How Can I Fund a Roth IRA If My Income Is Too High?

High earners who exceed annual income limits set by the Internal Revenue Service (IRS) can’t make direct contributions to a Roth individual retirement account (Roth IRA). The good news is that there’s a loophole to get around the limit and reap the tax benefits that Roth IRAs offer. This strategy, known as a backdoor Roth IRA, allows those with high incomes to make indirect contributions.

Roth IRA Income Limits

Roth IRAs provide unique tax advantages for retirement savers. The contribution to the account is taxed in the year it's made. But when the account owner withdraws the money in retirement, no further taxes are due on either the money contributed or the growth achieved.

However, those with modified adjusted gross incomes (MAGIs) above certain levels are limited in the amounts they can contribute or are banned from Roth ownership altogether. The income limits are updated annually.

For tax year 2023, single and head-of-household filers with MAGIs of $138,000 to $153,000 can contribute only limited amounts. The income phaseout range for married couples filing jointly is $218,000 to $228,000. In 2024, these phaseout ranges are $146,000 to $161,000 for single and head-of-household filers, and $230,000 to $240,000 for married couples filing jointly.

Taxpayers with incomes above those top numbers cannot contribute anything to a Roth IRA. However, all is not lost for those who exceed the limit.

The Backdoor Roth IRA Strategy

The removal of a $100,000 MAGI limit for Roth conversions in 2010 created a loophole in the tax code that allows high-income filers to legally make indirect contributions to Roth accounts using the backdoor Roth IRA strategy.

To use the backdoor Roth IRA strategy, you’ll need to take the following steps:

1. Open a traditional IRA with your IRA custodian of choice. It is usually easiest, but not necessary, to use the same custodian that holds your Roth conversion IRA or where you plan to open your Roth.
2. Make a fully non-deductible contribution to your traditional IRA. The contribution limit for 2023 is $6,500, plus an additional $1,000 catch-up contribution for those aged 50 and older (for a total of $7,500 for those 50 and over). In 2024, the contribution limit rises to $7,000 with the $1,000 catch-up contribution staying the same. That means not reporting your traditional IRA contribution as a deduction for MAGI on your Form 1040, even if you otherwise might be eligible to deduct it.
3. Next, convert the traditional IRA balance into a Roth IRA. Because the MAGI threshold for contributions does not apply to conversions, the income limitation does not apply.
4. Repeat this process every year that your MAGI is too high to allow you to contribute to your Roth IRA directly.

Tax Scenarios and Other Considerations

The backdoor strategy works best if you don’t already have a traditional IRA because it will leave you owing no taxes on your contribution. However, if you have a traditional IRA funded with deductible contributions, the tax benefit will be reduced, and computing your taxes becomes more complicated.

Understanding this takes time, but it’s worth paying attention to or discussing with your tax advisor for the following three situations:

Example 1: You Owe Zero Taxes

You are 40 years old and make $200,000 a year. You open a new IRA and make a non-deductible $6,500 contribution in 2023. You then convert this account with the $6,500 to a Roth IRA. You have no other traditional IRAs. Your tax bill for the conversion is zero because you did not deduct your contribution.

Example 2: You Owe Taxes on All Previous IRA Balances

Your actions and circumstances are identical to the first situation, except you also have a traditional IRA rollover account funded entirely with deductible contributions. You got a tax deduction when you made these contributions.

If you try to convert the entire amount you have in IRAs—both your $6,500 non-deductible contribution and the rest of your IRA balance—you will have a tax bill. How much you owe depends on how large that rollover IRA is and your current income.

This is because, under the pro-rata rule, all your IRAs are treated as one communal IRA. The amount of your Roth IRA conversion that is taxable is proportional to your total IRA balance.

