’s why Roth IRAs come with income limits that restrict high earners from contributing directly.

Roth IRA contribution limits are determined by your modified adjusted gross income (MAGI).

• Single filers in 2025:
  • Full contribution: MAGI under $150,000
  • Partial contribution: MAGI between $150,000 and $165,000
  • No contribution: MAGI over $165,000
• Married couples filing jointly in 2025:
  • Full contribution: MAGI under $236,000
  • Partial contribution: MAGI between $236,000 and $246,000
  • No contribution: MAGI over $246,000

The deadline for making Roth IRA contributions for a given tax year is April 15 of the following year. Therefore, the deadline for 2025 contributions will be April 15, 2026.

To contribute to either a Roth or Traditional IRA, you must have earned income. The annual contribution limit for 2025 is $7,000, or $8,000 if you’re age 50 or older due to a $1,000 catch-up provision.

The income limits imposed by the IRS can prevent high earners from contributing directly to a Roth IRA. However, there is a legal workaround that currently allows these individuals to still fund a Roth account—this is known as the Backdoor Roth IRA. We’ll explore this strategy in detail throughout the article.

Since it’s often labeled a “loophole” or “workaround,” it’s not widely understood. Yet, it can be a powerful tool for building tax-free retirement wealth—even for those who exceed the income limits for direct contributions.

Deductibility of Contributions

As previously mentioned, conventional Roth IRA contributions are not tax-deductible in the year they’re made. These contributions are made with after-tax dollars and do not offer any immediate tax benefit.

In contrast, Traditional IRA contributions can be tax-deductible, reducing your taxable income for the year. For example, if you contribute the maximum of $7,000 to a Traditional IRA in 2025, you may be eligible for a $7,000 deduction on your 2025 tax return. This is known as a deductible Traditional IRA contribution, which is the most common type. Because you received a tax deduction up front, all withdrawals from that Traditional IRA are fully taxable in retirement.

However, there’s another kind of Traditional IRA contribution: the non-deductible IRA contribution. This occurs when you contribute to a Traditional IRA but do not claim a tax deduction for it. Although you’ve already paid taxes on the contribution, the earnings from the account are still subject to taxation when withdrawn.

So why would anyone make a non-deductible IRA contribution? There are a couple of reasons:

• Income Limits with Employer Plans
  • If you’re an active participant in an employer-sponsored retirement plan (like a 401(k)), your ability to deduct a Traditional IRA contribution may be phased out or eliminated entirely if your income exceeds certain thresholds. In this case, you can still contribute, but the contribution becomes non-deductible.
• Backdoor Roth IRA

The Backdoor Roth IRA: How It Works

As mentioned, the Backdoor Roth IRA strategy enables high earners to fund a Roth IRA even when their income exceeds the IRS limits for direct contributions. To execute this strategy, you’ll need both a Traditional IRA and a Roth IRA, ideally held at the same custodian (like Schwab or Fidelity) to simplify the process.

To start, your Traditional IRA should have a zero balance—it’s important that no other pre-tax IRA funds are present in the account, as this can complicate the tax implications during the conversion process.

To implement:

1. Contribute to a Traditional IRA:
   You make a non-deductible contribution to a Traditional IRA. Since this contribution is made with after-tax dollars and you receive no tax deduction, it’s not considered pre-tax money.
2. Convert to a Roth IRA:
   You then immediately convert (or transfer) the funds from the Traditional IRA into your Roth IRA. Because the contribution was non-deductible, there is no tax owed on the converted amount—you’re simply moving after-tax dollars from one account to another.

However, if your Traditional IRA contribution was deductible (i.e. you claimed a tax benefit), the conversion would trigger taxes on the fully converted amount, since it would be considered pre-tax money.

Timing matters:

It’s highly recommended to convert the funds to your Roth IRA as soon as possible after the contribution is made and the funds have settled. Here’s why:

• The principal (your original contribution) is not taxable at the time of conversion.
• Any earnings or interest accrued in the Traditional IRA before conversion are taxable.

