A backdoor Roth can sometimes be a good idea.
The government puts income limits on who can contribute to a Roth IRA portfolio. In 2025, these limits are set at $165,000 for single filers, and $246,000 for joint filers. If you’re above this cap, you cannot contribute money to a Roth IRA. However, there is no income limit on converting money to a Roth IRA. This has led to a practice called “backdoor Roth conversions.” This is where high-income households contribute money to a pre-tax portfolio, then convert that money to a Roth IRA in order to maximize the portfolio’s untaxed benefits.
For the right household, at the right time of life, this can save significant money in the long run. For example, take a married couple making $360,000 in combined income. When would a backdoor Roth save them on taxes?
The answer will depend significantly on their stage in life, their current tax situation and several other factors.
A financial advisor can also help you determine if a backdoor Roth strategy could be beneficial for you depending on your individual situation.
What Is a Backdoor Roth?
There are two ways to fund a Roth IRA.Â
The first is with contributions. A contribution to an IRA account can only be made using earned income. This means money taken from earnings potentially subject to income taxes. The IRS places strict limits on IRA contributions each year. In 2025, you can contribute up to $7,000 to an IRA (Roth or traditional), with an additional $1,000 in catch-up contributions for those age 50 and older.
Roth IRAs have an additional income restriction called the phase-out. An individual can make full contributions to a Roth IRA if you make less than $150,000. You can make reduced contributions at income levels between $150,000 and $165,000, and you cannot contribute to a Roth IRA if your income is above $165,000. For married couples, this phase out window is between $236,000 and $246,000.Â
The second way to fund a Roth portfolio is with a conversion. A Roth conversion is when you move money from a pre-tax portfolio, like a traditional IRA or a 401(k), and put it into a Roth IRA. There is no limit on how much money you can convert to a Roth IRA, as long as it comes from a qualifying pre-tax portfolio. Perhaps more importantly, there’s also no income limit on making a Roth conversion.
This has created a strategy called a backdoor Roth. Households that earn too much money to make direct Roth contributions can instead contribute money to a 401(k) or a traditional IRA. Then, they convert that money to a Roth IRA. The upshot is that these households can fund a Roth portfolio despite making more than the program’s income limits. In fact, if they use a 401(k) for the backdoor conversion, they can fund a Roth IRA far more generously than direct contributions would allow, given that the 401(k) contribution limit significantly exceeds the IRA contribution limit.
Conversion Taxes and the Limits of a Backdoor Roth
The advantage to a backdoor Roth IRA is straightforward: untaxed retirement funds. When you convert assets to a Roth IRA, they grow tax-free. When you withdraw this money in retirement, you do not pay any taxes on these assets. For this reason, Roth IRAs are also not subject to required minimum distributions, allowing you to potentially leave the money in place longer for more compound growth.
The main disadvantage to a Roth conversion is the conversion tax. When you move funds to a Roth IRA, the entire amount transferred applies to your taxable income for the year. This means you’ll have to pay income taxes on the amount transferred. If you are over the age of 59.5, you can use the money from your portfolio to pay these taxes, although this will reduce your account’s value and long-term growth. If you are under that age, you must have cash on hand from other sources to pay these taxes.
For example, say that you earn $75,000 per year. In February you convert $50,000 to your Roth IRA, then in August you convert another $50,000. Your total taxable income for the year will be $175,000 (your original income of $75,000 and your combined Roth conversion of $100,000). This will increase your federal income taxes for the year from $8,341 to $31,538.
Or, to return to our question, you earn $360,000 in combined household income. Say that you convert $140,000 from your 401(k) to your Roth IRA. Your taxable income for the year would increase to $500,000, increasing your household income taxes from $91,264 to $140,264.Â
Roth conversion taxes also increase your taxable income for all purposes. This means that a conversion can potentially increase your state and local income taxes, and can reduce your eligibility for government programs and aid. If you’re retired, this can also increase your Social Security benefits taxes and Medicare premiums.Â
Finally, Roth conversions are subject to a five-year rule, which can require you to leave your portfolio’s earnings in place for a minimum of five years. But the money converted also isn’t subject to required minimum distributions.
