Can I Do a Backdoor Roth If I Have a Traditional IRA?

The backdoor Roth IRA allows high-income earners to fund a Roth IRA. The process involves contributing to a Traditional IRA and then converting those funds to a Roth IRA. This method is possible because no income limits apply to non-deductible Traditional IRA contributions or Roth conversions. However, the strategy is complicated if you hold pre-tax funds in other non-Roth IRAs. These existing balances can trigger tax rules that result in a significant tax bill on the conversion, undermining the goal of a tax-free transfer.

The IRA Aggregation and Pro-Rata Rules

When performing a Roth conversion, the IRS applies the IRA aggregation rule. For tax calculation purposes, all of an individual’s Traditional, SEP, and SIMPLE IRAs are treated as a single account, with the total value determined as of December 31 of the conversion year. This aggregation leads to the pro-rata rule, which dictates that any conversion will consist of a proportional mix of pre-tax and after-tax dollars from the entire aggregated balance. You cannot isolate and convert only the after-tax funds.

To illustrate, consider an individual with $94,000 in a rollover IRA. To perform a backdoor Roth, they make a new $6,000 non-deductible contribution to a Traditional IRA, bringing their total aggregated IRA balance to $100,000. Of this total, $94,000 (94%) is pre-tax, and $6,000 (6%) is after-tax basis. If this individual then converts $6,000 to a Roth IRA, the pro-rata rule applies. The IRS considers 94% of that conversion, or $5,640, to be taxable as ordinary income, while only $360 is tax-free.

Strategic Options for Existing Pre-Tax IRA Funds

To navigate the pro-rata rule, you can eliminate pre-tax funds from your IRAs before the conversion, often through a “reverse rollover.” This process moves pre-tax funds from a Traditional, SEP, or SIMPLE IRA into an employer-sponsored plan like a 401(k). Because employer plans are not part of the IRA aggregation rule, this transfer isolates the pre-tax money.

This strategy requires that the employer’s plan accepts incoming rollovers from an IRA, which you must confirm with the plan administrator or by reviewing the Summary Plan Description. If permitted, you can transfer only the pre-tax portion of your IRA funds. Any after-tax basis cannot be rolled into the 401(k) and must stay in the IRA.

Once the reverse rollover is complete, a subsequent non-deductible contribution and Roth conversion can be done without incurring tax from the pro-rata rule. An alternative is to convert the entire pre-tax IRA balance to a Roth IRA. This requires paying ordinary income tax on the full pre-tax amount in the conversion year, making it a costly option for many.

Executing the Backdoor Roth IRA Contribution and Conversion

With no pre-tax funds remaining in any non-Roth IRAs, the execution of the backdoor Roth is a two-step process. The first step is to make a non-deductible contribution to a Traditional IRA up to the annual limit.

The second step is to convert the funds from the Traditional IRA to a Roth IRA by requesting a conversion with your financial institution. This step should be completed by December 31 of the contribution year to ensure it is reported correctly for that tax year.

There is no required waiting period between the contribution and the conversion. Converting the funds shortly after the contribution is a common practice. This approach helps minimize or avoid the accumulation of taxable earnings in the Traditional IRA, as any growth is taxable upon conversion.

Tax Reporting on IRS Form 8606

The backdoor Roth transaction must be reported to the IRS on Form 8606, Nondeductible IRAs, which is filed with your annual tax return. A separate form must be completed for each spouse performing a backdoor Roth. Failure to file this form can result in a $50 penalty.

Part I of Form 8606 is used to report your non-deductible contribution to the Traditional IRA. You will enter the contribution amount on Line 1. If you had no prior after-tax basis in any IRAs, Line 2 will be zero. This part of the form establishes your total basis before the conversion.

Part II of the form is where you report the Roth conversion. The form guides you through the pro-rata calculation, and if you had a zero balance in all pre-tax IRAs at year-end, it will show the taxable amount of your conversion is $0. Your financial institution will also issue Form 1099-R to report the distribution from your Traditional IRA, which is needed to complete your tax return.