By converting the funds quickly, you can avoid or minimize any taxable earnings. The longer the money sits in the Traditional IRA, the greater the potential for growth—and, consequently, the higher the tax liability on the conversion.

To summarize:

It’s a non-deductible contribution to a Traditional IRA, followed shortly by a Roth conversion. This strategy allows you to effectively bypass income limits and take advantage of Roth IRA benefits, such as tax-free growth and withdrawals in retirement.

Important Dates

As previously mentioned, the contribution deadline for Roth and Traditional IRAs is April 15th of the following year. However, the deadline for Roth conversions is different…it falls on December 31st of the current calendar year. Therefore, if you’re utilizing a Backdoor Roth strategy, it must be completed by year-end to count for that tax year.

Zero Balance IRA

To avoid taxation when using the Backdoor Roth strategy, it’s crucial that all Traditional IRA balances are reduced to zero by the end of the calendar year.

Backdoor Roth contributions are not exempt from taxation if there is any balance in a Traditional IRA. This applies not only to the IRA used for the contribution but to all IRAs held under the individual’s name. That includes Traditional IRAs, Rollover IRAs, SEP IRAs, SIMPLE IRAs—any variation. The reason is the IRS’s pro-rata rule, which requires the value of all IRAs to be aggregated when calculating the taxable portion of a Roth conversion.

If there is money remaining in any IRA as of December 31st, a portion of the Backdoor Roth contribution may be subject to taxation. The taxable amount is determined based on the ratio of total IRA balances to the non-deductible contribution. The IRS treats distributions as a proportional blend of taxable and non-taxable funds across all IRA accounts.

There are essentially two ways to “zero out” IRAs:

1. Roth Conversion: As discussed earlier, you can convert pre-tax IRA funds into a Roth IRA. However, this conversion is typically taxable unless offset by a non-deductible contribution.
2. Tax-Free Rollover to a Retirement Plan: The second method is to execute a direct rollover from the IRA into an employer-sponsored retirement plan, such as a 401(k), before year-end. This option is only available if you have access to an active retirement plan through your employer that accepts incoming rollovers. When done correctly—institution-to-institution and before December 31st—this rollover is tax-free and removes the funds from the IRA environment.

The IRS permits you to consolidate pre-tax funds into a qualified employer-sponsored retirement plan without issue. However, to avoid pro-rata taxation, you cannot have funds in any type of IRA at the end of the year. Keep in mind that most retirement plans do not accept rollovers unless they are active, meaning this strategy is generally only available to individuals who are currently employed.

How It Shows Up on Your Tax Return / What Tax Documents You’ll Receive

When it comes to Backdoor Roth contributions, the key tax form to be familiar with is Form 8606 – Nondeductible IRAs. This is where the contribution and subsequent Roth conversion are properly reported and accounted for.

Tax Documents You’ll Receive:

1. Form 5498 – This form reports contributions made to your Traditional IRA. However, it’s typically issued after the tax filing deadline, so it’s not critical for preparing your return. Most individuals already know the amount they contributed, and there’s little additional useful information on this form.
2. Form 1099-R – This form is issued by January 31st and reports the distribution from the Traditional IRA (i.e., the conversion to the Roth IRA). It often shows that the taxable amount is not determined, which is expected. When reporting this, you’ll indicate that the funds were converted to a Roth IRA.

Completing Form 8606:

• Part I:
  • Line 1: Enter the amount of your non-deductible Traditional IRA contribution (up to the annual limit—$7,000 for 2025 if under age 50, or $8,000 if age 50 or older).
  • Line 2: This is your basis in Traditional IRAs. For a properly executed Backdoor Roth, this should be zero.
  • Line 6: Should also be zero, indicating you had no IRA balances at year-end.
  • Line 13: This line reports the conversion as non-taxable.
• Part II:
  • Line 16: Reports the amount converted from your Traditional IRA to your Roth IRA.
  • Line 17: Should reflect the non-deductible basis (from Line 1), effectively offsetting the conversion and ensuring it’s not taxed.

Where It Appears on Form 1040:

• Line 4a: Shows the total distribution from the IRA (the conversion).
• Line 4b: Should show $0 taxable income if everything was reported and executed correctly.

