Backdoor Roth Offers Savings Strategy for High-Income Earners

Most people are familiar with Roth IRAs as a great savings tool that allows for tax free money in retirement.  Many high-income taxpayers will find that they cannot make a direct contribution to a Roth IRA due to income limitations. However, it’s still possible for these high-income earners to create a Roth IRA through an IRA conversion, also known as the “backdoor” method.

In 2024, your MAGI has to be under $146,000 for single filers or under $230,000 for joint filers to make the full Roth IRA contribution of $7,000 (or $8,000 if you’re 50 or older). You have until tax filing deadline to complete these for 2024. The income limits for 2025 are up to $165,000 for single filers and up to $246,000 for married filing jointly.

Once you hit these income limits you can’t contribute to a Roth IRA directly, however you can use the backdoor Roth contribution strategy!

Here’s how it works:

  1. Contribute to a Traditional IRA: Since there are no income limits for contributing to a Traditional IRA, you put money into this account first. Typically, this contribution is non-deductible if your income is high. The maximum contribution limit for traditional and Roth IRAs in 2024 is $7,000 per year for those under 50 years old, and $8,000 for those 50 and older. The total amount contributed to all IRAs in a year cannot exceed taxable compensation for the year.
  2. Convert to a Roth IRA: After the contribution, you convert the funds from the Traditional IRA to a Roth IRA. There’s no income limit for converting, so anyone can do this.
  3. Tax Impact: If the contribution was non-deductible (which is often the case at higher incomes), you won’t owe a lot of tax on the conversion. However, if the money grew or if you have other pre-tax IRAs, you might owe tax on the earnings or a portion of the conversion.

Essentially, it’s a two-step process to sidestep the income limits on Roth IRA contributions.

I recommend speaking to your financial advisor about completing this type of contribution. There are nuances to it that you should be aware of such as having a balance in your IRA of deductible contributions or making sure this is a good strategy for your financial plan. This strategy isn’t for everyone but can be a great way to fund your retirement with more tax-free dollars.

At Copper Leaf Financial we combine comprehensive financial planning with careful, tax-aware strategies to give clients the confidence to map out their financial goals. Our team includes Certified Financial Planner® professionals who understand how taxes impact your decisions about retirement, estate planning, investments and insurance. Contact us today to learn more.

By Breanna Sykes, CFP®, Senior Wealth Advisor, Copper Leaf Financial