The Backdoor Roth IRA

The Roth IRA has income limits — $161k single / $240k MFJ in 2024 above which direct contributions are blocked. The "backdoor Roth" is a perfectly legal two-step workaround.

The steps

1. Contribute to a Traditional IRA (non-deductible, since you're above the income limit anyway). Up to the annual contribution limit.
2. Convert the Traditional IRA balance to a Roth IRA. No tax owed if the contribution was non-deductible and there were no other pre-tax balances.
3. File Form 8606 with your tax return to document the basis.

The pro-rata trap

The IRS aggregates all of your Traditional, SEP, and SIMPLE IRA balances when calculating the taxable portion of a conversion. If you have $93,000 in a pre-tax Traditional IRA and contribute $7,000 non-deductibly, then convert $7,000:

• Only 7% (7k of 100k total) is your basis.
• 93% of the conversion ($6,510) is taxable as ordinary income.

Defending against pro-rata

• If your 401(k) accepts rollovers in, roll pre-tax IRA balances into the 401(k) before doing the backdoor.
• Do the conversion in the same calendar year as the contribution to minimize earnings between steps.

A worked example

You earn $250,000/year as a single filer in 2024 — well above the $161,000 Roth IRA contribution phase-out. You want to fund your Roth anyway. Here's the four-step move:

1. In January, you contribute $7,000 to a Traditional IRA. Because your income exceeds the deduction phase-out (you have a workplace 401k), the contribution is non-deductible — it adds $7,000 to your basis in the Traditional IRA.
2. A few days later, you convert the entire $7,000 from Traditional IRA → Roth IRA. Since the contribution was non-deductible and there are no other pre-tax dollars in any IRA, the conversion is non-taxable.
3. At tax time, you file Form 8606 to document the non-deductible contribution and the conversion.
4. You've now successfully moved $7,000 of after-tax dollars into a Roth IRA, where it grows tax-free for life.

Repeat annually. Over 30 years at 7% real, $7,000/year compounds to roughly $700,000 — all tax-free in retirement.

The pro-rata rule: the trap that costs people thousands

The IRS aggregates all your Traditional, SEP, and SIMPLE IRA balances when calculating the taxable portion of any conversion. This is the most expensive misunderstanding in personal finance.

Suppose you have a $93,000 rollover IRA from an old 401(k), and you make a $7,000 non-deductible contribution and convert it. Your total IRA balance is $100,000, of which only $7,000 is your "basis." When you convert $7,000:

• 7% of the conversion (7/100) is your basis — tax-free.
• 93% ($6,510) is pre-tax — taxable as ordinary income.

At a 32% marginal rate, that's $2,083 of unexpected tax. The remaining $93,000 in your rollover IRA still has the same pre-tax/basis ratio, so this happens every year until you clean it up.

How to escape pro-rata

• Reverse rollover. If your current 401(k) accepts rollovers in, roll your Traditional IRA balances into the 401(k). 401(k)s don't count toward the pro-rata calculation.
• Convert everything to Roth. Pay the tax once on the rollover IRA, then there are no pre-tax IRA balances and backdoor Roths work cleanly. Best done in a low-income year.
• Wait it out. If your income will drop (early retirement, sabbatical), the conversion tax bill drops with it. Some people delay backdoor Roths for years to clear the way.

Timing within the same year

Conversion in the same calendar year as contribution is ideal but not required. Some practitioners advise a 1-day gap between contribution and conversion; others wait a few weeks. The IRS hasn't formally required any specific delay. The risk of doing it same-day is small — the bigger risk is forgetting to file Form 8606.

The Mega Backdoor Roth (different and more powerful)

If your 401(k) plan supports both after-tax contributions beyond the $23,000 pre-tax limit AND in-plan Roth conversions or in-service withdrawals, you can move up to $46,000+ per year (depending on the total $69,000 401(k) ceiling minus your pre-tax + employer contributions) into Roth tax-advantaged space.

Check your plan's Summary Plan Description for both features. They're more common at large tech employers (Google, Meta, Microsoft) than at typical companies. Where available, this is the single highest-impact retirement move for a high earner.

Common mistakes

• Skipping Form 8606. Without it, the IRS has no record of your basis and may eventually tax you twice on the same money.
• Leaving the Traditional IRA balance to grow for years before converting. Any earnings between contribution and conversion are taxable, defeating part of the strategy.
• Forgetting about SEP and SIMPLE IRAs. These count for pro-rata too. Self-employed people with SEP IRAs often get tripped up.
• Doing the conversion in December and missing the calendar. The contribution is for one tax year; the conversion is reported in the year it happened.

Frequently asked questions

Is the backdoor Roth legal?

Yes. The IRS has explicitly confirmed the strategy works, most recently in the 2018 conference report on the Tax Cuts and Jobs Act. Multiple legislative attempts to close it (Build Back Better) have failed. Until Congress changes the law, it's settled.

Will my heirs benefit?

Yes. Roth IRA balances pass tax-free to non-spouse heirs, who must withdraw within 10 years but pay no tax on the withdrawals. A backdoor-funded Roth becomes one of the most tax-efficient inheritances available.

I have a $50k Traditional IRA from an old job. Should I do the backdoor anyway?

Not until you handle the $50k. Either roll it into your current 401(k) (if allowed) or convert it to Roth (paying the tax). Doing backdoor with $50k of pre-tax dollars in the mix triggers significant pro-rata tax each year.

Putting this into practice this week

The hardest part isn't understanding the concept — it's making one small change before you forget. Pick the single most relevant action below and put it on your calendar. Future you will thank present you for choosing one thing and doing it, instead of nothing while planning everything.

• Open a high-yield savings account if you don't have one. Twenty minutes.
• Increase your 401(k) contribution by 1 percentage point. Five minutes.
• Sign up for the Krovea Sunday letter and bookmark this article.
• Walk through the relevant Krovea calculator with your actual numbers.

Key takeaways for your action plan

• Start now, not when the market "feels right." The optimal entry point is unknowable in advance.
• Automate the decision so behavior is removed from the equation.
• Match your strategy to your time horizon, not to recent headlines.
• Tax-advantaged accounts come first; taxable strategies are the finishing touches.
• Review your plan annually, ignore it the other 364 days.

The bottom line

The backdoor Roth is legal, well-documented, and one of the highest-leverage moves a high earner can make. The execution has one trap — the pro-rata rule — and one paperwork step — Form 8606. Get both right and you'll have moved hundreds of thousands of tax-free dollars by retirement.