“We often get in quicker by the back door than by the front.”

– Napoleon Bonaparte

I read the report again, just to make sure I wasn’t going crazy.

I rubbed my eyes and looked out my office window; it was a cloudy day, people were passing by on the street, a few birds were fighting over a spot on a telephone wire. Perfectly normal.

I couldn’t believe it. But when I read the report a third time, I couldn’t keep from smiling ear to ear.

Because I knew I had just discovered the holy grail of financial planning buried on page seventy-eight of an obscure trade magazine.

A way to invest almost $40k per year into a Roth IRA with no income limit.


Now I know what you’re thinking: ‘This guy IS crazy! I barely understood a word of that sentence, and he’s acting like he just cured cancer!’ And on the surface…yes, it is a little crazy. The kind of thing that only finance nerds like myself would get excited for.

But please believe me when I say that I’m not overselling this.

I’ve since utilized this strategy countless times, with some of my wealthiest clients, and it honestly could be the single most powerful financial strategy I’ve ever come across.

It’s called the ‘Backdoor Roth Conversion’, and I’m going to show you how it works in 6 simple steps. Just promise me one small thing.

Don’t read ahead, and follow every step in sequence.

Okay, that’s two things, but they’re equally important. This strategy works like Indiana Jones replacing the gold idol with a bag of sand—one false move, and the whole thing could fall apart.

Proceed with caution.

Step #1 Understand how a Roth IRA Works

A Roth IRA is an IRA that allows after-tax contributions today, with the potential of withdrawing money at a later date without having to pay any income taxes.

Not on the gain. Not on the earnings.


But there are limitations.

The 3 basic rules that govern Roth IRAs are:

(1) To avoid paying taxes, you need to be at least 59 ½ and have opened your Roth 5 years prior to withdrawing funds.

(2) In order to contribute to a Roth IRA, you can’t make too much money (in 2018 modified Annual Gross Income to be eligible was $135,000 or less for single filers and $199,000 or less for married).

(3) Contributions are limited! $5,500 per year is the most you can put in (unless you’re over 50—then you’re allowed a whopping $6,500).

But in the Backdoor Roth Conversion, you can essentially bypass the last two rules.

Which means no limitation on your income.

Interested? Read on.

Step #2 You MUST have access to a 401(k)

This means you need to be working at a company that offers a 401(k) plan, and you need to be eligible to invest in that plan.

Self-employed? Don’t give up yet. A Solo 401(k) (or One-Participant 401(k)) is a plan available for business owners covering only themselves and their spouse. Depending on the company you use to set up the plan, you could still be eligible for the Backdoor Roth!

If the above is true, continue to step #3.

Step #3 Your 401(k) plan MUST allow for after-tax contributions

The key to the Backdoor Roth is making contributions into your 401(k) with money you’ve already paid tax on.

These are called after-tax contributions, and unfortunately, some plans allow it and some do not.

Check with your HR person or 401(k) administrator if after-tax contributions are allowed in your plan. If your plan doesn’t allow it, speak up! The good news is it’s usually not difficult for a company to make the change.

Plus it could benefit you and other employees if they open up that option.

Note that some plans allow contributions into a Roth section of the 401(k). While the Roth 401(k) option may be a good choice for you, it’s not what I am referring to in this article. This option is restricted by contribution limits that we’ll talk about in the next step.

Step #4 Understand the IRS rules

Refer to my article last week for details, or email me and I’ll send it to you. 

In summary, the IRS allows a pre-tax or Roth 401(k) contribution of $18,500 (2018 limitations), an additional “catch-up” contribution of $6,000 if you’re over 50, and a company match.

If you’ve reached the $18,500 limit, the after-tax option allows additional contributions (which includes any company match) up to a limit of $55,000. This does not include your catch-up, so technically, if you’re over 50, you can contribute up to $61,000!

What this means for you is you can still take advantage of the maximum tax savings on 401(k) contributions…and fund the Backdoor Roth.

That’s a lot different than the Roth section of the 401(k), which is an either/or option. Either take the tax savings now or later. But with the Backdoor Roth…

You get both!

Step #5 Max it out

If you can afford it, stuff up to $55,000 per year into your plan.

Plus, if you’re over 50, you can contribute an additional $6,000!

Doing so could get somewhere from $20,000 to $36,500 into your after-tax account inside your 401(k), depending on how much your employer matches.

Having trouble hitting such a big saving goal? Here’s an article I was featured in with clever ways to help you save money every day.

Step #6 Transfer it out

This is it. The final step.

Take a deep breath, wipe the sweat from your brow, and pay very close attention. I need you to take all of that money you accumulated in your after-tax account and…

(drumroll please)

…transfer it to a Roth IRA.

“Wait a minute,” you ask, “that’s it?”

That’s it.

You just contributed up to $36,500 into a tax-free Roth IRA when the contribution limit is only $6,500.


Now we’re not finished quite yet. The last step is to find out if your 401(k) provider allows for in-service distributions.

This is not a make or break item, but the Backdoor Roth is even more effective if you can.

An in-service distribution means that you could transfer your after-tax contributions to a Roth IRA while you’re still working at the company.


If you can, I typically suggest employees make this transfer annually. Why?

The short answer is to move the money into the tax free protection of a Roth IRA so that the future earnings can be tax free for you. Let me give you an example.

If your money grows while in the after-tax account, you have to pay taxes on the growth. There’s no way around it. But once you get the money into a Roth IRA, you don’t have to pay taxes on any new growth as long as you follow the distribution rules for the Roth IRA

So the sooner you can get that money into a Roth IRA, the lower your potential tax liability.

One final master tip: when you transfer the money to a Roth, also transfer the growth to an IRA, so there’s no tax due at the time of the transfer (or conversion).

“A very little key will open a very heavy door.”

– Charles Dickens

Regardless of your income, you may be able to start adding up to $36,500 per year into a vehicle that could give you access to tax free income and withdrawals in retirement.

See if your 401(k) will allow it…and start taking advantage today.



Are you Financial Adviser Compatible? Take the QUIZ here to find out. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director with United Capital Financial Advisers, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances

© Byron Ellis