What Is a Backdoor Roth IRA and How Does It Work?

A Backdoor Roth IRA is a strategy, not a formal account type, used by high-income individuals to contribute to a Roth IRA. The method involves contributing to a Traditional IRA and then converting those funds into a Roth IRA. This approach is utilized because direct contributions to Roth IRAs are restricted by income limits set by the Internal Revenue Service (IRS).

While income rules restrict who can contribute directly to a Roth IRA, there are no such income limitations on converting funds from a Traditional IRA to a Roth IRA. This distinction allows savers to access the benefits of a Roth IRA, such as tax-free growth and withdrawals in retirement.

Understanding Roth IRA Contribution Limits

The primary reason for using the Backdoor Roth IRA strategy stems from the income limitations the IRS imposes on direct contributions based on your Modified Adjusted Gross Income (MAGI). For the 2025 tax year, the ability for a single filer or head of household to contribute to a Roth IRA begins to phase out with a MAGI between $150,000 and $165,000.

For those who are married and file taxes jointly, the phase-out range is between $236,000 and $246,000. Individuals who are married and file separately have a much lower phase-out range of $0 to $10,000. Once your MAGI surpasses the upper end of these ranges, you cannot make a direct contribution to a Roth IRA for that year.

The Pro-Rata Rule Explained

A consideration in the Backdoor Roth IRA 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 when you convert money from a Traditional IRA to a Roth IRA, the conversion is considered a proportional mix of your pre-tax and after-tax dollars from all your non-Roth IRA accounts combined. The IRS views all of your Traditional, SEP, and SIMPLE IRAs as a single entity for this calculation.

To determine the taxability of a conversion, you must calculate the ratio of your after-tax contributions to the total value of all your non-Roth IRAs as of December 31 of the year the conversion takes place. The remaining portion, representing the pre-tax funds, will be subject to ordinary income tax.

For example, an individual has an existing Traditional IRA with a balance of $93,000, all of which consists of pre-tax contributions. They make a new, non-deductible contribution of $7,000 to a Traditional IRA, bringing their total IRA balance to $100,000. Of this total, 93% is pre-tax money, and 7% is after-tax money.

If this person then converts $7,000 to a Roth IRA, the pro-rata rule dictates that 93% of that conversion, or $6,510, is considered a conversion of pre-tax funds and is added to their taxable income. Only $490 would be a tax-free conversion of their after-tax contribution.

Step-by-Step Guide to the Backdoor Roth IRA Process

The first step is to make a contribution to a Traditional IRA. This contribution must be made with after-tax money, meaning you will not claim a tax deduction for it. For 2025, the maximum contribution amount is $7,000, or $8,000 if you are age 50 or older. If you do not already have a Traditional IRA, you will need to open one with a financial institution.

Once the funds have been deposited into the Traditional IRA, the next step is to convert the money to a Roth IRA. This involves instructing your financial institution to move the assets from the Traditional IRA directly into a Roth IRA. Most brokerage firms allow this transaction to be completed online.

It is often recommended to perform the conversion shortly after the contribution is made to minimize the potential for the funds to generate investment earnings while in the Traditional IRA, as any earnings would be taxable upon conversion. After the conversion is complete, the funds are in the Roth IRA and can be invested according to your preferences. The process can be repeated annually as long as you remain ineligible for direct Roth IRA contributions due to your income.

Tax Reporting for the Conversion

Properly reporting the Backdoor Roth IRA transaction to the IRS is a necessary final step to ensure it is treated correctly for tax purposes. This is done using IRS Form 8606, Nondeductible IRAs, which must be filed with your annual tax return. Failing to file this form can result in a $50 penalty and may lead to the entire conversion being taxed.

Part I of the form is used to report your non-deductible contributions to your Traditional IRA. This is where you establish your “basis” in the IRA, which is the amount of after-tax money you have contributed. This basis is what allows a portion of the conversion to be tax-free.

Part II of Form 8606 is where you report the conversion itself. This section walks you through the pro-rata calculation to determine how much of the converted amount is taxable. You will need the total value of all your Traditional, SEP, and SIMPLE IRAs as of the end of the year to complete this part accurately. The form calculates the taxable portion of the conversion, which is then carried over to your main tax form, Form 1040. For individuals with no pre-existing pre-tax IRA funds, this calculation should result in a taxable amount of zero or very close to it.