Backdoor Roth Explained: A Guide to Tax-Smart Retirement Investing

For many federal and military employees, thinking about retirement and hitting various income thresholds can be both exciting and overwhelming. You’ve diligently saved, contributed to the Thrift Savings Plan (TSP) or other accounts, only to discover that your income now surpasses the limits for making direct Roth IRA contributions. That’s where the “backdoor Roth” strategy comes into play. Instead of being locked out of Roth IRA benefits, you can open a new door—albeit a “backdoor”—to tap into a Roth IRA’s unique tax advantages.

At PlanWell, we’ve spent over 30 years as a financial advisor for federal employees, guiding them through complex retirement decisions, leveraging our specialized designations such as the Chartered Federal Employee Benefits Consultant (ChFEBC), Certified Financial Planner™ (CFP®), and Accredited Investment Fiduciary (AIF®). In this conversation, we’ll unravel what a backdoor Roth IRA is, why it matters for those nearing or already in federal service retirement, and how it fits into a comprehensive financial plan. As always, we aim to keep things clear and friendly while leaning on our extensive experience and our proprietary Fed-Expert Financial Blueprint process.

Understanding the Backdoor Roth Strategy

A “backdoor Roth” is not a separate account; it’s a strategy that circumvents certain income restrictions preventing high earners from making direct Roth IRA contributions. The Internal Revenue Service (IRS) sets annual income phaseout ranges for individuals looking to fund a Roth directly. When your Modified Adjusted Gross Income (MAGI) is above these ranges, your direct contributions begin to reduce, and eventually, you cannot contribute at all. For federal employees and retirees in senior pay grades or those actively drawing significant pension and Social Security benefits, these income limits can become a barrier.

Here’s where the backdoor path comes in. Instead of making a direct Roth contribution, you first contribute to a traditional IRA—often with after-tax (non-deductible) dollars—and then convert those funds to a Roth IRA. Essentially, you’re taking a brief, detoured route into a Roth. This move takes advantage of the fact that there is no income limit for who can perform a Roth conversion.

So, why does this matter for someone who spent a career in federal service? For one, Roth IRAs offer the potential for tax-free growth—a compelling feature if you anticipate higher tax brackets later in retirement. In addition, unlike traditional IRAs or even traditional TSP accounts, Roth IRAs do not require you to take Required Minimum Distributions (RMDs) during your lifetime, which can offer more control over your retirement income and potential tax bill.

What Is a Backdoor Roth IRA?

Though “backdoor Roth” sounds like an exotic tool, it’s simply a two-step process:

First, fund a traditional IRA with after-tax dollars. Because the contribution is after-tax, you typically won’t receive a tax deduction for it—though exceptions exist if your income is below certain thresholds. Second, convert those funds from the traditional IRA into a Roth IRA. If you act quickly (and if the funds don’t experience substantial earnings in the interim), you might owe little to no extra tax on the conversion.

Federal or military status itself doesn’t disqualify you from a backdoor Roth, but your overall tax situation—including any existing IRAs—plays a critical role. Those with large traditional IRA balances from old rollovers need to watch out for the IRS’s pro-rata rule, which can impact how much of your conversion is subject to taxation. Often, federal employees find ways to manage or mitigate this rule by rolling existing pre-tax IRA funds into the TSP if the plan allows, thus clearing the way for a cleaner backdoor Roth conversion. For more details, see Rules to Move Money Into Thrift Savings Plan (TSP).

How the Backdoor Roth Strategy Works (Step-by-Step)

The mechanism may be straightforward, but the details matter.

You begin by contributing up to the annual IRA limit. For 2025, the limit is $7,000 if you’re under 50, and $8,000 for those 50 and older. This is especially important for our readers, many of whom are likely eligible for the catch-up contribution due to age. Because this contribution is made after-tax, you’ll need to keep track of your non-deductible basis on IRS Form 8606.

Next, you convert the traditional IRA funds to a Roth IRA. The sooner you do so, the smaller the risk of generating taxable investment gains between the contribution and the conversion. If you have no other untaxed IRA balances, your taxes on the conversion will typically be minimal.

