Roth IRA: eliminate the tax drag
ROTH IRA · TAX-FREE GROWTH
"How can I move more of my taxable savings to be permanently protected from taxes… for free?"
Three doors lead into a Roth IRA — the front door (annual contributions), the Backdoor Roth, and the Mega Backdoor Roth. Which ones are open to you depends on income, and on the retirement plan behind them.
ImpactAdvisor LLC is an independent, fee-only fiduciary RIA in San Francisco. These are estimates and general information only — many essential rules are simplified here; check with your CPA or financial professional before taking action.
Why bother — the tax drag on taxable accounts
In a taxable brokerage account, interest, CDs, ordinary dividends, bonds and short-term capital gains can face a combined top marginal rate of 54.1% in California (37% ordinary + 3.8% NIIT + 13.3% CA — see our marginal-tax-bracket visualizer), and that drag compounds against you every year. Inside a Roth IRA the same dollars grow tax-free: contributions can be withdrawn anytime, and earnings are tax-free at age 59½ once the account has been open five years.
Roth IRA contribution and income limits (2026)
Roth IRA contribution limit and income phase-outs for 2026.
| Contribution limit | $7,500 — $8,600 if age 50+ (catch-up $1,100) |
| Income phase-out, single | $153,000–$168,000 MAGI |
| Income phase-out, married filing jointly | $242,000–$252,000 MAGI |
- Spousal IRA: non-working spouses qualify — a working spouse's earned income can cover both contributions.
- Custodial Roth IRA: a child with earned income can contribute up to $7,500/year, with decades of tax-free compounding ahead.
- Saver's Credit: low-income, non-dependent, non-student filers age 18+ who owe taxes may get a credit for contributing.
- Deadline: prior-year contributions stay open until the tax-filing deadline.
Contributions require earned income (taxable compensation), not investment or passive income.
Backdoor Roth IRA — how it works, in two steps
The Backdoor Roth is a conversion, not a special account, and there is no income limit on either step:
- Contribute — non-deductible. Make your annual IRA contribution ($7,500, or $8,600 age 50+) as a non-deductible traditional IRA contribution. Anyone with earned income can, at any income level.
- Convert to Roth. Immediately convert (transfer) the contribution into your Roth IRA. Done promptly, there are no earnings to tax — the conversion is tax-free.
The pro-rata rule: for the conversion to be tax-free you cannot hold other pre-tax IRA dollars (rollover IRAs, SEP IRAs). The fix is to roll those pre-tax balances into your 401(k) by 12/31 — the pro-rata rule looks at IRAs, not 401(k)s. The rule is tested per spouse: each can move up to $8,600 a year, $17,200 together (age 50+).
Mega Backdoor Roth — up to $72,000 a year
If your 401(k) allows voluntary after-tax contributions, you can fill the gap between your regular contributions and the 2026 overall annual-additions limit of $72,000 — then move it Roth-ward through in-plan Roth conversion or an in-service rollover into your Roth IRA. The IRA pro-rata rule does not apply to 401(k) accounts.
Business owners and independent contractors: a custom solo 401(k) puts the plan document under your control — up to $80,000 a year Roth-ward with the age-50+ catch-up, plus the backdoor Roth on top. Deadlines for some prior-year plan contributions run to the extension due date (September/October).
Offsetting conversions: not maximizing your $24,500 / $32,500 pre-tax deferrals? Fund them from taxable savings and make offsetting Roth conversions of pre-tax IRA or 401(k) balances — more money behind the tax-free wall with no net tax implication.
Roth IRA withdrawal rules — contributions, conversions, earnings
Two independent tests decide what a Roth IRA withdrawal costs: age 59½ governs the 10% early-withdrawal penalty, and a five-year clock governs the income tax on earnings. Both must pass for earnings to come out clean — a "qualified distribution".
There are also two different five-year clocks: each conversion runs its own clock (penalty only), while earnings run on a single clock attached to the account, starting January 1 of the year of your first contribution to any Roth IRA.
Roth IRA withdrawal rules for contributions, conversions and earnings, before and after age 59½.
