If your income is over the Roth IRA limit, you can still fund one through the back door. Put after-tax money into a traditional IRA and convert it to a Roth, since conversions have no income limit. First move any pre-tax IRA money into your 401(k), or part of the conversion becomes taxable.
Roth IRA money grows tax-free, and qualified withdrawals in retirement come out tax-free. The catch for high earners is the income limit. As your income climbs through the IRS phase-out range, the amount you can contribute directly shrinks to zero.
Conversions have no income limit. That restriction disappeared in 2010. So you put after-tax money into a traditional IRA, a nondeductible contribution with no income limit of its own, and then convert that account to a Roth. You already paid tax on the contribution, so converting it costs little or nothing in tax.
The trap is the pro-rata rule. When you convert, the IRS treats all your traditional, SEP, and SIMPLE IRAs as one pool, valued on December 31 of that year. If after-tax money makes up 10% of the pool, only 10% of your conversion is tax-free, even if you convert just the new contribution.
So clear the pool first. If your employer’s 401(k) accepts incoming rollovers, move your pre-tax IRA balances into it, and finish before you convert. If the rollover slips past December 31, part of the conversion is taxed, and a conversion made since 2018 can’t be undone. With no way to clear the pool, expect part of every conversion to be taxable.
Then contribute to the traditional IRA and convert soon after, so little or no growth builds up to be taxed. File Form 8606 with your return for the year you contribute and the year you convert. It records the after-tax money as your basis. Skipping it can mean a $50 penalty and no record that you already paid tax on that money.
Repeat it each year your income stays over the limit. Contribute, convert, and file the form.
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