How Does the Backdoor Roth IRA Work?

The Backdoor Roth IRA is a financial strategy that allows individuals with high incomes to contribute to a Roth IRA. It involves a two-step process of first contributing to a Traditional IRA and then converting that account to a Roth IRA. This is a recognized method that allows savers to access the tax-free growth and withdrawal benefits of a Roth IRA for retirement. The process is available to anyone with earned income, and the goal is to move after-tax money into a Roth account without a large tax bill on the conversion.

Determining Eligibility and Suitability

For 2025, direct Roth IRA contributions phase out for single filers with a modified adjusted gross income (MAGI) between $150,000 and $165,000. For those married filing jointly, the phase-out range is $236,000 to $246,000.

A primary consideration is the pro-rata rule, which can create a tax liability. This rule states that a conversion’s taxability is based on the proportion of pre-tax to after-tax dollars across all your Traditional, SEP, and SIMPLE IRAs. You cannot simply convert only a new, non-deductible contribution if you have existing pre-tax IRA funds.

For example, if you have $93,000 in pre-tax IRAs and add a $7,000 non-deductible contribution, 93% of your total IRA funds are pre-tax. If you convert the $7,000, then 93% of it ($6,510) is taxable income.

This strategy is most effective for those with no pre-tax IRA balances. If a large pre-tax balance exists, you might roll those funds into a current employer’s 401(k) if the plan allows it. This removes the pre-tax funds from the pro-rata calculation, potentially allowing a tax-free conversion.

Information and Accounts Needed

To initiate a Backdoor Roth IRA, you must establish both a Traditional IRA and a Roth IRA. These can be opened at most financial institutions, and holding both at the same firm can simplify the transfer process.

You will also need to know the annual IRA contribution limit. For 2025, the limit is $7,000 for individuals under age 50 and $8,000 for those age 50 and over.

The Backdoor Roth IRA Process

The first step is to make a non-deductible contribution to a Traditional IRA. You must have earned income at least equal to the contribution, and the amount cannot exceed the annual limit.

Once the funds are in the Traditional IRA, the second step is to convert the account’s entire balance to a Roth IRA. This conversion is initiated through the financial institution where the accounts are held.

The IRS has not specified a required waiting period between the contribution and conversion. However, some suggest waiting a few business days for the contribution to settle. This can help avoid the appearance of a single transaction under the “step-transaction doctrine,” though the IRS has indicated it would not challenge these conversions.

Tax Reporting Requirements

Documenting the Backdoor Roth IRA on your tax return is a necessary final step. This is accomplished by filing Form 8606, Nondeductible IRAs, with your annual Form 1040 tax return. Failing to file this form can lead to the conversion being treated as fully taxable.

Part I of Form 8606 is used to report the non-deductible contribution to your Traditional IRA. This section establishes your after-tax “basis” in the IRA, which prevents it from being taxed again upon conversion or future withdrawal.

Part II of the form reports the Roth IRA conversion and calculates any taxable amount. This is where the pro-rata rule is applied on paper, based on the value of all your IRAs at year-end, to determine the taxable portion of the conversion.

To complete the form, you will need Form 1099-R from your financial institution. You will receive this early in the year after the conversion, and it reports the total amount converted from your Traditional IRA.