Backdoor Roth Simplified: Step-by-Step Examples

Quick overview

A Backdoor Roth IRA is a practical workaround for taxpayers whose income exceeds the IRS limits for direct Roth IRA contributions. The basic flow: make a nondeductible contribution to a Traditional IRA, then convert that money to a Roth IRA. Because Roth accounts grow tax‑free and qualified withdrawals are tax‑free, the Backdoor Roth can be a valuable long‑term tax planning move—if you understand timing, the pro‑rata rule, and required reporting.

(For official rules on conversions and nondeductible contributions, see IRS Publication 590‑A and the Form 8606 instructions at https://www.irs.gov/forms-pubs/about-form-8606.)

Step‑by‑step process

1. Confirm you can’t make a direct Roth contribution. Income limits for direct Roth IRA contributions are set by the IRS and change periodically—check current IRS guidance before acting.
2. Open a Traditional IRA (if you don’t already have one). Make a nondeductible contribution up to the annual IRA limit. Keep clear records that the contribution is nondeductible.
3. Wait briefly (many advisors convert promptly—often the same day or within a few days) to avoid meaningful gains between contribution and conversion. The IRS hasn’t prescribed a mandatory waiting period, but document your steps.
4. Convert the contributed amount from the Traditional IRA to a Roth IRA. Your custodian can usually do a direct transfer or an in‑kind conversion.
5. File IRS Form 8606 for the tax year to report nondeductible contributions and the conversion. Form 8606 establishes your basis in Traditional IRAs so the IRS won’t tax that portion again.

Why the pro‑rata rule matters (and a numerical example)

If you have any existing pre‑tax IRA balances—Traditional IRAs, SEP IRAs, or SIMPLE IRAs—the IRS’s pro‑rata rule requires that conversions be treated as part pre‑tax and part after‑tax across all your IRAs. This can create unexpected tax on what you intended to be a tax‑free conversion.

Example (simple numbers):

• Existing pre‑tax IRA balance (all Traditional/SEP/SIMPLE IRAs combined): $94,000
• Nondeductible contribution you make this year: $6,000
• Total IRA balance immediately after contribution: $100,000
• You convert the $6,000 to a Roth.

Pro‑rata calculation: nondeductible basis / total IRA balances = $6,000 / $100,000 = 6%. That means only 6% of the $6,000 conversion (=$360) is nontaxable. The taxable portion = $6,000 − $360 = $5,640. You pay ordinary income tax on $5,640 in the year of conversion.

Why this matters: many people assume an immediate conversion is tax‑free. If you have other pre‑tax IRAs, the conversion can create a tax bill unless you take steps to isolate the nondeductible basis.

Common ways to avoid or reduce pro‑rata tax impact

• Roll pre‑tax IRA balances into an employer plan (401(k) or similar) that accepts roll‑ins. That removes those pre‑tax dollars from the IRA aggregation used in the pro‑rata calculation. See our guide on how to coordinate 401(k) contributions with an IRA for more on rollovers and timing: How to Coordinate 401(k) Contributions with an IRA.
• If you don’t have a roll‑in option, consider a multi‑year conversion plan. Convert manageable chunks in low‑income years to smooth your tax brackets (see our piece on Roth conversion windows: Roth Conversion Windows: When Partial Conversions Make Sense).
• For very large after‑tax balances, evaluate the merits of a “mega” approach using after‑tax 401(k) contributions where available—see What is a Mega Backdoor Roth IRA?.

Required IRS reporting and forms

• Form 8606: You must file Form 8606 for each year you make nondeductible Traditional IRA contributions or convert amounts to a Roth IRA. This form records your after‑tax basis and calculates the taxable portion of conversions.
• Tax return: Any taxable portion of the conversion flows to your Form 1040 as ordinary income. Keep conversion confirmations and statements in your records.
  (See IRS Form 8606 details: https://www.irs.gov/forms-pubs/about-form-8606.)

