Higher earners who've been told they make too much to fund a Roth IRA have a workaround that's drawing fresh attention this tax season.
It's called the backdoor Roth IRA, and it lets savers who exceed the income limits still get money into a tax-free retirement account.
With contribution deadlines for 2024 looming on April 15, financial planners say questions about it are spiking.
Here's the catch: the maneuver isn't a single product you can buy.
You contribute to a traditional IRA — which has no income cap — then convert that money into a Roth.
Because you've already paid taxes on the contribution, the conversion typically carries little or no tax bill.
Roth IRAs let your money grow and come out tax-free in retirement, and they don't force withdrawals the way traditional IRAs do.
But for 2024, the ability to contribute directly to a Roth phases out for single filers earning between $146,000 and $161,000, and for married couples filing jointly between $230,000 and $240,000.
Above those ceilings, the front door is locked.
For 2024, you can put up to $7,000 into an IRA, or $8,000 if you're 50 or older.
For 2025, those limits hold at $7,000 and $8,000.
The strategy has survived repeated attempts in Washington to close it, though it remains a perennial target in budget talks.
There's one big trap that trips people up: the pro-rata rule.
If you hold pre-tax money in any traditional IRA — from an old job's rollover, for example — the IRS doesn't let you convert just the new after-tax dollars.
It treats all your IRA balances as one pot and taxes the conversion proportionally.
That can turn a clean maneuver into a surprise tax bill.
The fix, planners say, is to move any existing pre-tax IRA money into a workplace plan like a 401(k) before doing the conversion, if your employer allows it.
Others simply accept the partial tax hit.
Either way, experts warn against doing this blindly in December or April without running the numbers first.
One more wrinkle: the conversion itself has no income limit, but it's a taxable event on any pre-tax dollars involved.
And because Roth conversions can't be undone — the old "recharacterization" option disappeared after 2017 — a mistake can be costly.
That's why many advisors recommend converting soon after contributing, so market gains don't add to the taxable amount.
You'll need to file IRS Form 8606 to report the nondeductible contribution, and the conversion gets reported on Form 1099-R the following year.
Miss a step and you could face double taxation or penalties down the line.
Tax software often handles it, but it's worth double-checking.
Our take: the backdoor Roth remains one of the few legal ways high earners can still build tax-free retirement income, and it's worth a look if you've maxed out other accounts.
But the pro-rata rule and the no-undo feature mean this isn't a set-it-and-forget-it move.
Final Thoughts
Talk to a tax professional before you convert, especially if you have old IRAs sitting around.