If you’re a high-income earner, you’ve probably realized you’re not eligible to contribute directly to a Roth IRA. But there’s a strategy called the backdoor Roth IRA that allows you to still get money into a Roth and build tax-free wealth over time.
What is a Backdoor Roth IRA?
A backdoor Roth IRA is not a special account. It is simply a strategy that involves two steps: making a non-deductible contribution to a Traditional IRA, then converting those funds into a Roth IRA.
Who Should Consider This?
- High-income earners above Roth IRA income limits
- Business owners
- Individuals already maxing out their 401(k)
- Investors looking for long-term tax-free growth
How It Works
- Contribute to a Traditional IRA
- Convert those funds to a Roth IRA
- Invest the funds inside the Roth IRA
The Biggest Mistake to Avoid: The Pro Rata Rule
One of the most common mistakes is ignoring the pro rata rule. If you already have pre-tax IRA balances, the IRS looks at all IRA assets together when calculating taxes on the conversion.
