Backdoor Roth: The Underrated Strategy to Retire Tax-Free and Build Generational Wealth — Accessible at Any Income Level

Where does your tax dollar go?

The ROTH IRA is one of the most popular retirement strategies — and for good reason. It’s simple: you contribute after-tax dollars, your investments grow tax-free, and when you withdraw in retirement, the money is 100% yours, free from taxes. With benefits like that, it’s easy to see the appeal.

But not everyone can take full advantage of this powerful tool. Contribution limits apply — for 2025, married couples filing jointly with a MAGI over $246,000 aren’t eligible to contribute directly.

In today’s insights, we’ll show you how to access this popular strategy even if your income is above the limits. Let’s dive in.

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The benefits of ROTH IRAs

First - Let’s take a closer look at why the ROTH IRA is so popular and the benefits that make it such a powerful retirement tool:

1. Earnings grow tax-free: Both your contributions and investment gains accumulate completely tax-free, giving your money the chance to grow even more over time.

2. Qualified tax-free withdrawals: When you’re 59½ or older and have held the account for at least five years, you can withdraw funds without paying taxes or penalties.

3. No mandatory withdrawals: Unlike a Traditional IRA, Roth IRAs don’t require you to take required minimum distributions (RMDs), giving you more control over your money.

4. Tax-free inheritance benefits: If you pass your Roth IRA to heirs, their withdrawals of contributions are tax-free. Earnings from an inherited Roth IRA are generally tax-free as well, though they may be subject to income tax if the account is less than five years old at the time of withdrawal.

   
   

A side note: While points 1 and 2 alone make the Roth IRA an attractive retirement option, points 3 and 4 are especially appealing if your goal is to build generational wealth. Now that the benefits are clear, lets explore access at any income level.

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Executing the backdoor ROTH strategy

Step 1: Check if you’re above the contribution income limit. The IRS does offer some flexibility for higher earners. If your income still falls within the allowed range, you can simply open a Roth IRA and contribute directly. For 2025, here are the income limits — which you can also find [here].

Step 2: Open a Traditional IRA if you’re not eligible to contribute to a Roth.

Before you do, keep these three key points in mind:

1. Deduction limits: If you’re ineligible for a Roth, you’re likely also not eligible to take a tax deduction on your Traditional IRA contributions. You can check your limits [here].

2. Contribution limits: For 2025, the limit is $7,000, or $8,000 if you’re age 50 or older.

3. Reporting requirements: Any contributions you make here — which will eventually be rolled over to a Roth — must be reported to the IRS using Part I of Form 8606.

Step 3: Open a Roth IRA and complete a backdoor rollover from your Traditional IRA. The process can vary slightly depending on your brokerage, but it usually starts by giving them a call and requesting a rollover. Your brokerage may then send you a form to complete — once submitted, it triggers the backdoor rollover.

After the rollover is complete, don’t forget to report the conversion on Part II of Form 8606 to stay compliant with IRS rules.

Step 4: Repeat the process each year, staying within contribution limits.If your income consistently exceeds the Roth contribution threshold, you can continue using this strategy annually to take full advantage of its benefits.

Now that we’ve covered both the benefits and the steps of a Roth backdoor, let’s wrap up by looking at some potential pitfalls to watch out for.

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Common Pitfalls in Roth Conversions

When it comes to Roth conversions, there are a few things you’ll want to keep in mind:

1. The Five-Year Rule: Each conversion needs to stay in your Roth IRA for at least five years. Pulling money out too soon could trigger a penalty, so it’s important to plan ahead.

2. Taxes on Traditional IRA Gains: Any growth in your Traditional IRA before conversion could be taxable. A few ways to manage this include rolling over when markets are down, converting funds as soon as they hit your Traditional IRA, or doing regular rollovers before significant gains accumulate.

3. The Pro-Rata Rule: This one can get a bit tricky. If you have multiple IRAs or a mix of pre-tax and post-tax funds, part of your rollover could be impacted. It’s worth digging a little deeper and planning carefully here and we recommend your own research.