Isn't That Rich Podcast

The name alone makes it sound sneaky. "Backdoor Roth." It brings to mind Prohibition and slipping through the alley entrance of some speakeasy. But here is the good news we walked away with after this episode: it is completely legal, completely legitimate, and for the right person, it can be a really smart way to build a bucket of tax-free money for the future.

We sat down with Jolene Johnson, a financial advisor with Kemper Capital Management, to make sense of it all. Jolene has spent 20 years helping individuals, families, and business owners turn their financial goals into real plans, and she has a gift for taking something that sounds complicated and making it feel doable.

Kemper Capital Management is a subsidiary of Kemper CPA Group. Advisory services offered through KCPA Financial Advisors and insurance services offered through KCPA Insurance Services, subsidiaries of Kemper Capital Management. Tax and accounting services offered through Kemper CPA Group. All content is for educational purposes only and does not constitute individualized financial advice. You should consult your own financial and tax advisors about your personal situation before making any financial decisions.

So, What Exactly Is a Backdoor Roth?

Here is the simplest way Jolene explained it. A backdoor Roth is a strategy for high income earners who want the benefits of a Roth IRA but earn too much to contribute to one directly.

Instead of walking through the front door and contributing straight to a Roth, you take a slightly different path. You make a contribution to a traditional IRA, treat it as an after-tax (non-deductible) contribution, and then convert that money into a Roth. That is the "backdoor." You are not doing anything hidden or shady. You are simply using a route the tax law allows.

Why Do People Love the Roth So Much?

We talk about this a lot on the show, and it really comes down to one word: taxes.

With a Roth IRA, you pay the taxes now, while you know exactly what the rules are. Then, as long as you meet the requirements, that money and all of its growth come out completely tax-free later in life. Nobody knows what tax brackets are going to look like 15, 20, or 30 years from now, so having a bucket of money the government cannot touch again gives you a lot of flexibility and a lot of peace of mind.

Jolene made a great point here. When you retire, you shift from the accumulation phase to the distribution phase, and how you pull from your different buckets can affect the tax bracket you land in. A Roth bucket gives you real control over that.

Who Actually Qualifies for a Roth?

This is where a lot of people get tripped up. Roth eligibility is based on your modified adjusted gross income, or MAGI, and how you file.

So what on earth is MAGI? In plain English, it is not your salary and it is not the number on your paycheck. Start with your total income for the year, subtract certain things the IRS lets you subtract to get your adjusted gross income, and then add a few of those items back. That final number is your MAGI. For most people it lands very close to their adjusted gross income, so a good rough way to think about it is "your income after the usual deductions, give or take a few add-backs." The exact math is your tax professional's job. What matters for us is that MAGI is the number the IRS uses to decide whether you can contribute to a Roth and how much.

For 2026, here are the numbers. A single filer can make the full contribution with a MAGI under $153,000, and a married couple filing jointly can do the same under $242,000. The contribution limit itself is $7,500 for the year, and if you are 50 or older you can add a catch-up of $1,100.

As Jolene pointed out, these figures change almost every year for inflation, so treat them as a 2026 snapshot and confirm the current numbers with your tax professional before you act.

And remember, if you have both a traditional and a Roth IRA, the contribution limit is a total across both accounts. It is not a separate limit for each. You are splitting one bucket, not filling two.

The Two Rules That Make a Roth Tax-Free

Here is one that surprises people. To pull money out of a Roth completely tax-free, you have to meet both of these:

1. You have to be 59 and a half years old.
2. Your first Roth contribution had to have gone in at least five years ago.

It is the greater of the two that matters. So if you start your very first Roth at age 57, you may clear the age hurdle at 59 and a half, but that five-year clock is still ticking. Jolene gave a helpful example. Say you put in $7,000, it grows to $8,000, and you take it all out after age 59 and a half but before five years have passed. You avoid the 10 percent early withdrawal penalty, and you get credit for your original $7,000 because that was after-tax money. But that $1,000 of growth would still be treated as taxable income, because you did not meet the five-year window.

The Big Gotcha: The Pro-Rata Rule

If you remember one thing from this whole episode, make it this one. The most common and most expensive mistake Jolene sees comes down to something called the pro-rata rule. It sounds technical, so let us slow all the way down, because once it clicks, it really clicks.

