Earning Too Much for a Roth IRA? P&Gers May Have a Backdoor
I talk a lot about “tax buckets” with clients. Different accounts are taxed differently: brokerage or non-retirement accounts with capital gains get their own (often lower) tax rates, while traditional IRA or 401(k) accounts that are taxed wholly as ordinary income when you take regular distributions in retirement.
Then there are Roth accounts, which see no federal or state tax when you play by the rules and take money out in retirement. You fund them in the present with after-tax money (you get no tax advantage today), and then any potential growth becomes tax-free in the future. That’s a pretty great deal, especially if you think your tax situation will get worse in retirement or believe that tax rates for everyone will go up in the future.
So why don’t we all put every dollar we save into a Roth account? There are limits on how much you can put in, and wealthy folks are gatekept in certain situations by IRS rules. For instance, if you’re married and file your taxes jointly then you are not allowed to put money directly into a Roth IRA if your total modified adjusted gross income (MAGI) is higher than $252,000 in 2026.
Many employers have a Roth option in their 401(k) plans (yes, these are separate kinds of accounts), so that couple making $252k might save Roth dollars through a side door. However, a lot of wealthy people are classified as “highly compensated employees,” which again limits how much they can put into their 401(k). This is common with P&Gers at Band 3 and higher.
If this sounds anything like you, there might be another way to tax-free Valhalla: the indirect Roth IRA contribution or, colloquially, the backdoor Roth. In this strategy, you contribute what is called a nondeductible contribution into a regular, old traditional IRA. It doesn’t reduce your income when you do it, but what if you immediately converted the contribution into a Roth IRA? There is no IRS rule that says you can’t do a Roth conversion if you make too much money.
Imagine you have $5,000 lying around, so you make a nondeductible contribution into your IRA. The money lands and the next day you process a conversion of that $5,000 into a Roth IRA. It’s completely legal and the IRS is well aware. Now you’ve got money in a Roth IRA even if you make too much money to put it there directly. Go ahead and invest it, the growth will be tax-free if you take it out after age 59.5.
Sadly, there are caveats. Or perhaps not sadly, since these caveats are what make a financial advisor useful. You see, if every IRA you have is at a zero balance on December 31 of the year you convert, then you have no issues. However, the law says that any Roth conversion from your IRA must come out pro rata between your nondeductible contribution and balances that were in any IRA on December 31. So if you’ve built up an IRA balance of $95,000 (for easy math) and try to get a new $5,000 contribution converted over to your Roth IRA, the IRS says your account is only 5% nondeductible contribution and 95% taxable. That means your conversion will be 95% taxable, too. You already paid tax on the $5,000 you contributed in the first place, and then when you convert it you have to pay tax again on $4,750 of it. Of course, sometime in the future you would have had to pay that tax anyway, so it’s not really being double-taxed. But it’ll feel like it was, and it hurts your cash flow to pay that much tax when you were trying to save for retirement in the first place.
The good news is that for many P&G employees, P&G is the only job they’ve ever had (since high school, anyway). That means there’s a decent chance they never opened an IRA and funded it before, and if that’s the case then this is a great strategy. P&G folks, go ahead and ask yourself, do I have any IRAs anywhere? The bank, Vanguard, Fidelity, etc.? No SEP IRAs or SIMPLE IRAs from an old job (these are rare)? You might be good to go, but you should still be wary. Even for those who check every box, it’s easy to mess this up. When you execute this strategy you need to fill out a special Form 8606 for your tax return, and even in 2026 I see people screw it up in TurboTax. This is another place where a professional can help a lot. When someone tells me they have done this strategy in the past, the first thing I do is check past tax returns to make sure it was properly reported. The number of times I have seen things taxed twice, resulting in thousands of dollars of tax that was not owed, is greater than one.
If you’re at P&G this is just one strategy that can help you be ready for retirement (or at least your graduation from the Company). I’m here to chat if you’re interested in learning more.
Cloudsplitter Financial Planning LLC is an investment adviser registered with the State of Ohio Division of Securities. Registration does not imply a certain level of skill or training.
This post is for general educational purposes only. It is not individualized investment, tax or legal advice. Tax rules are summarized and simplified, and the figures shown are current as of the publication date and may change. Consult a qualified tax professional or advisor about your own situation before acting.
Questions? Contact Mike Schelle, CFP®, at mike@cloudsplitterfp.com or 513-298-9399.
