A "Backdoor Roth IRA" is a legal strategy allowing high-income earners to contribute to a Roth IRA, even if their income exceeds the direct contribution limits.
In Depth
This strategy involves contributing money to a traditional IRA and then immediately converting it to a Roth IRA. While direct Roth IRA contributions are limited by income, there are no income limits for converting a traditional IRA to a Roth IRA. This allows individuals who earn too much to contribute directly to a Roth IRA to still benefit from its tax-free growth and withdrawals in retirement. It's a two-step process that bypasses the income restrictions.
Example
Sarah, who earns too much to contribute directly to a Roth IRA, used a Backdoor Roth IRA strategy to get money into her Roth account.