Backdoor Roth IRA Basics

High earners whose income exceeds the Roth IRA contribution limits can still get money into a Roth through a two-step process commonly called the backdoor Roth.

How it works

1. Contribute to a traditional IRA. Anyone with earned income can make a nondeductible contribution regardless of income.
2. Convert that traditional IRA balance to a Roth IRA. Conversions have no income limit.

Because the contribution was made with after-tax dollars, converting it promptly usually generates little or no additional tax — the money then grows tax-free in the Roth.

The pro-rata rule — the big catch

The IRS looks at all of your traditional, SEP, and SIMPLE IRA balances when taxing a conversion. If you hold pre-tax IRA money, part of every conversion is taxable in proportion to your pre-tax balance. You cannot convert "just the after-tax dollars."

Common workaround: roll pre-tax IRA balances into an employer 401k (if the plan accepts roll-ins) before converting, leaving only the after-tax contribution in the IRA.

Paperwork to expect

• Form 8606 reports the nondeductible contribution and the conversion each year it happens.
• Your custodian issues a 1099-R for the conversion; correct reporting prevents double taxation.

Points to keep in mind

• Each conversion starts its own five-year clock for penalty-free access to converted amounts before age 59½.
• Contribute and convert in a reasonable timeframe; earnings that accrue between the steps are taxable at conversion.
• State tax treatment can differ from federal.

Key takeaways

• The backdoor Roth is a contribution-then-conversion sequence, not a special account type.
• The pro-rata rule across all IRAs determines how much of the conversion is taxable.
• Clean execution and Form 8606 filing are what make the strategy work.

This article is for educational purposes only and is not tax or investment advice. Consult your advisor about your specific situation.