Should You Use A Backdoor Roth To Reduce Your Taxes?
So, will a backdoor Roth reduce your taxes? That’s a question only you, perhaps with the help of a financial advisor, can answer.
Per our example, with a household income of $360,000, you aren’t eligible for a Roth IRA contribution. So a backdoor Roth is your only option for creating a Roth IRA portfolio. (If your employer offers a Roth 401(k), you can explore contributing to this account regardless of income level.)
The balance is current taxes and opportunity cost vs. long-term untaxed returns. Converting to a Roth IRA will cost you money up-front, which can potentially reduce the money you have available to invest. However, this conversion will also save you income taxes in retirement, which can potentially significantly increase the after-tax income of your retirement portfolio.Â
With your high rate of income, a Roth conversion already comes with a fairly steep price. Because you are already at the top tax bracket, any conversions you make will be taxed at that 35% tax rate. While you can mitigate your taxes by staggered conversions somewhat, at your tax bracket those savings would be marginal. So, it will be difficult (if not impossible) to hold down the tax costs of this conversion. Â
Beyond that, in general a Roth conversion works best under three conditions:
- If you are younger. The longer it will be until you need this money, the more time you will have for the tax-free growth that makes a Roth IRA so valuable, and that offsets those conversion taxes.
- If you currently pay a lower tax rate than you expect to pay in retirement. This will let you maximize the tradeoff of a conversion, in which you pay a lower rate today to save on higher rates in retirement.
- If you will pay conversion taxes with cash on hand, rather than investment capital. If you will not have to reduce the amount you save and invest based on conversion taxes, there will be no opportunity cost to a Roth IRA.
In general, a Roth conversion works less well under three conditions:
- If you are nearer to retirement. The sooner you will need this money, the less time it will have for tax-free growth. In this case, the high conversion taxes can quickly swamp any long-term income tax savings.
- If you currently pay a higher tax rate than you expect to pay in retirement. If so, then you will pay your higher, current tax rate to convert this money, in order to avoid your future lower tax rates in retirement.
- If you will pay conversion taxes with money you would otherwise have invested for retirement. If so, the opportunity costs of lost growth can outweigh the tax savings. Â
When You Retire Matters
An important question is when you plan on retiring. For example, say you and your spouse are in your mid-30s and plan to retire in 35 years. This would give your portfolio several decades of untaxed growth, maximizing the value of your Roth portfolio relative to the conversion taxes you will pay for the backdoor Roth. On the other hand, say that you’re already in your early 60s, and planning to retire in less than 10 years. Your Roth won’t have much time for the untaxed growth that offsets your up-front taxes.
Another important question is what income you plan on drawing down in retirement. As noted above, at $360,000, you’re currently in the 35% tax bracket with a 25.35% effective rate. If you plan on maintaining this rate of income, or something close to it, it’s likely that you will see relatively little value in exchanging your current tax rate (by paying conversion taxes) for your future tax rate (by saving on income taxes in retirement).Â
You would be considered a quite high-earning household, so it’s worth analyzing this approach with a financial advisor. The most likely answer here is this: If you are fairly early in your career, then a Roth conversion will probably save you quite a bit of money in the long run. While you will pay significant conversion taxes, decades of untaxed returns will usually offset that. If you are late-career right now, the odds are that this analysis will be reversed and you will pay more in conversion taxes than you will see in untaxed benefit.
Bottom Line
Can a backdoor Roth save you money? The answer depends entirely on your personal situation. Sometimes, it absolutely can. But make sure you actually look through all of the numbers with your financial advisor, because it can get complicated fast.
Tips on Maximizing a Roth Conversion
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Is a Roth conversion really worth it? We get asked this question all the time, so let’s take a few minutes and review the basics. For the right household, a Roth conversion can be far more than worth it.Â
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
- Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Read the full article here
