Having money in a Roth IRA could allow for tax-free withdrawals in retirement. Roth retirement accounts, like a Roth IRA, are funded with post-tax income, meaning you’ve already paid ordinary income taxes on that money. Once in the account, qualified withdrawals in retirement are generally not taxed.
However, the Roth IRA has income limits that may prevent high earners from contributing directly. If your income exceeds certain thresholds, you’re typically not eligible to make direct Roth IRA contributions.
The good news: there’s a potential workaround known as the Backdoor Roth IRA. It’s widely used and relatively simple to execute. Read on to know what a Backdoor Roth IRA is and how it works.

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What Is a Backdoor Roth IRA and How Does It Work?
A Backdoor Roth IRA is not a separate type of retirement account. Instead, it’s a contribution strategy that allows high-income earners to potentially fund a Roth IRA even if their income exceeds the standard contribution limits. It works by first contributing to a Traditional IRA, then converting those funds to a Roth IRA.
With a Roth IRA, your ability to contribute directly depends on your income. If you earn above a certain threshold, you may no longer be eligible to contribute the full amount—or anything at all.
Roth IRA Income Limits for 2025
✅ If your income is $150,000 or less, you can contribute up to the maximum Roth IRA contribution limit of $7,000 ($8,000 if you’re age 50 or older).
✅ If your income is over $150,000 but below $165,000, your contribution limit is reduced (also called a “phase-out”).
❌ If your income is $165,000 or more, you’re not eligible to make direct contributions to a Roth IRA.
This is where the Backdoor Roth IRA strategy comes in. Since the Traditional IRA does not have income limits for contributions, you can contribute to a Traditional IRA and then convert those funds to a Roth IRA. And because Roth IRA income limits apply only to contributions—not to conversions—this approach may allow high-income earners to still build tax-advantaged savings in a Roth IRA.
📌 Learn more about the Roth IRA income limits.
📝 Note: You can also use the Backdoor Roth IRA strategy to fund a self-directed Roth IRA, rather than a standard Roth IRA. A self-directed Roth IRA typically allows for a broader range of investment options, including alternative assets such as real estate, private funds, and certain private companies. Just keep in mind that investing in certain asset types, such as crypto, may be restricted depending on your custodian or platform.
Will I Have to Pay Taxes for a Backdoor Roth IRA?
In many cases, yes—but it depends on how the account was funded. One option is to contribute to a Traditional IRA using non-deductible contributions, meaning the money comes from income you’ve already paid ordinary income taxes on. A non-deductible IRA is still a Traditional IRA, but the contribution isn’t tax-deductible.
Because both a Roth IRA and a non-deductible IRA are funded with after-tax income, converting between the two generally doesn’t result in additional taxes. However, tax implications may arise depending on the source of the funds and the presence of other IRAs.
If Converting From a Traditional IRA Funded With Pre-Tax Contributions
✅ Yes, you’ll likely have to pay taxes. That’s because Traditional IRAs are typically funded with pre-tax income. These are contributions you deduct from your taxable income when you file your taxes.
❌ Roth IRAs, on the other hand, are funded with after-tax dollars. So, when you convert pre-tax funds from a Traditional IRA to a Roth IRA, the amount converted is generally treated as taxable income in the year of the conversion.
✏️ Hypothetical Example: If you convert $5,000 in pre-tax funds from a Traditional IRA, that $5,000 will be added to your taxable income and reported on your tax return.
If Converting From a Non-Deductible IRA
If you’re converting funds from a non-deductible IRA, the conversion is generally not taxable, because the contributions were already made with after-tax dollars.
📝 Important: If you hold other IRA accounts containing both pre-tax and post-tax funds, the IRS applies the pro-rata rule. You’ll pay taxes on the pre-tax portion of the total balance across all Traditional IRAs—not just the one you convert.
As long as the conversion happens soon after the non-deductible contribution—before the account earns any interest or investment gains—the potential tax impact is usually minimal. But if there are earnings in the account before the conversion, those gains would be considered taxable income when converted to the Roth IRA.
The Pro-Rata Rule
When you rollover funds from a Traditional IRA into a Roth IRA, it’s easy to assume that only the amount you choose to convert gets taxed.
But if your IRA contains both pre-tax and post-tax dollars, the IRS requires you to apply the pro-rata rule—a formula that determines how much of the converted amount is taxable.
