Marcus is a GS-15 at a defense agency, married to a nurse practitioner. Together they bring in about $290,000. He maxes out his TSP, pays down the mortgage, and last spring tried to open a Roth IRA at his brokerage. The site stopped him cold: income too high.

He assumed that was the end of it. It isn't. A well-worn workaround, usually called the backdoor Roth, lets high earners get money into a Roth IRA anyway. For federal employees, it comes with a few quirks worth understanding before you click anything.

Why the front door is closed

Roth IRAs have income limits. Once your modified adjusted gross income climbs past a threshold, your direct contribution allowance shrinks and then disappears. For recent years, the phase-out for married couples filing jointly has started in the low $200,000s and ended in the mid $200,000s. Single filers phase out at far lower figures. These numbers adjust annually, so check irs.gov for the current year.

Traditional IRAs have no income limit for contributions. But if you're covered by a workplace plan, and every FERS employee with a TSP is, the tax deduction for a traditional IRA phases out at much lower income levels. High earners can still contribute, but the contribution is nondeductible.

That gap is the opening.

How the backdoor works

The strategy has three steps:

  1. Contribute to a traditional IRA and do not claim a deduction.
  2. Convert that money to a Roth IRA, ideally within days or weeks.
  3. File Form 8606 with your tax return to document the nondeductible contribution and the conversion.

Because you already paid tax on the money going in, converting it triggers little or no additional tax. If the money sat for a few weeks and earned $12, you owe tax on that $12. After that, it grows tax-free in the Roth, with no required minimum distributions during your lifetime.

The IRA contribution limit changes periodically and is higher for those 50 and older. Confirm the current figure at irs.gov.

The pro-rata rule, where people get burned

Here's the part that trips up even careful savers. When you convert, the IRS doesn't let you pick which dollars you're converting. It looks at all of your traditional, SEP, and SIMPLE IRA balances combined as of December 31 of the conversion year, and treats the conversion as a proportional mix of pre-tax and after-tax money.

Say Marcus contributes $7,000 of nondeductible money. But years ago, he rolled $93,000 from a previous employer's 401(k) into a traditional IRA. His total IRA balance is $100,000, of which only 7 percent is after-tax basis.

If he converts the $7,000, only $490 comes over tax-free. The other $6,510 is taxable income. He expected a clean, nearly tax-free move and instead gets a surprise bill, plus he's left with pre-tax dollars still sitting in the IRA.

That's the trap. It's also where federal employees have an edge.

The TSP advantage

Your TSP balance is not an IRA, so it doesn't count in the pro-rata calculation. And the TSP accepts incoming rollovers of pre-tax money from traditional IRAs.

That means Marcus can roll the $93,000 pre-tax IRA balance into his TSP before December 31. His IRA balance is then close to zero before the conversion, and the backdoor works as designed. The pre-tax money keeps growing tax-deferred in a low-cost fund family.

A few cautions:

  • The TSP accepts pre-tax traditional IRA money, but generally not after-tax basis or Roth IRA money. Check the current rules at tsp.gov and complete the TSP's rollover form.
  • Rollovers take time. Don't wait until the last week of December.
  • Sequence matters. Do the rollover so the IRA is clear by year-end, then convert, or convert and clear before December 31. Either way, December 31 is the snapshot date.
  • You give up some flexibility. TSP withdrawal options are narrower than a typical IRA's, though the funds themselves are very cheap.

If you have a large pre-tax IRA and a small TSP, think hard before moving it. Some people prefer to keep IRA investment freedom and skip the backdoor entirely.

Check the Roth TSP first

Before building a multistep IRA strategy, remember the Roth TSP has no income limit. Any federal employee can direct contributions to the Roth side, up to the same elective deferral limit that applies to traditional TSP contributions (see tsp.gov for the current figure).

For many high earners, the real question isn't "backdoor or nothing." It's whether they want to shift some TSP contributions to Roth, then add the backdoor IRA on top for extra Roth space. The tradeoff is simple: Roth contributions cost you the deduction now, which hurts more at a 32 or 35 percent marginal bracket.

A common middle path is traditional TSP contributions during peak earning years, with Roth money built through the backdoor IRA. That diversifies your future tax exposure without giving up the current deduction.

Military and mixed-career considerations

If you have uniformed service in your history, a few extra wrinkles apply. Pay earned in a combat zone is tax-excluded but still counts as compensation for IRA contribution purposes, which can create Roth opportunities. And if you carry old military TSP balances, they belong to the same account as your civilian ones, so the rollover logic stays simple. Your tax preparer should confirm how combat-zone income affects your specific situation.

Other risks and details

Timing and gains. Convert quickly. Letting the contribution sit invested for months creates taxable growth on conversion. Many people hold it in cash until the conversion.

Form 8606. This is nonnegotiable. Without it, the IRS has no record that your contribution was after-tax, and you could be taxed twice. Keep copies permanently.

The five-year rule. Each conversion has its own five-year clock for penalty-free withdrawal of the converted amount if you're under 59½. If you're 35 and planning to leave the money alone for 25 years, this barely matters. If you plan early retirement under the FERS special provisions, such as a law enforcement or firefighter career, it deserves a closer look.

Legislative risk. Congress has repeatedly discussed closing the backdoor, and proposals have come and gone. As of this writing, the strategy remains legal and the IRS has acknowledged conversions without income limits. Rules can change, so confirm the current status before you act.

Spouses. A nonworking or lower-earning spouse can often use a spousal IRA contribution and run the same process on their own account. Each spouse's pro-rata calculation is separate.

A sensible way to start

For Marcus, the plan looks like this. Roll the old pre-tax IRA into the TSP in the fall. Confirm the IRA balance is zero. Contribute to a new traditional IRA, leave it uninvested, convert it a few days later, and report it on Form 8606 in the spring.

Total effort: a few hours and a couple of forms. Total payoff: a growing pool of tax-free retirement money that doesn't depend on his income staying under a line he crossed years ago.

Run the numbers with a tax professional who understands federal benefits, especially if your IRA balances are complicated. A modest fee now is cheaper than an avoidable tax bill later.