Potential Long-Term Benefits of Utilizing Backdoor Roth Conversions

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By:  Henry VanBuskirk, CFP®, Wealth Manager

“Who can it be knocking at my door?” It’s the Men at Work and Women at Work in Congress(1) with new retirement legislation, SECURE Act 2.0. While this new legislation has many positive changes, many of those changes come with added complexity to how the Traditional IRA and Roth IRA contribution limits and catch-up contribution amounts are calculated. For example, the $1,000 catch-up contribution amount for persons aged 50 and older will now be indexed for inflation starting in the 2024 tax year. Further, persons aged 60-63 have an even higher catch-up contribution amount, and then persons aged 64 and older revert back to the $1,000 catch-up contribution amount indexed for inflation rule. The exact wording in the SECURE 2.0 Act is in Sections 108-109 and reads as follows:

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Those familiar with the Medicare prescription drug coverage gap usually referred to as the “Medicare Part D donut hole”, know that coverage starts out good, then not so good, and then goes back to being good again. The new catch-up contribution rules in SECURE Act 2.0 for persons aged 50 and older give us a “Reverse Donut Hole”, where catch-up contributions to your Traditional IRA or Roth IRA start off okay, then really good, then go back to being okay. As I’m writing this and thinking through it, a reverse donut hole doesn’t make much sense, so I’m just going to call this catch-up contribution phenomenon created by Congress a donut with no hole. A wise man once said that “…A donut with no hole is a Danish”(2).

Whether you are Danish American, Asian American, African American, or prefer not to specify, chances are you probably want to maximize the potential of your Traditional IRA and/or Roth IRA accounts throughout your lifetime. You also most likely want to also take advantage of the new contribution limits applied by Congress.

The advice that’s generally given is that lower-income earners should contribute to a Roth IRA and higher-income earners should contribute to a Traditional IRA regardless of whether or not that Traditional IRA contribution is deductible or not. However, there is no catch-all solution to this catch-up contribution question for higher-income earners. Our team of CFP® professionals at BFSG can help answer that question for you through a customized financial plan.

If you are a high-income earner that cannot take a deduction on a Traditional IRA contribution and cannot contribute to a Roth IRA (read here for current phaseouts), it may be worth considering a Backdoor Roth IRA strategy. I will illustrate how this strategy works through a case study.

Case Study

Ray Barone (age 40) is a sportswriter for a local Long Island paper making $80,000 per year and is married to Debra Barone (age 40), a homemaker that takes care of their three children. Ray has a Traditional 401(k) at work that he contributes to and does not contribute to any other retirement accounts. Debra does not have any retirement accounts that she contributes to and believes that she is not eligible to contribute to a Traditional IRA or Roth IRA since she doesn’t have any earned income. Ray gets an unexpected call from Sports Illustrated saying that they loved reading his article on the career of retired New York Mets baseball player, Art Shamsky, and offered Ray a job as their Editor in Chief. His salary at Sports Illustrated would be $400,000 per year and full benefits, including a 401(k) plan. Ray almost fell out of his chair when he heard this news since he knew it would mean a significant increase in pay. Ray then asked if he could take time to discuss this job offer with his family and call them back in the morning.

Ray then proceeds to tell Debra, cynical brother Robert, and doting parents Frank and Marie the news and asks what they all think. They have the following conversation:

Debra: “I think this is a great opportunity, go for it, Ray!”

Frank: “Congratulations son, I say take the job.”

Marie: “This is great, Ray! I always knew that one of my sons would be successful!”

Robert: [With a long sigh] “Everybody Loves Raymond.”(3)

Marie: “Robert! Don’t be jealous of Ray’s talent.”

Robert: [Nefariously] “Sorry Ray, I’m happy for you. I really am. Just remember, the higher up the corporate ladder you climb, the further down you have to fall.”

Frank: “Robert, don’t be a jerk to Ray! Maybe I should climb up that corporate ladder and knock some sense into that big head of yours.”

Robert: “Please forgive me, King Ray. I didn’t mean to upset your loyal subjects.”

Ray: “Stop it, everyone! I’ll call Sports Illustrated in the morning and accept their job offer.”

Ray accepts the new job offer but is nervous about making sure his wife and kids have a prosperous future. After Ray starts his new job, Ray and Debra then decide to meet with their advisor, Phil Rosenthal, to have him run a financial plan for them. Ray and Debra’s main goal is to have the greatest possible account value in their retirement accounts so that they can pass on a legacy to their kids. They also know that they need to make sure that Ray continues to contribute to his 401(k) at work.

