What a backdoor Roth is and why people use it

A backdoor Roth is a way to move money into a Roth IRA when your income is too high to contribute directly. The process has two steps: you put money into a traditional IRA (which has no income limit), then you convert that money to a Roth IRA. The converted money grows tax-free in the Roth, and you can withdraw it tax-free in retirement.

The reason people do this is straightforward: Roth IRAs have income limits. In 2024, if you earn above a certain threshold (the amount depends on your filing status), you cannot contribute directly to a Roth. A backdoor Roth gets around that limit. You are not circumventing the rules — the IRS acknowledges this strategy and it is legal — but it requires following the steps in the right order and understanding the tax consequences.

The main trade-off is that you owe taxes on the conversion in the year you do it. If the money you convert has never been taxed before, you pay income tax on the full amount. If you already have pre-tax money in a traditional IRA, the math gets more complicated, and you may owe taxes on a portion of what you convert.

Key Takeaways

  • A backdoor Roth involves contributing money to a traditional IRA, then converting it to a Roth IRA in the same tax year or shortly after.
  • You owe income tax on the converted amount in the year of conversion, unless the money was already after-tax contributions.
  • If you have existing pre-tax money in any traditional IRA, SEP IRA, or straightforward IRA, the IRS pro-rata rule may force you to pay taxes on a larger portion of your conversion.
  • The conversion itself is reported to the IRS on Form 8606, and your brokerage will send you a 1099-R form documenting the transaction.
  • A backdoor Roth is legal, but the steps must be done in the correct order and timing matters for tax purposes.

Step one: contribute to a traditional IRA

You start by opening a traditional IRA if you do not already have one, or by using an existing one. You then deposit money into it. This contribution is not deductible (you do not get a tax break for it), because your income is too high to deduct traditional IRA contributions. The money sits in the account as an after-tax contribution.

The amount you can contribute is the same as the regular IRA limit: $7,000 per year in 2024 if you are under 50, or $8,000 if you are 50 or older. You can do this contribution in January, or you can wait until the tax filing important date (usually April 15 of the following year) to make the prior year's contribution. Timing does not matter much for the contribution itself, but it matters for the conversion step.

At this point, you have after-tax money sitting in a traditional IRA. You have not received a tax deduction, and you will not owe taxes on this money again when you convert it — as long as you have no other pre-tax money in any traditional, SEP, or straightforward IRA accounts.

Step two: convert to a Roth IRA

Once the money is in the traditional IRA, you instruct your brokerage to convert it to a Roth IRA. This is usually a straightforward request — you log into your account or call the brokerage and ask them to move the funds from your traditional IRA to your Roth IRA. The brokerage handles the paperwork and reports it to the IRS.

The conversion can happen days after the contribution, or weeks later. Many people do the contribution and conversion in the same calendar year to keep things straightforward. Some people contribute in April (for the prior tax year) and convert in May, which is also fine. The key is that the conversion must happen in the same tax year as the contribution, or in the following tax year if you contributed for the prior year.

When you convert, the money moves from the traditional IRA to the Roth IRA. The brokerage will send you a Form 1099-R at the end of the year, showing the amount converted. You will report this on your tax return using Form 8606.

The tax bill: what you owe and when

You owe income tax on the converted amount in the tax year the conversion happens. If the $7,000 you converted was never taxed before (which it was not, since you did not deduct the contribution), you owe income tax on the full $7,000 at your ordinary tax rate. If you are in the 24% federal tax bracket, that is roughly $1,680 in federal tax.

You pay this tax when you file your tax return for that year. You do not pay it upfront, and the brokerage does not withhold it automatically (though you can ask them to withhold if you want). Many people set aside money from their regular income to cover the tax bill, or they pay it when they file.

The tax bill is the cost of getting money into a Roth when your income is too high to contribute directly. Once the money is in the Roth and you have paid the tax, it grows tax-free, and you can withdraw it tax-free in retirement (after age 59½ and once the account has been open for at least five years).

The pro-rata rule: when existing pre-tax IRAs complicate things

If you already have money in a traditional IRA, SEP IRA, or straightforward IRA — money that was never taxed because you deducted the contributions — the IRS pro-rata rule applies. This rule says you cannot convert only the after-tax money and leave the pre-tax money behind. Instead, the IRS treats all your IRAs as one big pool for tax purposes.

