A Roth IRA is one of the most valuable accounts an investor can have: contributions grow tax-free, and qualified withdrawals in retirement are tax-free too. There's just one catch. Once your income passes the limits the IRS sets, you can't contribute directly.
That's where the backdoor Roth IRA comes in. It's a legal, widely used two-step strategy that lets higher earners still get money into a Roth.
How the backdoor works
- Make a non-deductible contribution to a traditional IRA. Anyone with earned income can contribute to a traditional IRA, regardless of income. At higher incomes the contribution simply isn't tax-deductible.
- Convert that traditional IRA to a Roth IRA. There are no income limits on conversions. Because you already paid tax on the money you put in, little or no extra tax is usually due when you convert.
Many investors convert shortly after contributing, which keeps any taxable growth between the two steps very small.
The pro-rata rule: the trap to avoid
This is where most backdoor Roth mistakes happen. When you convert, the IRS doesn't let you choose to convert only your after-tax dollars. It looks at the total balance of all your traditional, SEP and SIMPLE IRAs and treats the conversion as a proportional mix of pre-tax and after-tax money.
| Scenario | Existing pre-tax IRA balance | New after-tax contribution | Share of conversion that's taxable |
|---|---|---|---|
| Clean backdoor | $0 | $7,000 | None (apart from small growth) |
| Pro-rata trap | $63,000 | $7,000 | About 90% |
In the second example, converting $7,000 would make roughly $6,300 taxable, which defeats the purpose.
Paperwork: Form 8606
You report a non-deductible contribution and the conversion on IRS Form 8606 with your tax return. This form tracks your after-tax "basis" so you aren't taxed twice. Keep copies every time you use the strategy, and make sure your tax preparer knows about it.
Who the backdoor Roth suits
- Earners whose income is above the Roth contribution limits.
- Investors with little or no pre-tax IRA money, or who can roll it into a workplace plan.
- People who expect to be in a similar or higher tax bracket in retirement.
- Anyone who wants tax-free money to leave to heirs, since Roth IRAs have no required distributions for the original owner.
When to think twice
- You hold large pre-tax IRA balances that can't be moved.
- You'll need the money soon. Each conversion has its own five-year clock for penalty-free access to converted amounts before age 59½.
- You haven't yet captured your full employer 401(k) match, which usually comes first.
A quick checklist
- Confirm you have earned income and that direct Roth contributions are phased out for you.
- Total your traditional, SEP and SIMPLE IRA balances.
- If needed, roll pre-tax balances into your 401(k) first.
- Contribute to a traditional IRA, then convert to your Roth IRA.
- File Form 8606 and keep good records.
The backdoor Roth is simple in principle but easy to get wrong in practice. Our tax-smart investing team can check your accounts and walk you through each step.
This article is for general education only and is not personalized investment, tax or legal advice. Rules and limits change, so please check current figures or speak with an advisor before acting.