What is a Backdoor Roth IRA?
A backdoor Roth IRA is a legal technique that lets taxpayers whose incomes exceed the Roth IRA contribution limits still get money into a Roth account. It uses a two-step sequence: (1) make a nondeductible (after‑tax) contribution to a traditional IRA and then (2) convert that traditional IRA to a Roth IRA. If done correctly, the converted funds can grow and be withdrawn later tax‑free under Roth rules.
Key definitions
– Roth IRA: An individual retirement account where qualified withdrawals of earnings are tax‑free. Qualified withdrawals generally require age 59½ and that the Roth account be at least five years old.
– Traditional IRA (nondeductible contribution): A retirement account funded with after‑tax dollars when the contributor cannot take a tax deduction for the contribution.
– Roth conversion: Moving money from a traditional IRA to a Roth IRA; taxable if the converted amount includes pre‑tax funds or earnings.
– MAGI (modified adjusted gross income): A tax metric used to determine eligibility for certain retirement account benefits, including direct Roth contributions.
– Pro‑rata rule: An IRS rule that treats all non‑Roth IRAs (traditional IRAs, SEP, SIMPLE) as one account for tax purposes when you convert, so taxable and after‑tax balances are converted proportionally.
How the backdoor Roth works — step by step
1. Open a traditional IRA at a brokerage or custodian.
2. Make a nondeductible (after‑tax) contribution up to the annual IRA limit (see limits below). This contribution must not be claimed as a tax deduction. Your contribution cannot exceed your earned income for the year.
3. Convert the contributed amount from the traditional IRA to a Roth IRA. To avoid taxation on investment growth, many people convert immediately (before investing the cash), so there is little or no earnings to tax.
4. File IRS Form 8606, Nondeductible IRAs, with your tax return for that year to report the nondeductible contribution and the conversion. If you don’t file Form 8606, the IRS may treat the conversion as fully taxable.
Timing and paperwork
– You can perform these steps any time before filing your tax return for the contribution year (typically April 15 of the following year).
– Your brokerage will issue Form 1099‑R (distribution) and Form 5498 (contribution reporting); Form 8606 tells the IRS that the conversion contained nondeductible basis.
Contribution limits and eligibility
– For the 2025 tax year the maximum IRA contribution is $7,000, with a $1,000 catch‑up (total $8,000) if you are age 50 or older. (This amount was unchanged from 2024.)
– Your contribution cannot exceed your earned income for the year; a nonworking spouse may be able to use a spousal rule based on the working spouse’s income.
– The backdoor Roth itself is a workaround only for those whose MAGI disqualifies them from direct Roth contributions.
Advantages
– Roth IRAs provide tax‑free growth and tax‑free qualified withdrawals in retirement.
– Roth balances do not increase adjusted gross income during retirement, which can help manage Social Security taxation and Medicare premiums.
– Anyone with earned income (or a qualified spouse) can use the technique, regardless of MAGI.
Disadvantages and risks
– The process is procedural: mistakes in timing or paperwork (especially failing to file Form 8606) can create taxable events or paperwork problems.
– The pro‑rata rule can make part of the conversion taxable if you have existing pre‑tax IRA balances (traditional IRAs, SEP, SIMPLE, rollovers from employer plans).
– Once converted, reversals (recharacterizations) are no longer allowed for conversions made after 2017; correcting errors can be complex.
Short checklist before you do a backdoor Roth
– Confirm your IRA contribution limit for the year and that you have sufficient earned income.
– Open a traditional IRA and a Roth IRA at the same custodian (or ensure you can convert between them).
– Make the traditional IRA contribution as a nondeductible (after‑tax) deposit.
– Convert the contribution to the Roth IRA promptly — ideally before the contribution earns any investment income.
– File Form 8606 with your tax return to report the nondeductible contribution and conversion.
– Review all existing non‑Roth IRA balances to assess the pro‑rata rule impact; consider professional tax help if you have pre‑tax IRA money.
Worked numeric examples
Example A — clean backdoor (no other IRAs)
– You contribute $7,000 of after‑tax cash to a new traditional IRA.
