Backdoor Roth IRA Explained: How High Earners Avoid Income Limits

In today’s episode, you’ll learn more about:

• 2026 Roth IRA income limits and contribution limits
• How the Backdoor Roth IRA works step-by-step
• How to make a non-deductible IRA contribution and convert it to Roth
• The pro-rata rule and how it can trigger unexpected taxes
• How to handle existing Traditional, SEP, or SIMPLE IRA balances
• When a spousal Backdoor Roth makes sense

Listen Now:

The Smart Take:

Go Inside the Episode: 

0:00 – Intro

2:44 – Why It’s Used

6:42 – The Benefits

9:00 – Step-by-step implementation

10:46 – The Biggest Trap

14:09 – Tax Reporting Caveats

14:55 – The Mega Backdoor Roth explained

 

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

The IRS says you can’t contribute to a Roth IRA if your income is too high, but they left the door open to do it anyway. That’s where the backdoor Roth comes in, and it’s a strategy a lot of high income earners are using, often without fully understanding the full tax implications though. So today we’re going to go through how it works step by step, and more importantly, how to avoid the mistake that can turn into a taxable event.

Walter Storholt:

Hey, it’s another edition of Retire Smarter. Walter Storholt here alongside Tyler Emrick, certified financial planner. You know the drill, chartered financial analyst, and of course a wealth advisor at True Wealth Design, based out of Northeast Ohio, but serving clients all across the country and helping us learn a little bit more about the financial world and how to retire a little bit smarter each and every week here on the YouTube channel and on the podcast. Thanks for joining us again this week. And Tyler, good to talk to you. Looking forward to today’s conversation, because the old Roth IRA-

Tyler Emrick:

Roth accounts are fun. Come on. Yeah, Roths are great. Nothing wrong with a good old Roth IRA. And not as good as an HSA, but hey, Roths are good.

Walter Storholt:

And in the hierarchy, it’s up there.

Tyler Emrick:

Definitely important. Well, and I think it’s definitely something that… It’s a conversation I have quite a bit, right?

Walter Storholt:

Yeah.

Tyler Emrick:

I think there’s a lot of misconceptions on, can I contribute to a Roth? Can I not? So today we kind of want to just break it down a little bit on, “Hey, what are your options? What do you need to be aware of? And what are some of the key sticking points that can trip you up if you are trying to implement a contribution strategy to your Roth accounts?” Specifically, we’re going to focus probably on the IRA the most, but we do got a little tidbit at the end where we’ll talk about the mega backdoor Roth IRA, which is more applicable to 401(k)s towards the end of-

Walter Storholt:

I’ve got to say, that one just sounds made up, but…

Tyler Emrick:

Mega backdoor, right?

Walter Storholt:

Mega backdoor Roth.

Tyler Emrick:

Yes. So on a couple episodes before we talked about net unrealized appreciation and I got excited about how I learned about the net unrealized appreciation. It was this big thing in my career like, “Oh, wow, this is crazy. You can do this?” Well, the mega backdoor Roth was maybe second on that list of an aha moment like, “I can’t wait to talk to people about this. Did you know this was possible? Did you not?” So yeah, we’ll definitely get to that, for sure. But the first is these Roth IRA accounts and can you contribute or not? And what is this whole idea of a backdoor Roth, right? And how do we want to use it? Because certainly, sounds a little sketchy, but completely legal, right?

Walter Storholt:

Yeah.

Tyler Emrick:

Well, I mean this is something that’s utilized by a lot of families that we work with, for sure.

Walter Storholt:

I mean, my question is, why do we even have to jump through these hoops if you’re going to make it essentially legal to do anyway, but make me jump through 45 other hoops to do it?

Tyler Emrick:

You’ve got it.

Walter Storholt:

I mean, I guess that’s the purpose, is it’s like, “We don’t really want to take away this benefit, but we kind of don’t want to make it as easy on you, so…”

Tyler Emrick:

It could be one of those ideas like, “Hey, our tax code is pretty complex.” Maybe this is one of those sneaky ways to where, was it intended? Was it not? Hey, this is the way it’s getting done and worked in practice. Do we go back and change it now that so many families and individuals are utilizing it and being aware of it? But yeah, it has everything to do with the whole income limits and phase out for, “Hey, can you contribute to a Roth IRA or not?”

