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Let me ask you something. You've worked hard. You've built up your income. You finally made some good money.
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Let me ask you something. You've worked hard. You've built up your income. You finally made some good money. And then you go to try to open up Roth IRA, then you find out that you made too much to contribute. And now, I know that feeling. It almost feels like you're being penalized for being successful.
Like the government is saying that you've done too well, and this isn't for you anymore. But here's what most high earners don't know. There's a completely legal strategy that allows you to get more money into your Roth IRA, regardless of how much you make. It's been around for years. IRS knows about it, and financial advisors use it with their clients all the time.
It's called a backdoor Roth IRA. And today I want to talk you through and break it down exactly what it is and why it matters for high earners, especially walk them through the exact steps to do it yourself. Hi, I'm Prince, a chartered financial consultant working in wealth management. I created this channel to help professionals and business owners to build real wealth and align their money with matters most to them.
Every week I break down practical financial strategies and the ways that are clear, honest, and useful to help you make better decisions with your money that you've worked so hard for. If that sounds like you, make sure you subscribe and let's get into it. Now, before we go straight into the backdoor strategy, let's first make sure we're on the same page about what a Roth IRA is and why it's so valuable in the first place.
A Roth IRA is a retirement account where you contribute money that has already been taxed. So, unlike a traditional 401k or traditional IRA, where you get a tax deduction now and pay taxes in the future, meaning retirement, with a Roth IRA, you pay taxes now and everything after that is completely tax-free. And I mean everything is tax-free.
The money that grows in is tax-free. The withdrawals in retirement are tax-free. You never pay taxes on any of the gains. And on top of that, a Roth IRA has no required minimum distributions. With a traditional 401k or traditional IRA, the government requires you to start withdrawing money at a certain age, whether you need it or not.
With the Roth IRA, your money stays invested and it keeps on growing for as long as you want. For a high earner, someone in the top tax bracket, the value of tax-free growth is enormous. Because the higher your tax bracket today, the more valuable it is to have money that the government can't touch.
That's why so many financial advisors consider the Roth IRA one of the most powerful retirement strategies available. But here's the problem. The IRS has income limits on who can contribute directly to a Roth IRA. And for 2026, the limits are $161,000 for single and $251,000 for married filing jointly. Once your income exceeds those thresholds, you are completely phased out.
You cannot make direct contributions to a Roth IRA. And for a lot of professionals and business owners watching this, you're already above that number or you're getting close to that number. So, what do you do? You use the backdoor. Now, I really want to be clear about something before we get further. A backdoor Roth IRA is not a special account.
It's not a loophole in a shady way or anything like that. It's completely legal, IRS-approved strategy that has been used by financial advisors and their clients for years. And here's the simple version of how it works. Even though there's income limits on contributions directly directly to Roth IRA, there's no income limits on contributions to a traditional IRA.
And there's also no income limits on converting a traditional IRA to a Roth IRA. So, the backdoor strategy simply takes advantage of both of those facts. You contribute to a traditional IRA first, then you convert that traditional IRA to a Roth IRA, and the result being that you will end up with money inside a Roth IRA even though you earned too much to get it in there directly.
In a nutshell, that's the whole strategy. Simple in concept, but there's more important detail in the execution that you need to get right. And that's exactly what I'm going to go through in this video. Now, let me give you a real example so this can actually click and make sense. Say you're a professional business owner and you earn $255,000 a year.
And you max out your 401k, you get some investment in your taxable brokerage account, and someone mentions to you a Roth IRA. You look into it, you see the income limits, and you assume this is not available for you. So, that money keeps on going into your taxable brokerage account where every year the dividends are taxed, the income gains are taxed, eventually withdrawals in retirement are also taxed.
Now, let's say instead that you learn about the backdoor Roth, and you start contributing $7,500 every year, which is the 2026 contribution limit. $7,500 a year every year growing completely tax-free inside a Roth IRA. At a 7% annual return, which is reasonable long-term assumption, over 25 years that $7,500 per year grows to approximately $473,000 completely tax-free.
And you never paid the government a cent on any of that growth. Now, think about what that same money looks like in a taxable account. At a combined federal and state rate of around 30%, you're giving up over 140,000 in taxes. And that's the difference that the backdoor Roth makes for high earners.
And that's why this strategy matters so much, not just as tax technique, but also as a way to be intentional and purposeful with every dollar that you earned. Because I truly believe that being a good steward of what has been given means not leaving money on the table where there's a legal and smart way to keep more of it working for you.
