Many people want to contribute directly to a Roth IRA, but their high income prevents them from doing so.
However, there is a way around this obstacle. It’s called the backdoor Roth IRA conversion.
Here’s a simplified explanation of how it works: You make an after-tax (i.e., non-tax-deductible) contribution to a Traditional IRA (2025 limit: $7,000, plus an extra $1,000 for those over 50).
You can then use the backdoor method to roll over that amount to a Roth IRA.
When you use this strategy, you can bypass the Roth IRA income limits.
Now, you might think that if you take a distribution that’s equal to or less than your after-tax contribution, it won’t be taxable, right?
The answer is: Maybe. Or maybe not.
If you’ve only made after-tax contributions to a Traditional IRA, you may not have to pay taxes on the amount you withdraw (although you will have to pay taxes on any earnings).
However, if you’ve ever made pre-tax (i.e., tax-deductible) contributions to your IRA, or you have another IRA funded with pre-tax assets (like a rollover IRA), your backdoor Roth conversion could run headlong into the infamous IRS pro-rata rule.
If it’s taxable, it comes out first
The problem is that when you take any kind of distribution from a Traditional IRA, the IRS doesn’t let you choose to withdraw “only” the after-tax contributions.
Instead, the IRS requires you to mix the value of taxable and non-taxable assets in your distribution.
The rough order of money that comes out is:
- Earnings
- Pre-tax contribution principal
- After-tax contribution principal
It doesn’t matter that you’re taking this distribution to complete a back-door Roth IRA conversion. Taxable assets are always distributed before non-taxable assets. If you’ve made pre-tax contributions to the same IRA, up to 100% of your distribution could be taxable.
Pro-rata applies to all of your Traditional IRAs
The pro-rata tax bite could be even bigger if you have more than one pre-tax IRA--for example, a Traditional IRA you’ve previously funded with pre-tax-contributions and a rollover IRA funded with pre-tax assets from one or more 401(k) plans.
In this case, you’ll have to count the aggregated value of both IRAs when calculating how much of your distribution is taxable.
If this sounds complicated, you’re right. So, let’s use a hypothetical example to show the potential tax impact of the pro-rata rule.
Jane’s backdoor Roth IRA dilemma
Jane, 59, can’t make a regular contribution to a Roth IRA because her annual adjusted gross income (AGI) is $190,000.
So, she decides to use the backdoor Roth IRA conversion method.
In 2025, she makes an after-tax $8,000 contribution to her Traditional IRA. She plans to immediately withdraw that amount as a distribution to fund her newly opened Roth IRA.
Here’s the problem. Her Traditional IRA (previously funded entirely with pre-tax contributions) was worth $192,000 before she made her $8,000 contribution this year.
To complicate matters, Jane also has a rollover IRA worth $100,000.
Which means she’ll have to incorporate the $300,000 aggregated value of both pre-tax IRAs when calculating the taxable portion of her distribution.
Let’s do the math in two steps.
- Jane divides the amount of taxable assets in her IRAs by the total overall value of her IRAs. In this case, the formula is $292,000 divided by $300,000, which equals 0.97. Converted to a percentage, this means that 97% of her distribution will be subject to taxes.
- Jane then multiples her desired $8,000 distribution by 97%. The result is $7,760.
This means that $7,760 of that $8,000 distribution must come from the pre-tax portion of her Traditional IRA, and only $240 can come from the after-tax portion.
That $7,760 distribution—which could be comprised of earnings, principal, or both--will count as taxable income.
If this amount pushes her annual AGI as a single filer above $191,951, she might move from the 24% federal tax bracket to the 32% tax bracket.
How can you avoid Jane’s situation?
If you don’t already have a Traditional IRA, the cleanest way is to establish one and fund it only with after-tax contributions. That way, when you withdraw money to complete a back-door Roth IRA conversion, the principal won’t be taxed (although earnings will be).
Is it worth it?
That’s really the key question. Are the long-term tax-free benefits of a Roth IRA worth it if the cost of a back-door conversion is a higher tax bill?
Only your accountant or tax professional knows for sure.
Are there better Roth alternatives?
There might be. If your employer’s retirement has a Roth contribution option, you can contribute up to $23,500 per year to that account, with an additional $7,500 if you’re over 50. Your employer may even be able to make matching contributions to your Roth account, although these will be treated as taxable income. When you leave your company, you can roll over some or all of it to a Roth IRA with no tax consequences.
If you need help weighing the pros and cons of any Roth conversion strategy, consider speaking with a tax professional or a financial advisor.
This material has been provided for general informational purposes only and does not constitute tax or financial advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax professional on any tax-related issues. This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.
This article was authored by Michael Flaherty and Jeffrey Briskin. Michael is a senior financial advisor with Canby Financial Advisors, a SEC-registered investment adviser. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or training. Michael can be reached at 508.598.1082 or mflaherty@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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