Backdoor Roth IRAs: Step-by-Step and Common Pitfalls

Quick overview

A Backdoor Roth IRA is a two‑step process: contribute to a traditional IRA (often non‑deductible) and then convert those dollars to a Roth IRA. The strategy is widely used by high‑income earners who cannot make direct Roth contributions because of IRS income limits. When executed properly it preserves the Roth’s key advantages: tax‑free growth and tax‑free qualified withdrawals in retirement (subject to Roth rules). For official IRS guidance, see the IRS Roth IRAs page (https://www.irs.gov/retirement-plans/roth-iras).

In my practice helping clients plan retirement tax strategies, I’ve seen Backdoor Roths deliver long‑term value, but the tax mechanics can surprise people who skip planning. Below I walk through a step‑by‑step process, common pitfalls (including the pro‑rata rule), reporting requirements, and practical workarounds.

Step‑by‑step: How to do a Backdoor Roth IRA

1. Open the correct accounts

• Open a traditional IRA and a Roth IRA at a broker or custodian you trust. Many investors use the same firm for both to simplify transfers.

1. Make a non‑deductible traditional IRA contribution

• Contribute cash to the traditional IRA. If you expect to owe no tax deduction for that contribution due to your income or participation in a workplace plan, label it as a non‑deductible contribution for tax purposes.
• Important: IRA contribution limits are set annually by the IRS and can change; check IRS.gov for the current limit before contributing (see the IRS Roth IRAs page).

1. File IRS Form 8606

• File Form 8606 for any year you make non‑deductible IRA contributions or convert amounts to a Roth. Form 8606 documents your basis (after‑tax amount) in traditional IRAs and prevents double taxation when you eventually withdraw that basis.
• Failure to file Form 8606 can cause IRS penalties and create headaches when the IRS expects to see the nondeductible contribution recorded.

1. Convert the funds to the Roth IRA

• After posting the contribution, instruct your custodian to convert the amount to your Roth IRA. Many people convert quickly (same day or within a few days) to limit any taxable earnings while the money sits in the traditional IRA.
• When you convert, your broker will issue a Form 1099‑R showing the distribution; your Roth custodian may also show a contribution or conversion.

1. Report the conversion and any tax due

• Report the conversion on your tax return. If most or all of the converted dollars are after‑tax basis (non‑deductible contribution) and there were negligible earnings, tax may be minimal.
• If you have other pre‑tax IRA money, read the pro‑rata rule section below — conversion may be partially taxable.

The pro‑rata rule: the single biggest surprise

The IRS treats all your traditional IRAs as a single pool for tax purposes when you do conversions. That means if you hold any pre‑tax traditional IRA balance (deductible contributions or earnings), the taxable portion of a conversion is roughly:

Taxable portion = (pre‑tax IRA balances / total IRA balances) × conversion amount

Example (practical):

• Pre‑tax traditional IRA balances (existing): $94,000
• New non‑deductible contribution: $6,500
• Total traditional IRAs before conversion: $100,500
• Convert the $6,500 contribution amount.

Taxable portion = ($94,000 / $100,500) × $6,500 ≈ $6,077 taxable
So only about $423 would be treated as return of basis (non‑taxable) in this conversion. The rest is taxable as ordinary income in the year of conversion.

This is why many advisors recommend one of these workarounds when you have pre‑tax IRA money:

• Roll pre‑tax IRA balances into an employer plan (401(k), 403(b), or governmental 457) that accepts incoming rollovers. That removes pre‑tax dollars from the IRA pool and can make a clean Backdoor Roth conversion.
• Convert larger pieces over several years to manage tax brackets (partial conversions).

For more detailed examples and scenarios, see FinHelp’s step‑by‑step examples on Backdoor Roths: Backdoor Roth Simplified: Step‑by‑Step Examples.

Timing and earnings: why speed matters

Timing affects taxes because any investment gains between the contribution and the conversion are taxable on conversion. Many investors convert quickly to reduce taxable earnings. However, there is no formal IRS minimum wait — the IRS has not established a required waiting period. A same‑day or within‑days conversion is common; some custodians offer a one‑click “backdoor” flow.