All right. Let's walk through this exactly how you can do this, the five steps. I'm going to make this as clear and simple as possible. The first step is to open up a traditional IRA. You can do it at any major brokers like a Fidelity, Vanguard, Charles Schwab, whatever you have available to you.
The process is totally online, and it takes about 10 minutes. The key here is to make sure that you're opening up a traditional IRA, not a Roth IRA, not a rollover IRA, a traditional IRA. And that's your starting point. The second step is to make a non-deductible contribution. Once the account is open, make a contribution.
For 2026, the limit is $7,500, and if you're 50 or over, it's 8,500. Now, here's the important thing to understand. Because you're a high earner, the contribution will be non-deductible. What does that mean? That means that you don't get a tax deduction for putting this money in, and that's completely fine. That's exactly what you want for the strategy to work.
The other critical thing, do not invest the money yet. Leave it in cash inside of the traditional IRA. The reason for this will make sense in the next step. Now, the third step is to convert this money to your Roth IRA account. Now, step three is to convert this money to your Roth IRA account.
This is the key step. This is the actual backdoor. Log in to your brokerage account and initiate a Roth conversion. You're converting the money from your traditional IRA into your Roth IRA. Most major brokerages have simple buttons or a process for this. Now, here's why you left the money in cash in step two.
Because you've already paid taxes on that money. It hasn't grown yet at all. The taxable amount on the conversion is zero or as close to zero as possible. You're not creating a tax bill. You're just moving money from one account to another. If you had invested it and let it grown, even a small amount, you owe taxes on that growth at conversion.
Now that the money is sitting inside your Roth IRA, invest it. This is where the magic starts. From this point on, moving forward, every dollar of growth in this account is completely tax-free for the rest of your life. For most people, low-cost index funds are the most efficient and simple choice here. A total market index fund and a S&P 500 fund inside your Roth IRA is a powerful long-term wealth-building combination.
Get it invested and let it work. Now, this is the step that most people miss, and it's a critical step. When you file your taxes for that year that you did the backdoor Roth conversion, you need to file a Form 8606 with your return. This form tells the IRS that your traditional IRA contribution was non-deductible, meaning you already paid taxes on that money.
This is what prevents you from being double-taxed on the same money when you withdraw it in retirement. If you skip this step, the IRS has no record that you already paid taxes on that money. And when you withdraw it in retirement, they can get taxed again. So, the most important thing to do after completing this step is to talk with your CPA or tax preparer and let them know that you did a backdoor Roth IRA conversion that year.
Before you go out and do this, there's one more key thing to make sure that you understand. And this is where a lot of people get tripped up. And this is called the pro rata rule. Here's how it works. If you have other existing traditional IRA money, maybe from a rollover from a past employer 401k or you contributed in the past.
The IRA requires you consider all the IRA money together when calculating the tax on the Roth conversion. So, if you have 93,000 in your pre-tax traditional IRA, and you add 7,000 in new non-deductible contribution, the IRS sees your total IRA balance as $100,000. And only 7% of that is non-deductible. So, only 7% of your conversion will be tax-free.
The other 93% will be taxable. This can create significant unexpected tax bill and completely change the math on the strategy. If you have existing pre-tax IRA balances, whether from old job or previous contribution, please talk to your financial advisor CPA before doing this. There are ways to work around the pro rata rule, but it requires some additional planning.
All right. So, let's bring this back together. Here are the five steps to doing a backdoor Roth IRA. Step one, open up a traditional IRA at Fidelity, Vanguard, Schwab, or anywhere else. Step two, contribute up to 7,500 and leave it in cash. Step three, convert it to a Roth IRA. Step four, invest the money within the Roth IRA.
And then step five, make sure you file form 7606. And please make sure you let your CPA or your tax preparer know all of this. Now, here's what I want to walk away with today. As a high earner, you are in the highest tax bracket tax bracket of your life right now. Every dollar that you can get into a tax-free environment today, growing and compounding for the next 20 or 30 years is worth more to you than anything else.
The backdoor Roth IRA isn't just a tax strategy, it's a way of being intentional with your money. It makes sure that the wealth that you're building today is protected and positioned to serve you and the people that you love the most in the long haul. If this video helped you, please share this with a friend, colleague, or anybody else that needs to hear this.
And subscribe because every week I break down real strategies to help you build wealth with intention and purpose. I'll see you in the next one.
This video is for general educational purposes only and is not personalized investment, tax, or legal advice. Every situation is different. Talk with a qualified professional about your circumstances before acting. PLC Wealth Partners is a registered investment adviser. See our disclosures.