Think of it like coffee with cream

Here is the idea that unlocks the whole thing. The IRS does not let you separate your "already taxed" money from your "never been taxed" money. It treats every traditional IRA you own as one big blended pot. And when you pull money out to convert, the IRS assumes every dollar is the same mix as the whole pot.

Picture a pot of coffee. The money in an old traditional IRA (say, a $50,000 rollover from a past 401k) is the black coffee. That money has never been taxed, so it will be taxed on the way out. Your new $7,000 non-deductible contribution is the cream. You already paid tax on it, so it should come out tax-free.

Now you pour the cream into the pot. You have coffee with cream, all swirled together. When you scoop out a cup to convert, you cannot scoop out only the cream. Every scoop is the same blend as the whole pot. And in this case, cream is only a small slice of what is in there. That, in a nutshell, is the pro-rata rule.

Before we do the math, one quick definition, because the whole thing rests on it.

What makes money "pre-tax" versus "after-tax"?

It has nothing to do with what account the money is in or whether you personally wrote a check. It comes down to one question: has this money been taxed yet?

Money is pre-tax (the coffee) if you got a tax break when it went in. That is your 401k, which comes straight off your paycheck before taxes, or a traditional IRA contribution you deducted on your taxes. That money has never been taxed, so it gets taxed on the way out. It is not a penalty. It is just the first time the government is collecting.

Money is after-tax (the cream) if you got no break at all and paid tax on it first. The classic example is a traditional IRA contribution you did not deduct, usually because your income was too high to qualify. That money is called your "basis," which is just a fancy word for "money the IRS already got its cut of." It will not be taxed again.

One important catch. Your after-tax basis does not get to skip the line. The pro-rata rule still blends everything together, so a conversion is only fully tax-free when your entire traditional IRA balance is after-tax money, or when you have no other traditional IRA money at all.

The numbers, step by step

Let us walk through it with real figures.

1. You already have $50,000 in a rollover IRA. All pre-tax. That is the coffee.
2. You add a fresh $7,000 after-tax contribution, planning to convert it. That is the cream.
3. Your total IRA balance is now $57,000.
4. Your cream is only $7,000 out of $57,000, which works out to about 12 percent of the pot. (To be exact, 12.28 percent.)
5. Now you convert your $7,000 to the Roth. Because every scoop is the same blend, only 12 percent of that $7,000 comes over tax-free, which is about $860.
6. The other $6,140 gets taxed as regular income, even though you already paid tax on that money once.

Ouch. You wanted to move your clean $7,000 into a Roth with no tax, and instead most of it got taxed anyway. That happens because folks forget that old rollover account is sitting in the background, which is exactly the mistake Jolene warns about.

The version that works cleanly

Here is the good news. The backdoor Roth works beautifully when you have no other pre-tax money in any traditional IRA. Watch how the same math changes:

• Your $7,000 contribution is now 100 percent of your total IRA money.
• That means 100 percent of the pot is your after-tax cream.
• You convert it, and the whole $7,000 comes over tax-free, as long as you did it quickly before it had a chance to earn anything.

No blending, no surprise tax bill. Clean cream, no coffee.

What if you already have an old IRA in the way?

This is the piece most people miss, and it is worth its weight in gold. If you do have an old rollover IRA gumming up the works, you can sometimes move it out of the picture entirely by rolling it into your current employer's 401k. A workplace 401k does not count in the pro-rata calculation. So if you can empty those traditional IRAs into your 401k before December 31, you are left with just your fresh $7,000 contribution, and the conversion goes back to being clean.

This is not a do-it-yourself moment. The move itself is just a form. It is the pot behind it that decides your tax bill, so this is exactly where you want your CPA and your financial advisor working together before you press convert.

Backdoor Roth vs. Roth Conversion: What Is the Difference?

These two get used interchangeably, but they are not quite the same.

A backdoor Roth is that annual move for high earners: after-tax contribution to a traditional IRA, then a quick conversion to a Roth.

A Roth conversion is broader. Maybe you have contributed pre-tax dollars to a traditional IRA your whole life and now you want to move some or all of it into a Roth. There is no income limit on doing a conversion, thanks to a change in the tax law back in 2010. But since that traditional money was never taxed, converting it is a taxable event.

