How to fund a backdoor Roth IRA in 2025

Updated for 2025: Ever wondered how to do a backdoor Roth IRA? It's only a few steps, but there are a few things you'll want to understand before you do this!

Transcript:

You to go back to a Roth IRA, but don't totally understand the rules. You're in the right place. And this is the 2025 version of this video. So, we'll cover updated numbers here. I'm Chris Kaminski, partner and co-founder here at Consilio Wealth Advisors, where we specialize in working with tech professionals at Amazon, Microsoft, Meta, and Google.

This video, we're going to talk all about backdoor Roth IRAs. What are they? How to do them? And this is not to be confused with the after-tax contribution in a 401k plan, which is commonly referred to as the mega backdoor Roth. Those after-tax contributions are converted over to a Roth via an in-plan Roth conversion. We'll cover that in a separate video. Okay, so backdoor Roth IRA is a two-step approach where somebody funds a regular IRA and then performs a Roth conversion from that regular IRA over to a Roth IRA.

Why would you do this? Because you make too much money to fund a Roth IRA directly. And the first thing to understand is what are the income limits to be able to fund a Roth IRA directly. In 2025, if you make more than $236,000 and you are married filing jointly, you make too much money to fund a Roth IRA directly. That number is adjusted to $150,000 if you are a single filer. Separately, if you make more than $146,000 and you're married filing jointly in 2025, you make too much money to deduct your IRA contribution. That number is adjusted to $89,000 if you are a single filer.

The key word here is take a deduction. So, if you make too much money, you can't deduct your contribution to your IRA, but anybody can still make that contribution to the IRA at any income limit. Again, the phase out is just on the ability to deduct the contributions. So, if anybody at any income level can make a contribution to an IRA, and also if anybody at any income level can perform a Roth conversion, which is the process of converting, the money in the IRA over to a Roth IRA, that is the backdoor way of funding the Roth IRA.

Remember, if you make too much money, you can't fund the Roth directly, but anybody at any income limit can fund a regular IRA and anybody at any income limit can perform a Roth conversion. That two-step process gets you to the same outcome as if you could fund the Roth IRA directly. And that's really it. Step one, fund the IRA. Step two, convert IRA to Roth. Step three is investing the money. Don't forget to do that. That's really it.

If you're doing this in 2025 and you are age 49 this year or younger, your limit is $7,000 you can put into the IRA. If you turn 50 during the calendar year of 2025, you can add a thousand dollars to that and you can put $8,000 into the IRA. And if you have a spouse who is not working or you are a spouse who is not working, you can contribute $7,000 or $8,000 depending on if you are under age 50 or turn age 50 here in 2025 to your IRA and perform that same conversion. That's called a spousal IRA. Okay. A few other key points.

Since that $7,000 that you put into the IRA was not pre-tax, it was a post-tax contribution, the conversion from IRA to Roth is a non-tax conversion. Now, if you waited a few days or a few weeks and that $7,000 turned into $7,100 and you converted that $7,000 to Roth, you would now have $100 of ordinary income to show on your tax return and you'd have to pay tax on that extra $100. But if you do this quickly, there is low or a very little amount of taxable income that would be generated upon this conversion. Another thing, if you have IRA money, you can't do this. Technically you can do this, but it just causes some potential tax problems. For example, if you put $7,000 in an IRA and you have another IRA over here with $100,000 or a million dollars in it, you can't just choose to convert over that $7,000 that you just put in the IRA to Roth and do that on a tax-free basis. The IRS has a calculation called the Pro Rata Rule, and they would essentially add together both of those IRAs and they would perform a Roth conversion calculation.

Most of that conversion would be taxable and only a small amount would be tax free. Generally speaking, we just tell clients if you have an IRA balance, don't do this. However, if you have a small IRA balance, it might be worth it to perform a Roth conversion, pay tax on those pre-tax dollars, which is what would happen if you did a Roth conversion, in order to open up the door to be able to do these backdoor contributions each and every year moving forward. The key thing is there's a tax form that you have to file on your tax return in order to show that you did this IRA contribution and Roth conversion, and there's a question on there that says, what was your IRA balance as of 1231 of the end of the tax year? And you want that answer to be zero. If that answer is a positive number, then this pro rata rule comes into a play.

That's it. I definitely didn't cover all of the technical aspects of this in this video, but that gives you a pretty good rundown on how to do a backdoor Roth contribution here in 2025.