This rule prevents you from selecting only the post-tax portion (such as non-deductible contributions) for conversion. Instead, the IRS considers the total balance of all your Traditional IRAs, including rollover IRAs, when calculating the taxable and non-taxable portions of a Roth IRA conversion.
What Counts as Post-Tax Funds?
✅ Non-deductible Traditional IRA contributions
✅ Repaid reservist distributions
✅ Rollovers of post-tax dollars from a qualified retirement plan (e.g., 401k, 403b, or 457b)
The Pro-Rata Rule Formula
The pro-rata rule applies to all your Traditional IRAs, including rollover IRAs. It calculates the proportion of taxable versus non-taxable funds in all your Traditional IRAs when you make a conversion to a Roth IRA.
Here’s how the formula works:
Step 1:
[Non-deductible amount] ÷ [Total of all non-Roth IRA balances] = Non-taxable percentage
Step 2:
[Amount to be converted to Roth IRA] x [Non-taxable percentage] = Amount of post-tax funds converted to Roth IRA
✏️ Hypothetical Example: Let’s say your income in 2025 is $210,000, so you’re above the Roth IRA income limit for single filers ($150,000–$165,000 phase-out range). Because you don’t qualify for a direct Roth IRA contribution, you choose to use the Backdoor Roth strategy instead.
Step 1: Make a Non-Deductible IRA Contribution
- You contribute $7,000 to a Traditional IRA using post-tax income.
- Since your income is above the deduction phase-out range for Traditional IRAs ($79,000–$89,000 for single filers with workplace coverage), the contribution is fully non-deductible.
Step 2: Determine Your IRA Balances
- Before the new contribution, your Traditional IRA had a $93,000 pre-tax balance.
- After your $7,000 non-deductible contribution, the total Traditional IRA balance is $100,000.
Step 3: Calculate the Post-Tax Percentage
- $7,000 ÷ $100,000 = 7% post-tax
Step 4: Convert $7,000 to a Roth IRA
- 7% × $7,000 = $490 (non-taxable portion)
- 93% × $7,000 = $6,510 (taxable income on conversion)
Step 5: Review Post-Conversion Balances
Roth IRA receives $7,000
- $490 is post-tax (your basis)
- $6,510 is reported as taxable income
Traditional IRA remaining balance:
- Pre-tax: $93,000 − $6,510 = $86,490
- Post-tax basis: $7,000 − $490 = $6,510
- Total remaining IRA balance: $93,000
How to Avoid the Pro-Rata Rule in a Backdoor Roth IRA Conversion
If you’re eligible for a Solo 401k, one way to avoid the pro-rata rule is to first roll over all of your Traditional IRA funds into your Solo 401k. Once your Traditional IRA has zero balance, any new non-deductible contributions made to it can then be converted to a Roth IRA without triggering pro-rata calculations—since there’s no mix of pre-tax and post-tax funds in the account.
📝 Tip: This approach can help simplify your Backdoor Roth IRA strategy and reduce the potential tax impact of a partial pre-tax conversion.
Roth IRA vs. Roth Solo 401k Rollovers
If you already have a Solo 401k, you also have the option to roll over funds into a Roth Solo 401k rather than a Roth IRA.
Rollovers do not count toward your annual contribution limit, so you can roll over as much as needed from other retirement plans without reducing your ability to make new contributions to your Solo 401k for the year.
Solo 401k vs Roth IRA: Key Differences
Investment Options
✅ A Solo 401k typically allows you to invest in almost any asset type, including real estate and certain private investments.
✅ A Roth IRA is generally limited to traditional investments like stocks, bonds, mutual funds, and ETFs.
Contribution Limits (2025)
✅ Solo 401k: Up to $70,000 (or $77,500 if you’re age 50 or older)
✅ Roth IRA: Up to $7,000 (or $8,000 if you’re age 50 or older)
Income Eligibility
✅ A Solo 401k has no income limits. Business owners or self-employed individuals may contribute as long as they have no full-time employees other than a spouse.
✅ A Roth IRA has income limits that could reduce or eliminate your eligibility to contribute directly.
Loan Access
Some Solo 401k providers allow participants to take out a Solo 401k loan.
✅ If available, you may be able to borrow up to 50 percent of your account balance, up to a maximum of $50,000.
✅ Loans do not require a credit check, and repayment is typically spread over five years.
