High-income earners and the Backdoor Roth IRA strategy

When it comes to tax-advantaged accounts like 401(k)s, 529 plans, and HSAs, your income level doesn’t affect your eligibility to contribute. Whether you earn $10,000 or $1,000,000 a year, you can still contribute to these accounts as long as you stay within federal and state contribution limits.

However, income does play a crucial role in determining IRA contributions, particularly with Roth IRAs. For high-income earners, directly contributing to a Roth IRA might not be an option—but the Backdoor Roth IRA strategy offers a way around this limitation.

(Note: this is not to be confused with the Mega Backdoor Roth, which you can read more about in our post here!)

Let's start with some IRA basics

First and foremost, you must have earned income to contribute to an IRA in any given tax year.

Second, the amount you make also affects the type of account you would consider. Here's the skinny:

• Roth IRA: Direct contributions are limited or phased out entirely at higher income levels

• Traditional IRA: Contributions are allowed regardless of income, but your ability to deduct those contributions from your taxable income is limited as your income increases

Let's get a deeper understanding for how this impacts us by breaking down the limits for both types of IRA accounts.

IRA Limits

Traditional IRA Deduction Limits (2025)

You can contribute to a Traditional IRA at any income level, but whether you can deduct that contribution from your taxable income depends on your Modified Adjusted Gross Income (MAGI). If you're a single filer and your MAGI exceeds $79,000, the deductible amount begins to phase out. Once your MAGI reaches $89,000 or higher, you lose the ability to deduct your contributions entirely.

Note: If you don’t have access to a workplace retirement plan, you can deduct your full Traditional IRA contribution regardless of income.

Filing Status	Modified Gross Adjusted Income (MAGI)	Traditional IRA Deduction Limits
Single	≤ $79,000	Full deduction
	$79,001 - $89,000	Partial deduction
	> $89,000	No deduction
Married Filing Jointly	≤ $126,000	Full deduction
	$126,001 - $146,000	Partial deduction
	> $146,000	No deduction

The key takeaway here is that if you are a high-income earner, the Traditional IRA becomes a less attractive account since you don't get the tax benefit of a deduction. Let's piece this together with the Roth IRA now.

Roth IRA Contribution Limits (2025)

Roth IRA contributions are not tax-deductible but your contributions do grow tax-free. Your ability to contribute to a Roth IRA account is dependent on your income. If you are a single filer and your MAGI is greater than or equal to $150,000, then the amount you can contribute to a Roth IRA begins to shrink. Your ability to contribute anything directly to this account goes away once you hit $165,000.

Filing Status	Modified Gross Adjusted Income (MAGI)	Contribution Limit
Single	≤ $150,000	$7,000 ($8,000 if 50+) per person
	$150,001 - $165,000	Reduced amount
	$165,000+	Not eligible to contribute
Married Filing Jointly	≤ $236,000	$7,000 ($8,000 if 50+) per person
	$236,001 - $246,000	Reduced amount
	$246,000+	Not eligible to contribute

The two tables above highlight a challenge for high-income earners making over $165,000: they are ineligible for direct Roth IRA contributions and will see minimal tax benefits from Traditional IRA contributions due to limited or eliminated deductions. So, what are the remaining options for individual retirement investing?

You do a Backdoor Roth.

Backdoor Roth for high-income earners

A Backdoor Roth IRA is a legal tax strategy that allows high-income earners to indirectly contribute to a Roth IRA by (1) Contributing post-tax dollars to a Traditional IRA, and then (2) Converting those funds into a Roth IRA. It seems too simple to be true, but it's a very common practice high-income earners do.

Steps for a Backdoor Roth IRA:

1. Open and fund a Traditional IRA

   • Contribute up to $7,000, or $8,000 if you're 50 years or older (2025 tax year)

   • If you don't have a Traditional IRA you'll need to open one first

   • Invest your money

   • Do not deduct this contribution on your taxes since it’s non-deductible for high-income earners

2. Convert to a Roth IRA

   • Contact your IRA provider to initiate the conversion. You can do this over the phone.

   • Your provider will give you a step-by-step guide to follow to complete the Backdoor Roth.

   • If you don’t already have a Roth IRA, you’ll need to open one.

   • Avoid tax issues by converting funds as quickly as possible. Do the conversion immediately after funding your Traditional IRA. You want to minimize any investment gains in the time between you fund a Traditional IRA and convert the funds to the Roth.

3. Leave your Traditional IRA account open:

   1. This account will be left with a $0 balance.

   2. Just leave it open and empty for the year until you complete your next Backdoor Roth.

And voila, that's it! A short process you'll do each and every year as a high-income earner.

Key things to know before doing a Backdoor Roth

• Pro-Rata Rule: If you have pre-tax money in any Traditional, SEP, or SIMPLE IRAs, the Backdoor Roth process becomes more complicated and will likely result in additional taxes. Depending on how much money you have in those accounts, the taxes can be excessive and a Backdoor Roth might not be right for you. Consult a financial advisor for guidance if you have money in any of these accounts and still want to do a Backdoor Roth. You may be able to roll pre-tax IRA funds into an employer-sponsored plan (e.g., a 401(k)) which will bring your Traditional IRA back to $0 and allow you to do the Backdoor Roth effectively. Call your 401(k) provider to see if this is an option.

• No Deduction for Contribution: Again, you should not claim a tax deduction for the initial Traditional IRA contribution when doing a Backdoor Roth.

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Disclaimer:

The information contained in the Yield & Spread website, course materials and all other related content is provided for informational and educational purposes only. It is not intended to substitute for obtaining accounting, tax, or financial advice, and may not be suitable for every individual. Yield & Spread is not a registered investment, legal or tax advisor or a broker/dealer.