And this is very important, Walt. We’re talking about Roth IRAs here, not Roth 401(k)s. There are no income limits to save Roth money inside of your 401(k), but there are income limits to be able to even put money in a Roth, right? So for 2026, generally speaking, if you file jointly with a spouse, once your income hits above around 240, 242, 242,000, basically what you start to phase out of being able to contribute to a Roth account. And eventually, as your income increases above that, you won’t even be able to contribute directly to a Roth IRA. For our single listeners, it’s about 153,000 is where that starts for this year. So we’re certainly talking about high income earners, right?

Now, the opening, I guess, here for the backdoor Roth actually has everything to do with not a Roth, but a traditional IRA, okay? So we talked about the Roth and the income limits there, and hey, if you make too much, you can’t even contribute. That same rule is not really applicable to a traditional IRA. So the IRS really doesn’t care how much money you make, they’ll still allow you to put money into a traditional IRA. Now, this is separate from a Roth, right? But a traditional IRA, we would normally think of them as, “Well, I put money in, I get a tax deduction for it, and then I pay taxes on it when I pull it out.” But the IRS says, “If you make too much money, we’ll let you put the money in the traditional IRA, but we won’t allow you to take the tax deduction for that contribution.” So you have-

Walter Storholt:

Which kind of defeats the point a little bit.

Tyler Emrick:

It might. Yeah, absolutely, right? Because you’re putting it in this IRA, you’re not getting a tax deduction for it. You have complicated your tax return a little bit, because now you have after-tax money inside of that IRA account and you have to keep track of that, because if you don’t and you go and pull money out of the IRA down the road, the IRS will be like, “Hey, you owe us taxes on it.” So you’ve got to kind of record keep that.

But this is where the beauty of the backdoor comes into play. So the IRS will allow you to put money in that traditional IRA, not take a tax deduction for it, but then you can convert it to a Roth. And that terminology is very important, convert, right? That is not a contribution, right? A contribution is you take money out of your checking accounts, savings accounts and contribute it to a Roth. Those have income limits. A conversion is when you take money out of an IRA account, so it’s a retirement account, and you move it to a Roth. So it’s already in some type of retirement account and you move it over to a Roth.

Now, since you did not get a tax deduction for that contribution to the IRA, when you do that action of converting it to the Roth, there’s no taxes due, because it is already after-tax money and you did not get a tax deduction for it. So that’s the framework of it, right? That’s the thought process of this whole backdoor concept of, is getting money into a Roth, but going through a traditional IRA first. Make sense?

Walter Storholt:

Yeah, I’m tracking.

Tyler Emrick:

You follow? Perfect. Perfect. So why would you want to do this, right? Well, that Roth account has some tremendous advantages. There’s no required minimum distributions from a Roth account once you hit your mid 70s. All the growth that you earn in that Roth account grows tax-free and you can pull it out. So that adds for income diversification. When you think about retirement, having a pot of money you can pull from that’s not taxable is extremely, extremely advantageous. If you’re a younger listener and you’re in your 30s, 40s, 50s, you have a lot more time to let that money grow. That growth in that Roth IRA account can compound. So it’s just a tremendous benefit to have money in a Roth.

The IRS puts all these hoops that you’ve got to kind of be mindful of and potentially jump through to get money in there. But if you do it in the correct way, the correct path, like a backdoor Roth, for example, contribution, then it could be a wonderful way for you to start positioning money in these Roth accounts. That’ll be tremendously impactful for you as you think about down the road into retirement.

Walter Storholt:

I imagine this would be specifically intriguing for someone who maybe doesn’t have a Roth 401(k) option, for example. Whereas if you have that option or access to some other Roth plan through work, maybe you feel the need to do this a little less perhaps, although it’s still available to you, but then this would be really motivating for someone who really has no access to Roth money in any other way, shape, or form, perhaps.

