It’s worth revisiting Roth IRA and backdoor Roth rules in time for tax day. – Getty Images
All U.S. taxpayers have until Wednesday, April 15 — tax day — to take advantage of the Roth IRA tax break for 2025, even if they think they earned too much.
The so-called backdoor Roth, a simple two-step process, means anyone can contribute up to $8,000 to an account with after-tax dollars and shelter all of their future gains from federal taxes.
This is true even if your adjusted gross income exceeds the official levels that allow for direct Roth contributions. Making this contribution is a no-brainer for anyone with money.
It’s worth revisiting the Roth IRA and backdoor Roth rules for tax day, because they often cause confusion. And that’s not surprising, given the mess Congress made the rules.
Individual retirement accounts are federally tax-sheltered accounts available to anyone with taxable income for the reported year (and to the earning spouse, if they file jointly).
You can contribute up to $7,000 to an IRA for the 2025 tax year, plus another $1,000 if you’re 50 or older. (This assumes you’ve earned at least that much. You can’t contribute more than your income in any year. If you’re contributing to a spousal IRA, you and your spouse can’t contribute more than your combined income.)
There are two types of IRAs. With a traditional IRA, you can deduct contributions from this year’s taxable income — meaning you’re contributing pretax dollars. But when you withdraw money down the road, it will count as taxable income in the year you withdraw it. So, for a traditional IRA, you pay taxes on the back end.
Roths work in reverse. You can’t deduct the contribution from this year’s taxable income, meaning you’re contributing after-tax dollars. When you eventually withdraw the money, though, it will be tax-free. So with a Roth you’re paying taxes up front.
In each case, you are taxed once and only once.
Congress, in its own unique way, decided it was too simple and straightforward and decided to complicate it. So it created income limits for IRAs. If you earn more than the limit, you won’t be able to make tax-deductible contributions.
Then Congress created different income limits for traditional and Roth IRAs, because otherwise, where would the fun be? And the limit isn’t on what you normally think of as your income, but rather on what’s known as your modified annual gross income. And the limits are different if you’re single, married filing jointly, married filing separately or filing as head of household. Better yet, Congress created a phase out. So, for example, if you’re married filing jointly — or you’re a qualifying widow or widower — you can deduct your traditional IRA contribution entirely if your last year’s modified AGI was less than $123,000. If it was between $123,000 and $143,000, you can deduct part of your contribution. If it was more than $143,000, you can’t deduct it all.
There are different, higher limits for Roths, typically $168,000 for single filers and $252,000 for joint filers.
So is it? Of course not. There is a third type of IRA that is especially useful for high earners. This is called a non-deductible traditional IRA. Technically, this seems like a terrible deal. You can’t deduct them when you make contributions: You contribute with after-tax dollars, like a Roth. But the money isn’t tax-free when you withdraw it down the road, either: It’s taxed on withdrawals as ordinary income, as with traditional IRAs.
Lose-lose, right?
Not quite. The main advantage of a non-deductible traditional IRA is that anyone with income can contribute, no matter how much they earn – and you can convert it to a Roth right away. same day the same moment You file two separate pieces of paper. (Actually, there’s a third — you must also report the contribution to the IRS on Form 8606, which will keep track of your nondeductible IRA contributions.)
Contact your broker — Vanguard, Fidelity or whoever — and tell them you want to do a backdoor Roth, which means contributing to a non-deductible traditional IRA and then immediately converting the money to a Roth. If you’re doing it before April 15 and you want to maximize your tax break, make sure you clarify that it’s for tax year 2025, so you can still do another one for tax year 2026.
A backdoor Roth means that anyone can immediately put money into a Roth no matter how much they earn — making a mockery of the modified-adjusted-gross-income limits for Roth contributions.
Only the US Congress, people.
“There are income limits on direct contributions to a Roth, but no income limits on conversions,” says Carrie Sinnett, senior manager of the personal financial planning practice at the American Institute of Certified Public Accountants. “So the backdoor Roth works at any income level.”
The process, he writes, is straightforward: “Contribute to a nondeductible traditional IRA → convert it to a Roth → report it on IRS Form 8606.”
There is one wrinkle, he adds: The Ratio rule. “If you have other pretax IRA money, the conversion portion is taxable,” says Sennett. “Most people make sure they don’t have any other pretax IRA money before they start the conversion, otherwise it gets messy.”
This is the best – possibly the only – reason to convert all of your traditional IRAs to Roth. You take a one-off tax hit, which can be hefty, but then you can painlessly do a backdoor Roth each year with no added complications. If you’re reluctant to take a tax hit now, consider a watchlist for the next stock-market selloff. An IRA conversion account is taxable on the value of the conversion, so a bear market is the best time to do it.
Meanwhile, if anyone in Congress wants to know why lawmakers’ approval ratings are around 17%, part of the reason is unnecessarily complicated, stupid things.
