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High-income earners need to save for retirement just as much as anyone else, even if they currently enjoy a substantial income. Although they can’t directly use a Roth IRA, a “backdoor Roth conversion” offers a legal workaround. However, this strategy comes with potential pitfalls that should be carefully navigated. There are some mistakes you’ll want to be sure to avoid. Consider talking to a financial advisor to help you manage your portfolio.
Backdoor Roth Conversion Basics
Here’s how a backdoor Roth conversion works. If you earn too much income to contribute directly to a Roth IRA, you can instead fund a traditional IRA. For 2026, the income limits are $168,000 for single filers, $252,000 for married couples filing jointly, $10,000 for married couples filing separately and $168,000 for heads of household.
After you’ve made your contribution, you can roll the funds into a Roth account. You’ll have to pay taxes on any money in the account that hasn’t been taxed and on any gains you’ve made through your investments.
A Roth conversion may cost you a bit of money upfront in income taxes, but it allows you to let your investments grow tax-free until you retire. You won’t have to pay taxes on qualified withdrawals in retirement.
Backdoor Roth IRA Mistake #1: Forgetting the Pro Rata Rule
The pro rata rule applies to investors who have other traditional IRA accounts that are not being rolled into a Roth IRA. If a large portion of your traditional IRA consists of pre-tax dollars, such as funds rolled over from a 401(k), you will owe more in taxes when you convert that money to a Roth IRA. The actual calculation can be a bit confusing, so working with a financial advisor may be advisable if you think this might apply to your situation.
Backdoor Roth IRA Mistake #2: Ignoring the Escape Hatch
If the above pro rata rule has you worried, there is a possible fix: the escape hatch. If the company you currently work for offers a 401(k) plan, you might be able to roll your IRA assets into that plan. Once they are in the 401(k), they no longer apply to the pro rata rule. If you are self-employed, consider rolling traditional IRA assets into a Solo 401(k) for the same result.
Backdoor Roth IRA Mistake #3: Accumulating Capital Gains
When you fund your traditional IRA in preparation for a backdoor Roth conversion, you’ll have options in terms of investments. If you choose equity investments like stocks, they’ll potentially start earning money if the value of the investments goes up. If you leave the funds in the traditional IRA for too long before completing the conversion, you’ll be taxed on them.
You can avoid these taxes by investing in cash equivalents and making sure you complete the conversion as quickly as possible.
Backdoor Roth IRA Mistake #4: Only Converting Once
The maximum contribution to an IRA is $7,500 in 2026 ($8,600 if you’re 50 or older). For wealthy people likely to take advantage of a backdoor Roth IRA conversion, this is a drop in the bucket compared to their overall retirement plan. To take advantage of a backdoor Roth, you’ll need to contribute $7,500 year after year and complete the conversion each time.
Backdoor Roth IRA Mistake #5: Letting Legislative Uncertainty Deter You
Many in Congress have wanted to close this lucrative loophole. Some legislators even want to start taxing Roth withdrawals. While all of this can be scary, anyone who pays attention to the government knows that until something is signed by the president, you shouldn’t count on it happening. If legislation surrounding Roth accounts happens, then you’ll have to deal with it, but don’t let that possibility scare you off.
Bottom Line
A backdoor Roth conversion allows wealthy people to take advantage of Roth IRA accounts via a loophole. There are several mistakes you should avoid, such as allowing too much growth before you convert and forgetting about the pro-rata rule’s impact on taxes.
Retirement Tips
- For a Roth conversion or any other retirement considerations, consider working with a professional. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re saving with a 401(k), make sure you take advantage of any employer match available. This is free money, don’t leave it on the table.
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