Backdoor Roth IRA
A two-step strategy of contributing to a non-deductible traditional IRA and converting it to Roth, used by high-income earners who exceed direct Roth IRA contribution limits.
Detailed Explanation
The Backdoor Roth IRA is a two-step planning maneuver that lets high-income earners get money into a Roth IRA despite being phased out of direct contributions. Direct Roth contribution phaseouts in 2026 are roughly $150K-$165K (single) and $236K-$246K (MFJ), above which direct contributions are not allowed. The workaround: (1) make a non-deductible contribution to a Traditional IRA up to the annual limit ($7,500 in 2026, $8,500 with age 50+ catch-up), and (2) immediately convert that Traditional IRA balance to a Roth IRA. Because the contribution was non-deductible (basis), the conversion has minimal taxable income (only any earnings between contribution and conversion). The technique is reported on Form 8606 in two places: Part I tracks the non-deductible contribution and basis, Part II reports the conversion. The major trap is the pro-rata rule under IRC §408(d)(2). The IRS treats all of your Traditional, SEP, and SIMPLE IRAs as one bucket: when you convert, you must prorate the conversion across pre-tax and after-tax dollars in that combined bucket. If you have $90,000 of pre-tax IRA money plus a fresh $7,500 non-deductible contribution and convert $7,500, only 7.7% ($583) of the conversion is tax-free; the remaining $6,917 is taxable. The cure: roll your existing pre-tax IRA balances into a current employer 401(k) BEFORE doing the backdoor (401(k) balances are excluded from the pro-rata calculation). Note that 401(k) plans must permit incoming rollovers (most do, but check). The Mega Backdoor Roth is a separate, larger strategy using after-tax 401(k) contributions, available only when your employer's plan supports both after-tax contributions AND in-service distributions or in-plan Roth conversions.
Key Points
- Steps: non-deductible Traditional IRA contribution → immediate Roth conversion. Reported on Form 8606.
- Annual limit: $7,500 in 2026 (or $8,500 with age 50+ catch-up).
- Pro-rata rule (IRC §408(d)(2)) treats ALL Traditional/SEP/SIMPLE IRAs as one bucket on conversion. Must prorate.
- Cure for pro-rata: roll pre-tax IRA balances into a 401(k) before doing the backdoor.
- Mega Backdoor Roth is different: uses after-tax 401(k) contributions, requires plan support, can shelter $40K+ extra annually.
- Step transaction doctrine concerns are largely settled (Notice 2014-54, IRS commentary); same-day contribution and conversion are commonly accepted.
Practical Example
A married couple earns $300,000 (above the Roth IRA phaseout). Wife has no Traditional IRA balances. She contributes $7,500 non-deductible to a Traditional IRA and converts it to Roth the next day. Tax owed: roughly $0 (no earnings, all basis converted). Husband has a $50,000 SEP-IRA balance from prior self-employment. If he tries the same backdoor: pro-rata ratio is $7,500 / ($57,500) = 13%; $6,525 of his conversion is taxable. Husband's alternative: roll the SEP-IRA balance into his current 401(k), then the next year do a clean backdoor with no pro-rata.
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Learn about Tax Planning & StrategyRelated Terms
Solo 401(k)
A retirement plan for self-employed individuals and small business owners with no full-time employees, allowing both employee deferral and employer profit-sharing contributions.
SEP-IRA
A simplified employee pension IRA allowing self-employed individuals and small business owners to contribute up to 25 percent of net earnings to a traditional IRA structure.
Adjusted Gross Income (AGI)
Adjusted Gross Income is your total gross income reduced by specific above-the-line deductions, used as the starting point for calculating your federal taxable income.
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