– You immediately convert the $7,000 to a Roth IRA. No earnings occurred before conversion.
– Because the contribution was nondeductible and there were no pre‑tax IRA balances, the conversion produces no taxable income. You still must file Form 8606 to document the nondeductible contribution.
Example B — pro‑rata rule (existing pre‑tax IRA balance)
– Existing traditional IRA balance (pre‑tax): $15,000.
– New nondeductible contribution: $5,000 (to a separate traditional IRA).
– Total non‑Roth IRA balances considered by the IRS: $15,000 + $5,000 = $20,000.
– Fraction of balances that are pre‑tax = $15,000 / $20,000 = 75%.
– Taxable portion of the $5,000 conversion = 75% × $5,000 = $3,750.
– If your marginal federal tax rate is 24%, additional federal tax due on the conversion = 0.24 × $3,750 = $900 (state tax, if any, not shown).
– Filing Form 8606 is still required and the calculation above is reported on that form.
Common pitfalls to avoid
– Waiting to convert until the contribution has earned gains — those gains are generally taxable on conversion.
– Having pre‑existing pre‑tax IRA funds and ignoring the pro‑rata rule
– Forgetting to file Form 8606 — even if the conversion produces no taxable income, Form 8606 (which documents nondeductible contributions and conversions) must be filed for the year of the conversion. Failing to file can trigger IRS adjustments and potential penalties.
– Rolling employer plan money into an IRA before converting — if you roll a pre‑tax 401(k) into an IRA and then do a backdoor conversion, those pre‑tax dollars are part of the pro‑rata calculation and can create an unwanted tax bill. Where possible, keeping employer plan money in a workplace plan (or rolling it directly into a Roth if permitted and desirable) can avoid enlarging your IRA pre‑tax balance.
– Timing and market movement — a delay between contribution and conversion can produce investment gains (or losses); gains are taxable on conversion, and losses may complicate the intended tax outcome.
– Step‑transaction doctrine risk — the IRS could treat a series of formally separate steps as one integrated transaction if it believes the steps were prearranged solely to obtain a tax benefit. That argument is rare but possible; maintain clear, contemporaneous paperwork showing each step and the rationale for it.
Additional considerations
– Legislative risk: Congress could alter rules that enable the backdoor Roth. Proposals have been discussed in the past to limit or close this strategy. Treat the backdoor as a planning tactic subject to future change.
– State tax rules: state tax treatment of conversions varies. Some states follow federal rules; others tax conversions differently. Check state guidance or consult a tax professional for state‑level consequences.
– Recordkeeping: keep Form 8606 copies, IRA statements showing basis and timing of each contribution/conversion, and any trustee-to‑trustee rollover documentation. These records make future tax reporting (and audits) far simpler.
Practical checklist to execute a backdoor Roth (high level)
1. Confirm ineligible for direct Roth contributions because of income limits.
2. Decide amount to contribute (subject to annual Roth/IRA contribution limits). For 2025 and beyond, verify current IRS limits.
3. Open or use an existing traditional IRA for a nondeductible contribution. Designate the contribution as nondeductible on your tax return if you are eligible for a deduction or on Form 8606.
4. Make the nondeductible contribution. Use cash or securities as allowed by your custodian.
5. Convert the contributed amount to a Roth IRA — you can convert the cash immediately to minimize gains, or wait if there are strategic reasons. If you have other traditional, SEP, or SIMPLE IRA pre‑tax balances, compute the pro‑rata taxable portion before converting.
6. File Form 8606 with your tax return for the year of contribution/conversion to report the nondeductible contribution and the conversion. Pay any tax due on the taxable portion of the conversion.
Worked numeric checklist example (quick)
– You contribute $6,500 nondeductible to a traditional IRA.
– You have no other traditional, SEP, or SIMPLE IRA balances.
– You immediately convert the $6,500 to a Roth IRA.
Result: No pro‑rata tax applies; conversion is not taxable (except for any tiny gains realized between contribution and conversion). File Form 8606 to document the nondeductible contribution and conversion.
