If your career is going well, you may be earning a good — or very good — salary. But there is a possible drawback to your success: You might not be able to contribute to a Roth IRA. However, you may still be able to reap the benefits of this powerful retirement savings vehicle.

When you contribute after-tax dollars to a Roth IRA, your earnings grow tax free, and withdrawals are also tax-free, provided you follow the IRS rules for a tax- and penalty-free withdrawal. A Roth IRA is one of very few investment vehicles that offers this type of tax treatment.           

But not everyone can take advantage of a Roth IRA. You can contribute the full amount ($6,500 per year for 2023, or $7,500 if you’re 50 or older) only if your modified adjusted gross income (MAGI) is less than $138,000 if you’re single or $218,000 if you’re married and filing jointly. Above these limits, you can contribute lesser amounts until your MAGI reaches $153,000 (single) or $228,000 (married, filing jointly), at which point your ability to contribute to a Roth IRA is phased out.

If your income exceeds these limits, you might want to consider what’s known as a backdoor Roth IRA. This isn’t a separate type of IRA but rather a strategy to gain the tax advantages offered by a Roth IRA.

How does it work?

First, you make a nondeductible, or after-tax, contribution to a traditional IRA. You may already have a traditional IRA, but if not, you’ll need to open one and fund it.

Next, you convert these contributions to a Roth IRA. Again, you can either open a Roth IRA or use one you already have. Even if you are above the income limits for contributing to a Roth IRA, you can still open one.

Finally, if necessary, pay taxes on the conversion.

Taxes with a backdoor Roth IRA strategy can be small or nonexistent. If you were to open a traditional IRA, consider contributing the annual maximum of $6,500 (or $7,500 if you’re 50 or older) and then converting the funds to a Roth IRA; the conversion could trigger income tax if you generate earnings on your after-tax contributions before you convert them to the Roth IRA. But once the money is in the Roth IRA, you’ll get its tax benefits if you follow the rules to make a qualified withdrawal.

If you have other IRAs, the tax picture can be more complicated. When calculating the taxes due on the conversion, you have to include all your traditional IRA assets. Because of the IRS’ pro rata rule, you’ll pay a proportional amount of taxes on the pretax contributions and earnings. For example, if your combined traditional IRAs consist of 80% pretax money and 20% after-tax money, 80% of the amount you convert to a Roth IRA will be taxable.

Issues to consider

When considering whether a backdoor Roth IRA is right for you, ask yourself these questions:

How will I pay the taxes? While taxes on a backdoor Roth IRA strategy can be small, it’s possible you could owe some. It’s generally better to pay any taxes that may be due from another source rather than having them withheld from the conversion. Otherwise, you’ll end up with a smaller amount of the contribution converted, and you’d essentially be giving up any potential future investment gains from this money.

When do I need the money? One of the conditions for taking tax-free withdrawals from a Roth IRA is that you must meet the IRS’ five-year holding period requirements. If you withdraw earnings before meeting this requirement, you will generally owe taxes on the earnings and a possible 10% penalty. You’re also required to adhere to a five-year holding period for each taxable conversion contribution you make; otherwise, you may owe a 10% penalty on a withdrawal of these amounts as well. Before you start the Roth conversion, make sure you won’t need the funds for at least five years.

Will the backdoor Roth IRA strategy always be available? There’s no guarantee the backdoor Roth IRA strategy will always be available. Congress recently considered legislation that would have eliminated the backdoor option. As of now, the backdoor Roth IRA is still around, but no one can predict its future.

Before making any moves related to a backdoor Roth IRA, you’ll want to talk to your tax advisor to help ensure this strategy is appropriate for your situation. You also will want to consult with your financial advisor on the investment-related aspects involved.

Kyle Harpin's head shot

Kyle Harpin

Analyst, Client Needs Research


Kyle Harpin is an analyst on the Client Needs Research team, which creates advice and guidance related to preparing for retirement, living in retirement, saving for education, estate planning considerations and protecting financial goals.

Kyle graduated summa cum laude from the W.P. Carey School of Business at Arizona State University with a bachelor’s degree in finance. He is a CFA® charter-holder and a member of the CFA Institute and the CFA Society of Nevada. Kyle also holds the CFP® designation.

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Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional.