Roth IRAs are popular because qualified withdrawals in retirement are tax-free. But people with incomes above a set level cannot contribute to a Roth IRA directly. The "backdoor Roth" is a way around that limit, and in 2021 Congress came close to closing it.
How the backdoor works
- Make a non-deductible contribution to a traditional IRA. There is no income limit for this.
- Convert the traditional IRA to a Roth IRA. Since 2010 there has been no income limit on conversions.
- Pay tax on any untaxed portion of the conversion. If the only money in your traditional IRAs is the non-deductible contribution, there is little or nothing to tax.
The catch is the pro-rata rule: if you have other pre-tax money in traditional IRAs, part of the conversion is taxable. The steps are reported on Form 8606.
A related strategy, the "mega backdoor", uses after-tax contributions to a 401(k) plan that are then converted to Roth.
The 2021 fight
In September 2021 the House Ways and Means Committee's draft of the Build Back Better Act included provisions to:
- ban conversions of after-tax money in IRAs and plans, ending both the backdoor and mega backdoor, from 2022;
- bar Roth conversions entirely for high-income taxpayers from 2032.
When a slimmed-down framework was released at the end of October 2021, the retirement provisions were missing, and commentators reported that the backdoor had survived. Days later a revised House text restored them, and the version the House passed on 19 November 2021 included the restrictions.
The bill then stalled in the Senate. The Inflation Reduction Act that passed in 2022 did not include the Roth changes, and neither did later legislation. The backdoor Roth remains permitted under current law.
Why critics wanted it closed
Supporters of a ban argued that the backdoor let high earners get around income limits Congress had set deliberately, and that some had built very large tax-free accounts. Defenders said the strategy was legal, transparent and the result of Congress's own decision to remove income limits on conversions.
Should you use it?
It depends on your income, your other IRAs and your expected tax rate in retirement. The rules are mechanical but easy to get wrong; a tax professional can check the pro-rata calculation before you convert.
Sources
General information about the law as it stood when this page was updated, not financial, tax or legal advice. Rules and limits change; check the official source or a qualified adviser before acting.