Make Too Much to Contribute to a Roth IRA? Consider Doing This.

Why can’t I contribute to my Roth IRA anymore?

It’s a question we hear more often than you’d think, and it usually comes from people who are doing everything right. They’ve worked hard, built their careers, and finally started earning the kind of income they set out to earn. Then they go to make their usual Roth contribution and find out they can’t. Their income is too high.

It can feel like a strange kind of penalty. The account you’ve heard about for years is suddenly off limits, right when you finally have the means to use it well.

Here’s another way to look at it: this isn’t a wall. It’s a milestone. Outgrowing the Roth IRA income limits means you’ve built real success. And there’s a legal, well-established way to keep saving in a Roth even after you’ve crossed that line. It’s called a backdoor Roth IRA.

How It Works

The backdoor Roth isn’t a special account. It’s a two-step process using accounts you already know.

First, you contribute to a traditional IRA. Traditional IRAs have no income limit on contributions. The income limits only affect whether you can deduct the contribution on your taxes, and at higher incomes, you usually can’t. That’s fine. A contribution you don’t deduct is called a non-deductible contribution, which just means you’ve already paid tax on that money.

Second, you convert that traditional IRA to a Roth IRA. Since you already paid tax on the contribution, there’s little or no tax due on the conversion.

That’s it. Two steps, and you end up in the same place as someone who contributed to a Roth directly.

Why It’s Worth the Extra Steps

Money in a Roth grows without a future tax bill attached to it. That might not sound like much in year one. Over 20 or 30 years, it makes a real difference, because every dollar of growth is yours to keep. The earlier you start, the more time that growth has to compound.

Roth dollars also give you flexibility later on. There are no required minimum distributions during your lifetime, so the government never forces you to take money out. And because qualified withdrawals aren’t taxable income, they don’t push you into a higher tax bracket in retirement. Nobody knows what tax rates will look like 30 years from now. Having some money that isn’t exposed to that question is worth a lot.

Where It Gets Tricky: The Pro Rata Rule

This is where people run into trouble doing it on their own.

Imagine two people, Sarah and James. Both earn too much to contribute to a Roth directly. Both put $7,000 into a traditional IRA and convert it to a Roth a few weeks later. They took the exact same steps. They don’t get the same tax bill.

James has no other IRA money. His conversion is clean. He already paid tax on that $7,000, so he owes little or nothing on the conversion.

Sarah, on the other hand, rolled $93,000 from an old 401(k) into an IRA a few years ago. That money has never been taxed. When she converts her $7,000, the IRS doesn’t let her pick only the dollars she’s already paid tax on. Instead, it looks at all of her IRA money together: $100,000, with just 7% of it already taxed. So only 7% of her conversion comes out tax-free. The other 93%, about $6,500, gets added to her taxable income for the year.

Same contribution. Same conversion. Very different results. The only difference was the money Sarah already had sitting in an IRA. The industry calls this the pro rata rule. Put simply, it means every conversion is treated as a proportional slice of all your IRA money combined, both the dollars you’ve paid tax on and the dollars you haven’t.

A few details catch people off guard. The rule counts traditional IRAs, rollover IRAs, SEP IRAs, and SIMPLE IRAs, which matters if you’re self-employed or own a business. And the IRS measures your balances as of December 31 of the year you convert, not the day you convert. So clearing out an IRA in the spring doesn’t help if new money lands in one before year-end.

Ways to Work Around It

If you’re in Sarah’s situation, there are a couple of options.

One is to convert your entire pre-tax IRA balance to a Roth, either all at once or spread over several years. You’d pay tax on that money now rather than later, but once it’s done, future backdoor contributions convert cleanly.

The other is to move your pre-tax IRA money into a 401(k), if your employer’s plan accepts incoming rollovers. 401(k) balances don’t count toward the pro rata rule, so this clears the way without a tax bill.

Neither option is automatically the right call. A 401(k) might have fewer investment choices or higher fees than your IRA. Converting a large balance could mean a big tax bill in a single year. And if you only plan to use the backdoor Roth for a few years, it may not be worth reshuffling everything to make it work. Sometimes the math favors keeping things simple and living with the pro rata calculation. Sometimes it doesn’t. It depends on your accounts, your income, and your timeline.

Why It’s Worth Having Someone in Your Corner

A backdoor Roth done well is one of the best tools available to high earners. Done without looking at the full picture, it can create a tax bill you didn’t see coming, or paperwork headaches when it’s time to file.

At Launch Wealth, we look at all of your accounts before recommending a backdoor Roth, not just the one you’re contributing to. We map out whether the pro rata rule applies to you, which workaround (if any) makes sense, and how to time each step so the tax reporting comes out the way it should.

If you’d like to see how we approach planning like this with our clients, take a look at Our Process.

Disclaimer

This article is for educational purposes only and is not personalized investment, tax, or legal advice. Examples are hypothetical, and figures are based on current law, which may change. Investing involves risk, including possible loss of principal. Launch Wealth LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. View our full disclaimers here.