When pro‑rata applies (brief reminder)
– Pro‑rata means you must include the proportion of your total pre‑tax IRA balances when calculating taxable amount on conversion. Formula: taxable portion = total conversion × (pre‑tax IRA balance ÷ total IRA basis+pre‑tax balances). Always use year‑end balances for Form 8606 reporting.
Filing and forms
– Form 8606: use it to report nondeductible contributions and conversions, and to calculate taxable and nontaxable portions of conversions. File it with your federal tax return for the year of the conversion.
– Keep statements showing the nature of each contribution, conversion confirmations, and year‑end IRA balances. These support the numbers on Form 8606 if the IRS asks.
Alternatives and related strategies
– Mega backdoor Roth: using after‑tax contributions and in‑plan
conversions or rollovers to move larger sums into Roth accounts without triggering the IRA pro‑rata rule (if your plan accepts after‑tax contributions and allows in‑service rollovers to a Roth account). Check your 401(k) plan’s rules — not all plans permit after‑tax contributions or in‑service rollovers — and confirm plan and IRS contribution limits for the current year.
Roth conversion ladder
– Purpose: a conversion ladder is a timing strategy used by early retirees to convert traditional (or other pre‑tax) retirement money to Roth in stages so converted amounts become available tax‑ and penalty‑free after satisfying the five‑year rule (see below).
– Mechanic: convert modest amounts each year so each conversion’s five‑year clock finishes before you need the funds. Withdrawals of converted amounts are penalty‑free if each conversion has aged five tax years and distribution rules are otherwise met.
– Caveats: conversions create immediate taxable income; you must manage marginal tax rates and withholding/estimated taxes carefully. Recharacterizations (undoing a conversion) were eliminated by law in 2018.
Key rules to remember
– Five‑year rule: for conversions, each conversion has its own five‑tax‑year clock for determining whether converted amounts are eligible for tax‑ and penalty‑free withdrawal (exceptions apply for age 59½, disability, death, etc.). Separately, Roth IRAs also have a five‑tax‑year rule for qualified distributions of earnings.
– No recharacterizations: you cannot reverse a Roth conversion (recharacterize to a traditional IRA) for conversions made after 2017.
– Tax reporting: file Form 8606 every year you make nondeductible contributions to a traditional IRA or perform a conversion. Keep supporting statements and year‑end balances.
Common mistakes and how to avoid them
– Ignoring pro‑rata: converting only the nondeductible contribution but having other pre‑tax IRA balances leads to taxable conversions. Avoid by moving pre‑tax IRAs into an employer plan if that plan accepts rollovers, or accept the tax cost.
– Skipping Form 8606: failing to file Form 8606 triggers IRS attention and can result in double taxation of basis or penalties.
– Waiting too long to convert: earnings between the contribution and conversion are taxable on conversion; convert promptly if your plan allows to minimize earnings subject to tax.
– Underpaying estimated tax: converting creates taxable income. Pay estimated taxes or increase withholding to avoid underpayment penalties.
– Assuming plan features: rely on written plan documents or plan administrator confirmation for in‑service rollovers or after‑tax contribution options.
Practical step‑by‑step checklist for a basic backdoor Roth
1. Confirm you’re ineligible to contribute directly to a Roth IRA (based on current income limits) or decide you prefer the backdoor route.
2. Make a nondeductible contribution to a traditional IRA (label and record it as nondeductible).
3. Wait a short time if you prefer (some wait zero to a few days to limit earnings), then convert the traditional IRA to a Roth IRA.
4. File Form 8606 for the year of the contribution and conversion to report basis and compute taxable amount.
5. Pay any tax due on the conversion when filing your tax return (or through estimated payments).
6. Keep all statements showing the contribution date, conversion confirmation, and year‑end balances.
Worked numeric example — pro‑rata effect
Assumptions:
– Existing pre‑tax IRA balances (traditional/SEP/SIMPLE) at year‑end: $95,000
– Total nondeductible basis (after‑tax contributions) across IRAs: $5,000
– You make a nondeductible contribution of $