July 21, 2026
Those who pass the Roth IRA income threshold early in their careers will often mentally file the account away as unavailable, then slowly forget about it. The assumption that Roth contributions are no longer an option is understandable, but incomplete. While direct contributions remain blocked above certain income levels, a widely used two-step strategy known as the “backdoor” Roth IRA can keep the account in play for a portion of high earners.
How the Backdoor Roth IRA Works
For 2026, direct Roth IRA contributions phase out between $242,000 and $252,000 of modified adjusted gross income for married couples filing jointly, and between $153,000 and $168,000 for single filers. Above those ranges, direct contributions are off the table. IRS Publication 590-A covers the contribution and deductibility rules in detail.
A key detail is that there is no income limit on making a nondeductible contribution to a traditional IRA, and there is no income limit on converting a traditional IRA to a Roth. Put those two rules together and you get the backdoor strategy: contribute after-tax dollars to a traditional IRA, then convert the balance to a Roth shortly after. Because the contribution was already taxed, a prompt conversion generally triggers little or no additional tax, then those funds grow in an account that offers tax-free qualified withdrawals.
The Two-Step Process
The mechanics are straightforward when executed cleanly:
- Contribute to a traditional IRA on a nondeductible basis (up to $7,500 for 2026, or $8,600 if age 50 or older) and file Form 8606 to document the after-tax contribution
- Convert that balance to a Roth IRA, ideally before meaningful earnings accumulate, so little or no additional tax is due on the conversion
Because the contribution was made with after-tax dollars, converting it promptly generally results in minimal taxable income. The funds then grow inside the Roth, where qualified withdrawals are tax-free.
The Pro-Rata Rule Can Complicate the Math
If you hold pre-tax dollars in any traditional, SEP, or SIMPLE IRA, the IRS treats all of your IRA balances as one pool when you convert. You cannot isolate the after-tax contribution. A conversion is taxed proportionally across pre-tax and after-tax money, which can turn a clean maneuver into an unexpected tax bill. Executives who rolled an old 401(k) into an IRA years ago are the most common example. This is precisely the kind of calculation to run with your CPA before converting, not after. Investopedia’s Backdoor Roth Setup Guide gives a useful explanation.
Why Tax Diversification Matters for Equity-Heavy Executives
Executives wealth often lives in two buckets: taxable brokerage accounts holding employer stock and RSU proceeds, and pre-tax 401(k) balances that will eventually be taxed as ordinary income. A Roth adds a third bucket that isn’t taxed at distribution. In retirement, the flexibility of a Roth account can help people manage their tax brackets year by year, complementing strategies like net unrealized appreciation that also hinge on account structure.
The backdoor Roth IRA is a modest annual move, but repeated over a career it can build meaningful tax-free capital to complement a concentrated equity position.
Wondering whether a backdoor Roth IRA fits your account structure, or whether the pro-rata rule applies to you? Contact Spectrum Asset Management to talk it through.
Disclaimer: This material is for informational and educational purposes only and should not be construed as investment, legal, or tax advice. All investing involves risk, including the potential loss of principal. Tax rules, including contribution limits and phase-out ranges, are subject to change; consult a qualified CPA or tax professional regarding your personal circumstances before executing a conversion. Spectrum Asset Management, Inc. (SAM) is an SEC-registered investment adviser headquartered in Newport Beach, California.
Third-Party Website Disclosure: Links to third-party websites are provided for informational purposes only. Spectrum Asset Management, Inc. does not control or endorse the content of external sites and is not responsible for their accuracy or completeness.
