You May Have “Backdoor” Options Available Beyond Traditional and Roth IRAs


Last week we discussed making contributions to a traditional IRA and a Roth IRA. To recap, the deductibility of the traditional IRA and the ability to contribute to a Roth IRA are both limited based on AGI (adjusted gross income). For those individuals above the income thresholds, do not be discouraged. As a high-income earner, you still have the ability to contribute to an IRA and convert the contribution to a Roth IRA (amounts limited to $5,500 or $6,500 for those over 50). However, the contributions to an IRA are not income tax deductible (as obvious as it is, this is what we call a non-deductible IRA) and the Roth IRA conversion has an extra step with some considerations (this is called the “backdoor” Roth IRA).


With the non-deductible IRA, contributions go in after-tax and like the traditional IRA remain tax-deferred until withdrawn. The difference between a distribution from a deductible IRA and a non-deductible IRA is the taxable amount upon withdrawal. Recall, with a traditional IRA the entire withdrawal amount is subject to ordinary income tax. On the other hand, non-deductible IRAs maintain a cost basis, which is the amount contributed and not awarded the income tax deduction. Since these dollars go in after-tax, at withdrawal the distribution is a combination of the basis (after-tax contributions) and gains/earnings. Since you already paid tax on the contribution amount the portion attributed to the contribution is not taxed as income. The balance of the withdrawal is considered gain and is subject to ordinary income tax.


For the “backdoor” Roth IRA, things are a little more tactical and an additional item needs to be considered. Since you (as a high-income earner) cannot contribute to the Roth IRA directly, you first must contribute to the non-deductible IRA as we discussed above. Once in the non-deductible IRA, contributions and earnings, at any point, can be converted to a Roth IRA. This additional step of putting funds into the non-deductible IRA and converting is the “backdoor” way of contributing to the Roth IRA given the specific income limits for a direct Roth IRA contribution. Often, once a contribution is made, a full conversion to the Roth IRA should be executed. An immediate conversion to a Roth IRA will keep gains from accruing and being taxed as ordinary income upon conversion.


One thing to keep in mind with the “backdoor” Roth IRA contribution and conversion are balances currently held in other IRA accounts. The IRS does not allow individuals to cherry pick which IRA balances are converted to the Roth IRA (ex. traditional IRA vs. non-deductible IRA balances). Balances in a traditional IRA can diminish the advantages of converting the non-deductible IRA because of a potential taxation on the non-deductible IRA conversion amount. With that said, it is best explained through an example:


If an individual has a traditional IRA with $20,000 (an income deduction was taken) and they contribute $5,000 to a non-deductible IRA, with the intent of converting to a Roth, the total IRA balances would be $25,000. The $5,000 conversion would have to consider the total of $25,000 to see how much can be converted income tax free. The individual would take the $5,000 non-deductible contribution and divide it by $25,000 to get 20%. 20% of $5,000 is $1,000, therefore, the $1,000 would be tax free and the remaining $4,000 would be taxed as income to the individual. The basis of $4,000 does carry forward through your tax return, however, this is where we would recommend you work with an accountant to maintain the basis as it is carried forward on the IRA as well as considering your personal tax situation. Additionally, cash flow needs to be a consideration when making this conversion since any income tax liability will need to be paid out of pocket to avoid the use of IRA money to pay for the tax.


With the “backdoor” Roth IRA conversion, currently there are no limitations on income like there are on direct Roth IRA contributions. Keep in mind, the ability to convert IRA accounts (deductible and non-deductible) is available to everyone, however, it is important to look at your current situation to determine if it is right for you. If you would like to learn more about the non-deductible IRA and “backdoor” Roth IRA contributions and if they are good planning decision for you, feel free to contact me or your advisor here at D.B. Root so that we can discuss.



Steve Kohler is Managing Director of DBR Advisory Services at D. B. Root & Company, a Pittsburgh-based wealth management firm. If you would like to contact Steve please e-mail him at or call 412-227-2800. Read bio…



This material has been provided for informational and educational purposes only and is not suitable for everyone. This material should not be regarded as a complete analysis of the subjects discussed. The information contained herein should not be construed as personalized investment advice. This information does not constitute legal or tax advice and is not intended to be a substitute for specific individualized legal or tax advice. We suggest that you discuss your specific legal or tax issues with a qualified tax adviser or attorney. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. All expressions of opinion reflect the judgment of the authors as of the date of publication. All information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Share on Facebook
Share on Twitter
Please reload

Subscribe to our monthly Big Picture Financial Planning newsletter


Please reload

Where to find us:



436 Seventh Avenue, Suite 2800

Pittsburgh, PA 15219-1818


Phone: 412.227.2800

Toll Free: 888.227.0913

Fax: 412.227.2805



811 Madison Ave, 7th Floor

Toledo, OH 43604


Phone: 419.574.9399

Toll Free: 888.227.0913

Fax: 419.574.9356

  • White LinkedIn Icon
  • White Facebook Icon
  • White Twitter Icon
  • YouTube - White Circle

© 2020 DBR & CO

This communication is strictly intended for individuals residing in the states of AK, AL, AR, AZ, CA, CO, CT, DC, DE, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, NY, OH, OR, PA, RI, SC, SD, TN, TX, UT, VA, VT, WA, WI, WV, WY.

Important Consumer Disclosure: D.B. Root & Company, LLC (“DBR & CO”) is an SEC registered investment adviser located in Pittsburgh, Pennsylvania. DBR & CO and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC-registered investment advisors by those states in which D.B. Root & Company maintains clients. DBR & CO may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. DBR & CO’s web site is limited to the dissemination of general information regarding its investment advisory services to United States residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of DBR & CO’s web site on the Internet should not be construed by any consumer and/or prospective client as DBR & CO’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Furthermore, the information resulting from the use of tools or other information on this Internet site should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from DBR & CO. Any subsequent, direct communication by DBR & CO with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of DBR & CO, please contact the United States Securities and Exchange Commission on their web site at A copy of DBR & CO’s current written disclosure statement discussing DBR & CO’s business operations, services, and fees is available from DBR & CO upon written request. DBR & CO does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to DBR & CO’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.

Advisory HQ’s Top Ten advisors’ rankings are based on methodologies used by established financial news organizations and are highly focused on three pillars: total assets under management (AUM), firm size/quality, and the amount of revenue generated by an advisory firm. AdvisoryHQ’s Advisor Selection Methodology is based on a wide range of filters including fiduciary duty, independence, transparency, level of customized service, history of innovation, fee structure, quality of services provided, team excellence, and wealth of experience. The review and ranking articles are always 100% independently researched and written without the ranked Firms knowing they are being reviewed.

Certain supervised persons of DBR & CO, in their individual capacities, as registered representatives of a broker-dealer, may provide securities brokerage services and implement securities transactions under a separate commission based arrangement and may be entitled to a portion of the brokerage commissions paid to the brokerage firm, as well as a share of any ongoing distribution or service (trail) fees from the sale of mutual funds. 


A number of DBR & CO’s Supervised Persons are also licensed insurance agents and may offer certain insurance products on a fully-disclosed commissionable basis.  A conflict of interest exists to the extent that DBR & CO recommends the purchase of insurance products where its Supervised Persons may be entitled to insurance commissions or other additional compensation.