Putting It All Together

A simple way to understand the Backdoor Roth strategy is through an example. Let’s use Emily as our case study.

Emily is 28 years old and anticipates earning $170,000 in 2025, which makes her ineligible for a direct Roth IRA contribution. She also does not have any existing IRA accounts with a balance—no Traditional, SEP, SIMPLE, or Rollover IRAs.

In October 2025, Emily opens both a Traditional IRA and a Roth IRA at Charles Schwab. Both accounts start with a $0 balance. She contributes $7,000 in cash to her Traditional IRA. Once the funds settle, she converts the entire $7,000 to her Roth IRA via an internal journal transfer, with no tax withholding. Since she didn’t earn any interest during this short period and the full amount was converted, her Traditional IRA balance returns to $0 immediately after the transfer.

Before the end of the calendar year (i.e., before January 1, 2026), Emily confirms that her Traditional IRA has a zero balance.

How It’s Reported on Her Taxes:

• For her 2025 tax return, Emily:
  • Reports the $7,000 IRA contribution as non-deductible.
  • Receives a Form 1099-R from Schwab showing the $7,000 distribution from the Traditional IRA.
  • Indicates on her tax return that this distribution was converted to a Roth IRA.
• She completes Form 8606, confirming:
  • A $7,000 non-deductible contribution.
  • A $0 IRA balance at year-end.
  • That the entire $7,000 conversion is non-taxable.

Because the distribution is fully offset by her non-deductible contribution, Emily owes no tax on the conversion for 2025.

She can repeat this strategy in future years, as long as she:

• Has earned income, and
• The IRS continues to allow Backdoor Roth contributions.

When Would Emily Owe Tax on the Conversion?

Emily would face taxation if any of the following were true:

• She incorrectly reported her 2025 Traditional IRA contribution as deductible.
• She delayed the conversion, and she earned some interest on $7,000 before the transfer.
• She had money in any IRA account at the end of 2025, triggering the pro-rata rule.

Who It’s For and Who It’s Not For

Now that we’ve covered what a Backdoor Roth strategy is and how it works, let’s shift to understanding who this strategy is best suited for…and who it may not benefit.

Who It’s Best For:

A Backdoor Roth contribution can be an effective strategy for individuals who:

• Earn too much to contribute directly to a Roth IRA but still want to build tax-free retirement savings.
• Are already maximizing contributions to their employer-sponsored retirement plans (e.g., 401(k), 403(b)) and are looking for additional ways to save for retirement.
• Have no existing IRA balances, meaning their retirement funds are primarily held in employer-sponsored accounts, avoiding complications with the IRS pro-rata rule.
• Understand the process well enough to either implement it themselves or work with a financial professional to ensure it’s done correctly.
• Can handle both the technical side of the transfer and the correct tax reporting, including Form 8606.

Who It’s Not For:

On the other hand, a Backdoor Roth strategy is likely not a good fit for individuals who:

• Qualify for direct Roth IRA contributions based on their income (no need for the workaround).
• Haven’t maxed out their employer-sponsored retirement plan contributions, which often have higher limits and may offer a better first step.
• Have existing IRA balances (Traditional, SEP, SIMPLE, or Rollover IRAs) that can’t be easily rolled over or emptied, triggering the pro-rata rule and potential taxes.
• Lack confidence or understanding of how the strategy works and aren’t comfortable with executing or documenting it properly.

Conclusion

The Backdoor Roth contribution can be a powerful strategy for adding more Roth dollars to your retirement nest egg. For those considering it, it’s important to do your due diligence—understand how the process works, how to execute it properly, and how to report it accurately on your tax return. A lack of understanding can result in unintended taxation.

One of the most common pitfalls is overlooking existing IRA balances, which can trigger the pro-rata rule and lead to unexpected tax consequences. Make sure to account for all IRA assets before proceeding.

At Anchor Bay, we guide and support our clients in implementing Backdoor Roth strategies when appropriate. Having Roth money in retirement is incredibly valuable, especially given the uncertainty surrounding future tax rates.