Is a Backdoor Roth IRA Worth It for You?

A Roth Individual Retirement Account (IRA) offers tax-free growth and withdrawals during retirement, making it an attractive savings vehicle. Direct contributions to a Roth IRA are limited by specific income thresholds. For those whose earnings exceed these limits, a “backdoor Roth” strategy provides an alternative method to access these benefits.

Understanding the Backdoor Roth Strategy

Direct contributions to a Roth IRA are subject to modified adjusted gross income (MAGI) limitations set by the Internal Revenue Service (IRS). For 2025, individuals filing as single with a MAGI of $150,000 or more, but less than $165,000, can make a reduced contribution, and those earning $165,000 or more are ineligible to contribute directly. For married couples filing jointly, the full contribution is available if their MAGI is less than $236,000, a partial contribution is allowed between $236,000 and $246,000, and no direct contribution is permitted at or above $246,000. The annual IRA contribution limit is $7,000 in 2025, or $8,000 for those age 50 and older.

The backdoor Roth strategy bypasses these income limitations through a two-step process. The first step involves making a non-deductible contribution to a Traditional IRA. These contributions use after-tax money and do not have income restrictions, meaning anyone with earned income can make them.

The second step is to convert the funds from the Traditional IRA into a Roth IRA. This conversion moves the after-tax funds into the Roth account, where they can then grow tax-free. The initial non-deductible contribution establishes a basis in the Traditional IRA, which is then converted.

Determining Personal Suitability

Evaluating the suitability of a backdoor Roth strategy involves understanding the IRA aggregation rule, often referred to as the “pro-rata rule.” The IRS views all of an individual’s non-Roth IRA accounts—including Traditional, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE) IRAs—as a single combined account for tax purposes. This rule dictates how the taxable portion of a Roth conversion is calculated.

If an individual has existing pre-tax (deductible) balances in any Traditional, SEP, or SIMPLE IRAs, a Roth conversion will be partially taxable. The conversion amount will be treated as coming proportionally from both the pre-tax and after-tax (non-deductible) portions of all aggregated IRAs. For instance, if 75% of an individual’s total non-Roth IRA balance is pre-tax money, then 75% of any converted amount will be taxable, even if the conversion originated from a non-deductible contribution. This can significantly reduce the tax efficiency of the backdoor Roth for those with substantial pre-tax IRA balances.

The “basis” in an IRA represents the portion of contributions that have already been taxed, typically referring to non-deductible contributions. Individuals without existing pre-tax IRA balances, or those who can roll their pre-tax IRA funds into an employer-sponsored retirement plan (like a 401(k)) before performing the conversion, generally find the backdoor Roth most advantageous.

Executing the Backdoor Roth

Executing a backdoor Roth conversion involves a precise sequence of actions to ensure compliance and maximize tax efficiency. Individuals must have both a Traditional IRA and a Roth IRA account established with a financial institution. These accounts must be opened before proceeding if not already in place.

The first step is to make a non-deductible contribution to the Traditional IRA. It is important to explicitly designate this contribution as non-deductible with the IRA custodian. Once the funds have settled, typically within a few business days, the conversion can be initiated.

The next step is to request a conversion of the Traditional IRA balance to the Roth IRA. This is often done through an online portal or by contacting the financial institution directly. It is advisable to perform the conversion promptly after the non-deductible contribution has settled to minimize any investment gains that might occur in the Traditional IRA. Any earnings accumulated, even over a short period, would be considered pre-tax money and thus taxable upon conversion. The conversion can be completed via a direct trustee-to-trustee transfer.

Filing Tax Forms

Properly reporting a backdoor Roth conversion to the IRS requires specific tax forms. Individuals will receive Form 5498, “IRA Contributions Information,” from their IRA custodian, typically by May 31 of the following year. This form reports all IRA contributions, including non-deductible Traditional IRA contributions and Roth conversions. While informational and not filed with the tax return, it helps verify reported contributions.

For the conversion itself, individuals will receive Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” from their IRA custodian. This form reports the distribution from the Traditional IRA that constituted the conversion to the Roth IRA.

The most important form for reporting the backdoor Roth is IRS Form 8606, “Nondeductible IRAs.” This form tracks non-deductible Traditional IRA contributions and reports Roth conversions. Part I of Form 8606 is used to report the non-deductible contribution, establishing the individual’s basis. Part II is then completed to report the Roth conversion, detailing the amount converted and calculating any taxable portion, especially if the pro-rata rule applies due to other pre-tax IRA balances. This form ensures the IRS accurately accounts for the after-tax money being converted, preventing double taxation.