High earners are locked out of contributing directly to Roth IRAs once income passes $165,000 for single filers and $246,000 for joint filers in 2025.
Unless you know this workaround called a Backdoor Roth IRA.
How the Backdoor Roth IRA Works
- Make a nondeductible IRA contribution: Contribute to a Traditional IRA without taking the tax deduction. Up to $7,000 in 2025 (or $8,000 if you’re over 50).
- Convert to a Roth IRA: Immediately convert that Traditional IRA into a Roth IRA. If you do this right away, before any growth occurs, you’ll owe zero additional taxes on the conversion.
A Word of Caution: The Pro-Rata Rule
Here is where people often trip up. If you already have other pre-tax IRA balances, the IRS requires you to convert proportionally, or pro-rata.
For example, suppose you have $63,000 in an old rollover IRA and add a $7,000 nondeductible contribution with the intention of doing a backdoor Roth. Your total IRA balance becomes $70,000, but only $7,000 is after-tax, which is 10% of your total IRA balance. When you then convert funds to a Roth IRA, only 10% of the conversion is tax-free, and 90% becomes taxable, regardless of how much you convert. This is why pretax IRA balances can significantly reduce the tax efficiency of the backdoor Roth strategy.
Timing Matters Too
Another key detail: Complete the contribution and conversion within the same tax year. Delays can create complications and potentially increase your tax bill.
The Bottom Line
The Backdoor Roth IRA is one of the most effective ways for high earners to build tax-free retirement income. Done correctly, it provides long-term growth potential, flexibility, and even estate planning advantages.
At JGP Wealth Management, we guide clients through the Backdoor Roth process every year, making sure it’s done correctly and aligned with their overall financial plan. Schedule a call with our team today to explore whether this strategy is right for you.
JGP Wealth Management is a registered investment adviser. This brochure is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by JGP Wealth Management unless a client service agreement is in place.
This commentary reflects the personal opinions, viewpoints and analyses of the JGP Wealth Management employees providing such comments, and should not be regarded as a description of advisory services provided by JGP Wealth Management or performance returns of any JGP Wealth Management client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. JGP Wealth Management manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
