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What is a “Backdoor” Roth IRA Conversion and Should I Should Consider It?

A “Backdoor” Roth IRA conversion, in concept, is not different from a typical Roth IRA conversion. The actual conversion process is the same. The taxpayer is transferring funds from a tax-deferred traditional IRA to a tax-free Roth IRA and pays some income taxes on the amount transferred. The name “backdoor” is just an informal name used by financial planners and investment advisors to distinguish the fact that, when performing a backdoor Roth conversion (as opposed to a typical Roth IRA conversion), not all the funds being converted are taxable funds.

The reason not all the converted funds are taxable is that some people make contributions to their traditional IRA that are not tax-deductible and are, in fact, after-tax contributions. Why would anyone make a contribution to a traditional IRA that is not tax-deductible? If someone has access to an employer sponsored retirement plan and their annual income is over a certain threshold, they are not eligible to make tax-deductible IRA contributions. Table 1 below lists the income limits for traditional IRA tax deductible contributions for 2025 for people with access to employer sponsored retirement plans.

TABLE 1: 2025 Income Limits for Tax-Deductible Traditional IRA Contributions

The next logical question is, since the contributions are not tax-deductible, why don’t these people make a Roth IRA contribution instead? If a tax filer’s income is not much higher than the limits shown in Table 1, they likely would make a Roth IRA contribution. But there are income limits to making Roth IRA contributions. Table 2 below list the income limits to be eligible to make Roth IRA contributions for tax year 2025. 

TABLE 2: 2025 Income Limits for Roth IRA Contributions

NOTE: People who are age 50 or older in 2025 can contribute an additional $1,000 “catch-up” contribution totaling $8,000 annually, subject to the income limitations in Table 2.

Presumably, before considering a backdoor Roth conversion, the tax filer has made the maximum contributions to their employer retirement plan. Also, presumably, the tax filer’s employer plan does not offer a Roth 401(k) option as these employer-sponsored Roth plans do not have an income limit for contributions. Assuming these two presumptions are true and the tax filer still wants to save more money for retirement; they can still do so by making non-deductible contributions to their traditional IRA. While Roth IRAs have an income limit to make contributions, traditional IRAs do not. Traditional IRAs only have an income limit for making tax-deductible contributions. And this distinction is why “Backdoor” Roth IRA conversions exist. In essence, the backdoor Roth IRA conversion is a way for higher income taxpayers to get around the Roth IRA contribution income limitations.

Why Would Someone Do a Backdoor Roth IRA Conversion?

From Table 2, it is clear the Roth IRA contribution limitation only affects relatively high-income taxpayers. These taxpayers are in a higher tax bracket and will very likely be in a higher tax bracket in retirement as well. Therefore, someone would do a backdoor Roth conversion if they want to get some retirement funds into a tax-free account. The reason they want to do this is, generally in retirement, it is best to have funds in all three type tax accounts; regular taxable accounts, tax-deferred accounts (traditional IRAs, employer 401(k) plans, and the like), and tax-free accounts (i.e., Roth-type accounts). This allows someone to better manage their tax liability in retirement. Without doing backdoor Roth IRA conversions, there is no way for these higher income taxpayers to accumulate any retirement funds that are 100% tax free.

However, the decision of whether, how much, and when to do a backdoor Roth conversion should be determined after a discussion and tax analysis with one’s financial advisor as there are many things to consider.

How Does a “Backdoor” Roth IRA Conversion Work?

Even though the backdoor conversion process is the same as any other Roth conversion, the fact that some of the traditional IRA contributions are after-tax funds makes this type conversion more complicated. The taxpayer cannot just “declare” that he is converting only the traditional IRA funds that have already been taxed. There are a couple IRS rules that any IRA conversion must follow; the IRA “Aggregation” and “Prorata” rules.

The IRS aggregation rule requires that, when performing any Roth IRA conversion, the taxpayer’s funds from all their tax-deferred IRAs (including SEPs and Simple IRAs) must be added together (the aggregation rule). After aggregation, the taxable amount is calculated based on the ratio of total value of tax-deductible contributions and earnings from all IRAs to the total value of all these IRAs (the prorata rule). These IRS rules have no impact on conversions if 100% of the traditional IRA contributions over time have been tax-deductible contributions. In this more common case, 100% of any converted funds will be taxable at the taxpayer’s current marginal rate, so no prorata calculation is required. However, if the taxpayer has both deductible and non-deductible IRA contributions, determining the amount of the conversion that is subject to taxation requires the prorata calculation.

The prorata calculation is best explained with an example. Table 3 below shows the taxpayer, Tom’s, total traditional IRA balance broken down by tax-deductible contributions and non-tax-deductible contributions along with their associated earnings.

Table 3: Tom’s Total IRA Balance by tax Status

NOTE: The earnings for non-tax-deductible contributions are taxable funds when withdrawn.

