Could the Backdoor Roth IRA Be Right for You?

By Sara Pierce

For high-income earners, the Roth IRA can be an attractive savings option. It offers tax-free growth, qualified tax-free withdrawals, and no required distributions during your lifetime. But if your income exceeds a certain threshold, the IRS prohibits you from contributing to a Roth directly. In these instances, a “backdoor Roth IRA” might offer a legal workaround, but the strategy deserves careful consideration within your broader retirement and tax picture before you proceed. At Lido Advisors, we approach decisions like this through Lido One, which brings together financial planning, tax planning, estate planning, and investment management into a single, coordinated strategy.

This Perspective reviews current income limits and contribution amounts, explains how a backdoor Roth works, and outlines considerations for evaluating whether the strategy makes sense as part of your overall financial plan.

Who Might Benefit from a Backdoor Roth?

The income limits for direct Roth IRA contributions remain in place for 2026. Single filers and heads of household can generally make a full contribution with modified adjusted gross income below $153,000, with contributions phasing out between $153,000 and $168,000. For married couples filing jointly, full contributions are available below $242,000, with a phase-out range extending to $252,000.

If your income exceeds the upper threshold for your filing status, you can’t make direct Roth contributions. A backdoor Roth IRA addresses that limitation. Unlike direct contributions, Roth conversions are generally available regardless of income, meaning you may be able to convert funds from a traditional IRA to a Roth no matter how much you earn.

What Is a Backdoor Roth IRA?

To be clear, a backdoor Roth IRA is a strategy that typically follows a straightforward sequence:

1. Contribute to a traditional IRA using after-tax dollars (the money you have already paid income tax on)
2. Convert those funds to a Roth IRA
3. Report the contribution and conversion on your tax return using Form 8606

Because you already paid tax on the contribution, the conversion generally does not trigger additional tax (assuming you have no other pre-tax IRA balances, a critical point discussed below). Once the funds are in the Roth, they may grow tax-free, and qualified withdrawals are also tax-free.

2026 Contribution Limits and Deadlines

The combined IRA contribution limit for 2026 is $7,500 for those under age 50, and $8,600 for those 50 or older (which includes a $1,100 catch-up contribution). This limit applies across all your traditional and Roth IRAs combined, not to each account separately. Contributions also cannot exceed your taxable compensation for the year.

You can generally make contributions for 2026 through the federal tax-filing deadline in April 2027, and the contribution counts for the tax year you designate. The conversion, however, is reported for the year it happens. If you contribute in early 2027 for the 2026 tax year and convert it shortly after, you report the contribution for 2026 but the conversion for 2027. Because the contribution and conversion can land in different tax years, it may be worth confirming the sequence with a tax professional before you act.

Converting soon after the contribution settles may limit the chance that investment gains accrue first. Any gains that accrue before conversion generally are included in taxable income.

The Pro-Rata Rule: When It Can Become Problematic

This is where the strategy may require careful planning.

If you have existing pre-tax IRA balances anywhere (whether in a traditional IRA, a rollover IRA from a prior employer plan, a SEP IRA, or a SIMPLE IRA), the IRS applies the pro-rata rule to your conversion. The rule prevents you from converting only your newly contributed after-tax dollars while leaving pre-tax funds untouched. Instead, the IRS treats all your IRAs as a single pool and calculates the taxable portion of your conversion based on the ratio of pre-tax to after-tax dollars in that pool.

Illustrative Example: You contribute $7,500 in after-tax dollars to a traditional IRA. On December 31, 2026, you also hold $92,500 in pre-tax IRA balances from a prior employer rollover. Your total IRA balance is $100,000. Your $7,500 after-tax contribution represents 7.5 percent of that pool. When you convert the $7,500:

• Approximately $562.50 (7.5 percent) is treated as tax-free
• Approximately $6,937.50 (92.5 percent) is treated as taxable ordinary income

The remaining after-tax basis does not disappear. It stays attached to your IRA accounts and continues to be tracked on Form 8606 for future conversions. But the immediate tax bill can be substantial if you overlook the pro-rata rule.

Important note about 401(k) plans: Balances in current workplace 401(k)s, 403(b)s, and governmental 457(b) plans are not included in the pro-rata calculation. However, if you have rolled a prior employer’s 401(k) into an IRA, that balance does count. Some employer plans allow you to roll pre-tax IRA balances back into the plan, which would remove them from the pro-rata equation. Whether that option is available and whether it makes sense for your situation might be worth discussing with a tax professional.

When a Backdoor Roth May Make Sense

A backdoor Roth might be worth considering if you:

• Earn more than the Roth IRA phase-out threshold for your filing status
• Have eligible compensation within the annual IRA limit
• Have little or no pre-tax money in traditional, SEP, or SIMPLE IRAs (or have a concrete plan to address those balances)
• Expect to keep the money invested for many years, ideally past age 59½, to benefit from tax-free growth and avoid early withdrawal penalties on conversions
• Want greater tax diversification in retirement, or are in a higher tax bracket now than you expect to be later

The strategy may be less beneficial if:

• You have substantial pre-tax IRA balances and cannot roll them into a workplace plan
• You expect to need the converted funds soon
• The pro-rata rule would create a tax bill that outweighs the long-term Roth benefit
• You are in a peak earning year and expect much lower income in retirement. Maximizing pre-tax deferrals now may be a better use of your savings capacity.

Tax bracket considerations can matter. Someone in a high bracket today who expects to be in a significantly lower bracket in retirement might benefit more from maximizing traditional pre-tax contributions and making strategic conversions over time in lower-income years. Someone else expecting higher future tax rates, or seeking to diversify across account types, may find annual backdoor contributions more valuable. These calculations depend on your specific income trajectory and retirement projections, which a Lido advisor can help model alongside your broader tax picture.

Mega Backdoor Roth: Additional Roth Savings Potential

If your employer’s plan permits it, a mega backdoor Roth may offer more Roth savings capacity than the standard $7,500 or $8,600 IRA limit. Instead of contributing to an IRA, you make after-tax contributions directly through your 401(k) plan, beyond your regular salary deferrals and any employer match. You could then convert those funds to a designated Roth account in the plan or roll them to a Roth IRA.

In 2026, the combined annual additions limit for 401(k)s is $72,000, which includes your employee deferrals, employer contributions, and any after-tax contributions. For a participant under 50 who contributes the maximum $24,500 in salary deferrals and receives, say, $10,000 in employer matching contributions, the remaining room for after-tax contributions could be up to $37,500, if the plan permits.

Not every plan supports this strategy. Your plan must explicitly allow both after-tax contributions and either in-plan Roth conversions or in-service distributions to a Roth IRA. Confirm the details with your plan administrator before attempting this strategy.

How a Backdoor Roth Might Fit Into Your Broader Plan

A backdoor Roth may be a useful tool, but like any tax strategy, its value depends on how well it suits your needs and circumstances. Your decision should consider your current tax bracket, projected future brackets, overall account structure, withdrawal timeline, and other retirement income sources. It should also consider whether you can roll pre-tax IRA balances into a workplace plan, and how a Roth conversion today affects your tax situation in future years.

At Lido Advisors, we know that contribution and conversion decisions rarely stand on their own. Lido One’s coordinated approach can help identify gaps and surface opportunities that are easy to miss when planning, tax, estate, and investment decisions are handled separately. Before executing a backdoor Roth in 2026, it may help to review your complete IRA picture, understand your plan’s rules and options, and think through how the strategy serves your broader financial goals.