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The Backdoor Strategy to a Smarter Retirement: The Pros, Cons, & Opportunities of Backdoor Roth IRAs

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While high-income earners are often ineligible to contribute to a Roth IRA due to income caps, there is an alternative option available. Known affectionately in the industry as the “backdoor Roth,” this strategy allows high-income earners to access the benefits associated with a Roth IRA. It is, in a sense, taking a backdoor route to a type of account that offers very specific benefits for investors and retirees.

For people interested in long-term financial planning, the backdoor Roth provides the opportunity for tax-free distributions down the road. The trick is working with a professional that effectively advises you and accurately assesses risk, rewards, and other viable options based on your financial goals.

So, what are the implications of a backdoor Roth? This article provides a quick overview of the financial strategy and explores whether it might be the right option for you.

The Backdoor Roth IRA — What is it?

The backdoor Roth IRA is a strategy through which people access the unique benefits of the Roth IRA even if they earn above the stated income threshold. While high-income earners cannot make contributions to a Roth, they can make conversions.

In order to set up a backdoor Roth IRA, you’ll first start by funding a traditional IRA and then converting all or a portion of the balance to the Roth IRA. This strategy can also be used with 401ks that allow after-tax deferrals, known as the mega back door conversion due to the larger contribution amounts allowed in 401ks with this feature. (Note: this after-tax deferral feature is not the same as 401k Roth deferrals and is not offered in all 401ks). Upon the conversion (or at the time of your tax return filing), you will pay taxes on the money converted to the Roth account. Typically you would not want to pay taxes out of the amount you wish to convert as this will be considered a distribution which would incur an early distribution penalty if you are under the age of 59 ½. But once the conversion is complete, the money will grow tax-free.

Roth IRA benefits and rules include:

  • Tax-free distributions after the age of 59 ½

  • Ability to lock in today’s tax rate rather than risk a higher tax rate later

  • No income limit. People at all income levels can do conversions

  • There are no restrictions on how much money can be converted to a Roth

  • No age restrictions

  • Unlike traditional IRAs, Roth IRAs don’t require mandatory withdrawals at age 72. This allows for the savings to grow and compound even after retirement

What are the Tax Implications of a Backdoor Roth?

Using this strategy does have tax implications for you right away. It will mean that:

  • You will have to pay taxes upfront for the amount converted since it was not taxed upon investing it in the traditional IRA.

  • If utilizing the mega back door conversion strategy, any contributed amount to the after-tax deferral bucket can be converted tax-free, but if there are any earnings on those contributions, those dollars will be taxed.

Is the Backdoor Roth IRA for Me?

Because of the name, some people fear that a backdoor Roth IRA is a tax scheme or some kind of tax dodge. Not at all. Rather, this strategy is merely a way to choose to pay taxes on your account now rather than later. And yet, like any financial decision, it depends heavily on your personal circumstances and financial goals.

Here are a few things to keep in mind:

  • Counted as income. The money converted can will count as income for that year, so that might throw you into a higher tax bracket and affect your tax filing for the year.

  • Five-year horizon. You should foresee that that money is there to stay for at least five years. If not, the backdoor IRA option might not be optimal because once converted, you must wait at least five years before withdrawals (some exclusions apply).

  • This strategy is alive and well as of this writing but there is currently legislation being proposed that could limit or even disqualify high-income earners from transacting conversions after 2021 if the new legislation is passed.

Need More Information About Backdoor Roth IRAs? We Can Help!

Financial planning is all about seeking the best pathway to your future and working strategically towards financial goals. Looking to secure your financial future? Call TrinityPoint Wealth today and learn more.


This material prepared by TrinityPoint Wealth is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by TrinityPoint Wealth are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. TrinityPoint Wealth, however, cannot guarantee the accuracy or completeness of such information, and certain information may have been condensed or summarized from its original source. Materials herein were prepared by AGI Marketing. TrinityPoint Wealth and AGI Marketing are not affiliated.

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