Backdoor Roth Contributions are a commonly used planning technique to help high-income earners contribute to a Roth IRA. While the strategy is commonplace, the logistics are often misunderstood. This can lead to misconceptions and potential errors on tax return filings. In this article, we will discuss the income limitations for direct Roth contributions and the tax deductibility limitations for Traditional IRA contributions.
If you or your spouse receive earned income, then you are eligible to contribute to an Individual Retirement Account (IRA). In 2021, the IRS limit allows you to contribute up to $6,000 (or $7,000 if you are 50 or older). It is important to note that the contribution limit is $6,000 total for all IRAs. Contributions need to be made by the tax filing deadline of April 15th (note: tax extensions do not extend IRA contribution deadlines).
Roth IRA versus Traditional IRA
As advisors, we are always excited about the opportunity to help clients contribute to Roth IRAs. Roth IRAs have several unique features that make them appealing, the main feature being tax-free growth. The table below summarizes the main differences between Roth and Traditional IRAs.

Roth Income Limitations and Traditional IRA Deductibility
Due to income limitations placed on Roth IRAs, it is challenging for high-income earners to directly contribute funds to a Roth IRA. For example, if you are Married Filing Jointly (MFJ) and your Modified Adjusted Gross Income (MAGI) exceeds $208,000 you are not allowed to directly contribute to a Roth IRA.

Additionally, Traditional IRAs have income limitations for tax deductibility. For example, if you are Married Filing Jointly (MFJ) and your Modified Adjusted Gross Income (MAGI) exceeds $125,000, you are not allowed to take a tax-deduction for your contribution.

I’m a High-Income Earner – What Can I Do?
The complexity of Roth IRA income limitations and Traditional IRA deductibility brings us to the concept of the Backdoor Roth Contributions. The IRS allows high-income earners to make a nondeductible contribution to their Traditional IRA then immediately convert that contribution to their Roth IRA. This results in no tax due, but timing and record-keeping are essential.
Example: Mike and Jen are a married couple around 48 years old. Their MAGI is $325K. Both participate in their company 401(k)s and have $0 balances in their Traditional IRA accounts. Mike and Jen cannot directly contribute to their Roth IRAs because their income is too high. In addition, Mike and Jen will not receive a tax-deduction for contributing to their Traditional IRA.
Recommendation: We encourage Mike and Jen to each make a $6,000 nondeductible contribution to their Traditional IRA accounts. Mike and Jen will be contributing using funds they have already paid tax on which means they are using “after-tax” dollars. The after-tax dollars create “basis” in their IRA accounts. Once the initial contribution is made, the next step is to immediately convert to their Roth IRA accounts.
The IRS requires that you track nondeductible IRA contributions on the tax form 8606. To calculate the taxable portion of the transaction, you take the total amount converted less any after-tax contributions.
Important consideration: If you currently have a large Traditional IRA balance, the Backdoor Roth contribution may not be the most optimal planning strategy for you, and could result in a large unexpected tax liability!
Be Careful of the Pro-Rata Rule
The key reason that the Backdoor Roth contribution works without creating a tax liability is because there are no pre-tax dollars already held in the Traditional IRA. The IRS requires that a conversion from a Traditional IRA to a Roth IRA be done on a pro-rata basis.
How this works: When determining the tax liability on a conversion, the IRS looks at all of your Traditional, SIMPLE, and SEP IRA accounts combined. If this consists of 80% pre-tax dollars and 20% after-tax dollars, then that ratio determines what percentage of the money you convert to a Roth is taxable. (In this example, 80% of the conversion would be taxable.)
Unfortunately, you can’t choose to convert only after-tax money. The IRS applies the pro-rata rule to your total IRA balance at year-end, not at the time of conversion. It is worth noting that 401(k)s, even self-employed 401(k)s, are not included in the pro-rata calculation.
See below for a high-level illustration of how the taxable conversion amount results in $0 tax due. Your Paracle Team will work closely with you and your tax preparer to make sure you have the proper documentation to report your Backdoor Roth Contribution.


The Backdoor Roth Contribution provides a unique opportunity to gain access to tax-free growth. Roth IRAs provide an additional tax-diversifier in retirement. If you have any questions or would like to explore other Roth opportunities, we encourage you to reach out to your Paracle Team with any questions.
About Paracle
Paracle Personal Financial Management is an independent financial planning firm founded in 2004 with an honest desire to help people optimize their finances by providing unbiased financial planning and investment advice that puts their clients first. Paracle specializes in delivering expert, comprehensive wealth management services to busy families. Their expertise integrates financial planning with investment management to ensure their clients experience confidence in every aspect of their plan so they can focus on what matters most. To learn more about Paracle, connect with them on LinkedIn.