Understanding IRAs and the Backdoor Roth IRA Strategy for High Earners

An IRA, or Individual Retirement Account, is a tax-advantaged account that allows you to set aside money for retirement as long as you have earned income. Even children with earned income from a job can contribute to an IRA.

Like other retirement accounts, IRAs come in two main flavors: Traditional IRAs and Roth IRAs. While they share similarities, the tax treatment and long-term planning implications are very different, especially for high-income earners like physicians.

Traditional IRA: Tax Benefits Now, Taxes Later

With a Traditional IRA, contributions are generally made pre-tax, meaning you may be able to take a tax deduction when you contribute. The investments inside the account grow tax-deferred, which means you don’t pay taxes on dividends or capital gains while the money remains in the account.

However, the IRS eventually wants its share. When you withdraw money from a Traditional IRA, those withdrawals are taxed at your ordinary income tax rate.

There are also Required Minimum Distributions (RMDs). Once you reach age 73, you are required to start withdrawing money from your Traditional IRA—even if you don’t need the funds. The amount you must withdraw is calculated using IRS life expectancy tables found in Publication 590-B.

If you withdraw money from a Traditional IRA before age 59½, you’ll generally owe:

• Ordinary income taxes plus

• A 10% early withdrawal penalty

Roth IRA: Pay Taxes Now, Enjoy Tax-Free Growth Later

The Roth IRA was created by the Taxpayer Relief Act of 1997 and named after Senator William Roth. (The Roth 401(k) didn’t become available until 2006.)

With a Roth IRA:

• Contributions are made with post-tax dollars

• You do not receive a tax deduction for contributions

• Investments grow tax-free

• Qualified withdrawals in retirement are tax-free

As long as withdrawals are taken after age 59½ and after a five-year holding period from your first contribution, both contributions and earnings come out tax-free and penalty-free.

Contribution Limits

2025:

• Under age 50: $7,000

• Age 50 and older: $8,000

2026:

• Under age 50: $7,500

• Age 50 and older: $8,600

These limits apply to the total contributions across all IRAs (Traditional and Roth combined).

Why Roth IRAs Are So Flexible

One of the biggest advantages of a Roth IRA is flexibility.

Roth IRA money is categorized as:

• Contributions

• Earnings

You can withdraw your contributions at any time, for any reason, with no taxes or penalties. The restrictions apply only to the earnings, which require you to meet age and timing rules.

There are also exceptions that allow early access without penalties, including:

• Total and permanent disability

• Inherited Roth IRAs

• Up to $10,000 for a first-time home purchase (for yourself, a child, or a grandchild)

Penalty-Free (But Taxable) Early Withdrawals

Certain non-qualified distributions avoid the 10% penalty, though ordinary income tax may still apply. These include:

• Unreimbursed medical expenses exceeding 7.5% of AGI

• Health insurance premiums during unemployment

• Qualified higher education expenses

• Qualified disaster recovery distributions

• Qualified reservist distributions

• IRS levies

No Required Minimum Distributions for Roth IRAs

Unlike Traditional IRAs, Roth IRAs have no required minimum distributions during your lifetime. This makes them an excellent tool for long-term tax planning and wealth transfer.

Income Limits for Roth IRA Contributions

Here’s the catch: you can’t always contribute directly to a Roth IRA.

2025 Income Limits

• Single: MAGI under $150,000

• Married filing jointly: MAGI under $236,000

2026 Income Limits

• Single: MAGI under $153,000

• Married filing jointly: MAGI under $242,000

Most physicians exceed these limits—which is where the Backdoor Roth IRA comes in.

What Is a Backdoor Roth IRA?

A Backdoor Roth IRA is a legal strategy that allows high-income earners to fund a Roth IRA indirectly.

This strategy works best if you do not have:

• Existing Traditional IRAs with pre-tax (deducted) contributions, or

• Rollovers from old 401(k)s or 403(b)s sitting in a Traditional IRA

Why? Because of the pro-rata rule, which can trigger unexpected taxes.

How the Backdoor Roth IRA Works

1.      Open a Traditional IRA

2.      Contribute cash (do not take a tax deduction)

3.      Open a Roth IRA at the same brokerage

4.      Convert the Traditional IRA to a Roth IRA (a Roth conversion)

5.      Invest the funds inside the Roth IRA

6.      File IRS Form 8606 correctly the following tax year

⚠️ Many accountants make mistakes with Form 8606. If it’s done incorrectly, you could pay taxes twice.

Why the Backdoor Roth IRA Makes Sense for Physicians

For most physicians:

• Traditional IRA contributions are not deductible

• Direct Roth IRA contributions are not allowed

That means you’re contributing post-tax dollars either way. Converting to a Roth IRA gives you:

• Tax-free growth

• Tax-free qualified withdrawals

• No required minimum distributions

  
  

  There’s little advantage to leaving post-tax money in a Traditional IRA.

The Pro-Rata Rule (Important!)

If you already have pre-tax money in a Traditional IRA, any Roth conversion is subject to the pro-rata rule. You’ll owe taxes on the portion of the conversion that represents pre-tax contributions, often at 24–37% for physicians.

If the pre-tax balance is relatively small (roughly $10,000–$20,000), it may be reasonable to convert and move forward cleanly. If the balance is large—often due to rolling over an old employer plan—you should speak with a fee-only financial planner.

Strategic Roth Conversions in Low-Income Years

If you temporarily fall into a lower tax bracket, it can be an excellent time to do Roth conversions.

Example:

• Normal income: $550,000 (35% tax bracket)

• Sabbatical year income: $150,000 (2% tax bracket for single filers, 22% for married filing jointly)

You might convert just enough pre-tax money to fill up the 24% bracket without pushing yourself into the next bracket. (For 2026, the top of the 24% tax bracket is $201,775 for single filers and $403,550 for married filing jointly for if single, converting $51,774 or married converting $258,549.) That converted money will never be taxed again.

The 5-Year Rule for Roth Conversions

 

Each Roth conversion has its own five-year clock for penalty-free withdrawals of principal if you are under age 59½.

• Convert at age 50 → access principal at age 55

• Convert at age 58 → access at age 59½

The rule is five years or age 59½, whichever comes first.

This can be especially helpful for early retirees.

Timing Your Contributions

IRA contributions for a given tax year can be made between:

• January 1 of the tax year

• April 15 of the following year

Personally, I recommend making the contribution and conversion within the same tax year to reduce confusion.

Special Situations: Spouses and Children

Non-working spouse: You can still contribute to an IRA using spousal IRA rules—and even use the backdoor Roth strategy.

Children with earned income: They can contribute directly to a Roth IRA. Since most kids pay little or no income tax, this can be an incredibly powerful wealth-building tool. Generous parents can even fund the contribution while letting the child keep their paycheck.

Final Thoughts

IRAs are powerful retirement savings tools, and for most physicians, the Backdoor Roth IRA is one of the best ways to build long-term, tax-free wealth.