Tyler Emrick:

Correct. Correct. And we’ve got to remember, if you’re dealing with this, you’re a high income earner, so you might already be maxing out your 401(k) account and putting in the cap. So this might be the next place or the next funnel to potentially do it. Or if you’ve built up some assets in a brokerage account that’s outside of retirement and you’ve gotten that up to a level to where you feel comfortable and you’re like, “Well, hey, should I start appropriating this money elsewhere? How can I get it in a Roth?” This might be a way to do it, because of course the retirement plans through your employer, you’ve got to do it through payroll to get money into those 401(k)s. You can’t just write them a check to get it in there, unless you’re a small business owner or you have your own 401, solo 401(k) or something like that. But theoretically speaking, it’s almost impossible to be able to do it. So these would be use cases where, hey, you might be thinking about that.

And it does get, as you think about it, I guess, and you’re listening, “Okay, this might be an opportunity for me.” Well, how does that work kind of step by step? Well, the first thing is you need to have an IRA opened up somewhere, a traditional IRA. And generally I’d say, “Hey, wherever you have that traditional IRA opened up, go ahead and open up your Roth there too.” Because you’re going to essentially be contributing money to that traditional IRA and you really want to almost immediately convert it over to the Roth. You don’t want it to be in that traditional IRA earning interest or growing, because, hey, that growth would then be taxable when you move it over into the Roth and convert it.

Walter Storholt:

It’s not even a year like, “Just make sure you take it out this year.” You’re saying do it pretty fast.

Tyler Emrick:

Yeah, absolutely. I mean, you could do all this within a few business days at most custodians, depending on how you contribute to the traditional IRA. But it’s a very easy process. And that’s why generally as you think about, “Well, hey, where do I want my accounts to be?” Having them at the same custodian, it makes things so much easier, because you can just quickly shift from the traditional IRA to the Roth. Normally it’s a click of a button online and it’s done. And then you minimize that growth that would potentially be taxable when you complete the conversion, right? And you can do this for you, your spouse, right? I mean, the contribution limits to an IRA if you’re married would be for each of you, right? So I think this year, 7,500 is the contribution limit, 8,600 if you’re over 50 per individual. So if you’re married filing jointly, potentially both spouses can do that.

But there is a little bit of a caveat that we need to be mindful of that can really trip you up. And this is this, what they call pro rata or aggregation rule that we need to really be mindful of. So if you’re an individual where you have no IRA accounts at all out there, you just have a 401(k), that’s it, okay, you’re in good shape. Backdoor Roth is going to be available to you. But if you have an IRA account that has pre-tax money in it already, I mean, well, you can get an IRA in so many different ways. Maybe you left your employer and rolled over your old 401(k) to an IRA.

Walter Storholt:

I got one.

Tyler Emrick:

Yep, yep. Or contributed maybe like, hey, maybe you haven’t always had high income and you were making contributions to a traditional IRA and actually being able to deduct them and you’ve built up a pot of money in an IRA account. What happens is the IRS, when you do that second step of the backdoor Roth where you actually convert it from the traditional area to the Roth, what they’re going to do is, they’re going to look at all your IRA accounts that are out there and they’re going to add that up and think of it as one balance. So even though you made a contribution to your traditional IRA this year of, say $7,500, if you’ve got 50,000 in an IRA, they’re going to look at that total $57,500. And when you do the conversion, they’re going to say it’s converted proportionate, some pre-tax, some after-tax money.

So it makes it very difficult to do this strategy if you have traditional IRA accounts out there, because what you’re doing is, when you do that conversion, you’re going to pay taxes on more and more of that money because it’s proportionately from the part that you haven’t paid taxes on and that new contribution of non-deductible money that’s in there. So as we think about that, that’s a big caveat. Now, so it’s very simple. If you have-

Walter Storholt:

You’re saying that’s based on the balance, not the…

Tyler Emrick:

The balance.

Walter Storholt:

It’s a dead traditional IRA, I’m no longer contributing to it?

Tyler Emrick:

But if you have a balance in it, they’re going to look at that balance and that contribution that you made, the non-deductible one we talked about, and they’re going to look at it in aggregate and say, “Well, what proportion of the second step, the conversion is taxable, and what portion is coming from the contribution you just made?” And it’s all pro rata based off of the total balance inside the account.

The benefit of the backdoor Roth is you immediately contribute it, convert it, and no taxes due, because it’s all there. But if you’ve got a big pre-tax balance in an IRA, that’s going to make it less and less advantageous because you’re going to have a taxable event of some portion of that conversion when you move it over. So we need to really, really be mindful of that. And that might make it to where you don’t have that as an option.