Figuring the Tax Bill

If the IRA is worth $49,500, $5,746 of your $6,500 would be taxable:

• Non-deductible contribution to traditional IRA = $6,500
• IRA rollover balance = $49,500
• Total of contribution plus IRA balance = ($6,500 + $49,500) = $56,000
• $6,500 / $56,000 = 0.116 = 11.6%. This is the percentage of your conversion that will be nontaxable.
• $6,500 × 11.6% = $754 nontaxable conversion balance
• $6,500 – $754 = $5,746 taxable conversion balance
• Only the $754 will be subtracted from the total contribution as nontaxable

If the IRA is worth $3,000, only $2,054 would be taxable:

• Non-deductible contribution to traditional IRA = $6,500
• IRA rollover balance = $3,000
• Total of contribution plus IRA balance = $9,500 ($6,500 + $3,000)
• $6,500 / $9,500 = 0.684 = 68.4%
• $6,500 × 68.4% = $4,446 nontaxable conversion balance
• $6,500 – $4,446 = $2,054 taxable conversion balance
• $4,446 will be subtracted from the total contribution as nontaxable

If you have one or more IRAs you funded with deductible contributions, even the backdoor strategy cannot keep you from owing taxes on a Roth conversion. You can’t open a second IRA, rollover only that second account, and owe no taxes.

The Roth IRA will have just the $6,500 in it. Your other IRAs won’t be folded into it; they’ll just be included in the government’s tax calculations. The tax bill will be assessed regardless of whether a new or existing account is used.

Example 3: You Owe Taxes on Some IRA Balances

This is a more complex circumstance, but the math is fairly straightforward. Under the pro-rata rule, IRA conversions are taxed in proportion to the amount of taxable contributions across all your IRA balances.

Imagine you are the same age with the same income as in the previous examples. You could have several IRAs funded partly with deductible contributions and partly with non-deductible contributions. For the sake of simplicity, though, imagine you have just two traditional IRAs, one funded each way:

• IRA 1 ($60,000): Funded only with deductible contributions
• IRA 2 ($34,000): Funded only with non-deductible contributions

You open a third traditional IRA with a $6,500 non-deductible contribution and convert that balance to a Roth IRA. The taxable proportion of your contribution is equal to the percentage of taxable contributions across all of your IRAs. Since 60% of your IRA balances were funded with pretax (deductible) contributions and 40% with after-tax (non-deductible) contributions, 60% of your conversion will be taxable.

For a $6,500 conversion, $3,900 will be classified as income for the year of conversion. Depending on your annual income, that may move you to a higher tax bracket.

The Backdoor Strategy and Qualified Retirement Plans

If you or your spouse participates in a traditional qualified retirement plan at work that accepts rollovers of pretax (deductible) IRA balances, you have another way to avoid tax when you use the backdoor strategy to fund a Roth. Here’s how:

Roll over all your deductible IRAs into a traditional 401(k) at work before starting the conversion process. Then, open a new IRA with a $6,500 non-deductible contribution and convert that amount into a Roth IRA. Your tax bill will be zero because the government doesn’t include qualified-plan balances in calculating the tax on a backdoor Roth conversion. However, not all 401(k) plans offer this benefit.

Contribute to a Roth 401(k) If You Can

The backdoor strategy is unnecessary if your employer offers a Roth 401(k) and you are not making the maximum possible contribution. Roth 401(k) plans let you contribute up to $22,500 in 2023 in after-tax dollars that you can withdraw tax-free when you retire. In 2024, this limit rises to $23,000.

For example, if you have only contributed $5,000 to your Roth account in the plan, it would be simplest to contribute the remaining $17,500 in 2023 before opening a backdoor IRA. Moreover, if you are 50 or older, you can contribute an additional $7,500 to a Roth 401(k).

One possible exception to this rule could be if you are unhappy with the investment choices in the plan and wish to explore alternative options elsewhere.

The Bottom Line

High earners can circumvent contribution limits to Roth IRAs by using the backdoor strategy. You save the most if you do not have pre-existing traditional IRA balances that must be factored into your tax bill or if your employer’s qualified plan allows rollovers of deductible IRA balances.