We Will Make Over $300,000 Combined This Year. Can We Use a Backdoor Roth to Reduce Taxes?

High-income households can use a backdoor Roth to contribute to a Roth IRA despite the program’s standard income limits. This can be a legal and effective way to build a tax-free stream of income for your retirement. Whether this method will reduce your taxes depends heavily on your current tax rates versus those in retirement. For some high-earners, a Roth IRA can actually cost you money if you spend more on taxes today than you will save in retirement.

If you have questions about taxes and retirement planning, speak with a financial advisor today.

What Is a Backdoor Roth?

A Roth IRA is a post-tax retirement account. You pay taxes when you make contributions to the account so there are no taxes to pay when you make withdrawals in retirement.

It’s more expensive to set up a Roth IRA upfront than setting up a pre-tax portfolio, such as a traditional IRA or 401(k). However, you save on higher taxes later when your portfolio is at its peak value and you are on more limited retirement income.

Roth IRAs have income limits. ¹ For 2026, if you’re single and make less than $153,000, you can contribute up to $7,500 for the year. Married couples filing jointly must make less than $236,000.

This contribution limit begins to shrink and phase out from there. It ultimately reaches income caps of $165,000 and $246,000 for single and joint filers, respectively.

For high-earners beyond these figures, they will find themselves locked out of a Roth IRA. However, they have a solution in a backdoor Roth.

A backdoor Roth works in three steps:

1. Sign up. You open both a Roth IRA and a traditional IRA.
2. Contribute. A traditional IRA has no income limits, so you contribute money to the traditional, pre-tax IRA.
3. Convert. Either in a lump sum or periodically, you convert the funds to your Roth IRA. 

Since the IRS puts no income limits on Roth rollovers, you have greater flexibility in building a fully funded Roth IRA. Just remember that you must pay taxes on those funds upfront.

A financial advisor can help you create the right backdoor Roth strategy to suit your long-term financial goals.

Backdoor Roth Conversion Taxes and Cooldowns

When you convert money to a Roth IRA, you must pay income taxes on the entire amount in the tax year that you make the conversion.

For example, if you move $50,000 from your traditional IRA to your Roth IRA, you must add $50,000 to your taxable income that year. This can potentially push you into a higher tax bracket. 

It’s important to manage your cash flow appropriately for this tax event. Unlike portfolio withdrawals, a conversion doesn’t generate spendable cash that you can use to pay these taxes. Instead, you must have the money on hand. 

You must also account for the pro rata rule. If your IRA contains a mix of deductible and non-deductible contributions, you will pay taxes based on their proportion in your account. You cannot simply volunteer to move all of the nondeductible contributions and avoid conversion taxes.

It’s not uncommon for households to convert their IRAs regularly, such as every year or every several months. This can help minimize your taxable gains, but conversion taxes will still apply each time you roll money over.

Ongoing transfers can also help avoid the Roth IRA’s cooldown period, also known as the 5-year rule.

Long-Term Tax Benefits of a Backdoor Roth

A Roth IRA offers several benefits.

Because you pay taxes on the funds upfront, this portfolio will grow tax-free and you pay no taxes on your withdrawals. It also has no required minimum distributions (RMDs), giving you more flexibility in your financial planning ² .

High-earning households may not find it helpful to save money with this vehicle. In fact, the more you make, the more you are likely to pay in conversion taxes.

Example Scenarios

The standard rule of thumb is as follows:

• A Roth IRA is typically better if you expect to pay higher taxes in retirement than you do currently.
• A traditional IRA can be optimal if you expect your tax rates in retirement to go down.

For example, say that you pay an effective rate of 20% in taxes while working and have $50,000 to invest.

Now, say that your portfolio has doubled in value by the time you reach retirement. For taxes, you now pay an effective rate of 22% and withdraw all of the funds.

This is where the rule of thumb comes from. The Roth would still leave you with $80,000, but the traditional IRA’s after-tax value would drop to $78,000.

