Is the Backdoor Roth IRA Still Allowed?

The Backdoor Roth IRA remains a permissible strategy for retirement savings. While past legislative proposals aimed to eliminate it, those proposals did not become law. This method allows high-income earners who are prevented from making direct contributions to a Roth IRA to still utilize the account.

A Backdoor Roth IRA is not a formal type of account but a term for a two-step process. It involves contributing to a Traditional IRA and then converting those funds into a Roth IRA. This bypasses the income restrictions the IRS places on direct Roth IRA contributions.

2025 Eligibility and Contribution Limits

The need for a Backdoor Roth IRA stems from the income limitations on direct Roth IRA contributions. For 2025, your ability to contribute is phased out if your Modified Adjusted Gross Income (MAGI) exceeds certain thresholds. For single filers and heads of household, this phase-out range is $150,000 to $165,000, and an income above $165,000 prevents direct contributions.

For married couples filing jointly, the income phase-out range is $236,000 to $246,000. An income exceeding $246,000 disqualifies a couple from making direct Roth contributions. A stricter limit applies to those married filing separately, with a phase-out range of $0 to $10,000.

The total amount you can contribute to all your IRAs is capped annually. For 2025, the maximum contribution is $7,000. Individuals age 50 or over are permitted an additional catch-up contribution of $1,000, bringing their total to $8,000.

The Backdoor Roth IRA Process

The first step in a Backdoor Roth IRA is to make a non-deductible contribution to a Traditional IRA. You deposit funds up to the maximum annual limit, ensuring you do not take a tax deduction for this contribution on your tax return.

The second step is the conversion of these funds to a Roth IRA. After the contribution settles, you initiate a transfer of the assets. It is recommended to perform the conversion shortly after to minimize potential investment earnings, as any earnings would be taxable upon conversion.

The taxability of this conversion depends on your existing IRA assets. If you have no other funds in any Traditional, SEP, or SIMPLE IRAs, the conversion is a non-taxable event. If you hold pre-tax funds in other IRAs, the tax outcome is determined by the pro-rata rule.

The Pro-Rata Rule Explained

The pro-rata rule is a tax calculation that determines the tax liability of a Roth conversion when an individual has both pre-tax and after-tax funds in their IRAs. The rule requires you to aggregate the value of all your Traditional, SEP, and SIMPLE IRAs to find the taxable proportion of the conversion. You cannot convert only the after-tax money if pre-tax funds exist elsewhere in your IRA portfolio.

To illustrate, consider an individual with a pre-existing Traditional IRA holding $93,000 in pre-tax funds. They make a $7,000 non-deductible contribution, bringing their total IRA balance to $100,000 ($93,000 pre-tax + $7,000 after-tax).

If this person converts $7,000 to a Roth IRA, the pro-rata rule dictates that the conversion consists of a proportional mix of pre-tax and after-tax dollars. In this scenario, 93% of the total IRA balance ($93,000 / $100,000) is pre-tax, and 7% ($7,000 / $100,000) is after-tax.

Consequently, 93% of the $7,000 conversion ($6,510) is a taxable distribution and must be included as ordinary income. Only 7% of the conversion ($490) is treated as a tax-free return of the non-deductible contribution. This demonstrates how pre-existing IRA balances can create a significant tax consequence.

Tax Reporting Requirements

A Backdoor Roth IRA is documented with the IRS using Form 8606, Nondeductible IRAs. This form is a required part of your annual tax filing for any year you make a non-deductible contribution or perform a Roth conversion. It records your after-tax basis and calculates the taxable portion of any conversion.

Part I of Form 8606 is where you report the non-deductible contributions made to your Traditional IRA. This step establishes your cost basis, which is the total amount of after-tax money in your IRAs. Tracking this basis ensures you do not pay tax on the same money again in the future.

Part II of the form is used to report the Roth conversion. This section guides you through the pro-rata calculation if you have pre-tax IRA funds. The form’s calculations determine the taxable amount of the conversion, which you then carry over to your Form 1040.