Why does timing matter? The IRS has rules (including the five-year rule) that govern when you can withdraw converted funds without penalty. Converting at the tail end of a tax year could shorten your waiting window. Additionally, if you do have pre-tax IRA balances, the pro-rata rule will require you to calculate how much of your conversion is taxable. Some federal employees prefer to consolidate pre-tax IRA dollars into the TSP first, thereby avoiding that complication.

Income Limits and Phaseouts

When it comes to Roth IRAs, the tipping point is often your income. Below is a snapshot of the 2025 Roth IRA income phaseout ranges. Note how direct Roth contributions are limited as you move through these income brackets. Once you exceed them, you’ll likely consider the backdoor Roth as an alternative.

As a federal worker, your retirement income sources might also include pension from the Federal Employees Retirement System (FERS) or a military pension. These streams can push your income over the limit. In cases like these, the backdoor Roth is a legal workaround to enjoy longtime Roth IRA benefits normally inaccessible to high earners.

Key Benefits for Federal and Military Employees

A Roth IRA is prized for tax-free growth and withdrawals in retirement—assuming you meet necessary holding periods. That can lighten the burden on your retirement income, especially if you foresee your tax rate rising. This perk dovetails well with the TSP, particularly if you retain a sizable portion of your retirement savings in the traditional TSP. Balancing a pre-tax TSP with a Roth IRA can provide meaningful tax diversification. You’ll have some assets taxed upfront and others taxed upon distribution, giving more strategic control over your tax bill in retirement.

Roth IRAs also have no RMDs. Traditional IRAs, as well as traditional TSP accounts, require compulsory withdrawals starting at a certain age. By contrast, with a Roth IRA, you’re not forced to deplete these assets on the government’s timetable—a reason the backdoor Roth strategy is attractive to legacy planners who want to pass assets to heirs or preserve a larger nest egg for late retirement years.

Potential Drawbacks and Considerations

While the backdoor Roth can be valuable, there are a few considerations to navigate. The most commonly cited is the pro-rata rule. If you have any pre-tax traditional IRA funds, the IRS lumps all your IRA money into one total to figure out how much of your conversion is taxable. This rule can lead to unintended tax bills if not planned properly. Federal employees who have the TSP open (and are eligible to roll pre-tax IRA funds into it) may be able to shield those pre-tax funds in the TSP, leaving their IRAs with only after-tax funds to convert.

It’s also important to consider the IRS’s step-transaction doctrine. The IRS might argue that a near-immediate conversion from a non-deductible IRA contravenes the spirit of the law. Historically, this has not been a routine problem, but it’s worth being mindful of timing. A further nuance is the five-year rule on each conversion, which affects how soon you can withdraw converted funds penalty-free.

All these considerations underscore why it’s prudent to consult an experienced adviser. At PlanWell, we’ve seen many federal employees navigate these rules with confidence by understanding them on the front end. One aim of our Fed-Expert Financial Blueprint is to help incorporate strategies like a backdoor Roth into a cohesive plan. For an even deeper dive into potential pitfalls, check out our dedicated article, Backdoor Roth IRA Conversion: Beware of Tax Traps and Pitfalls.

Backdoor Roth IRA vs. Mega Backdoor Roth

Some retirement plans, including certain 401(k) plans, allow after-tax contributions above and beyond the usual pre-tax or Roth deferral limits. That capability can open the door for a “mega backdoor Roth,” where significantly larger amounts can be converted to a Roth. While TSP currently does not allow an after-tax bucket the same way some private plans do, it’s useful to know the difference.

The mega backdoor Roth concept can be a powerful tool for private-sector employees with plans allowing large after-tax contributions. Federal employees primarily focus on the TSP’s pre-tax or Roth contributions. Even so, if you have post-government employment on the horizon, or if specialized legislation is ever introduced for TSP in the future, it helps to understand how these strategies differ.

Tax Reporting Tips for Federal Employees

Correct reporting is where many well-intentioned backdoor Roth strategies go awry. You need to file IRS Form 8606 any year you make a non-deductible IRA contribution or a Roth conversion. This document calculates how much of your conversion is taxable. Regimented record-keeping becomes crucial because an error can lead to a double tax—once when you contributed after-tax dollars and once upon conversion if you fail to accurately record your cost basis.