For Tom’s first five working years, his income was low enough that he could deduct his IRA contributions. These deductible contributions total $24,000. But Tom’s income increased every year and, for the last decade, Tom’s income exceeded the limits allowing tax-deductible IRA contributions. During this ten-year period, Tom’s income also exceeded the limits for making Roth IRA contributions. So, over the last decade, Tom has made $60,000 in non-tax-deductible contributions to his traditional IRA. At this time, Tom has no funds in a Roth IRA.

After meeting with his financial advisor, Tom was advised to start thinking about getting some money into a Roth IRA so he would have better tax diversification when he retired. Since Tom does not have a Roth (401)k option to contribute to at work, his financial advisor suggested he  consider doing a “backdoor” Roth IRA conversion. After meeting with his CPA, it was decided that, in 2025, Tom should convert about $40,000 to a Roth IRA. This $40,000 amount is less than his total non-deductible IRA contributions over the last decade. As stated earlier, even though Tom is converting an amount less than his non-deductible IRA contributions, he still must pay some tax on this conversion amount because of the IRS prorata rule.

In Tom’s situation from Table 3 above, if he decided to convert $40,000, his taxable amount would be 48.3% of this amount or $19,320. This is because Tom’s IRA tax-deductible contributions and earnings total $56,000. $56,000 is 48.3%% of $116,000, the total value of his IRA. Because of the prorata rule, it would not have mattered how much Tom decided to convert, the taxable amount would still 48.3% of the total converted amount as this ratio would apply to any conversion. (NOTE: For the purposes of determining the taxable amount, the IRS uses the total value of the IRA on 31 December of the year of the conversion.)

In this example, Tom had only one traditional IRA. If Tom had a second traditional IRA, both IRAs would have been combined or “aggregated” and the ratio of the combined account’s taxable amount to the total value of both IRAs would be the percentage of the converted amount that would be taxable.

Important Note: There are no income or age limitations to do a Roth IRA conversion; nor are there any annual or lifetime limitations to the dollar amount converted.

Is There a Way to Reduce the Taxes on a Backdoor Roth IRA Conversion

While there is no way to avoid the IRS’s prorata or aggregation rules when doing a Roth conversion, there are a few strategies that might be available to some taxpayers to minimize taxes.

1. The first logical strategy is to do a backdoor Roth IRA conversion (or any Roth conversion) in a year that your income is much lower than usual.
2. Another strategy that may be available to some people, is to “Roll over” your traditional IRA funds into your employer’s 401(k) plan, if the plan allows it. The reason this move helps minimize taxation is because the IRS prorata and aggregation rules only apply to IRAs. They do not apply to any funds in employer retirement plans. If your employer allows you to transfer funds from your IRA to your 401(k), this would reduce the amount of pre-tax funds in your traditional IRA and thus lower the taxable portion of any future backdoor Roth conversion.
3. Whether or not strategy number 2 above is available to you, when you decide to make your first non-deductible IRA contribution, consider doing the backdoor Roth conversion as soon as possible after the non-deductible contribution is made. Waiting to do the Backdoor Roth conversion for several years after making a non-deductible contribution just allows the contribution (as well as the whole account) to accumulate more earnings which increases the ratio of the taxable amount for any conversion. In fact, if someone believes their future income will be such that they will be making non-deductible contributions every year, this person should consider doing a backdoor Roth conversion every year to avoid the earnings build up.
4. Finally, when considering a backdoor Roth conversion, if your current traditional IRA already has a significant amount of pre-tax contributions and accumulated earnings (and strategy number 2 is not available), it would make more sense to do the backdoor Roth conversions over several years to be sure the conversion does not bump you up to a higher tax bracket. This is one reason why it is best to discuss any conversions in advance with your financial advisor. In some cases, it may be better to wait to do any Roth conversions until you have retired and are likely in a lower tax bracket.

Are There Any Drawbacks to Backdoor Roth IRA Conversions

In my opinion, the only drawback to doing a backdoor Roth IRA conversion is the increased administrative tax burden. Actually, it is not the backdoor Roth conversion itself that creates the administrative burden, it is the decision to start making non-deductible contributions to your traditional IRA.

Once you make a non-deductible contribution to a traditional IRA, you will have to begin tracking this amount throughout the life of your traditional IRA. If you make many years of non-deductible IRA contributions, you will need to keep track of all these contributions (filing an IRS form 8606 each year). When you finally retire and you want to make withdrawals from your traditional IRA, the same IRS prorata and aggregation rules will apply to determine the taxable amount every year just the same as was required for performing a backdoor Roth IRA conversion. Of course those using a CPA to prepare their taxes, the CPA would likely keep track of this data.

Still, to keep tax records simple, if I were to start making non-deductible IRA contributions, I would try to make sure that, certainly by retirement, I had converted my entire traditional IRA balance to my Roth IRA. That way, in retirement, not only would my entire IRA funds be tax-free with no Required Minimum Distributions (RMDs), there would also be no traditional IRA requiring the calculation of how much of each distribution is taxable

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