Real‑world examples and strategies from practice

Example A — No other IRAs

• Client details: Single filer with no existing IRAs and income above the Roth limit.
• Action: Contributed $7,000 nondeductible to a Traditional IRA and converted it to a Roth within one business day.
• Result: Conversion produced little to no taxable income (no pre‑tax balances and almost no market movement). Client benefits from tax‑free growth in the Roth.

Example B — Has pre‑tax IRA balances

• Client details: $90,000 in a Traditional IRA and wants to use the Backdoor Roth for an extra $7,000.
• Action: We considered two options: 1) roll the $90,000 into the client’s 401(k) (the employer plan accepted roll‑ins), then do the Backdoor Roth; or 2) convert in stages and pay the pro‑rata tax over several years.
• Result: Rolling to the 401(k) removed the pre‑tax IRA balance from the pro‑rata mix, permitting a nearly tax‑free conversion of the nondeductible contribution.

Timing, practical tips, and pitfalls

• Timing: Converting soon after the nondeductible contribution minimizes market gain between steps and keeps taxable gains small. Many custodians allow same‑day conversions; confirm procedures in advance.
• Custodian processes vary: Some firms require a separate conversion request; others can process a contribution then convert immediately. Call your provider first.
• Keep good records: Track nondeductible contributions on Form 8606 and retain IRA statements showing contribution and conversion dates.
• The step‑transaction myth: Some worry the IRS will challenge immediate conversions as abusive. Historically, the IRS has allowed the Backdoor Roth when executed properly; however, tax laws can change—monitor legislation and consult a tax professional.

Who should (and shouldn’t) use the Backdoor Roth

Good candidates:

• High‑income taxpayers blocked from direct Roth contributions but who want tax‑free growth.
• People with minimal pre‑tax IRA balances or who can roll them into an employer plan.
• Savers looking for tax diversification and estate‑planning benefits of Roth accounts.

Less suitable:

• Taxpayers with large pre‑tax IRAs who cannot roll balances into an employer plan and who want to avoid short‑term tax bills.
• Those who can’t or won’t file Form 8606 correctly—misreporting leads to IRS notices and penalties.

Legislative and audit considerations

The Backdoor Roth relies on current tax rules and IRS guidance. While widely used and accepted, the strategy has attracted legislative attention in the past. Keep in mind:

• Tax law can change. Proposals to limit or close the Backdoor Roth have appeared in congressional discussion but, as of this writing, the technique remains available.
• Document your intent and steps carefully so you can support your position if the IRS asks questions.

Checklist before you act

• Verify current Roth income limits and IRA contribution limits on IRS.gov.
• Confirm your custodian’s conversion process and fees.
• Review all IRA balances and consider rolling pre‑tax IRAs to an employer plan if possible.
• Prepare to file Form 8606 for the year you make the nondeductible contribution or do conversions.
• Consult a CPA or CFP® to model tax impact, especially if you have pre‑tax IRA dollars.

Further reading (internal resources)

• Pro‑Rata Rule for Backdoor Roth IRA Conversions: Pro‑Rata Rule for Backdoor Roth IRA Conversions
• What is a Mega Backdoor Roth IRA?: What is a Mega Backdoor Roth IRA?
• Roth vs Traditional IRA primer: Roth IRA vs. Traditional IRA

Professional disclaimer

This article is educational and does not constitute tax, legal, or investment advice. Rules for IRA contributions, conversions, and reporting change. For personalized guidance, consult a tax professional or a certified financial planner. For official IRS guidance, see IRS Publication 590‑A and the Form 8606 instructions (https://www.irs.gov/forms-pubs/about-form-8606).

Author note: I’m a CPA and CFP® with 15+ years advising clients on IRA conversions and tax‑aware retirement planning. In practice, careful recordkeeping and early coordination with custodians and employers are the two things that reduce surprises when executing Backdoor Roths.