Additionally, pay attention to deadlines. IRA contributions can typically be made up until the tax filing deadline (around mid-April), not merely by December 31. That timing can create opportunities to fund your IRA in early the next year but still apply it to the prior tax year—a practice that can sync nicely with your expected tax bracket situation.

If you’re juggling RMDs from other retirement accounts, coordinate carefully. Converting funds you must withdraw anyway might make sense, as you’re already triggering the required distribution. In some cases, though, focusing on RMD compliance before doing a backdoor Roth can simplify your record-keeping.

Who Should Give the Backdoor Roth IRA Strategy Serious Thought?

If your income disqualifies you from making direct Roth contributions, consider the backdoor Roth. Many federal employees in mid- to late-career stages fall into this bracket—particularly those at GS-12 pay grades and higher, dual-income households, or those with robust side income. Retirees drawing pension plus other income might also surpass these thresholds.

Age is another factor. Individuals nearing retirement might think short time horizons render a Roth less beneficial. Yet even for those in their mid-50s and early 60s, a Roth can still make sense. If you anticipate living several decades in retirement or wish to leave something tax-free to heirs, a strategic Roth position remains valuable. Younger employees with many years of compounding also stand to benefit significantly, as every year of tax-free growth can result in substantial savings down the road.

To determine if you should pursue a backdoor Roth, it’s wise to review your full federal package: TSP balances, FEHB (Federal Employees Health Benefits), potential Social Security income, and any other pensions. This comprehensive view helps reveal whether a backdoor Roth will genuinely enhance your retirement picture or if alternatives might serve you better.

Common Pitfalls and How to Avoid Them

An important stumbling block is ignoring those pre-existing IRA balances when you do the conversion. The pro-rata rule can produce a surprise tax bill if you thought you were converting purely after-tax dollars but overlooked some pre-tax funds. Another risk is missing or misfiling Form 8606, resulting in the IRS taxing you twice on the same dollars.

Some worry about the IRS’s step-transaction doctrine, which questions whether you’re performing a true two-step process or effectively circumventing the rules. Though the backdoor Roth has been permitted for years, it’s smart to put a slight gap between the IRA contribution and the Roth conversion, maintain solid documentation, and remain consistent. For additional clarity, we often direct clients to sign up for one of our free Federal Retirement Planning Workshops to discuss timing and tax nuances in a more interactive setting.

Alternatives to Consider

One question we often hear from TSP participants is, “Why not just use the TSP Roth?” The Roth TSP is an excellent option if you’re still working and your agency or uniformed service offers payroll-deduction contributions. However, once you hit the annual deferral limit, any additional after-tax amounts can’t simply be added to your TSP to replicate a mega backdoor scenario. So if you’re looking to go beyond TSP Roth contributions, the backdoor Roth strategy might still be relevant.

Some turn to taxable investment accounts, funneling excess income there. While taxable accounts don’t have the same tax-free growth, they offer flexibility with fewer withdrawal constraints. Another less-discussed option is an HSA (Health Savings Account), which carries distinct triple-tax benefits for qualified medical expenses. However, not everyone can open an HSA, especially if you’re not enrolled in a high-deductible health plan.

Conclusion and Next Steps

The backdoor Roth IRA offers a path for federal and military employees to unlock the advantages of tax-free retirement growth—even when their income surpasses the standard Roth IRA threshold. By understanding the two-step structure, preparing for potential tax implications, and making use of tools like the TSP to manage pre-tax funds, you can position yourself for greater flexibility and control over your income during retirement.

At PlanWell, our Fed-Expert Financial Blueprint is designed to recognize these unique challenges federal employees face. Our deep experience—over 30 years in service—along with our ChFEBC, CFP®, and AIF® credentials, positions us to help you chart a course tailored to your circumstances. Whether it’s timing your conversion to minimize taxation, coordinating with TSP balances, or weaving Roth conversions into a broader retirement strategy, we’re here to assist.

If you’d like to explore these strategies further, you’re welcome to register for one of our free Federal Retirement Planning Workshops. These sessions provide an opportunity to dive deeper into the nuances of the backdoor Roth IRA, TSP considerations, and other key elements of a well-rounded retirement plan. Our mission is to empower you to retire with confidence—making informed decisions about every piece of your financial puzzle.