Here is how it works: suppose you have $50,000 in a traditional IRA (pre-tax money from old 401(k) rollovers) and you contribute $7,000 to a new traditional IRA (after-tax money). Your total is $57,000. When you convert $7,000 to a Roth, the IRS says that $7,000 is not purely after-tax — it is a mix of pre-tax and after-tax money in the same proportion as your total accounts. In this case, about 88% of your accounts is pre-tax ($50,000 ÷ $57,000), so about 88% of your $7,000 conversion is taxable. That is roughly $6,160 in taxable income, not $7,000.

This rule catches many people off guard. If you have any pre-tax IRA money, a backdoor Roth becomes much more expensive or impossible. The solution is to roll the pre-tax IRA money into a 401(k) at your employer (if your plan allows it) before you do the backdoor Roth. This removes the pre-tax money from the IRA pool, so the pro-rata rule does not explore to your conversion.

Reporting to the IRS: Form 8606 and Form 1099-R

Your brokerage will send you a Form 1099-R in January showing the amount you converted. This form goes to the IRS automatically. You must report the conversion on your tax return using Form 8606, which is the IRS form for nondeductible IRA contributions and conversions.

On Form 8606, you report the amount of the contribution, the amount converted, and any pre-tax IRA balances you had at the end of the year. The form calculates how much of the conversion is taxable. If you do not file Form 8606, the IRS may assume the entire conversion is taxable, even if part of it was after-tax money. This can result in double taxation — paying tax on the same money twice.

If you work with a tax preparer or use tax software, they will usually ask you about IRA conversions and pre-tax IRA balances. Make sure you tell them about the backdoor Roth so they can file Form 8606 correctly. Keeping records of your after-tax contributions (your brokerage statements) is important in case the IRS ever asks for proof.

Common mistakes and how to avoid them

One common mistake is doing the conversion in a different tax year than the contribution. If you contribute in December and convert in January of the following year, the IRS may treat them as separate transactions in separate tax years. This can create complications. To keep things straightforward, do both the contribution and conversion in the same calendar year.

Another mistake is forgetting about the pro-rata rule. If you have any pre-tax IRA money, you must deal with it before you do a backdoor Roth. Rolling it into a 401(k) is the standard solution, but you need to do this before the conversion, not after.

A third mistake is not filing Form 8606. Even if your brokerage reports the conversion on a 1099-R, you must file Form 8606 to tell the IRS that part of the conversion was after-tax money. Without this form, the IRS assumes the entire amount is taxable.

Finally, some people try to do a backdoor Roth and a Roth conversion in the same year, or they do multiple backdoor Roths. These strategies can work, but they interact with the pro-rata rule in ways that require careful planning. If you are doing anything beyond a straightforward one-time backdoor Roth, consider talking to a tax professional.

Frequently Asked Questions

Can I do a backdoor Roth if I have a 401(k) at work?

Yes. The income limits that prevent you from contributing directly to a Roth are based on your income, not on whether you have a 401(k). However, if you have a traditional IRA with pre-tax money, the pro-rata rule still applies. A 401(k) does not count toward the pro-rata rule, so having a 401(k) does not complicate a backdoor Roth — only having pre-tax IRA money does.

What if I convert and then the market drops — can I undo it?

You can undo a conversion through a process called a recharacterization, but only if you do it before the tax filing important date for that year (usually October 15 if you file an extension). If you recharacterize, the conversion is treated as if it never happened, and you do not owe tax on it. However, you cannot cherry-pick which conversions to undo — if you recharacterize, you must recharacterize the entire conversion.

Do I have to convert the same year I contribute?

No, but it is simpler if you do. You can contribute in one year and convert in the next, as long as you report both on the correct tax returns. The main reason to do them in the same year is to avoid confusion and to minimize the time the money sits in a traditional IRA earning investment returns (which can complicate the pro-rata calculation).

What happens if I do not have enough money to pay the tax bill?

You still owe the tax when you file your return. You can pay it from your regular income, or you can set up a payment plan with the IRS if you cannot pay in full. Some people use money from outside their IRA accounts to cover the tax, which is why many financial advisors recommend only doing a backdoor Roth if you have cash on hand to pay the tax bill.

Can my spouse do a backdoor Roth if I do one?

Yes, each person can do their own backdoor Roth independently. Your spouse would follow the same steps with their own traditional IRA and Roth IRA. However, if you file taxes jointly and either of you has pre-tax IRA money, the pro-rata rule applies to both of you combined. This means you may need to coordinate your conversions or roll pre-tax money into a 401(k) before either of you converts.