Here is the key piece Jolene stressed. When you convert pre-tax money, that amount gets added to your household income for the year. If you are already earning a good income, a large conversion could bump you into a higher bracket. So, a decision has to be made about how the tax gets paid. In a perfect world, you pay that tax from savings or another bucket, not from the IRA itself, so you get the full benefit of the conversion.

Why Would Anyone Do This? A Few Scenarios

We kept asking Jolene, "This feels like a catch-22. Where does it actually make sense?" Here is what she shared.

The high earner who is already maxing out a 401(k). A 401(k) and a personal Roth are two separate buckets with separate limits. Someone who is already maximizing their workplace plan but still wants to build tax-free savings on the side may find the backdoor Roth is a perfect fit.

Legacy and the next generation. This one is big. The rules for inherited IRAs have changed. When a non-spouse inherits a traditional IRA, they generally have 10 years to deplete it, and every dollar they withdraw counts as taxable income to them. Picture inheriting that during your own high-earning years. Ouch. A Roth has no required minimum distributions during your lifetime, so you are never forced to draw it down. Your heirs still have to empty an inherited Roth within 10 years, but that money comes out tax-free, unlike an inherited traditional IRA.

Protecting your Social Security. When you retire, pre-tax withdrawals count as income and can cause more of your Social Security to be taxed. Roth withdrawals do not count as income the same way. So if you are teetering on the edge of the next tax bracket, being able to pull from your Roth instead can help you stay put.

Is a backdoor Roth actually for you?

The episode circled this for a while, so let us make it simple. A backdoor Roth tends to be a great fit when all three of these are true:

1. Your income is above the Roth limit. You earn too much to contribute to a Roth directly.
2. You are already maxing out your other retirement savings. Your 401k is full and you still have money you want to put to work tax-free.
3. You have little or no other pre-tax IRA money. No old rollover IRA sitting in the background to trigger the pro-rata rule, or you have a plan to move it into a 401k first.

If all three describe you, this strategy is probably worth a serious conversation. If that third one is not true yet, it can still work, it just takes a cleanup step first, which we will get to.

The Timing Trick Most People Miss

Here is a fun one. You are not locked into the calendar year for contributions.

Let us say we are sitting in March of 2026 and you never made a contribution for 2025. As long as you have not filed your 2025 taxes yet, you can still make a prior-year contribution for 2025 and a contribution for 2026. Stack those together and you could be moving a meaningful amount into a Roth at one time.

Jolene's caution here is worth repeating: do not wait until the very end of the year to fund and convert. December gets congested, bank transfers take longer than a single day, and you do not want to be scrambling on December 30th hoping it clears in time. Give yourself room to work with your CPA and your advisor.

The Bottom Line: It Takes a Team

If there is a theme to this whole episode, it is that you do not have to figure this out alone, and honestly, you probably should not try to.

Jolene put it simply. A backdoor Roth is complicated but not complicated, if that makes sense. The mechanics are straightforward, but the pieces around them, the pro-rata rule, the tax impact, the timing, are where mistakes get expensive. That is why she leans on a coordinated effort between your investment professional and your tax professional. At Kemper, she can literally walk down the hall and talk to a CPA before making a recommendation, because what makes sense in the investment world might look different from the tax side.

We say this all the time on the show. You need a banker, you need a financial advisor, and you need a CPA. Build your team, because they all work together, and taxes matter.

Ready to Explore It?

If a backdoor Roth or a Roth conversion sounds like it might fit your situation, the first step is a conversation. Start with your financial advisor if you have a good relationship there, or start with your CPA. Between the two of them, you can figure out whether this strategy makes sense for you.

Jolene offers a complimentary introductory meeting, no pressure and no cost, just a chance to get acquainted and learn about your situation. You can visit Kemper's website to learn more about services offered and to locate an Advisor in your area, or to contact Jolene directly, her phone is 618-993-0934 and her email is [email protected]. 

As Jolene reminded us, it is not about how much you are saving for the future. It is about the fact that you are saving something, and life goes fast. The sooner you start thinking about it, the better prepared you will be.