A practical caution: converting very quickly has raised questions in conversations about the “step‑transaction doctrine” (a legal concept used by courts to combine steps into a single transaction), but historically the IRS has accepted these conversions when properly reported and accompanied by Form 8606. There is no broad IRS rule disallowing short‑interval conversions as of 2025, but policy can change, so stay informed.

Reporting and forms

• Form 1099‑R: Your custodian issues this for distributions from the traditional IRA (the conversion). It will show the gross distribution and codes that identify the conversion.
• Form 8606: You must file this to report nondeductible contributions and conversions. It tracks your basis so future distributions aren’t taxed twice.
• Tax return: Include the Form 8606 results on your Form 1040 return. If you owe tax on a conversion, it is reported with your ordinary income for the year.

IRS sources: see the IRS Roth IRAs page and the page for Form 8606 for filing details.

Common pitfalls and how to avoid them

• Not filing Form 8606: This is the most frequent reporting error. File it every year you make a nondeductible contribution or conversion.
• Ignoring the pro‑rata rule: If you have any pre‑tax traditional IRA balance, you’ll likely owe tax on most of a small conversion. Consider rolling pre‑tax IRAs into a 401(k) or doing partial conversions planned across years.
• Using conversion funds that come from the converted IRA: If you pay the conversion tax using funds withdrawn from the IRA, you reduce the long‑term benefit of the Roth. Paying tax from outside funds preserves more retirement assets inside tax‑free growth.
• Misunderstanding “legal” vs “policy risk”: Backdoor Roths are legal under current law, but proposals have periodically emerged to restrict or tax the strategy. Don’t assume long‑term legal permanence; plan for the possibility of legislative change.

When a Backdoor Roth makes sense—and when it doesn’t

Good candidates:

• High‑income earners who exceed Roth contribution limits, have little or no pre‑tax IRA balances, and expect to be in the same or higher tax bracket in retirement.
• Those who value tax diversification and want to minimize required minimum distributions (RMDs) impact on retirement income planning.

Poor candidates:

• People with significant pre‑tax IRA balances and no employer plan that accepts roll‑ins (unless they accept the tax cost).
• Those who need the tax deduction today more than they value future tax‑free withdrawals.

For help deciding between Roth and traditional choices or timing conversions, see FinHelp’s planning guides: When to Convert a Traditional IRA to a Roth: Key Considerations and Backdoor Roth and Retirement Income: Long‑Term Considerations.

Practical checklist before you convert

• Confirm current year IRA contribution limits on IRS.gov.
• Decide whether your traditional IRA contribution will be non‑deductible.
• If you have existing IRAs, calculate the pro‑rata impact or explore rolling pre‑tax IRAs into an employer plan first.
• Convert and obtain Form 1099‑R; prepare and file Form 8606 with your tax return.
• Pay any conversion tax from outside funds if possible.

Short illustrated example (clean backdoor)

• No existing IRAs. You contribute $7,000 to a traditional IRA (after‑tax). You convert the $7,000 to a Roth within days. Because there were no pre‑tax IRA balances and little to no earnings, your conversion is largely non‑taxable (aside from any small investment earnings). File Form 8606 to record the basis.

Closing thoughts and professional perspective

In my experience advising clients, Backdoor Roths are a valuable tool when used deliberately. The tax paperwork and pro‑rata rule are the usual pain points; both are manageable with planning. If you have significant pre‑tax IRA assets, consider whether rolling those into a workplace plan or a multi‑year conversion schedule better meets your goals.

This article is educational and not individualized tax advice. Tax rules change and personal circumstances matter — consult a CPA or financial advisor before executing a Backdoor Roth. For authoritative rules and current limits, consult the IRS Roth IRAs page (https://www.irs.gov/retirement-plans/roth-iras) and Form 8606 guidance (https://www.irs.gov/forms-pubs/about-form-8606).