The Meeting

The first thing Phil recommends is for Ray to maximize his 401(k) contributions at work, which was not a surprise to hear from Ray and Debra. Phil then recommends that Debra start to contribute to a Traditional IRA and make the maximum contribution each year that Ray has earned income. This confuses Debra since she believes that since she has no earned income of her own, she cannot contribute to a Traditional IRA or a Roth IRA. Phil then exclaims, “A non-earning spouse can contribute to a Traditional IRA or Roth IRA as long as the other spouse has earned income.”(4) Debra thinks to herself that this is great since with the extra money that Ray is earning, they will be able to afford to contribute to a Traditional IRA for her and Debra asks Phil to run an analysis of what the account could be at her age 100 assuming that she only takes the Required Minimum Distributions (RMDs) in her account and that because of SECURE Act 2.0, her starting age to take RMDs will be age 75. Ray wants to retire at 65 and Ray and Debra want to see the analysis run until their age 100. Phil then proceeds to run the analysis with the following assumptions:


Here is a summary of the results of that analysis based on the assumptions above:

  • Total RMDs throughout Debra’s lifetime: $1,087,987.46
  • Total Tax on RMDs: $335,644.13

While Phil was running the analysis, Debra reads on the IRS website that they would not be able to take a tax deduction for the contributed amount to her Traditional IRA because Ray makes too much money and also is covered by a 401(k) plan at his work. This leads to the following conversation:

Debra: “Why would anyone contribute to a Traditional IRA now, not be able to deduct the contributed amount, and then pay taxes on their RMDs later in life? I don’t understand the purpose of a nondeductible Traditional IRA.”

Phil: “That’s a great point, Debra. I do recommend contributing to a tax-advantaged account like a Traditional IRA or Roth IRA since the assets in the account will grow tax-deferred. Assets in nonqualified accounts do not grow tax-deferred and taxes could be owed on any dividends, interest, or capital gains earned in the account. The main difference between the Traditional IRA and how you would be able to fund a Roth IRA, you either pay the taxes later in the case of a Traditional IRA or pay taxes now, in the case of a Backdoor Roth IRA strategy. For you and Ray, a Backdoor Roth IRA strategy would be more beneficial to you both in the long run.”

Ray: “What is this Backdoor Roth IRA strategy?”

Phil: “The strategy would be that Debra would contribute to a nondeductible Traditional IRA. She would then immediately convert any amount into a Roth IRA and would repeat this process each year until you retire at 65.”

Ray: “What do you mean by, convert to a Roth IRA?”

Phil: “You establish a Roth IRA and transfer funds from the Traditional IRA. Any funds that are transferred from the Traditional IRA to the Roth IRA are taxable to you as ordinary income. After the funds are in the Roth IRA, they will grow tax-free, and distributions are tax-free as long as the account has been established for 5 years and you are at least age 59.5. A Roth IRA also does not have Required Minimum Distributions.”

Debra: “According to the IRS website, Ray also makes too much money to contribute to a Roth IRA. We can’t do what you are suggesting, Phil.”

Phil: “You are right in that you cannot contribute to a Roth IRA. However, the IRS does allow you to convert existing assets in a Traditional IRA to a Roth IRA. This is referred to as a Backdoor Roth IRA since you have to go through this extra hoop to fund a Roth IRA account because you are above the Roth IRA contribution limit.”

Phil: “What is going on mechanically is you are making after-tax contributions. Instead of receiving a tax deduction for the contribution, your adjusted gross income will stay the same as if you were to never take a tax deduction on the converted amount. You aren’t paying taxes on that nondeductible contribution itself. For example, if a married couple is in the 35% tax bracket with an AGI of $500,000 and decides to make a nondeductible contribution of $5,000 their AGI would still be $5,000. If they could receive a deduction, their AGI could be reduced to $495,000 and their tax bill would be reduced by $1,750. The “tax due from the backdoor Roth” would be this $1,750.”

Debra: “Can you show us the same analysis, but with this Backdoor Roth Strategy?”

Phil: “I’d be happy to.”

Phil then proceeds to run the analysis on the Backdoor Roth Strategy and uses the following assumptions:


The analysis using the assumptions above concluded that the total tax on Roth conversions would be $88,560.43.

