Backdoor Roth IRA Contributions

An Advanced Strategy for High-Income Earners to Build Tax-Free Wealth

For many high-income and high-net-worth individuals, contributing directly to a Roth IRA is not permitted due to income limitations imposed by the IRS. However, the Backdoor Roth IRA Contribution Strategy provides a legitimate way for these individuals to allocate money into Roth IRAs using a carefully structured tax strategy.

At Greenbush Financial Group, we help clients evaluate whether the backdoor Roth strategy is appropriate, structure it correctly, and avoid common (and costly) mistakes that can cause unintended tax consequences.

Why Backdoor Roth IRA Contributions Exist

Many taxpayers are surprised to learn that:

• There are income limits on Roth IRA contributions

• But…..there are no income limits on Roth conversions

This distinction is what makes the backdoor Roth IRA contribution strategy possible.

For individuals who have already:

• Maximized employer-sponsored retirement plans (401(k), 403(b), etc.)

• Reached income levels that phase them out of direct Roth IRA contributions

The backdoor Roth IRA becomes a powerful way to continue building tax-free retirement assets instead of placing additional savings into taxable brokerage accounts.

How the Backdoor Roth IRA Contribution Strategy Works

The strategy generally follows two steps:

1. Make a non-deductible contribution to a Traditional IRA
   Because income limits apply only to deductions, not contributions, high-income earners can still fund a Traditional IRA on an after-tax basis.

2. Convert the Traditional IRA to a Roth IRA
   The contributed funds are then converted to a Roth IRA. Since Roth conversions have no income limits, the money can move into a Roth account where future growth and qualified withdrawals are tax-free.

When executed correctly, this strategy allows after-tax dollars to grow in a Roth IRA rather than in a taxable account.

Why Backdoor Roth IRAs Are Attractive for High-Net-Worth Individuals

For many clients, the backdoor Roth strategy comes into play after all pre-tax retirement options have been exhausted.

Instead of directing excess savings into a taxable brokerage account—where dividends, interest, and capital gains may be taxed—this strategy allows:

• Tax-free accumulation inside a Roth IRA

• Tax-free withdrawals after age 59½ (subject to Roth rules)

• No Required Minimum Distributions (RMDs) during the owner’s lifetime

• Greater flexibility and tax efficiency in retirement

• More favorable assets to pass on to heirs

Beware of the IRS Step Transaction Rule

One of the most common mistakes we see with backdoor Roth IRA contributions involves the IRS step transaction rule.

Some taxpayers contribute to a Traditional IRA and then convert the funds to a Roth IRA immediately or the next day, without understanding how the IRS may interpret the intent of the transaction.

If the IRS determines that:

• The contribution and conversion were pre-planned as a single transaction

• The steps were merely a formality to bypass contribution limits

The conversion may be disallowed, potentially triggering taxes and penalties.

How We Help Manage the Step Transaction Rule

We work with clients to structure timing and documentation appropriately so that backdoor Roth contributions are:

• Executed correctly

• Defensible under IRS scrutiny

• Allowed to remain in the Roth IRA

This is a critical planning detail that is often overlooked.

Understanding the Aggregation Rule

Another major issue that can derail a backdoor Roth IRA strategy is the IRA aggregation rule.

The IRS does not look at IRAs individually when determining the taxability of a Roth conversion. Instead, it aggregates all of a taxpayer’s pre-tax IRAs, including:

• Traditional IRAs

• SEP IRAs

• SIMPLE IRAs

If a taxpayer has other pre-tax IRA balances, the conversion is treated as pro-rata, meaning a portion of the conversion will be taxable—even if the specific IRA being converted was funded with after-tax dollars.

Why This Matters

Many individuals assume their backdoor Roth conversion will be tax-free, only to discover later that:

• A large portion of the conversion was taxable

• The strategy did not work as intended

This is one of the most common and costly errors with backdoor Roth IRAs.

Our Role

We help clients:

• Understand how the aggregation rule applies

• Determine whether the backdoor Roth strategy is viable

• Coordinate employer plans or other strategies to mitigate issues

Backdoor Roth IRAs as Part of a Broader Plan

Backdoor Roth IRA contributions are most effective when integrated into a broader financial plan that includes:

• Employer retirement plans

• Tax bracket management

• Roth conversion strategies

• Retirement income projections

• Estate and legacy planning

When coordinated properly, this strategy can significantly improve tax efficiency over decades.

Contact Us . . . .

All of our services start with a complimentary consult. No high pressure sales tactics. We are financial planners, not salesmen.

About Our Firm:  Greenbush Financial Group is an independent registered investment advisory firm based in Albany, New York, that provides four main services to clients: fee-based financial planning services, investment management, employer-sponsored retirement plans, and retirement planning services.  The firm serves clients locally in the Albany region and virtually across the United States.

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