How To Set Up a Backdoor Roth IRA

Setting up a backdoor Roth IRA is a multi-step process

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A backdoor Roth IRA refers to a specific maneuver when managing individual retirement accounts (IRA)—it is not an official type of IRA. 

In 2010, Congress removed the $100,000 income limit placed on IRA conversions, allowing people who earn too much to contribute to a Roth IRA directly to instead contribute to a traditional IRA (which has no income limits) and then convert their traditional IRA to a Roth IRA. The backdoor part of the name refers to this workaround. 

If a backdoor Roth IRA sounds like it might fit your situation, learn more about where and how to set one up. 

Key Takeaways

  • A backdoor Roth IRA is not a type of retirement account, but rather a workaround for those who want to contribute to a Roth IRA but their income exceeds the limits for doing so. 
  • To open a backdoor Roth IRA, you need to first open and contribute to a traditional IRA, then convert that traditional IRA to a Roth IRA. 
  • Converting a traditional IRA to a Roth IRA can have tax implications that need to be planned for. 

Where Can You Set Up a Backdoor Roth?

Setting up a backdoor Roth IRA first requires setting up a traditional IRA at a financial institution like a credit union, bank, investment brokerage, or mutual fund provider. It’s pretty easy to set up an IRA online. When opening the account, you’ll have options for how you want to manage it. Not all brokerages that support IRAs will offer each of the following options, so it can be helpful to first choose the type of account management you want, and then find a brokerage that offers the services you’re looking for. These are some of the options you can pursue: 

  • Professionally managed: This is the most expensive account management option. It involves having a dedicated (human) portfolio manager to help you choose and manage your investments based on your unique needs.
  • Self-managed: When you have a self-managed IRA, you are responsible for selecting and managing the investments in the account. Someone who is new to investing may find this style of management overwhelming, but it does come with lower fees. 
  • Automated "robo-advisor": Robo-advisors allow the account holder to choose from different portfolio options intended to suit a variety of life stages and risk tolerances. Instead of human intervention, algorithms determine the best investment choices for your specific IRA. These also offer lower fees.

Before choosing a brokerage firm, it can be helpful to answer the following questions as you shop around for the best fit:

  • What fees will I need to pay to open and maintain the account?
  • Does this account require a minimum initial investment or for me to maintain a certain minimum balance?
  • Can I receive customer support in-person, via the phone, online, or other ways?

Setting Up a Backdoor Roth

To better understand how a backdoor Roth IRA works, let’s walk through the process. 

Open a Traditional IRA

Because a backdoor Roth IRA isn’t an actual retirement account type, the first step to establishing one is to open a traditional IRA that can be converted into a Roth IRA.

Make a Contribution

After opening a traditional IRA, you will make after-tax contributions (the allowed contribution amount updates annually).

It’s important to file an IRS Form 8606 every year you make contributions to the traditional IRA.

Transfer the Traditional IRA Assets

Once you’re ready, you can transfer the assets held in your traditional IRA to a Roth IRA. Advisors typically recommend waiting a few months to make this move. You’ll work with your brokerage to convert your traditional IRA into a Roth IRA. It can walk you through the specific steps the institution requires to make this happen. 

Tax Implications

You need to budget for the taxes you’ll be expected to pay when you transfer the assets held in the traditional IRA account to a Roth IRA. Converting to a Roth IRA will trigger income tax on the appreciation of your after-tax contributions. Once the assets are in the Roth IRA, they will compound tax-free—one of the main reasons why some people choose to pursue a backdoor Roth IRA.

To calculate the taxes owed, you need to take all your traditional IRA assets into account, and will then pay a proportional amount of taxes on the original account’s pretax contributions and earnings.

Consulting a tax accountant is a good idea if you need help figuring out how much you will owe in taxes after the conversion. 

Potential Issues With Roth Conversions

Because backdoor Roth IRAs aren’t a standard practice, they come with some possible complications to be aware of. 

For starters, there’s some concern that the IRS doesn’t officially condone this practice, as it hasn’t released formal guidance on whether a backdoor conversion violates the step-transaction rule, which treats several different steps as if they were a single transaction for tax purposes. While experts aren’t too concerned that the IRS will see this loophole as a violation, there is some risk involved because the account holder may be charged a 6% excise tax for overfunding their Roth IRA. 

There’s also some apprehension that if the IRS ever does release restrictions on backdoor Roth IRAs, this could lead to penalty fees or having to comply with a grandfather clause. These worries are speculative for now, but the risk of such changes happening may not be something you’re comfortable taking on.

Another concern about backdoor Roth IRAs arises from the fact that calculating how much you owe in taxes after a conversion can be very complex. 

Because Roth IRAs trigger income tax on the appreciation of your after-tax contributions, converting sooner rather than later can help you save money on taxes, as the contributions won’t have had much time to appreciate in value.

Frequently Asked Questions (FAQs)

What is a mega-backdoor Roth IRA?


When someone refers to a mega-backdoor Roth IRA, they’re basically talking about the same thing as a normal backdoor Roth IRA. The “mega” refers to the fact that this maneuver is used by high-income earners who surpass Roth IRA income limits and transfer their funds from a company-sponsored 401(k), which has a much higher contribution limit than a traditional IRA, into a Roth IRA.

How much can you contribute to a backdoor Roth IRA?

How much you can contribute to a backdoor Roth IRA depends on the type of account from which the funds are coming. If you plan to convert within a year, you’ll tap out at your traditional IRA or 401(k)’s contribution limits. As of 2022, you can contribute as much as $61,000 in total contributions (or $67,500 if over age 50) to a Roth IRA after transferring funds from a 401(k) and a further $6,000 maximum to a traditional IRA

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