Here are a couple of conclusions that we can draw from this analysis:

  1. Since Debra would not be subjected to RMDs in a Roth IRA, she would not need to pay taxes on those distributions. That difference in tax savings over their lifetimes is $247,083.70. This is the difference between the total taxes for the Traditional IRA of $335,644.13 and the total taxes for the Backdoor Roth Strategy of $88,560.43.
  2. If Ray and Debra decide not to do the Backdoor Roth strategy and did not need the funds from the RMD to live on, they could always reinvest those proceeds in a nonqualified investment account. The nonqualified investment account could grow, and taxes could be owed on any dividends, interest, or capital gains earned on that account. If they needed the funds from the RMDs to live on, they would still owe taxes regardless because they are required to take RMDs on a Traditional IRA.
  3. With the Roth IRA strategy, they are able to keep it in a tax-free bucket and not be subjected to RMDs. If they need cash from the Roth IRA to live on in retirement, distributions would be tax-free.
  4. Another key factor to consider is that any amount still in the Traditional IRA or Roth IRA at Ray and Debra’s passing would go to their children. Their children would be subjected to the inherited IRA and inherited Roth IRA rules, which declare as of SECURE Act 2.0’s passing, that inherited IRA and inherited Roth IRA accounts are subjected to RMDs on the beneficiary’s life and that the inherited IRA or inherited Roth IRA account must be depleted within 10 years of the original depositor’s death. Inherited IRA distributions are taxable at ordinary income and inherited Roth IRA distributions are tax-free. Not only do Ray and Debra get to enjoy tax-free growth and distributions with a Roth IRA in retirement, but their kids would as well.

Debra and Ray are delighted by the analysis and eager to start the Backdoor Roth Strategy. They proceed to thank Phil for his work and proceed to end the meeting. The next day at work, Ray then thinks about his own 401(k) and if there are additional long-term planning opportunities that they can do. He believes that his plan at work will start to offer employer-matching Roth contributions and not require RMDs from Roth 401(k)s because of the new SECURE Act 2.0 legislation. His thinking comes from the following two sections in the SECURE Act 2.0:


Ray then proceeds to call Phil and ask about this. Phil states, “There might be a financial planning opportunity for you and Debra with a Mega Backdoor Roth strategy. A Mega Backdoor Roth Strategy works similarly to the regular Backdoor Roth Strategy. I am happy to run the numbers for you.” Ray declines since he believes it’s too premature to run the numbers since his company has yet to amend its current 401(k) plan and may not offer matching Roth contributions(5). Ray feels content for now with Phil’s answer and believes that his financial plan is solid.

Pro-Rata Rule

You may be asking yourself, what if I want to implement a Backdoor Roth strategy or Mega Backdoor Roth Strategy and my existing IRA has some deductible contributions and some nondeductible contributions? In that case, we would need to account for the pro-rata rule. To illustrate the pro-rata rule for an IRA and for a 401(k), we have the following two examples.

IRA: 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.

This rule is in place so that people implementing Backdoor Roth or Mega Backdoor Roth Strategies aren’t able to pick and choose what converted amounts get taxed and what converted amounts don’t. You will need to make sure to track any nondeductible contributions with the IRS Form 8606 and we strongly recommend working with a trusted tax professional when implementing a Backdoor Roth or Mega Backdoor Roth Strategy.


After reading through this article, you may be thinking why Congress adjusted the catch-up contributions the way they did, why they increased the RMD age to 73 for persons that will be 73 before 01/01/2033 and age 75 for persons that will be 75 after 01/01/2033, or why they had Roth 401(k) RMDs before but now they are getting rid of them. If you are upset about these changes that Congress made, you are free to fill in the following blanks to blame Politician _______ from the ________ Political Party who has Machiavellian intentions to do _________. We aren’t here to judge why Congress does what they do. We just work with the facts that we’re given and plan accordingly. What we do know is that even after the new SECURE Act 2.0, the Backdoor Roth strategy is still available. It may be more beneficial now than ever to consider a Backdoor Roth strategy if your situation is similar to what was described in this article.

Our team of Certified Financial Planners work with you to craft your comprehensive financial plan to understand whether or not a Backdoor Roth strategy is right for you. Please feel free to reach out to us at financialplanning@bfsg.com or 714-282-1566 and let us know how we can be of help. Thank you.


  1. From the ‘80s band, Men at Work, and their song, “Who can it be now?”
  2. That great philosopher was Chevy Chase in the movie Caddyshack: https://www.imdb.com/title/tt0080487/.
  3. The characters in the case study are from the sitcom, “Everybody Loves Raymond”: https://www.imdb.com/title/tt0115167/.
  4. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  5. If you are interested in learning more about a Mega Backdoor Roth strategy and how it impacts your financial plan, our team of CFP® professionals are happy to analyze how this strategy affects your long-term financial goals.


  1. https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
  2. https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
  3. https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
  4. https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/costs-in-the-coverage-gap

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.

Please Note: The above projections are based upon historical data and should not be construed or relied upon as an absolute probability that a different result (positive or negative) cannot or will not occur. To the contrary, different results could occur at any specific point in time or over any specific time period. The purpose of the projections is to provide a guideline to help determine which scenario best meets the client’s current and/or current anticipated financial situation and investment objectives, with the understanding that either is subject to change, in which event the client should immediately notify BFSG so that the above analysis can be repeated.

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