The Secret Backdoor Roth

Previously, we learned the power of contributing to a Roth IRA. But what if you are no longer eligible for a Roth? Is there a way to grow your savings tax-free?

Let’s look at two real-world examples.

Meet H&M (and S)

Hannah and Matt have a combined income of more than $200,000/year. She’s currently a full-time mom (they have twins!) while Matt works for an insurance company. They have been contributing to a non-deductible Traditional IRA for several years.

Sheila just started a job at a software company, and is excited to make $170,000/year. Based on her budget, she has the ability to save about $1,500 per month.

Hannah and Matt can no longer directly contribute to a Roth because their combined income is more than $198,999 (limit for married filing jointly). Sheila also can’t since her income is above $134,999 (limit for single).

How can we help Hannah, Matt, and Sheila be smarter with their money?

The Backdoor Roth IRA

In the figure below, Sheila can use part of her savings by contributing to a Traditional IRA. The maximum for 2018 is $5,500. This is called a non-deductible contribution, because she cannot deduct this contribution from her taxes because she makes more than $73,000.

Because of a loophole left open by Congress in 2010, Sheila can do a Roth conversion, and violà! Now she has a Roth IRA, where her investments can grow tax-free.


Hannah and Matt are already contributing to their respective Traditional IRAs. All they have to do is do a Roth conversion. One caveat is they’ll have to pay taxes on the earnings they made when they do a Roth conversion.

Backdoor Roth Leads to Significant Tax Savings

Let’s say Sheila maximizes her Traditional IRA contributions each year and does subsequent Roth conversions beginning at age 30 and continue through age 64. By age 90, she can save as much as $250,000 in taxes!

Warning: Proceed with Caution

First caveat: If Hannah, Matt or Sheila have a Rollover IRA or any other IRAs, doing a Roth conversion will create significant tax headaches. The IRS will treat that Traditional IRA conversion, as if part of the Rollover IRA was also converted. Wait, what? Trust me, it gets complicated. Basically, the IRS treats all types of IRAs as a single sum when determining taxes on conversions.

To avoid this complication, they can simply move their Rollover and other IRAs into their current 401(k). After this, the coast is clear.

Second, the IRS may not like the idea of you contributing to a Traditional IRA, with the intention of converting it immediately to a Roth. So what Sheila, Hannah, and Matt can do is:

  • Invest their Traditional IRA contributions, then

  • Wait for one year before doing the Roth conversion.


Doing regular Roth conversions is a powerful tool to grow our investments tax-free. But there are a few minefields to navigate around. Please consult a certified financial planner to help ensure you are doing the right thing.

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