How to Make a Backdoor Roth Contribution
Understand the mechanics of a backdoor Roth IRA contribution, including the critical tax implications of existing IRAs and the steps for proper execution.
A backdoor Roth contribution is a method for individuals to fund a Roth Individual Retirement Account (IRA) even if their income surpasses the limits for direct contributions. It involves contributing to a Traditional IRA and then converting those funds to a Roth IRA, allowing access to the tax advantages of a Roth IRA, such as tax-free growth and withdrawals in retirement. The strategy is a response to IRS regulations that cap who can contribute directly to a Roth IRA based on Modified Adjusted Gross Income (MAGI). While there are no income limits for converting a Traditional IRA to a Roth IRA, the primary complexity arises when an individual already holds pre-tax funds in other IRA accounts.
Understanding the Core Concepts
The primary reason individuals use the backdoor Roth IRA strategy is to navigate the income limitations on direct Roth IRA contributions. For the 2025 tax year, a single filer’s ability to contribute begins to phase out with a Modified Adjusted Gross Income (MAGI) between $150,000 and $165,000. For those married filing jointly, the phase-out range is a MAGI between $236,000 and $246,000. If your income exceeds the upper threshold, you cannot contribute directly at all.
Since there are no income limits on making non-deductible contributions to a Traditional IRA, this account serves as the entry point. Similarly, there are no income restrictions on converting funds from a Traditional IRA to a Roth IRA. This absence of an income cap on conversions makes the backdoor strategy possible. By contributing to a Traditional IRA first and then converting it, you move the money into a Roth IRA, bypassing the income limits.
A consideration in this process is the pro-rata rule, which can introduce tax consequences if you have existing pre-tax funds in any Traditional, SEP, or SIMPLE IRAs. The IRS requires that for tax purposes, you treat all your traditional IRAs as one single account. When you convert funds to a Roth IRA, the conversion is deemed to consist of a proportional mix of your pre-tax and after-tax dollars from all your traditional IRA accounts combined.
To illustrate the pro-rata rule, consider an individual with $93,000 in a pre-tax Rollover IRA who contributes $7,000 in non-deductible funds to a new Traditional IRA. Their total IRA balance is now $100,000, with 93% being pre-tax and 7% being after-tax. If they convert the $7,000 to a Roth IRA, the IRS does not view this as a tax-free conversion of only the after-tax money. Instead, 93% of the converted amount ($6,510) would be taxable income, while only $490 would be a tax-free conversion of their after-tax basis.
Required Accounts and Information
To execute and report a backdoor Roth contribution, you must have a Traditional IRA and a Roth IRA. The Traditional IRA will be used to receive your initial non-deductible contribution, and the Roth IRA will be the destination for the subsequent conversion. You will need to open these accounts with a financial institution or brokerage firm if you do not already have them.
The primary document for reporting this strategy is IRS Form 8606, Nondeductible IRAs. The purpose of this form is to track your total basis in non-deductible contributions to your traditional IRAs. This tracking prevents you from being double-taxed on those after-tax funds when you eventually take distributions in retirement.
You must file Form 8606 for any year you make a non-deductible contribution or take a distribution from a traditional, SEP, or SIMPLE IRA that includes after-tax amounts. To complete it, you will need your total basis in traditional IRAs from prior years, which is on line 14 of your most recently filed Form 8606. You also need the total value of all your traditional, SEP, and SIMPLE IRAs as of December 31 of the tax year, and the exact amount of any funds you converted.
When completing Form 8606, you will report your non-deductible contribution on Part I. The total value of all your IRA accounts is used to calculate the taxable portion of any conversions, which is where the pro-rata rule comes into play. The form walks you through this calculation, determining how much of your conversion is taxable and what your remaining after-tax basis is for future years.
Executing the Backdoor Roth Contribution
The first step is to make a non-deductible contribution to your Traditional IRA. For 2025, the annual contribution limit is $7,000, or $8,000 if you are age 50 or older. This contribution must be made by the federal tax filing deadline for the contribution year, which is typically April 15 of the following year, and this deadline cannot be extended.
Once the funds have settled in your Traditional IRA, the next action is to convert the money to your Roth IRA. You will need to contact your financial institution or brokerage to initiate this transaction. It is recommended to perform the conversion shortly after the contribution to minimize the potential for the funds to generate earnings while in the Traditional IRA, as any earnings will be taxable upon conversion.
The final step is to properly report the transactions by filing the completed Form 8606 with your annual income tax return, such as Form 1040. This form documents the non-deductible contribution and the Roth conversion, ensuring that the after-tax portion of the conversion is not taxed. Your financial institution will also send you Form 1099-R to report the distribution from your Traditional IRA, which you will use to help complete your tax return.