How a backdoor Roth conversion works

A backdoor Roth IRA is a two-step process: you contribute money to a traditional IRA (where you get no tax deduction), then convert that money to a Roth IRA. The IRS allows this conversion regardless of your income, which is why people use it when their income is too high to contribute directly to a Roth. You pay income tax on the converted amount in the year you do the conversion, but after that, the money grows tax-free and you can withdraw it tax-free in retirement.

The process itself takes a few weeks to a few months, depending on how quickly your IRA custodian processes the paperwork. You do not need permission from the IRS beforehand — you straightforward execute the conversion and report it on your tax return.

Key Takeaways

  • A backdoor Roth involves depositing money into a traditional IRA, then when ready converting it to a Roth IRA through your IRA custodian.
  • You will owe income tax on the converted amount in the year of conversion, calculated at your marginal tax rate.
  • The pro-rata rule means if you have other traditional, SEP, or straightforward IRAs with pre-tax balances, the IRS treats all your IRAs as one pool for tax purposes, which can create an unexpected tax bill.
  • You must complete the conversion in the same calendar year as the contribution, and report both the contribution and conversion on Form 8606 when you file taxes.
  • Some employers' 401(k) plans allow you to roll a traditional IRA balance into the plan, which can help you avoid the pro-rata rule if you have existing IRA balances.

Step 1: Contribute to a traditional IRA with no tax deduction

Open a traditional IRA with a brokerage or bank if you do not already have one. Fidelity, Vanguard, Charles Schwab, and most other major custodians offer them. You can also use your existing IRA if you have one.

Deposit the amount you want to convert. For 2024, the contribution limit is $7,000 per person ($8,000 if you are 50 or older). You can contribute this amount even if your income exceeds the Roth limit. When you make the deposit, you are making a non-deductible contribution — meaning you will not claim a tax deduction for it on your tax return.

Some custodians require you to specify whether the contribution is deductible or non-deductible at the time of deposit. If yours does, select non-deductible. If it does not ask, you will designate this on Form 8606 when you file your taxes.

Step 2: Convert the traditional IRA to a Roth IRA

Contact your IRA custodian and request a conversion of the traditional IRA balance to a Roth IRA. You can do this by phone, online portal, or mail, depending on the custodian. Some custodians call this a "Roth conversion" or "IRA rollover to Roth."

The custodian will ask which account the money should go to. If you do not have a Roth IRA yet, you will need to open one first — this usually takes a few minutes online. Then provide the custodian with the Roth IRA account number.

The custodian will process the conversion and send you a Form 1099-R showing the amount converted. This typically happens within one to four weeks. The money is now in your Roth IRA and begins growing tax-free.

Understanding the pro-rata rule and its tax impact

The pro-rata rule is the biggest trap in a backdoor Roth. If you have any traditional, SEP, or straightforward IRA accounts with pre-tax money in them, the IRS treats all your IRAs as a single account for conversion purposes. This means you cannot convert only the after-tax money you just contributed — you have to pay tax on a portion of the entire balance.

Here is how it works: suppose you contribute $7,000 to a traditional IRA and when ready convert it. But you also have a traditional IRA with $30,000 of pre-tax money from an old 401(k) rollover. The IRS sees $37,000 total. Of that, $7,000 is after-tax (the amount you just put in) and $30,000 is pre-tax. When you convert the $7,000, you owe tax on roughly $5,676 of it (the pre-tax portion of the $7,000 being converted). This is calculated as: ($30,000 ÷ $37,000) × $7,000 = $5,676.

To avoid this, you can roll your existing traditional IRA balances into your employer's 401(k) plan if the plan allows it. This removes those balances from the pro-rata calculation. Check with your plan administrator to see if your plan accepts rollovers from IRAs.

Reporting the conversion on your tax return

When you file your tax return for the year you do the conversion, you must file Form 8606 (Nondeductible IRAs). This form tells the IRS about your non-deductible contribution and the conversion.

On Form 8606, you will report the amount of the non-deductible contribution, the total value of all your traditional IRAs on December 31 of that year, and the amount converted. The form calculates how much of the conversion is taxable based on the pro-rata rule.

You will also receive a Form 1099-R from your custodian showing the conversion amount. This goes on your tax return as well. The taxable amount (after the pro-rata calculation) is added to your ordinary income for the year, and you pay tax on it at your marginal rate.

Timing: when the contribution and conversion must happen

The contribution and conversion must occur in the same calendar year. You cannot contribute in December 2024 and convert in January 2025 — the IRS will treat the conversion as happening in 2025, and you will have a non-deductible contribution sitting in a traditional IRA with no conversion, which creates a tax reporting problem.

Most people do the conversion within days or weeks of the contribution to avoid any market risk and to keep the process straightforward. However, there is no rule against waiting several months — as long as both happen in the same calendar year, you are fine.

If you miss the important date and the contribution sits unconverted past December 31, you can still convert it in the next year, but you will have to report the non-deductible contribution for the prior year on Form 8606 and then report the conversion in the new year. This creates extra paperwork and can trigger IRS notices, so it is best to complete both steps in the same year.

What happens after the conversion is complete

Once the money is in your Roth IRA, it grows tax-free. You can withdraw the contributions (the $7,000 you converted) at any time without penalty or tax. You cannot withdraw the earnings (the growth on that $7,000) until you are 59½ and the account has been open for at least five years.

The five-year rule is per Roth IRA account, not per conversion. If you open your first Roth IRA in 2024 and do a conversion, the five-year clock starts in 2024. Any conversions you do in future years use the same five-year clock.

You do not have to take required minimum distributions from a Roth IRA during your lifetime, unlike traditional IRAs. This makes Roths useful for leaving money to heirs.

Frequently Asked Questions

Can I do a backdoor Roth if I am married?

Yes, each spouse can do a separate backdoor Roth in the same year. Each person contributes to their own traditional IRA and converts to their own Roth IRA. The pro-rata rule applies separately to each spouse — your spouse's traditional IRA balances do not affect your conversion tax bill.

What if my custodian will not let me convert?

Most major custodians allow conversions, but some smaller banks or brokers may not. If your current custodian does not offer conversions, you can open a Roth IRA at a different custodian and request a trustee-to-trustee transfer from your traditional IRA. The receiving custodian will handle the conversion on their end.

Do I have to pay the tax bill when ready?

No. The tax is due when you file your tax return for that year, which is typically April 15 of the following year. You can pay it from other income or savings. Some people set aside money from their paycheck throughout the year to cover the expected tax bill.

What if the market drops after I convert but before I file taxes?

You can undo a conversion by doing a "recharacterization" if you file your tax return before the important date (including extensions). This means you move the money back to a traditional IRA and report the conversion as if it never happened. You then have until October 15 of the following year to decide whether to reconvert. This is useful if the account value drops significantly after conversion.

Can I do multiple backdoor Roths in one year?

You can only contribute up to the annual limit ($7,000 in 2024, or $8,000 if 50+) across all your traditional IRAs in a single year. You cannot do multiple $7,000 conversions. However, you can do one conversion per year, every year, as long as you stay within the annual contribution limit.