Backdoor Roth 2025: The Secret High-Income Earners Use for Tax-Free Retirement Growth

If you’re a high-income earner, you’ve probably already run into the frustrating reality that many of the best tax-free investment options are off-limits to you. One of the biggest culprits? The Roth IRA. 

For 2025, the IRS is holding firm on income limits that keep a lot of people out of Roth IRAs. But here’s the thing: there’s a perfectly legal, IRS-approved strategy that lets you still get your money into a Roth account, even if you make way too much to qualify. It’s called the backdoor Roth, and it’s one of the best-kept secrets for building long-term tax-free retirement income.

In this post, we’ll walk through exactly how the backdoor Roth works, step-by-step. We’ll also show you a sneaky tax rule that could completely derail your plan if you’re not careful (and how to avoid it). 

Why High-Income Earners Get Shut Out of Roth IRAs 

The Roth IRA is popular for good reason. You pay taxes on the money before it goes in, and from that point on, it can grow and be withdrawn completely tax-free, assuming you follow the rules. 

For 2025, if you’re single and your Modified Adjusted Gross Income (MAGI) is $150,000 or less, or married filing jointly and earning $236,000 or less, you can contribute the full $7,000 ($8,000 if you’re 50 or older) to a Roth IRA. But if you’re a single filer making $165,000 or more – or a married couple earning $246,000 or more – you’re locked out of making direct Roth contributions altogether. 

That’s where a backdoor Roth comes in. It’s a workaround that uses a traditional IRA as the entry point to move money into a Roth, bypassing those pesky income caps. 

How the Backdoor Roth Strategy Works 

This process really boils down to four steps: 

Step 1: Open a traditional IRA if you don’t already have one.

Step 2: Open a Roth IRA if you don’t already have one.

Step 3: Make a nondeductible contribution to the traditional IRA.

Step 4: Convert that money from your traditional IRA to your Roth IRA. 

At first glance, that seems almost too easy. But each step has a few important details you have to get right. 

Why Your Contribution Will Be Nondeductible 

If you make too much to contribute directly to a Roth IRA, you also make too much to deduct traditional IRA contributions. That means any contribution you make to your traditional IRA will be with after-tax dollars; you’ve already paid tax on this money once. The upside? You won’t owe taxes on it again when it’s withdrawn. 

This nondeductible contribution is the key to successfully completing the backdoor Roth strategy. 

Avoiding Double Taxation 

Here’s the first tax pitfall: when you make that nondeductible contribution to your traditional IRA, you must report it on IRS Form 8606. This form officially tells the IRS, “Hey, this portion of my IRA has already been taxed.” Skip this, and you risk getting taxed again on that money down the road. 

Watch Out for Gains Before Converting 

The second tax trap happens if your money grows inside the traditional IRA before you convert it to your Roth. If you contribute $7,000 and it grows to $7,200 before converting, that extra $200 is taxable at your regular income rate. 

The workaround? Convert as soon as possible after making the contribution, so there’s no time for gains to build up. This will require some pre-planning to ensure a smooth rollover, but it’s worth the effort. 

The Big One: The Aggregation Rule 

The most dangerous pitfall in the backdoor Roth process is something called the aggregation rule. This rule says the IRS looks at all of your IRA accounts combined – traditional, SEP, and SIMPLE IRAs – when calculating the taxable portion of your conversion. 

You can’t just “pick” the nondeductible dollars to convert. The IRS forces you to take a proportional amount of both pre-tax and after-tax money. Here’s an example: 

 Say you have $72,000 total in your IRAs: $67,000 from past pre-tax contributions, and $5,000 from your new nondeductible contribution this year. That $5,000 is only 6.94% of your total IRA balance. So, if you try to convert “just” that $5,000, the IRS says only 6.94% ($347) is tax-free. The remaining $4,653 gets taxed at your ordinary income rate. 

That’s a nasty surprise you definitely want to avoid. 

How to Avoid the Aggregation Rule 

The easiest way to sidestep the aggregation rule is to have nothing to aggregate with. In other words, make sure you have no pre-tax money already sitting in IRAs when you do the conversion. 

If you have pre-tax IRA money now, you may be able to roll it into an employer-sponsored 401(k) before starting the backdoor Roth process. 401(k)s don’t count toward the aggregation rule. 

Is a Backdoor Roth Right for You? 

The backdoor Roth strategy can be a powerful tool for high-income earners who want tax-free growth in retirement. But it’s not for everyone. If you have large pre-tax IRA balances, or if you don’t plan carefully around timing and reporting, you could end up with an unexpected tax bill. 

If you’re not sure whether it’s a fit for you, it’s worth talking with a financial professional who can look at your full picture, including your tax situation, and guide you through the process. 

If you’d like to learn how a backdoor Roth might work in your specific situation and to explore other strategies to maximize your retirement income, email us at education@thenoblegroup.com to schedule a complimentary review. We’ll help you see exactly how to take advantage of this strategy while avoiding costly mistakes. Alternatively, you can reach us via phone or contact form by clicking here. 

The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. 

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. 

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.