Rollover Options for a Backdoor Roth IRA
When completing a Backdoor Roth IRA conversion, there are a few ways you can move funds from a Traditional or non-deductible IRA to your Roth IRA. Each method has different implications, so it’s important to understand how they work.
✅ Same trustee transfer: If your Traditional (or non-deductible) IRA and Roth IRA are held at the same financial institution, the easiest option is a same trustee transfer. Your provider can move the funds directly between the accounts with no checks or manual processing required.
✅ Direct rollover: If your IRAs are held at different providers, you can request a direct rollover. In this case, the funds are transferred directly from your Traditional or non-deductible IRA to your Roth IRA—without you ever receiving the money. This method generally avoids complications or penalties and is often preferred when using different custodians.
✅ Indirect rollover (use with precaution): An indirect rollover involves the IRA provider sending the funds to you first. You then have 60 days to deposit the full amount into your Roth IRA. However, this method is not recommended for most people due to the added complexity and risk of penalties:
- The IRA provider typically withholds 10 percent for taxes.
- You’ll need to replace the withheld amount from other funds to complete the full rollover within the 60-day window.
- If the full amount isn’t deposited in time, the IRS may treat it as a distribution, potentially triggering taxes and penalties.
That said, some people use indirect rollovers as a form of short-term, interest-free loan, since you’re temporarily allowed to hold the funds as long as you re-deposit them within 60 days.
📌 Also read: Transfer vs Rollover: Main Differences
How Much Can I Contribute Through a Backdoor Roth IRA?
For 2025, you can contribute up to the IRA contribution limits:
- $7,000
- $8,000 if you’re age 50 or older
📝 Note: Contributions must be within your earned income for the year and may be affected by other IRA activity.
How Do I Set Up a Backdoor Roth IRA?
To implement the Backdoor Roth IRA strategy, you’ll need to have both a Traditional IRA (or a non-deductible IRA) and a Roth IRA. You can typically open both accounts at the same time, though having them set up beforehand may simplify the process.
Here’s how the process works:
- Make a non-deductible contribution to your Traditional IRA:
- Up to $7,000 (or $8,000 if age 50+).
- Convert the contributed amount to your Roth IRA shortly after.
- If the contribution was made to a pre-tax Traditional IRA, you’ll need to pay income taxes on the converted amount.
- Invest the converted funds inside your Roth IRA once the transfer is complete.
📝 Note: Any potential earnings in your Roth IRA may grow tax-free, and qualified withdrawals in retirement are typically not taxed.
When Can I Withdraw From a Roth IRA?
You can withdraw your contributions from a Roth IRA at any time without taxes or penalties. However, to withdraw earnings tax-free, you must:
- Be age 59½ or older, and
- Have had the Roth IRA open for at least five years.
When Can I Withdraw My Backdoor Conversions?
Conversions from a Traditional IRA to a Roth IRA follow a separate five-year rule. This rule applies to each conversion—not the account itself.
- Once five years have passed from the date of the conversion, you can generally withdraw the converted amount without taxes or penalties.
- Withdrawing before the five-year period or before age 59½ could trigger a 10 percent early withdrawal penalty on the converted amount, even if taxes were already paid. This is why the Backdoor Roth IRA is typically more suitable for those who don’t plan to withdraw within the next five years.
No RMD for a Roth IRA
One major benefit of the Roth IRA is that it does not have required minimum distributions (RMDs), allowing your funds to remain invested and potentially grow tax-free for as long as you like. Traditional IRAs, by contrast, require withdrawals starting at age 73. These withdrawals are taxable and must continue annually.
Reporting the Backdoor Roth IRA on Your Taxes
To properly document your Backdoor Roth IRA, the IRS requires you to file Form 8606:
- Part I: Reports non-deductible contributions to Traditional IRAs
- Part II: Reports Roth IRA conversions
You may also receive:
- Form 1099-R: Reports the distribution from your Traditional IRA.
- Form 5498: Confirms contributions to your IRA.
📝 Note: If any earnings accrued in your Traditional IRA before you converted it, those earnings may be considered taxable income at the time of the conversion. Working with a tax professional or using reliable tax software can help ensure accurate reporting and avoid potential penalties.
📌 Want to start your Backdoor Ira conversion? Learn how Carry IRAs work and follow this guide to complete your Backdoor Roth IRA online.
Disclaimer:
The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.
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