Now, there’s a whole host of ways to get money out of an IRA, right? If you’re self-employed, maybe you move it into a solo 401(k), potentially maybe you move some of it into your 401(k) account, and then that would open the door for you to potentially be able to do these backdoor Roth contributions, because then you would have no IRA money and you’d be starting from scratch and kind of going from there.

Walter Storholt:

So the best way to operate this is to kind of just have this traditional IRA that you’re constantly emptying out, like a zero balance, you add a little bit, boom, take it right back out.

Tyler Emrick:

Take it back back out.

Walter Storholt:

You never want that number to grow.

Tyler Emrick:

You got it. Absolutely. And there’s some tax reporting caveats here too, right? I mean-

Walter Storholt:

Sounds like a few. A couple.

Tyler Emrick:

Yeah, you’ve got to file a form 8606 to kind of track that after-tax basis inside your IRA. So make sure you’re filing all the appropriate forms and conversions and all that good stuff depending on how the timing works of your conversion. But to keep things in its most simple form, hey, if you don’t have any IRA money, you make the IRA contribution, immediately convert it over. That kind of makes it as clean as you possibly can do it as you’re thinking about it. But backdoor Roths-

Walter Storholt:

Lots of double taxation, so let’s do it right.

Tyler Emrick:

Yeah. And the goal is to get as much money in your Roth account as possible, because they get that tax-free growth. So the earlier you can do this, the better and the more bigger pot that you can kind of go in here too.

Walter Storholt:

Are you ready for it?

Tyler Emrick:

Ready for the mega backdoor, right?

Walter Storholt:

Ladies and gentlemen, it’s time for the mega backdoor Roth IRA solution.

Tyler Emrick:

Yes.

Walter Storholt:

You’ve got to really emphasize this one.

Tyler Emrick:

You do. You do. And what this does is, remember, now we’re shifting from IRAs. Now we’re not talking about IRA accounts anymore. Now we’re really specifically talking about your employer-provided retirement plan, 401(k), 403(b) account, things like that, right? And if you have a contribution option, most individuals have a contribution option of, “Hey, I want to contribute pre-tax or I want to contribute Roth.” You make that election and that’s how when they pull it off your paycheck, it goes into your 401(k), right?

Some 401(k) plans and 403(b) plans have a third option, Walt, it’s called an after-tax contribution. So generally speaking, once you’ve maxed out contributing, because there’s limits to how much you can put in pre-tax or Roth into your 401(k) or 403(b), once you’ve hit that and you’re looking for other places to put money, well, you want to find out if your employer offers an after-tax contribution to your 401(k), which would be on top of your pre-tax or Roth contributions.

These after-tax contributions are tremendously advantageous. What they allow you to do is put more money into your retirement account. You don’t get a tax deduction for it after-tax, right? So it’s not like you’re going to deduct it on your taxes. It’s not going to be pulled off off your W2. But what it does allow you to do then is when you contribute after-tax money to your 401(k), just like in the backdoor Roth, you can immediately convert it to a Roth and now it will grow tax-free forever and it gets added to the Roth portion of your 401(k) account. So this really expands the amount of money that you can put into your 401(k), thus the mega backdoor Roth option.

Early in my career, not every plan, 401(k) or 403(b) offered it, Walt. It was actually kind of rare. Over the years, in the last 15 years, this has become a very commonplace inside of your employer plans. It’s most likely that your employer is going to offer this as an option. And if you are maxing out how much you’re putting in pre-tax or Roth, this mega backdoor Roth starting after-tax contributions on top to that 401(k) could be tremendously advantageous and another way for you to get bigger dollar amounts into that Roth account.

Speaker 3:

What would your life look like if you designed it around your true wealth? It’s a powerful question, and one that True Wealth Design helps individuals, families, and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments, and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.

Walter Storholt:

Good to know about the differences between the two.

Tyler Emrick:

You got it.

Walter Storholt:

One last question on that mega backdoor. Is it the same kind of thing where you’re wanting to convert those extra contributions very quickly out of their same routine on the [inaudible 00:17:59]?

