Everything You Must Know About "Backdoor" Roth IRAs

If you earn too much to contribute directly to a Roth IRA, there are still ways to move funds to this type of an account.

Concept art showing the backdoor to a house.
(Image credit: Getty Images)

Want to put money into a Roth IRA but earn too much? Use the “backdoor” Roth IRA strategy.

Unlike traditional IRAs, the Roth version has an income threshold. The ability to make a direct contribution to a Roth IRA phases out for single filers with an adjusted gross income between $125,000 and $140,000, for 2021. For joint filers, it phases out between $198,000 and $208,000.

For those with income over those thresholds, you can make nondeductible contributions to a traditional IRA and then later convert the traditional IRA to a Roth IRA. There are no income limits on nondeductible IRAs or conversions to a Roth. Since these contributions are nondeductible and have already been taxed, you can convert the money tax-free.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

However, if you have deductible contributions in a traditional IRA then only a portion of the funds converted to a Roth will be tax-free. You have to calculate the ratio of your nondeductible contributions compared with the total in the traditional IRA. That percentage will be tax free when you convert.

For example, if you have $10,000 total in your traditional IRA with $1,000 in nondeductible contributions and $9,000 in deductible contributions then just 10% will be tax-free. You must pay your ordinary income tax on the remaining amount.

You could also rollover funds from a 401(k) account into a Roth IRA when you leave a job, if your 401(k) plan allows for this type of transfer. You will owe income taxes at your ordinary rate on any funds you put into your 401(k) pretax.

Once you have converted either a 401(k) or a traditional IRA to a Roth, your withdrawals will be tax-free as long as you are at least 59 ½ and have had the Roth for a minimum of five years. You also won’t have to take required minimum distributions once you hit the age of 72.

Senior Retirement Editor, Kiplinger.com

Jackie Stewart is the senior retirement editor for Kiplinger.com and the senior editor for Kiplinger's Retirement Report.