On the other hand, say that your effective tax rate had dropped to just 15% in retirement. The Roth would then generate the same $80,000, but the traditional IRA’s value would surpass it at $85,000 after taxes.

That’s why this decision always comes down to whether your tax rates will be higher or lower in retirement compared to your working life. A backdoor Roth may help reduce your taxes.

It all depends on your anticipated retirement income and current investment strategy. There’s still a chance that you may actually spend more than you save in the long run.

For a high-earning household that’s making $300,000, it can be helpful to speak with a financial advisor.

The Pro Rata Rule Explained

The backdoor Roth strategy works cleanly when your traditional IRA contains only the non-deductible contribution you just made. For many people, that’s not the case, and the pro rata rule further complicates matters.

The IRS treats all of your traditional IRA assets as a single pool when you make a conversion. This is regardless of which account the money sits in or which dollars you intended to move.

Say you have $90,000 in pre-tax contributions across existing IRAs, and you add $10,000 in non-deductible contributions before converting. In this case, the IRS treats 90% of your conversion as pre-tax income.

Converting that $10,000 doesn’t move only after-tax dollars. It moves a proportional mix, and you owe taxes on the pre-tax portion.

The math works like this.

• $10,000 non-deductible contribution added to a $90,000 pre-tax IRA balance creates a total of $100,000.
• The after-tax percentage is 10%.
• A $10,000 conversion is 90% taxable.
• $9,000 is added to your income that year
• $1,000 converts tax-free

This conversion strategy produces far less benefit than most people assume going in.

How a Rollover Helps

The most common way to address this is to roll existing pre-tax IRA balances into your employer’s 401(k) before executing the conversion.

Not all 401(k) plans accept incoming rollovers, so you must confirm this first. If the plan does accept them, moving the pre-tax money out of your IRA leaves only the new non-deductible contribution behind. The conversion then proceeds without the pro-rata complication.

Use IRS Form 8606 to track non-deductible contributions and accurately report conversions each year. ³ Keeping this form current is important because it establishes your cost basis and prevents you from being taxed twice on money you already paid taxes on.

The Mega Backdoor Roth

The standard backdoor Roth is limited by IRA contribution caps. For most people, this means moving a few thousand dollars per year into a Roth account.

Instead, a mega backdoor Roth operates through a 401(k) plan. This allows you to move significantly more - potentially tens of thousands of dollars annually - into Roth treatment. It depends on plan rules and where you stand relative to overall contribution limits.

The strategy relies on after-tax 401(k) contributions. These are separate from the standard pre-tax or Roth 401(k) contributions most employees make. The IRS sets an overall annual limit on combined contributions to a 401(k) from all sources. This includes contributions, employer matches and after-tax contributions.

For 2026, the limits are as follows: ⁴

• Under 50 years old: $72,000
• Age 50 and older: $80,000
• Ages 60 to 63: $83,250

If your pre-tax contributions and employer match leave room below that ceiling, you may be able to fill the gap with after-tax contributions.

The after-tax contributions themselves don’t grow tax-free; you must convert them. Some plans allow what’s called an in-plan Roth conversion, where after-tax contributions are converted to Roth within the 401(k) itself. Others allow after-tax contributions to be rolled to a Roth IRA while you’re still employed.

Either way, the goal is to move those after-tax dollars into Roth status before they generate earnings. This keeps the tax impact minimal.

Bottom Line

Not every employer plan allows after-tax contributions or in-service withdrawals, and those that do may have restrictions on timing and frequency. Checking your summary plan description or asking your plan administrator directly is the only way to know whether the option exists. For high earners who have already maxed out standard contribution limits and are looking for additional tax-advantaged space, it is worth finding out.

Tips on Making a Roth Conversion

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Planning for your retirement income can be a complicated and speculative process. But knowing your tax bracket isn’t. Once you know what you plan on withdrawing, try using an income tax calculator.

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