| What you withdraw | Before age 59½ | Age 59½ + |
|---|
| Contributions (annual) | Tax-free · Penalty-free — Contributions are your own already-taxed dollars, so under the IRS ordering rules they come out first — no income tax and no penalty, at any age, and regardless of how long the account has been open. | Tax-free · Penalty-free — Unchanged by age: annual contributions remain available tax-free and penalty-free. |
| Conversions (from IRA / 401(k)) | Tax-free (previously taxed at conversion) · Penalty-free (5+ yrs since conversion) · 10%–12.5%* penalty (< 5 yrs) — Converted amounts were already taxed in the year of the conversion, so no further income tax applies when they are withdrawn. The only exposure is the 10% early-distribution penalty (12.5% with California's additional 2.5%), and each conversion runs its own separate five-year clock — the penalty falls away in the fifth year after that particular conversion. | Tax-free (previously taxed at conversion) · Penalty-free — At age 59½ the conversion clocks stop mattering: converted amounts are available tax-free and penalty-free no matter when each conversion took place. |
| Earnings (growth / profit) | Taxed as income · 10%–12.5%* penalty — Earnings withdrawn before age 59½ are taxable as ordinary income and carry the 10% early-distribution penalty (12.5% in California). The five-year account clock cannot help on its own: a qualified distribution requires the age test and the five-year test to pass together, so a Roth IRA older than five years changes nothing while the owner is under 59½. | Penalty-free · Tax-free (Roth open 5+ yrs) · Taxed as income (Roth open < 5 yrs) — Age 59½ satisfies the penalty test on its own, so no penalty applies either way. The five-year account clock then decides the income tax: earnings are tax-free once the Roth IRA has been open five years — a qualified distribution — and taxable as ordinary income if it has not, though still without a penalty. |
IRS ordering rules are generally favorable — withdrawals draw down in this order:
- Contributions — no tax, no penalty — ever.
- Conversions — no 5-year wait if age 59½ (FIFO).
- Earnings — income tax + penalty if too early.
Early access rarely touches the taxed buckets. Note the five-year clock on the account also applies to earnings on conversions made after age 59½ — the sooner your first Roth IRA is open, the better.
Penalty exceptions. California adds a 2.5% penalty on top of the federal 10%. The IRS states that the exceptions apply to "an early distribution from a traditional or Roth IRA" (Topic 557), including death, total and permanent disability, a series of substantially equal periodic payments (SEPP), qualified higher-education expenses, health insurance premiums while unemployed, birth or adoption, unreimbursed medical expenses, an IRS levy. IRA-only exception: up to $10,000 toward a first home — this one is available to IRA owners only, and a 401(k) cannot use it. Conversely, the age-55 separation-from-service rule applies only to employer plans, never to an IRA.
Frequently asked questions
What is a Backdoor Roth IRA?
A two-step conversion, not a special account: (1) make your annual IRA contribution as a non-deductible traditional IRA contribution — there is no income limit on that; (2) immediately convert it into your Roth IRA. Done promptly there are no earnings to tax, so the conversion is tax-free.
How much can I contribute to a Roth IRA in 2026?
$7,500, or $8,600 if you are 50 or older (a $1,100 catch-up). Direct contributions phase out at $153,000–$168,000 MAGI for single filers and $242,000–$252,000 for married filing jointly — above that, the Backdoor Roth still works.
What is the pro-rata rule for a Backdoor Roth?
If you hold other pre-tax IRA dollars (rollover or SEP IRAs), a conversion is taxed proportionally across all your IRA money — which defeats the backdoor. The common fix is rolling pre-tax IRA balances into a 401(k) by December 31; the pro-rata rule looks at IRAs, not 401(k)s, and it is tested separately for each spouse.
What is the Mega Backdoor Roth?
Voluntary after-tax 401(k) contributions above the employee deferral limit but within the overall annual-additions limit ($72,000 for 2026), moved to Roth through in-plan conversion or an in-service rollover to a Roth IRA. It requires a plan that allows after-tax contributions — a solo 401(k) lets business owners design that in.
Can I withdraw money from a Roth IRA before 59½?
Contributions: anytime, tax- and penalty-free. Conversions: penalty-free in the fifth year after each conversion, or anytime at 59½. Earnings: taxed plus a 10% penalty (plus 2.5% in California) if withdrawn early. IRS ordering rules count withdrawals against contributions first, so early access rarely touches the taxed buckets.
What is the Roth IRA five-year rule?
There are two clocks. Earnings are tax-free at 59½ only once your Roth IRA has been open five years — and that account clock also governs earnings on conversions made after 59½. Separately, each conversion carries its own five-year clock for penalty-free access before 59½.
I am over 59½ but my Roth IRA is less than five years old — what happens to earnings?
Earnings are taxable as ordinary income, but there is no 10% penalty. Age 59½ satisfies the penalty test on its own; the five-year account clock is a separate test that governs the income tax. Contributions and conversions remain available tax-free and penalty-free in the meantime.
Can my spouse or kids have a Roth IRA without a job?
A non-working spouse qualifies through the spousal IRA — the working spouse's earned income covers both contributions. A child needs earned income of their own; a custodial Roth IRA can then take up to $7,500 a year.
Do Roth IRAs have required minimum distributions?
No — Roth IRAs have no lifetime RMDs for the owner, which is part of their estate-planning appeal. (Traditional IRAs and 401(k)s do; see our RMD guide.)
When is the deadline for a prior-year Roth IRA contribution?
The tax-filing deadline (without extensions) of the following year. Backdoor steps can also be completed then, though pro-rata cleanup — moving pre-tax IRA money into a 401(k) — is measured at December 31.