Here’s something most people don’t find out until they’re already making decent money: high earners generally can’t deduct traditional IRA contributions if they’re also covered by a retirement plan at work. So you put money in, but you don’t get the tax break. That stings.
But here’s the thing — you can still *make* the contribution. There’s no income limit that stops you from putting money into a traditional IRA. The limit only affects whether you can write it off on your taxes.
So what do you do with a non-deductible traditional IRA contribution? You convert it to a Roth IRA. That’s the backdoor Roth.
Because you already paid taxes on the money you put in (since you couldn’t deduct it), you only owe taxes on any gains the account earned between when you contributed and when you converted. If you do the conversion quickly — like within days — there’s usually little to no gain sitting in there, which means little to no extra tax bill.
The result: money that’s now in a Roth IRA, where it grows tax-free and you won’t owe taxes on withdrawals in retirement. That’s the whole point.
It’s called “backdoor” because you’re going in through the side door instead of the front. Roth IRAs have their own income limits that can shut high earners out of contributing directly. The backdoor method gets around that by using the traditional IRA as a middle step.
One thing to keep in mind: your IRA contributions can’t exceed what you actually earned that year, regardless of strategy. And the IRS does have annual contribution limits that apply across all your IRAs combined — so you can’t just dump unlimited money in.
This isn’t some shady loophole. It’s a legal, well-documented strategy that financial professionals use regularly. But the rules around conversions and taxes can get a little tricky depending on your situation — especially if you have other traditional IRA money sitting around (there’s something called the “pro-rata rule” that can complicate things). That’s where a financial advisor earns their keep.