KEY TAKEAWAYS

• Roth IRAs offer valuable tax advantages, including potential tax-free growth and tax-free qualified withdrawals.
• Income limits may restrict direct Roth IRA contributions, but a Backdoor Roth IRA may be an option for investors whose income exceeds those limits.
• Tax treatment can be complicated, especially if you already own pre-tax Traditional IRA assets, so it is important to consult your tax advisor before using this strategy.

Why Roth IRAs Are Attractive

A Roth IRA is an individual retirement account funded with after-tax dollars. While contributions are not tax deductible, earnings may grow tax free, and qualified withdrawals can also be tax free, provided certain requirements are met.

Generally, Roth IRA withdrawals of earnings are tax free if you are at least age 59½ and have satisfied the five-year holding period. The five-year period begins with the first tax year for which you contributed to any Roth IRA.

For many investors, one of the most attractive Roth IRA features is that Roth IRA owners are not required to take required minimum distributions during their lifetime. That means assets can potentially continue growing tax free for longer, which may support retirement income planning, legacy planning, or both.

However, Roth IRAs come with income limits. If your modified adjusted gross income exceeds certain thresholds, you may be limited—or completely ineligible—from making a direct Roth IRA contribution.

Roth IRA and Traditional IRA Limits for 2026

What is a Backdoor Roth IRA?

A Backdoor Roth is a strategy that allows certain investors to move assets from a Traditional IRA to a Roth IRA, even if their income is too high to make a direct Roth IRA contribution. The process generally works in two steps:

1. You make a nondeductible contribution to a Traditional IRA.
2. You convert those Traditional IRA assets to a Roth IRA.

Under current rules, Roth IRA conversions are not subject to the same income limits that apply to direct Roth IRA contributions. This means high earners may be able to use a Backdoor Roth IRA strategy even if they are ineligible to contribute directly to a Roth IRA.

It is important to note that this strategy does not eliminate taxes. Instead, the tax outcome depends on whether the Traditional IRA contribution was made with after-tax dollars, whether the account generated earnings before conversion, and whether you own other pre-tax IRA assets.

Example: A Simple Backdoor Roth Conversion

Ned would like to make a Roth IRA contribution, but his income is above the 2026 eligibility limit. He decides to explore a Backdoor Roth IRA strategy.

Ned contributes $7,500 to a Traditional IRA. Because of his income and circumstances, the contribution is nondeductible, meaning he does not receive a tax deduction. The contribution is made with after-tax dollars.

A month later, the account has grown to $7,700, and Ned converts the full balance to a Roth IRA. Because $7,500 represents after-tax dollars, that amount is generally not taxable again. However, the $200 of earnings would typically be taxable in the year of conversion.

After the conversion, Ned has moved the full $7,700 into a Roth IRA, where future qualified growth and withdrawals may be tax free.

Tax Considerations

A Backdoor Roth IRA strategy generally works best when you do not have other pre-tax Traditional IRA, SEP IRA, or SIMPLE IRA assets. If you do, a portion of the conversion may be taxable under the IRS pro-rata rule.

The pro-rata rule requires the IRS to look at all of your Traditional IRA, SEP IRA, and SIMPLE IRA assets together when determining how much of a Roth conversion is taxable. You generally cannot choose to convert only the after-tax dollars.

Example: How the Pro-Rata Rule Can Affect Taxes

Jan has $142,500 in a Traditional IRA, all of which consists of pre-tax assets. She then makes a $7,500 nondeductible contribution to a Traditional IRA. Her total IRA balance is now $150,000, with $7,500 representing after-tax dollars.

That means only 5% of her IRA balance is after-tax:

$7,500 ÷ $150,000 = 5%

If Jan converts $7,500 to a Roth IRA, only $375 of the conversion would generally be tax free:

$7,500 × 5% = $375

The remaining $7,125 would generally be taxable upon conversion:

$7,500 – $375 = $7,125

This example illustrates why it is important to review your full IRA picture before using a Backdoor Roth IRA strategy.

Is a Backdoor Roth IRA Right for You?

A Backdoor Roth IRA may be worth considering if you:

• Earn too much to contribute directly to a Roth IRA.
• Want access to potential tax-free growth.
• Do not have significant pre-tax IRA assets, or you have a plan to address them.
• Are comfortable paying any taxes that may result from the conversion.
• Want to incorporate Roth assets into your broader retirement and estate planning strategy.

However, this strategy is not appropriate for everyone. Potential tax consequences, account aggregation rules, timing considerations, and future legislative changes should all be evaluated carefully.

Before moving forward, consult your Financial Advisor and your tax professional to determine whether a Backdoor Roth IRA aligns with your overall financial plan.