The Backdoor Roth Explained
For high-income earners, the Roth IRA often feels off-limits.
The IRS places income limits on direct Roth IRA contributions. If you earn above those thresholds, you’re simply not allowed to contribute to a Roth IRA directly.
The Backdoor Roth exists to solve that problem. It isn’t a special account or a loophole. It’s a two-step process that works because of how the tax code is written.
But there are a number of nuances that must be understood in order to execute the strategy correctly.
Why Does it Work?
While the IRS limits direct Roth IRA contributions based on income, it does not impose income limits on contributions to a Traditional IRA. It also does not restrict who can convert Traditional IRA assets to a Roth IRA.
The Backdoor Roth combines these two facts.
Step one is contributing to a Traditional IRA using after-tax dollars. This contribution is non-deductible. Step two is converting those assets to a Roth IRA. When done properly, the conversion itself can be largely or entirely tax-free.
IRA contribution limits still apply, though. For most people, that means up to $7,000 per year if under age 50 and $8,000 if 50 or older. The power of the Backdoor Roth comes from executing the strategy consistently over time, not from large one-time conversions.
Where People Get Burned: The Pro-Rata Rule
The most common mistake with Backdoor Roth IRAs has nothing to do with the contribution or conversion. It has to do with existing pre-tax IRA balances.
If you already own assets in pre-tax Traditional IRAs, rollover IRAs, SEP IRAs or SIMPLE IRAs, the IRS treats all of those accounts as one combined pool. So in this case, the Backdoor Roth can create a taxable event on a proportion of the amount converted.
For example, assume you have $93,000 in a pre-tax Traditional IRA. You then open a new Traditional IRA, contribute $7,000 of after-tax dollars and attempt a Backdoor Roth conversion. At that point, you have $100,000 of Traditional IRA assets, of which $7,000 is after-tax. If you convert the $7,000 in your new Traditional IRA, only 7% of that conversion is tax-free. In dollar terms, only $490 (7% of $7,000) is tax-free, and $6,510 (93% of $7,000) is taxable.
This small but important subtlety is why Backdoor Roth IRAs can often create surprise tax bills.
The key nuance is this: the pro-rata rule applies only when you have existing pre-tax IRA assets. If you other retirement assets are already in Roth IRAs, the rule does not apply. Roth IRAs are completely excluded from this calculation.
When Does it Work Best?
The Backdoor Roth works best when your pre-tax IRA balance is zero.
Many people “clear the IRA deck” before using this strategy. That can be done in one of two ways. One options is converting pre-tax IRA assets to a Roth IRA and intentionally paying the tax. Another option, often more tax-efficient, is rolling pre-tax IRA assets into a current employer’s 401(k) plan, if the plan allows unbound rollovers. Once those assets are inside a 401(k), they are excluded from the pro-rata rule.
Employer retirement plans like 401(k)s, 403(b)s, 457 plans and solo 401(k)s do not count toward the pro-rata calculation. Traditional IRAs, rollover IRAs, SEP IRAs and SIMPLE IRAs do.
Timing matters too. While IRA contributions can be made up until the tax filing deadline, the pro-rata calculation is based on total IRA balances as of December 31 of the conversion year. What exists at year-end is what matters to the IRS.
Reporting Matters Too
If you complete the Backdoor Roth, Form 8606 must be filed with your tax return. This form reports non-deductible Traditional IRA contributions, tracks after-tax basis and calculates the taxable portion of any Roth conversion. Filing it correctly prevents double taxation
When the conversion occurs, your custodian will issue a Form 1099-R. This form is for informational purposes and simply reports the conversion amount. The real heavy lifting is done with Form 8606.
The Bigger Picture
The Backdoor Roth is not about reducing taxes this year. It’s about building tax-free assets for future flexibility. Over time, consistently adding money to Roth accounts can create meaningful planning advantages and help build wealth tax-free.
Like many planning strategies, the Backdoor Roth is powerful when used deliberately and problematic when used casually. Understanding how it fits into your broader financial picture is what determines whether it adds value or creates friction.
Helping clients think through strategies like this in context is a core part of the work I do. If you’re considering a Backdoor Roth and want to be sure it’s implemented correctly and intentionally, that’s a conversation worth having.
This article is for general informational purposes and may not apply to every individual situation. If this is a question you’re actively considering, a personalized conversation can often bring clarity.
