Maximizing Retirement Savings with a Backdoor Roth IRA Contribution: A Step-by-Step Guide

Does tax-free growth for your retirement nest egg sound good to you? Perhaps your employer doesn’t offer a Roth retirement option, or your income exceeds the limits for direct Roth IRA contributions? If so, the backdoor Roth IRA strategy could be what you have been looking for! A Roth IRA is a retirement account where contributions are made with after-tax dollars, offering tax-free growth and tax-free withdrawals in retirement. Considering the current government spending and budget deficit, it is reasonable to assume that tax rates in the future may be higher than they are today. Therefore, contributing to a Roth IRA and diversifying the tax status of your portfolios and reducing your tax burden in retirement is a wise decision. However, income limits prevent many high earners from contributing directly to a Roth IRA. Enter the backdoor Roth IRA contribution, a powerful strategy allowing high-income earners to enjoy the tax advantages of a Roth IRA, even if their income exceeds the contribution limits. This comprehensive guide will walk you through the process, highlighting the benefits and potential considerations.

Benefits of a Roth IRA Account:

  • Tax-Free Growth: Contributions are made with after-tax dollars, but withdrawals in retirement, including any earnings, are tax-free.
  • No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs don’t have RMDs. This means you can leave the money in the account to potentially grow tax-free for as long as you like, offering flexibility in retirement planning.
  • Flexibility: In addition to no RMDs, Roth IRAs offer more flexibility with withdrawals. Contributions (but not earnings) can be withdrawn at any time without penalty, making them a potential source of emergency funds if needed.
  • Estate Planning: Since there are no RMDs for the original account owner, the account can continue to grow tax-free throughout their lifetime and potentially be passed on to heirs tax-free, providing a tax-efficient inheritance.

Steps to Execute a Backdoor Roth IRA Contribution

  1. Check Your Eligibility: Ensure you meet the eligibility requirements. While there are no income limits for contributing to a traditional IRA, you must have earned income at least equal to your contribution amount.
  2. Open a Traditional IRA: If you don’t already have one, open a traditional IRA with a reputable financial institution.
  3. Make a Non-Deductible Contribution: Contribute after-tax dollars to your traditional IRA. For 2024, the total contribution limit for all IRAs is $7,000 ($8,000 if you’re 50 or older). You will need to make sure to track any nondeductible contributions with IRS Form 8606.
  4. Convert to Roth IRA: Immediately convert the contributed amount from your traditional IRA to your Roth IRA. It’s advisable to consult with a financial advisor to ensure a seamless conversion process.

Important Considerations

  • Pro-Rata Rule: If you have pre-tax funds in other traditional IRAs, the pro-rata rule may apply, potentially triggering taxes on a portion of the conversion. We strongly recommend you consult with a tax professional to understand the implications.

To illustrate the pro-rata rule for an IRA, we have the following example:

Example: Tom has an IRA worth $100,000 with $30,000 from nondeductible contributions and $70,000 from deductible contributions. If Tom wants to implement a Backdoor Roth Strategy and convert $10,000 from his IRA to a Roth IRA, $3,000 of that converted amount is from nondeductible contributions and $7,000 would be from deductible contributions. Tom would then need to pay tax at ordinary income rates on $7,000 of the $10,000 total converted amount.

  • The Five-Year Rule: To avoid taxes and penalties on withdrawals, earnings in your Roth IRA must be held for at least five years, and you must be at least 59 ½ years old.


I know that some of the steps outlined here can be confusing and the thought of receiving a letter from IRS containing a tax bill due to a misstep can be daunting. But don’t let that hold you back, our team at BFSG can help you simplify this process and maximize your retirement savings by accomplishing the backdoor Roth IRA contribution for you. And for the right person, a mega backdoor Roth conversion is the tax equivalent of a free lunch. To learn more about this strategy, check out the article by clicking here. So don’t hesitate to call us if you’d like to learn more about the strategies discussed here and to see if it is right for you!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

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