Should I Be Funding a Roth IRA?

Roth IRAs are often touted as one of the best retirement accounts available, mostly due to significant tax advantages. However, many financial advisors don’t encourage their clients to utilize Roth IRAs due to a conflict of interest. To contribute to a Roth IRA, many doctors will need to move their pre-tax IRAs into their 401(k). For advisors not managing the 401(k), this means lost revenue. Keep reading to learn how you can take advantage of this tax-free retirement account!

A Roth IRA is an individual retirement account that can be opened with most brokerage platforms.  Here’s why it’s one of the best accounts out there:

• You contribute after-tax money
• All contributions grow tax-free
• Withdrawals are tax-free after age 59.5

Compare this to a traditional IRA, where you’ll pay taxes on withdrawals in retirement.  Also, traditional IRAs force you to withdrawing money (called required minimum distributions or RMDs) at age 73, (or 75 if you’re not 75 by 2035). Roth IRAs have no RMDs, which make them much more valuable.

To contribute to a Roth IRA, your household needs earned income (like your salary or practice profits) at least equal to your contribution. For 2025, the contribution limits are:

• $7,000 per person
• $8,000 if you’re 50 or older

The catch?  Many doctors are told they earn “too much” to contribute directly to a Roth IRA. However, that’s only partly true.

Your ability to contribute directly to a Roth IRA depends on your Modified Adjusted Gross Income (MAGI), which is roughly your total income minus certain deductions. For 2025:

• Married filing jointly: You can contribute the full $7,000 if your MAGI is below $236,000. If it’s between $236,000 and $246,000, you can contribute a partial amount. Above $246,000, direct contributions are not allowed.
• Single filers: Full contribution if MAGI is below $150,000; partial between $150,000 and $165,000; no contribution above $165,000.

Many doctors exceed these limits. Cue the backdoor Roth IRA!

The backdoor Roth IRA lets you contribute to a Roth IRA even if your income is too high. Here’s how it works in three easy steps:

1. Contribute to a traditional IRA: Contribute $7,000 (or $8,000 if 50+) into a traditional IRA as a non-deductible contribution (meaning you do not get a tax deduction). Keep this money in cash.
2. Convert to a Roth IRA: Transfer the $7,000 from your traditional IRA to your Roth IRA.
3. Enjoy tax-free growth: Once in the Roth IRA, your money grows tax-free, and you can withdraw it tax-free in retirement.

However, the pro rata rule can make this taxable if you’re not careful.

The pro rata rule is an IRS rule that treats all your traditional, SIMPLE, and SEP IRAs as one account when you convert money to a Roth IRA. If you have pre-tax money (deductible contributions or earnings) in any of these accounts, part of your conversion will be taxed based on the ratio of pre-tax to after-tax funds.

For example:

• You have $7,000 in a traditional IRA (all pre-tax) and contribute $7,000 (non-deductible) to a new traditional IRA.
• Total IRA balance: $14,000 ($7,000 pre-tax + $7,000 after-tax).
• If you convert $7,000 to a Roth IRA, 50% ($3,500) is considered pre-tax and taxable at your income tax rate (37% for many doctors).

To avoid this tax:

1. Move pre-tax IRA funds to a 401(k): Roll over all pre-tax traditional, SIMPLE, or SEP IRA balances into your workplace 401(k). The pro rata rule doesn’t count towards 401(k) balances.
2. Make a non-deductible contribution: Contribute $7,000 to a traditional IRA.
3. Convert to Roth IRA: Transfer the $7,000 to your Roth IRA. Since there’s no pre-tax money left in your IRAs, the conversion is 100% tax-free.

Still confused? Imagine you make a trip to Las Vegas every January 1st with $7,000 in red chips (your after-tax money). You want to enter the coveted Roth IRA Lounge, where drinks are free, and all gambling winnings (investment growth) are tax-free when you leave.  However, the bouncer says, “Sorry, you earn too much to enter this lounge.” Instead, he sends you to the Traditional IRA Lounge, where drinks cost money, and all winnings (plus your original chips) are taxed when you cash out.

Then, someone whispers about a backdoor passage to the Roth IRA Lounge. But there’s another bouncer at this entrance. If you’re carrying $7,000 in blue chips (pre-tax IRA money) and $7,000 in red chips (your new nondeductible contribution), the bouncer says, “Half your chips are pre-tax, so you’ll owe taxes on half of the $7,000 you’re bringing in.” That means you would pay taxes on $3,500, which is about $1,295 at a 37% tax rate.  You still bring all $7,000 into the Roth IRA Lounge, but the tax bill hurts.

How do you get around this?  Before heading to the backdoor passage, stash your blue chips in a 401(k) safety deposit box (your workplace 401(k)). Now, when you approach the backdoor passage with your $7,000 in red chips, the bouncer lets you in for free—no taxes!  You’re in the Roth IRA Lounge with all $7,000, enjoying tax-free winnings, and you can repeat this every year.

Most doctors we meet aren’t funding their Roth IRAs, and they should be. We recommend working with a financial advisor to execute these steps correctly. Many doctors skip the backdoor Roth or mess it up, costing them unnecessary taxes. Let’s assume you and your spouse each contribute $7,000 annually to Roth IRAs ($14,000 total) starting now. Assuming a 6% annual return, after 15 years, you’d have $345,415 of tax-free money in retirement!

Want personal assistance with your retirement planning? Request a call with us!