Everybody is talking about Roth Conversions (aka Backdoor Roth) right now so let’s break it down in plain English.

The Basics

Imagine you want to contribute to a Roth IRA, but you make too much money. The IRS has this rule that says if you earn above a certain amount (161k single and 240k filing married in 2024), you can’t directly contribute to a Roth IRA.

You can’t make a direct contribution, but you can sneak in another way. Here’s how it works: first, you contribute to a Traditional IRA. Unlike a Roth, there’s no income limit for contributing to a Traditional IRA. But hold on, we’re not done yet.

Arriving at the Party

Next step, you convert funds from that Traditional IRA into a Roth IRA. This is where the magic happens. Since you’re converting from a Traditional to a Roth, there’s no income limit. Voilà! You’ve just snuck into the Roth IRA party.

Taxes, Timing, More

Now, there are a couple of things to keep in mind… actually there are A LOT of things to keep in mind but for the purposes of this article, we’ll keep it basic. See Part 2 for more complex situations. When you convert from Traditional to Roth, you’ll owe taxes on any pre-tax contributions and earnings in the Traditional IRA. So, if you’ve made deductible contributions to your Traditional IRA over the years, you’ll need to pay taxes on those amounts when you convert.

Also, timing is key. Ideally, you want to convert your Traditional IRA to Roth IRA as soon as possible. Why? Because if your Traditional IRA has earned any interest or gains, you’ll owe taxes on those too.

Lastly, when you convert your Traditional funds into Roth funds, you cannot withdraw the contribution amount for five years. You’ll want to factor that into your financial plan.

Wrapping It Up

The Backdoor Roth IRA is a sneaky (but legal) way for high-income folks to still enjoy the benefits of a Roth IRA. Just remember to dot your i’s and cross your t’s, especially when it comes to taxes. It’s always a good idea to consult with a financial advisor and a tax professional.

In Part 2 of this article, we’ll discuss some nuances and why a Backdoor Roth is not the best fit for everyone. As are most concepts in finance, there are a lot of things to consider.


House Writer is not a registered investment advisor or broker/dealer and does not make security recommendations nor provide financial advice. Readers are advised that the material contained herein should be used solely for informational and entertainment purposes, and to consult their personal tax and/or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.