How to Fill Out Form 8606 for a Backdoor Roth

The backdoor Roth IRA is a strategy for individuals whose income is too high to contribute directly to a Roth IRA. It involves making a nondeductible contribution to a traditional IRA and then converting that amount to a Roth IRA. Executing this correctly requires proper reporting to the IRS using Form 8606, Nondeductible IRAs. Filing this form accurately shows the IRS that your contribution was made with after-tax money, making the subsequent conversion to a Roth IRA a non-taxable event.

Information Needed to Complete Form 8606

Gathering the necessary information beforehand will streamline the process of filling out Form 8606. You will need the exact dollar amount of the nondeductible contribution you made to your traditional IRA for the tax year. If you have made nondeductible contributions in previous years, you will also need the total basis from line 14 of your prior year’s Form 8606.

You will also need the total value of all your traditional, SEP, and SIMPLE IRAs as of December 31st of the tax year, which is available on your year-end brokerage statements. The total amount you converted from a traditional IRA to a Roth IRA during the year is also required. This figure is reported in Box 1 of Form 1099-R.

Two documents you should have on hand are Form 5498 and Form 1099-R. Form 5498, IRA Contribution Information, reports all contributions made to your IRAs for the year. Form 1099-R, Distributions From Pensions, Annuities, Retirement Plans, IRAs, etc., details the distribution from your traditional IRA that was converted to your Roth IRA.

Completing Form 8606 Line-by-Line

For a backdoor Roth, you will primarily focus on Part I and Part II of the form. A standard, or “clean,” backdoor Roth assumes you have no pre-existing balance in any traditional, SEP, or SIMPLE IRAs, which simplifies the reporting.

Part I of the form deals with your nondeductible contributions. On line 1, you will enter the total nondeductible contributions made to your traditional IRA for the tax year. For a clean backdoor Roth, enter zero on line 2 for your total basis from previous years. Line 3 is the sum of lines 1 and 2, which establishes your total basis in nondeductible contributions.

Part II is where you report the conversion itself. You will skip lines 6 and 7 if you had no pre-existing IRA balance. On line 8, enter the net amount you converted from your traditional IRA to a Roth IRA, which you can find on your Form 1099-R. Proceeding through the calculations on lines 9 through 15 will ultimately result in a zero on line 17, the taxable amount. This is because your basis equals the amount converted. The total amount of the conversion is entered on line 16. Part III is not applicable when only reporting a backdoor Roth conversion and can be skipped.

Addressing the Pro-Rata Rule

The pro-rata rule can complicate a backdoor Roth IRA if you have existing pre-tax funds in other traditional, SEP, or SIMPLE IRAs. The IRS requires you to aggregate all of these IRA accounts to determine the taxability of any conversion. The rule states that any conversion will be composed of a proportional, or pro-rata, mix of your pre-tax and after-tax funds.

To illustrate, imagine you have an existing traditional IRA with $93,000 in pre-tax funds. You then make a new $7,000 nondeductible contribution to a traditional IRA, bringing your total IRA value to $100,000. If you then convert $7,000 to a Roth IRA, the IRS does not consider that $7,000 to be solely from your after-tax contribution.

Instead, it calculates the taxable portion based on the ratio of pre-tax funds to the total value of all your IRAs. In this example, 93% of your total IRA funds are pre-tax ($93,000 / $100,000). Therefore, 93% of your $7,000 conversion, or $6,510, would be considered taxable income. The remaining 7%, or $490, would be a tax-free return of your nondeductible contribution. This calculation directly affects the numbers you enter on Form 8606, resulting in a taxable amount reported on line 17.

Filing Form 8606 with Your Tax Return

Once completed, Form 8606 must be filed with your annual income tax return. The form is not submitted to the IRS on its own; it is an attachment to your Form 1040, 1040-SR, or 1040-NR.

The information from Form 8606 flows directly to your main tax return. The total amount of your Roth conversion, found on line 16 of Form 8606, is reported on line 4a of Form 1040. The taxable portion of that conversion, from line 17 of Form 8606, is reported on line 4b of Form 1040. In a clean backdoor Roth scenario, line 4b would be zero.

If you use tax preparation software, the program will automatically handle the attachment of Form 8606 and the transfer of the relevant figures to your Form 1040. For those who file on paper, you must physically attach the form to your tax return before mailing it.