re: Roth Income Limits and Backdoor

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Can someone lay out how to do the backdoor Roth process as if I were a 5 year old child?

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Make contribution to Traditional IRA that is not tax deductible. As soon as possible, convert those funds to a Roth IRA. IRS says you have to pay taxes on any of the pre-tax portion that you convert, but since all of the money is after-tax (since it wasn’t deductible), you’re home free.

It’s a little bit more complicated if you have ANY money in ANY traditional IRA that is pre-tax.


Side note - many employer retirement plans offer the ability to make after tax contributions to those plans as well. That can create opportunities for “super” backdoor Roth conversions. You basically rollout the after tax money from the 401k to a Roth while you’re working. Always worth checking into with your 401k provider.

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Side note - many employer retirement plans offer the ability to make after tax contributions to those plans as well. That can create opportunities for “super” backdoor Roth conversions. You basically rollout the after tax money from the 401k to a Roth while you’re working. Always worth checking into with your 401k provider.

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Can you explain this further? How am I saving more taxes this way?

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Can you explain this further? How am I saving more taxes this way?

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You can essentially save in a 401k 4 ways - pre tax contributions, Roth contributions, employer contributions, and after tax contributions.

In the first two you can save up to $23,000 between the two. Your employer contributions and your after tax contributions could theoretically be as high as $69,000 (all contributions to a 401k from your combined sources have to under that limit if you’re younger than 50).


Hopefully pre tax (traditional) and Roth 401k tax savings now and later are understandable.

As for after tax contributions, they allow you to get more money into a Roth IRA each year since many plans allow you to rollover the after tax portion while you’re still working. It’s eligible to be rolled over into a Roth IRA.

I personally max out traditional 401k contributions, then max out after tax (which is around $12,000 with my employer), then backdoor Roth.

I’d save all of it pre-tax if I could, given my marginal rate, but I can’t do that. Saving it tax free in the future is the next best thing compared to a plain taxable brokerage account.

Hopefully that makes sense.

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23,000 401k (is that my contribution or combined with employer)

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That’s yours. Employer is a separate bucket.

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7,500 Traditional, then converted to Roth.

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7,000 if you’re under 50. 8,000 if you’re over. If you’re over 50, the 401k limit for your pre-tax/Roth contributions is $30,500.

That being said, your traditional IRA and Roth IRA contributions are irrelevant to the 401k buckets.

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That’s way less than 69,000.

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Yeah, and most employers aren’t that generous so the $69k cap never comes into play. They also do not have to offer after tax options, but many do.

A lot of confusion comes from the words being used interchangeably. Contributions, rollovers, and conversions all mean very different things and have very different rules.


Your new, out of pocket or paycheck money going into a 401k or an IRA is a contribution and has a limit on it. For 2024 it is $23,000 for pre-tax/Roth 401k, theoretically as high as $69,000 on after tax 401k (in practice it’s never this high because the other contributions eat away at the $69k combined cap - if you put $23k in pre tax 401k, and assuming no employer contributions, you could put $46k after tax at best), and $7,000 for traditional/Roth IRA.

Generally, a rollover is uncapped and is movement from two retirement accounts that do not have the same account type. Moving from a 401k to an IRA is a rollover, and is a reportable transaction to the IRS. Whether or not it’s taxable as well depends on the type of rollover. You can rollover Pre tax 401k to traditional IRA and pay no taxes, or to a Roth IRA and pay taxes on all of it at once. You can rollover Roth 401k to Roth IRA and pay no taxes. You can rollover after tax contributions to a Roth IRA, but you have to also deal with any earnings on those contributions. The earnings can be rolled into a traditional IRA without paying taxes, or you can roll it into a Roth and pay the taxes on the earnings.

For example, if you contribute $10k to after tax 401k, and it’s worth $10k when you roll it over, you just roll it into a Roth IRA and you’re good. You can typically do this immediately in the plan, even while you’re working. If you contribute $10k and it’s worth $12k when you roll it over, you can either roll the $10k to Roth and $2k to traditional IRA, abounding any immediate tax liability, or roll the entire balance to a Roth IRA and pay taxes on the $2k at that time as a conversion. The growth on the after-tax amount while it’s in the 401k is treated as pre-tax money (same as it would be if you made nondeductible contributions to a traditional IRA). For this reason, it is typically a good idea to roll them over to Roth options as quickly as possible. In the case of the typical backdoor Roth, it’s a conversion of the nondeductible amount, not a rollover.


That leads us to conversions, which is the process of taking pre-tax money, paying taxes on it, and converting it to Roth accounts where it’s presumably never taxed again. These are also uncapped. You can convert as much as you’d like in any given year.

One other quirk- some 401k plans allow what’s called in plan Roth conversions. This allows you to convert your after tax contributions to your Roth 401k inside of the plan without doing a rollover to a Roth IRA.

Whether any of this is a good idea depends on your individual situation and what your plan allows, but hopefully that clears some things up.

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Probably not going to make a difference. Depends on the state and their tax forms. Most state tax forms use the federal agi which already accounts for the 401k contributions prior to assessing state tax

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This. For one single year it’s also probably not worth the hassle.

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almost seemed like I had to be missing something for it to be that easy

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I still feel that way too. The rule is absurd.

"Don't you dare contribute to this Roth IRA if you make over this amount. If you do, your ONLY option is a traditional IRA. And fine we'll let you immediately transfer that to a Roth IRA seconds later."

If I contribute $7,000 cash to a Trad IRA, can I move that cash then immediately to the Roth or does that cash need to be used to purchase something first then that something immediately moved to Roth?

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Reading through this rule, it seems like I should not try to take any Traditional IRA deductions if I’m planning to just backdoor the Roth every year.

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Yes.

But what typically trips people up is not that.

What trips people up is their Rollover IRA.

Because a Rollover IRA is treated as a Traditional IRA.

Even though it came from your 401(k).

Many people who make enough money to be ineligible to contribute to a Roth, also have a Rollover IRA.

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The pro rata rule only applies to your traditional taxable IRA to determine how much tax you owe on the amount you converted to Roth. Example 1: You have $100,000 in a traditional IRA and it is 100% taxable. You have a Roth IRA with any amount. You can convert any or all of your Traditional IRA into your Roth. The amount you convert to Roth is taxable income. Example 2: You have $100,000 in a traditional IRA and it is 80% taxable and 20% after tax. You have a Roth IRA with any amount. You can convert any or all of your Traditional IRA into your Roth. The amount you convert to Roth is taxable income for 80% of the amount you converted. In summary, you can convert as much of your Traditional IRA to Roth IRA as you want to in any tax year. You just pay normal unearned income taxes for the taxable amounts you converted.

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How would one have a traditional IRA that is 80% taxable and 20% non-taxable? I thought you pay taxes on 100% of a traditional IRA’s distributions? Am I dumb or missing something?