There is, however, a technique which is referred to as a “Back-Door Roth Contribution“.

There are Roth IRAs. And there are Roth conversions. But “back-door” is a two-step technique, not an account, and not just a conversion.

And, no, this is not just picking nits. This is a very important distinction and if you try to engage in Roth contributions or conversions without being aware of this, it’s very easy to make a mess.

The Back-Door Roth Contribution technique — is the combination of using two steps, and the second one may or may not be possible, depending on one’s other IRA assets — to make a new contribution to a Roth IRA for people who otherwise might not have been permitted to do so. But it’s not a Back-Door Roth IRA — it’s just a regular Roth IRA — this is simply a way to get money into that Roth IRA. And it’s not a Roth conversion — though the conversion, if you can do it, is one of the steps of the technique. It’s perfectly possible to make Roth conversions which have nothing to do with any “back door” because anyone with an IRA is permitted to make Roth conversions.

The Back-Door Roth Contribution is the combination of the following two steps:
1. a non-deductible contribution to a traditional IRA
2. a tax-free conversion of that traditional IRA into a Roth IRA (which is only going to be tax-free if the pro-rata rule doesn’t apply because one doesn’t have any other pre-tax IRA money in any other IRA account).

So in order to clarify, we’re going to have to start with (a) what a Roth IRA is (very briefly), then (b) direct contributions to one’s Roth IRA (also very briefly), and then (c) traditional IRAs (both pre-tax and after-tax contributions and “basis”) — all of which will allow us to talk about (d) Roth conversions, which finally will have put in place all the pieces to understand (e) the Back-Door Roth Contribution technique.

A. What is a Roth IRA?
A Roth IRA is a tax-favored account (or the set of such accounts) intended for saving for one’s retirement. The idea is that contributions go into the account (you do not get a tax break for making the contributions — you are contributing “after-tax” money) and eventually, when you pull the money back out — along with any growth of those investments — all that growth is free of income taxes. That’s a great opportunity. Normally, the growth of such investments may be taxed at rates as high as (under current rules) of more than 50% (between federal, state, NIIT taxes alone, not counting other impacts such as IRMAA or AGI-related phaseouts).
If you have an opportunity to put money into a Roth IRA, especially as compared to leaving money in an ordinary taxable account, it’s something you should seriously consider. From a tax perspective, so long as you eventually make qualified distributions — it’s always better than a taxable account.

B. Direct Contributions to your Roth IRA?
So how do you get money into a Roth IRA? There are several ways — you could directly make contributions, you could make conversions of other IRA money into it, you could roll over money from an employer’s retirement plan (like a 401k) into it, and, of course, the money in the Roth IRA itself could grow.
The problem is that there are rules governing getting that money into there. Direct contributions should be the most straightforward — however, the rules governing direct contributions limit who can put money in. (i) you have to have earned income; and (ii) there’s an annual limit as to how much you can put in; and (iii) the part which is most relevant for the discussion at hand — if you make too much money, you cannot make direct contributions. For 2023, if you file taxes as a single person, you cannot have a modified adjusted income (MAGI) of over $153,000 (it phased out from $138,000 up to there). For married filing jointly, the MAGI cutoff for direct Roth IRA contributions is $228,000 (again, a phaseout up to there).

C. So how does the Traditional IRA factor into this?
The traditional IRA is somewhat similar to a Roth IRA, except the order of taxes/contributions/growth/distributions is re-arranged. In the case of a traditional IRA, most of the time, the contributions give one a tax deduction. This means that the money going into the traditional IRA is “pre-tax” — by deducting the contribution from your income for income tax purposes, you’ve effectively put money into the traditional IRA before it’s ever been taxed as income. Then, after it grows, the entire distribution (which may be a mix of both the return of your contributions and the growth on them) is all taxable income. A Traditional IRA is tax-deferred. Instead of paying taxes now on the contributions and on the growth, you defer those taxes and pay them all later. (This can be a very powerful tool if your tax rate is high now, but will be lower later).
If, for example, you make a $5000 ordinary deductible contribution to your IRA, you get a $5000 tax deduction for your income taxes today. Then, suppose the account doubles over time, to $10,000. If you distribute that entire $10,000 so you can spend it — you’ll also have to pay income taxes on that full $10,000.
However, there are limits on which contributions to a traditional IRA may be deducted on one’s taxes, too. Sometimes people make “non-deductible” contributions. Those non-deductible contributions add “basis” to the IRA — when you make distributions from the IRA, you don’t pay taxes on the return of that “basis” because the basis is the part on which you’ve already paid taxes. So, for example, if you put $5000 of non-deductible contributions into your IRA, you don’t take a tax deduction right now. So that $5000 is “after-tax” money. If the IRA then doubles in value to $10,000 and you take a full distribution of it, you’ll pay income on only $5000, not the full $10,000 because $5000 of it was the return of your after-tax “basis” and only the second $5000 was the as-yet-never-taxed growth. And this works on a “pro-rata” system. If you have a $10,000 IRA of which $5000 was “basis” — then 50% of any distribution right now is taxable because your basis is 50% of your account value. If you only took a $20 distribution, $10 would be taxable, $10 would be non-taxable return of basis. This issue of “basis” is very important and will come back to us shortly.

D. Roth Conversions?
As noted earlier, there are several ways to get money into a Roth IRA. Not everyone qualifies to make direct contributions (see (B) above). But if you have money in an existing Traditional IRA — you may convert money from that traditional IRA — you move money from the traditional IRA and, since that money may not have had income taxes yet paid on it, you also have to pay income taxes on the conversion.
But there’s a potential wrinkle. If your traditional IRA had any of those non-deductible contributions noted in (C) above, any such Roth conversions are also subject to that same “pro-rata” rule. If you have a $10,000 traditional IRA with $5000 of after-tax “basis” in it — any Roth conversion of money from that IRA will be 50% conversion of that basis, and 50% taxable conversion of the never-yet-taxed portion.

So, finally, how about that “back-door Roth contribution” we started with?
Well, suppose you have no existing pre-tax traditional IRA. And your income is too high to be able to make direct contributions to a Roth IRA. But you want to protect some of your savings from taxes by getting it into an IRA. Your options are either (i) non-deductible contributions to a traditional IRA; or (ii) just leave it in an ordinary taxable account — because you cannot put it into the Roth.

But here’s where the “back door” comes in. Suppose you do make those non-deductible contributions to a traditional IRA. Again, suppose we are talking about $5000. So you make a $5000 non-deductible contribution to a traditional IRA. You now have an IRA with a value of $5000 and a “basis” of $5000 — and, again, this only works if you don’t have any other traditional IRA (because the “pro rata” rule applies to the aggregate of all your IRA accounts, not just any single account) — what happens if you take money back out of that IRA? Whether you make ordinary distributions from it (why would you? You just put the money in there!) — or you make Roth conversions from it — the “pro rata” rule applies and since the value of the IRA (in this example, $5000) is the same as the sum of the after-tax contributions (the “basis” – again, $5000 in this example) — while you were not allowed to directly contribute $5000 to the Roth IRA — you are allowed to do a Roth conversion.

Now, you’ve managed to get $5000 into your Roth IRA, even though you make to much money to be able to make a direct contribution. That — those two steps — a non-deductible traditional IRA contributions, followed by a tax-free Roth conversion (again, only possible because you don’t have any other traditional IRA balance) — is a “back door Roth contribution”.

It wasn’t a “back door Roth conversion”. And you don’t have a “back door Roth IRA”.

You simply have a Roth IRA. And there are multiple ways to get money into that Roth IRA. This two-step process simply is one of those ways. Congratulations!