You have until April 15 to claim this $8,000 Roth IRA freebie — no matter what your income

You have until April 15 to claim this $8,000 Roth IRA freebie — no matter what your income

Brett Arends

5 min read

All U.S. taxpayers have until Wednesday, April 15 — Tax Day — to take advantage of the Roth IRA tax break for 2025, even if they think they earn too much.

The so-called backdoor Roth, a simple two-step process, means anyone can contribute up to $8,000 to an account with after-tax dollars and shelter all their future gains from federal taxes.

That’s true even if your adjusted gross income exceeds the official levels that allow for a straightforward Roth contribution. Making this contribution is a no-brainer for anyone who has the money.

It’s worth revisiting the Roth IRA and backdoor Roth rules in time for Tax Day, because these often spark confusion. And that’s hardly a surprise, given the mess Congress has made of the rules.

Individual retirement accounts are federally tax-sheltered accounts available to anyone with taxable income for the year being reported (and to a nonearning spouse, if they file jointly).

You can contribute up to $7,000 to an IRA for the 2025 tax year, plus another $1,000 if you are 50 or older. (This assumes you have earned at least this much. You cannot contribute more than your income in any given year. If you’re contributing to a spousal IRA, you and your spouse cannot contribute more than your joint income.)

There are two kinds of IRAs. With a traditional IRA, you can deduct the contribution from this year’s taxable income — meaning that you are contributing pretax dollars. But when you withdraw the money down the road, it will count as taxable income in the year you withdraw it. So, for a traditional IRA, you pay taxes on the back end.

Roths work in reverse. You cannot deduct the contribution from this year’s taxable income, meaning you are contributing after-tax dollars. When you eventually withdraw the money, though, it will be tax-free. So with a Roth you’re paying the taxes up front.

In each case, you’re taxed once and only once.

Congress, in its inimitable manner, decided that this was far too simple and straightforward and decided to complicate it. So it created income limits for IRAs. If you earn more than the limit, you are not able to make tax-deductible contributions.

Then Congress created different income limits for traditional and Roth IRAs, because otherwise, where would the fun be? And the limit is not on what you typically think of as your income, but rather on something known as your modified annual gross income. And the limits are different if you are single, married filing jointly, married filing separately or filing as a head of household. Even better, Congress created phase-outs. So, for example, if you are married filing jointly — or you’re a qualifying widow or widower — you can deduct your traditional IRA contribution completely if your modified AGI last year was less than $123,000. If it was between $123,000 and $143,000, you can deduct part of your contribution. If it was over $143,000, you can’t deduct it at all.

So is that it? Of course not. There is a third type of IRA that is especially useful for high earners. It’s called a nondeductible traditional IRA. Technically, this looks like a terrible deal. You can’t deduct the contributions when you make them: You contribute with after-tax dollars, as with a Roth. But the money isn’t tax-free when you withdraw it down the road, either: It’s taxed on withdrawal as ordinary income, as with a traditional IRA.

Lose-lose, right?

Not quite. The main advantage of a nondeductible traditional IRA is that anyone with income can contribute, regardless of how much they earn — and that you can immediately convert it to a Roth. The same day. The same moment. You just file two separate pieces of paper. (Actually, there is also a third — you should also report the contribution to the IRS on Form 8606, which will keep track of your nondeductible IRA contributions.)

Contact your broker — Vanguard, Fidelity or whomever — and tell them you want to do a backdoor Roth, which means making a contribution to a nondeductible traditional IRA and then immediately doing a Roth conversion with the money. If you’re doing it before April 15 and you want to maximize your tax break, make sure you clarify it’s for tax year 2025, so that you can still do another one for tax year 2026.

The backdoor Roth means anyone can immediately put money into a Roth regardless of how much they earn — pretty much making a mockery of the modified-adjusted-gross-income limits for Roth contributions.

Only the U.S. Congress, folks.

“There are income limits on contributing directly to a Roth, but no income limits on doing a conversion,” says Cary Sinnett, senior manager of the personal financial-planning practice at the American Institute of Certified Public Accountants. “That’s why the backdoor Roth works at any income level.”

The process, he writes, is straightforward: “Contribute to a nondeductible traditional IRA → convert it to a Roth → report it on IRS form 8606.”

There is one wrinkle, he adds: the pro rata rule. “If you have other pretax IRA money, part of the conversion becomes taxable,” says Sinnett. “Most people ensure they have no other pretax IRA money before they start the conversion, otherwise it gets messy.”

This is the best — possibly the only — reason to convert all your traditional IRA to a Roth. You take the one-off tax hit, which can be hefty, but thereafter you can painlessly do a backdoor Roth each year with no further complications. If you are reluctant to take the tax hit now, keep the idea on a watchlist for the next stock-market selloff. An IRA conversion is taxable at the value of the account converted, so a bear market is a great time to do it.

Meanwhile, if anyone in Congress wants to know why lawmakers’ approval rating is only about 17%, part of the reason is needlessly complicated, stupid stuff like this.