Tyler Emrick:

Same concept, right? Because those after-tax contributions, if they earn interest or growth, that growth is pre-tax, meaning that it’ll be taxable to you when you pull it out or when you complete the conversion. So a lot of employer plans now will actually allow you to set it up to where, “Hey, if you get paid every two weeks, we’ll automatically complete that conversion for you inside of your plan automatically.” So whatever contribution goes in after-tax immediately goes over and you don’t even have to deal with it.

For those plans that don’t have that set up, most of the time what we’ll do is, once a year or twice a year with our families, we’ll make a call to the 401(k) provider, let the after-tax money kind of build up in the account and then do the conversion to the Roth piece inside the 401(k), because this all happens inside of that 401(k) wrapper, Walt. We’ll let that conversion, we’ll do it, give them a call, they’ll do it over the phone and complete the conversion. Any growth will just stay in the pre-tax portion and be taxable when you pull it out, but you’re normally able to get a pretty big chunk over into Roth and start building that big pot of money. I mean, the crux of this whole thing is trying to get more money into Roth where it grows tax-free and you don’t have to pay taxes on it.

Walter Storholt:

Okay. Excellent. I may have missed this, Tyler, so I just want to clarify one more thing. In that mega backdoor Roth, that conversion, is that coming out to a Roth IRA, but you’re saying it stays in the 401(k) or 3(b) wrapper?

Tyler Emrick:

Inside the 401(k) wrapper. You got it.

Walter Storholt:

Okay.

Tyler Emrick:

Yeah. So this is how you can have, just as a lot of families, you’re contributing maybe Roth money to your 401(k) right out of your payroll, but the employer match that you’re getting stays pre-tax. So you’re already kind of naturally, for some families, building two pots of money in that one 401(k). The after-tax just adds a third pot that eventually you want to get into that Roth pot inside of the same account. And the 401(k) tracks all of it for you. Now, you log online, they’re going to delineate, what’s pre-tax? What’s Roth? What’s after-tax? And kind of break it down for you. So it feels like-

Walter Storholt:

[inaudible 00:20:02] because you’re not having to now have another outside account. So that’s kind of nice. Even though it’s a slightly more complex way of doing it, I kind of like that benefit.

Tyler Emrick:

You got it. Absolutely. And just like when you retire, you’ll have the same options, right? “Hey, do you want to leave it in that 401(k)? Do you want to roll it over to an IRA or a Roth?” And then if you decide to move it out, your pre-tax money gets moved over to an IRA, traditional, no taxes due on that transfer. And then, of course, your Roth portion would then go to your Roth IRA and then grow and be growth for there. So that’s where the money would potentially be separated out into two accounts if you decided to move your money out of the 401(k) or 403(b).

Walter Storholt:

You don’t have to worry about it while you’re working necessarily.

Tyler Emrick:

You got it. No, absolutely.

Walter Storholt:

It’s nice.

Tyler Emrick:

Good stuff.

Walter Storholt:

Moral of the story sounds like don’t mess it up though. That’s the big thing, is to do this the right way.

Tyler Emrick:

Watch out for that aggregation rule if you’re doing the backdoor Roth in your IRA. And hey, if you’re a good saver, you’re putting up a ton of money back, check to see if your 401(k) provider or 403(b) provider allows that after-tax contribution for mega backdoor.

Walter Storholt:

Pretty cool. If you want to see if this is a good fit for you to do one of these types of strategies, you can cover this in a review with the True Wealth Design team. It’s very easy to set that up. You can have a discovery call, see if you’re a good fit to work with one another, click the, are we right for you? Or the let’s talk button when you go to truewealthdesign.com. And then you can also find that link in the description of today’s show to make it really easy. Schedule your time to meet. You don’t have to be in Northeast Ohio where the main offices are. True Wealth Design works with clients from all across the country. All the time we’re hearing from folks from the podcast and the YouTube channel reaching out from other states and other areas. So don’t hesitate to do that if that’s you.

And they’re happy to work with you remotely and walk you through that conversation and see if you’re a good fit to go even deeper into the planning process from there. So, easy to set that up. Again, click the link in the description of today’s show or go to truewealthdesign.com. Tyler, thanks for the help on this one, intriguing, and look forward to the next talk.

Tyler Emrick:

Absolutely. We’ll see you then.

Walter Storholt:

We’ll see everybody again next time right back here on Retire Smarter. Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.