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 $218,000 (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 are typically 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 convert 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 of the account.

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 rules, 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:

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 likely want to consult with your financial advisor on the investment-related aspects involved.

Important information:

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.