What is a Roth IRA?

A Roth IRA is a type of individual retirement account that is funded by after-tax, nondeductible contributions and has no required minimum distributions for the original account owner. Potential earnings grow tax-free, and distributions may be tax- and penalty-free if the requirements for a “qualified distribution” (as defined by the Internal Revenue Code) are met.

For 2025, the Roth IRA contribution limit is $7,000 for individuals under the age of 50, and $8,000 for individuals age 50 and over by the end of the calendar year.¹ Single filing individuals or heads of households making $165,000 or more in 2024 and married couples who file jointly and make $246,000 or more cannot contribute directly to a Roth IRA.² However, high-income earners looking to benefit from a Roth IRA may be able to employ a backdoor Roth IRA strategy.  

How does a backdoor Roth IRA work?

A backdoor Roth IRA is not another type of IRA, but a strategy for moving money into a Roth IRA when your income is too high to allow you to contribute to one directly. Income limits do not apply when converting assets from a traditional IRA to a Roth IRA. Therefore, if you are a high-income earner who would like to save for retirement in a Roth IRA, under the backdoor Roth IRA strategy, you can make a nondeductible contribution to a traditional IRA and very shortly afterward convert this amount from the traditional IRA to a Roth IRA.

Steps in utilizing the backdoor Roth IRA strategy

• Set up and fund a traditional IRA with after-tax nondeductible contributions (i.e., don’t claim a tax deduction for your contributions to the IRA even if you qualify for it). Be sure to file Form 8606 with the IRS for each year’s after-tax nondeductible contributions to your traditional IRA.
• Open a Roth IRA with a financial institution. Please note some financial institutions may require you to open both a traditional and a Roth IRA with them (the same financial institution) to complete a Roth conversion.
• Convert some or all of the assets from the traditional IRA by transferring them to the Roth IRA. You can make this conversion at any point; however, as part of utilizing this backdoor Roth strategy, consider whether the conversion should be completed as soon as possible following the contribution in order to avoid taxes to the extent possible. Taxpayers often convert their assets by December 31 of the year in which the after-tax nondeductible contribution was made.

Understand the impacts

After-tax nondeductible contributions that are converted are not taxable. However, if you have one or more SEP, SIMPLE or traditional IRA with earnings, previously deducted contributions or other taxable amounts, the converted amounts will be taken pro-rata from those amounts and contributions for which a deduction was not taken. This is why a backdoor Roth strategy may work best if you don’t have any IRAs with earnings, previously deducted contributions or other taxable amounts. Let’s look at a few scenarios to help illustrate this:

Scenario A: All after-tax nondeductible money across all of your SEP, SIMPLE and traditional IRAs.

Example One: You make an after-tax nondeductible contribution of $7,000 to a traditional IRA and shortly after (i.e., before the assets earn anything or earn a minimal amount) convert the assets to a Roth IRA. Since the original $7,000 contribution was nondeductible, little or no tax may be due on the conversion.

Scenario B: Mix of earnings/previously deducted contributions/other taxable amounts and nondeductible dollars across your SEP, SIMPLE and traditional IRAs.

Example Two: You make an after-tax nondeductible contribution of $7,000 to a traditional IRA and invest the money. A week later, your IRA is worth $7,075 and you convert the assets to a Roth. The $75 gain will be included in your taxable income that year.

Example Three: You have a $50,000 traditional IRA funded with previously deducted contributions. You make a $7,000 after-tax nondeductible contribution to a new traditional IRA that you just opened. You now have $57,000 in traditional IRAs. Then, assuming there are no further earnings, you do a Roth conversion for $7,000. Roughly 87.7% of the converted amount – just over $6,140 – is taxable, because $50,000 of the $57,000 is subject to taxation ($50,000 ÷ $57,000 is roughly 87.7%). So instead of being tax-free, this conversion would add about $6,140 to your taxable income for the year.

As these examples illustrate, this backdoor strategy of funding a Roth IRA may not make sense for you if you already have one or more SEP, SIMPLE or traditional IRA with earnings, previously deducted contributions and other taxable amounts, including rollovers from 401(k)s. This is because you will likely owe some tax when you convert the traditional IRA to the Roth IRA since part of the conversion would be treated as coming from those amounts.

Additionally, a conversion – including the backdoor Roth strategy – may not make sense if you plan to use the Roth IRA money soon after the conversion. You could face a 10% early withdrawal penalty if you withdraw funds from a Roth IRA within five years of a conversion.

Additionally, when taking a distribution of amounts attributable to a Roth conversion, you should keep in mind that each Roth conversion has its own five-year time frame for determining if the IRS’s 10% early withdrawal penalty applies. Unless you meet the applicable five-year time frame, the early withdrawal penalty could apply to the amount previously included in income for the conversion – the dollars you already paid taxes on – unless an exception applies.

There is also another five-year restriction that comes with potential tax consequences for Roth IRA distributions. If withdrawing earnings from a Roth IRA, the distribution may be subject to ordinary income tax and a 10% early withdrawal penalty unless it is a “qualified distribution.” The Internal Revenue Code stipulates that a distribution is qualified if it is made after the five-year period, beginning with the first tax year for which a contribution was made to the Roth IRA.

Note also that Roth IRA contributions can be withdrawn at any time without taxes or penalties.

If the ordinary income tax due when you convert (if any) is paid from the converted funds, less money will be available to grow in the tax-favored Roth IRA. Also, using converted funds to pay the tax could mean you would need to pay the 10% early withdrawal penalty on those amounts. The tax and penalty together could cause the cost of conversion to outweigh the benefits of future tax-free withdrawals. So, you should think about whether it makes sense to use non-IRA funds to pay any ordinary income tax due as a result of the conversion.

Please see IRS Publication 590-B for details on Roth IRA distributions and other Roth IRA rules. Speak with your tax professional with any questions and to determine impacts to your situation.

The bottom line

Taxes are an important factor when deciding if the backdoor Roth IRA strategy makes sense for you. If the benefits of a Roth IRA appeal to you and you are considering utilizing the backdoor Roth strategy, it may be worth discussing with a J.P. Morgan advisor or tax professional. At J.P. Morgan Wealth Management, we are here to help you with questions you might have on your retirement savings journey.