If you got a raise this year and suddenly found yourself locked out of the Roth IRA, you're not alone.
For 2024, the income phase-out for direct Roth contributions starts at $146,000 for single filers and $230,000 for married couples filing jointly.
Cross that line, and the IRS says no thanks.
But here's the workaround that financial planners have quietly used for years, and it's now going mainstream as more Americans cross that threshold.
It's called the backdoor Roth IRA, and despite the name, there's nothing shady about it.
Congress explicitly blessed the maneuver in 2014.
You contribute to a traditional IRA, which has no income limits.
You don't deduct it, so it's already after-tax money.
Then you convert that balance to a Roth IRA.
Since you already paid taxes on the contribution, you owe little or nothing on the conversion.
Because a Roth IRA grows tax-free, and withdrawals in retirement are tax-free too, provided you're 59½ and the account has been open five years.
A 35-year-old who funnels $7,000 a year into a backdoor Roth at a 7% average return could retire with roughly $1 million in tax-free money, depending on market performance.
If you hold any pre-tax money in a traditional IRA, SEP IRA, or SIMPLE IRA on December 31 of the conversion year, the IRS taxes the conversion proportionally.
Someone with $50,000 in a pre-tax IRA and a $7,000 after-tax contribution would owe tax on about 87% of the conversion.
The fix: roll existing pre-tax IRA money into a 401(k) before December 31.
Most employer plans accept rollovers, and this clears the path for a clean conversion.
First, the 2024 contribution limit is $7,000, or $8,000 if you're 50 or older.
Second, you must report the conversion on Form 8606 when you file.
Miss that step, and the IRS may treat the whole thing as a taxable distribution later.
That's a paperwork headache nobody wants.
If you're in a high tax bracket now and expect a lower one in retirement, a traditional 401(k) may still win.
But for high earners who expect rising taxes or want tax diversification, the backdoor Roth is one of the few legal levers left.
One more thing: the 2017 tax law killed recharacterization of conversions, meaning once you convert, you can't undo it.
If markets tank right after you convert, you're stuck.
Some advisors suggest converting in tranches throughout the year to smooth that risk.
It's a slow, boring, compounding machine.
And it works whether the market is up, down, or sideways, as long as you keep contributing.
My take: the backdoor Roth is one of the last great tax breaks available to upper-middle-class earners, and too few people use it.
Final Thoughts
If your income has crept past the limit, spend an hour with a tax pro and see if it fits your situation.