Backdoor Roth Contribution Limits and How They Work
Understand the nuances of the backdoor Roth IRA strategy. Learn the process for making contributions and navigate the tax rules to avoid common pitfalls.
The backdoor Roth IRA is a strategy used by individuals whose income is too high for direct contributions to a Roth IRA. It allows high-income earners to access the tax advantages of a Roth IRA, such as tax-free growth and withdrawals in retirement. The method involves contributing to a traditional IRA and then converting those funds to a Roth IRA, bypassing the income restrictions set by the IRS.
Annual IRA Contribution Limits
The IRS sets annual limits on IRA contributions. For 2025, an individual can contribute up to $7,000 to their IRAs. Those who are age 50 or over can make an additional catch-up contribution, for a total of $8,000. This limit applies to the combined total of all traditional and Roth IRAs an individual holds.
Direct contributions to a Roth IRA are limited by income. For 2025, the ability for a single filer to contribute begins to phase out at a Modified Adjusted Gross Income (MAGI) of $150,000 and is eliminated at $165,000. For married couples filing jointly, the phase-out range is between $236,000 and $246,000. Individuals with incomes above these thresholds must use the backdoor process to fund a Roth IRA.
The Pro-Rata Rule Explained
The pro-rata rule governs the taxation of a backdoor Roth IRA conversion. This IRS regulation applies if you have existing pre-tax funds in any traditional, SEP, or SIMPLE IRA. The rule requires that all of your non-Roth IRAs be treated as a single account for tax purposes. A conversion to a Roth IRA is then considered a proportional withdrawal of pre-tax and after-tax dollars from this total. Workplace retirement plans, such as 401(k)s or 403(b)s, are not included in this calculation.
The taxable portion of a Roth conversion is determined by a formula: (Total Pre-tax IRA Balances) / (Total of ALL Traditional, SEP, and SIMPLE IRA Balances) = Taxable Percentage of Conversion. This percentage is applied to the converted amount to determine the taxable income from the transaction.
For an individual with no existing traditional, SEP, or SIMPLE IRA balances, the process is straightforward. If this person makes a $7,000 non-deductible contribution to a new traditional IRA and converts it, the taxable percentage is zero. The $7,000 moves into the Roth IRA without creating a tax liability because the total pre-tax IRA balance is $0.
The situation is more complex for someone with pre-existing IRA funds. For example, a person has a rollover IRA with a $93,000 pre-tax balance and makes a new $7,000 non-deductible contribution, bringing their total IRA value to $100,000. If they convert $7,000 to a Roth IRA, the taxable percentage is 93% ($93,000 divided by $100,000). This means 93% of the $7,000 conversion, or $6,510, is taxable income for that year.
Step-by-Step Guide to the Backdoor Roth Process
The initial step is to open and fund a traditional IRA. This contribution must be made with after-tax money, meaning you do not claim a tax deduction for it. The amount should align with the annual contribution limits.
Next, convert the funds to a Roth IRA. There is no required waiting period between funding the traditional IRA and converting it. However, any earnings that accumulate in the traditional IRA before the conversion is completed will be taxable.
The final step is to request the conversion from your financial institution, which will move the assets from the traditional IRA to the Roth IRA. This is a straightforward process that can often be done online. The conversion must be completed by December 31 to be accounted for in that tax year.
Tax Reporting Requirements
A backdoor Roth IRA must be documented on your tax return using IRS Form 8606, Nondeductible IRAs. This form tracks your after-tax contributions, known as your “basis,” to ensure you are not taxed on that money again when it is converted. Failure to file Form 8606 when required can result in a $50 penalty.
On Part I of Form 8606, you report the non-deductible contribution to your traditional IRA. This step establishes your after-tax basis and informs the IRS the contribution was not deducted from your income.
Part II of the form is used to report the conversion and calculate its taxable amount. The form guides you through the pro-rata calculation, requiring you to list the value of all your traditional, SEP, and SIMPLE IRAs as of December 31 of the tax year. The final taxable amount from Form 8606 is then transferred to your Form 1040.