Backdoor Roth
Personal FinanceDefinition
A workaround that lets high-income earners (whose income exceeds direct Roth IRA phaseouts) still get money into a Roth IRA. Mechanics: contribute non-deductible to a Traditional IRA, then convert to Roth almost immediately.
Watch out for the pro-rata rule: if you have any pre-tax money in any IRA at year-end, the conversion is taxed proportionally. Best when you have no other Traditional IRA balances. The "Mega Backdoor Roth" goes further — using after-tax 401(k) contributions converted to Roth, allowing $50K+/year of Roth contributions.
Watch out for the pro-rata rule: if you have any pre-tax money in any IRA at year-end, the conversion is taxed proportionally. Best when you have no other Traditional IRA balances. The "Mega Backdoor Roth" goes further — using after-tax 401(k) contributions converted to Roth, allowing $50K+/year of Roth contributions.
Example
Earner makes $300K (above Roth phaseout). Contributes $7K to Traditional IRA non-deductible, then converts to Roth same day. Owes tax on any growth in the gap; if zero, the conversion is tax-free.
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