Backdoor Roth IRAs and Roth Conversions for High Earners in a High-Tax State
Income limits keep most Silicon Valley professionals out of direct Roth IRA contributions, but two well-established strategies keep the door open.
The Roth IRA is attractive for a simple reason: qualified withdrawals are entirely tax-free, and there are no required minimum distributions during the original owner's lifetime. The catch is that direct contributions are limited by income. For 2026, the IRS phases out Roth IRA eligibility between $153,000 and $168,000 of modified adjusted gross income for single filers and between $242,000 and $252,000 for married couples filing jointly. Most dual-income tech households in the Bay Area exceed those thresholds.
The backdoor Roth IRA
There is no income limit on making a nondeductible contribution to a traditional IRA, and there is no income limit on converting a traditional IRA to a Roth IRA. The "backdoor" Roth combines those two facts. You contribute up to the 2026 limit of $7,500 (or $8,600 if age 50 or older) to a traditional IRA on a nondeductible basis, then convert the account to a Roth IRA. Because the contribution was already taxed, the conversion generates tax only on any earnings that accrued between contribution and conversion, which is typically minimal.
The nondeductible contribution is reported on IRS Form 8606, which tracks your basis in traditional IRAs. Filing this form correctly each year is essential; without it, the converted amount could be taxed twice.
The pro-rata rule
The backdoor strategy works cleanly only if you have no other pre-tax IRA balances. The IRS treats all of your traditional, SEP, and SIMPLE IRAs as one pool when determining how much of a conversion is taxable. If you have $92,500 of pre-tax money in a rollover IRA and add a $7,500 nondeductible contribution, then convert $7,500, only 7.5% of the conversion is tax-free; the rest is taxable. Mercer Advisors' guide describes this calculation.
Common ways to address the pro-rata issue include rolling pre-tax IRA balances into a current employer's 401(k), if the plan accepts roll-ins, or converting the entire pre-tax balance in a year when doing so is affordable. Note that the rule is applied based on balances as of December 31 of the conversion year, not the conversion date.
Roth conversions of existing pre-tax balances
Beyond the annual backdoor contribution, some people convert larger pre-tax balances to Roth over time. The conversion is taxable as ordinary income in the year it occurs. The strategy generally makes sense when your tax rate today is expected to be lower than your rate when the money would otherwise be withdrawn.
For high earners in their peak years, that condition often is not met, and California's rates of up to 13.3% make the current cost steep. But there are windows when conversions become attractive:
A gap year. A sabbatical, a period between jobs, or the year after a layoff may produce unusually low income and room in the lower brackets.
Early retirement before Social Security and required distributions. Many Silicon Valley professionals retire or step back in their 50s. The years before age 73, when required minimum distributions begin, can be used to convert at moderate rates.
A planned move. Someone who expects to relocate to a state with no income tax may prefer to defer conversions until after establishing residency, since California taxes conversions of residents regardless of where the IRA is held. Conversely, someone moving into California might convert beforehand.
Market declines. Converting when account values are depressed moves more shares into the Roth for the same tax cost.
Practical cautions
Conversions cannot be undone; the recharacterization option was eliminated in 2018.
A large conversion can raise Medicare premiums two years later through income-related adjustments and can affect other income-based phase-outs, including the 2026 SALT deduction phase-down that begins at $500,000 of modified adjusted gross income.
Each conversion has its own five-year clock for penalty-free access to converted amounts before age 59½.
Estimated tax payments are usually needed, since custodians do not withhold state tax by default and withholding from the conversion itself reduces the amount moved to the Roth.
The takeaway
The backdoor Roth is a routine annual step for many high-income households, while larger conversions are an opportunistic tool that depends on timing. Both require careful record-keeping and coordination with your overall tax picture. This article is for general education and does not constitute tax or investment advice; consult a qualified professional before acting.
Important Disclosures
Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.
