Backdoor Roth IRA
RetirementGlossary term
Definition
A strategy that allows high-income earners who exceed Roth IRA income limits to contribute by first making a non-deductible contribution to a traditional IRA, then converting it to a Roth. The pro-rata rule may cause partial taxation if other traditional IRA funds exist.
Related terms
- Roth IRAA retirement account where contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. Particularly beneficial for younger investors.
- Roth ConversionThe process of moving money from a traditional IRA or 401(k) to a Roth IRA, paying income taxes on the converted amount in the year of conversion. This strategy can be advantageous when you expect to be in a higher tax bracket in retirement.
- Mega Backdoor RothAn advanced strategy allowing after-tax contributions to a 401(k) beyond the standard limit, then converting those funds to a Roth IRA or Roth 401(k). Not all employer plans allow this, but it can enable significantly higher Roth contributions each year.
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