Casual Finance Fridays: Backdoor Roth Strategy
Unlocking Tax-Free Growth for High Income Earners
Written By: Steven Higgins, Financial Advisor, Registered Principal
Happy Friday!
Welcome to the second iteration of Casual Finance Friday! This series is designed to send you into the weekend with some practical and actionable information to help you on your personal financial and wealth journey. Today we’re highlighting the sometimes confusing Back Door ROTH IRA Contribution Strategy. Let’s dive in!
For high-income earners, the ability to contribute directly to a Roth IRA is limited by IRS income thresholds. In 2025, single filers earning more than $165,000 and married couples filing jointly with income over $246,000 are ineligible to make direct Roth IRA contributions. However, a strategy known as the Backdoor Roth IRA provides a legal workaround, allowing individuals to take advantage of tax-free growth and withdrawals in retirement. Keep in mind the deadline for previous years IRA contributions, both tax deductible and after tax is your tax filing deadline, so if you didn’t use this strategy in 2024, it’s not too late. Also remember, if you are married, you can use this strategy for both spouses even if one of the spouses doesn’t have any earned income.
How the Backdoor Roth IRA Works
The Backdoor Roth IRA is a two-step process:
- Make a Non-Deductible Traditional IRA Contribution
- There are no income limits for contributing to a traditional IRA, though high earners won’t receive a tax deduction.
- In 2025, the contribution limits are $7,000 (under age 50) and $8,000 (age 50+).
- Convert the Traditional IRA to a Roth IRA
- After making the contribution, the funds are converted to a Roth IRA. If done quickly, little to no tax may be owed, as the contribution was made with after-tax dollars.
- Any growth on the contribution before conversion is subject to taxes at ordinary income rates.
Key Considerations
- Pro Rata Rule: If you have existing pre-tax funds in a Traditional IRA, the IRS requires that any conversion be done proportionally across all IRA balances. This could result in unexpected tax liability.
- Rollover Strategy: Work with a financial advisor to explore ways eliminate current traditional IRAs. This can be accomplished by using a ROTH conversion or rolling over assets into a different type of retirement account.
- Timing the Conversion: Converting the Traditional IRA to a Roth IRA as soon as possible can help minimize taxable growth.
Who Should Consider a Backdoor Roth IRA?
- Individuals who exceed the Roth IRA income limits but want to benefit from tax-free growth and withdrawals.
- Those who do not have large pre-tax IRA balances (to avoid the Pro Rata Rule complications).
- Investors looking to maximize retirement savings with tax diversification.
The Bottom Line
The Backdoor Roth IRA is a powerful strategy for high-income earners seeking tax-free retirement income. While the process is straightforward, potential tax implications should be carefully managed. Remember, the strategies are technical and errors can have consequences. We strongly recommend people seek help employing these strategies. As a full service, concierge financial planning firm, Higgins & Schmidt Wealth Strategies handles all of these details for our clients. We believe it is our job as advisors to our clients to identify opportunities for and implement strategies with the least amount of complexity and pain as possible. If you feel that Higgins and Schmidt Wealth Strategies might be the appropriate advisory firm for you, I encourage you reach out. Happy Friday!
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Higgins & Schmidt Wealth Strategies, a registered investment advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation does not ensure a profit or protect against a loss. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity.
Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ _may result in a 10% IRS penalty tax in addition to current income tax.
