Backdoor Roth IRA
Definition
A strategy for high earners to contribute to a Roth IRA even if they exceed income limits. You contribute to a traditional IRA (non-deductible) then immediately convert it to a Roth. It's legal but has tax implications if you have other pretax IRA accounts.
Why It Matters
If you earn too much to contribute directly to a Roth, a backdoor Roth lets you bypass income limits and get tax-free growth. It's become essential for high earners who want Roth benefits.
Example
Earn $180,000 and can't contribute to a Roth directly. Contribute $7,000 to a traditional IRA, convert to Roth. Now $7,000 grows tax-free forever. Your future $700,000 gain is tax-free.