Backdoor Roth IRA: Complete Guide

What Is a Backdoor Roth IRA?

A backdoor Roth IRA is a two-step strategy that allows high earners to get money into a Roth IRA despite income limits. It works because while Roth IRA contributions have income limits, Traditional IRA contributions do not (for non-deductible contributions), and there are no income limits on Roth conversions.

The strategy: Contribute to a Traditional IRA (non-deductible), then immediately convert to a Roth IRA. The result is the same as a direct Roth contribution—after-tax money growing tax-free forever.

Is This Legal?

Yes, completely legal. The IRS has been aware of this strategy for years and has implicitly blessed it. The Build Back Better Act nearly eliminated it in 2021-2022, but those provisions didn't pass. As of 2025, the backdoor Roth remains a valid strategy.

That said, tax laws can change. Some legislators want to close this "loophole." If you're planning backdoor Roths for decades, be aware this strategy could be eliminated in the future.

Step-by-Step Backdoor Roth Process

Step 1: Confirm You Have No Existing Traditional IRA Balances

This is the most important step. If you have ANY pre-tax money in Traditional IRAs (including SEP-IRAs and SIMPLE IRAs), the pro-rata rule will cause unexpected taxes. More on this critical issue below.

If you do have Traditional IRA balances, you have options:

• Roll the Traditional IRA into your current employer's 401(k) (if allowed)
• Convert all Traditional IRA money to Roth (triggering taxes on the conversion)
• Accept the pro-rata tax calculation

Step 2: Contribute to a Traditional IRA

Open a Traditional IRA if you don't have one. Contribute up to the annual limit ($7,000 in 2025, or $8,000 if age 50+). This contribution is non-deductible—you won't get a tax deduction because your income is too high.

Important: Don't invest this money yet. Leave it in cash or a money market fund. You want to convert it before any gains accumulate.

Step 3: Convert to Roth IRA Immediately

As soon as the contribution settles (usually 1-3 days), convert the entire Traditional IRA balance to your Roth IRA. Most brokers have a simple online process—look for "Convert to Roth" or "Roth Conversion" in your account.

The conversion itself is technically a taxable event, but since you contributed after-tax dollars and haven't earned any gains, the taxable amount should be $0 (or close to it if a few cents of interest accumulated).

Step 4: File Form 8606

At tax time, you must file IRS Form 8606 to report:

• Part I: Your non-deductible Traditional IRA contribution
• Part II: Your conversion to Roth

This form tracks your basis (after-tax contributions) so the IRS knows you're not being taxed twice. Many tax software programs handle this automatically if you answer questions correctly about IRA contributions and conversions.

The Pro-Rata Rule: Critical Tax Trap

The pro-rata rule is where most backdoor Roth attempts go wrong. Here's how it works:

When you convert any Traditional IRA money to Roth, the IRS looks at ALL your Traditional IRA accounts combined (including SEP-IRAs and SIMPLE IRAs) and calculates what percentage is pre-tax vs after-tax. You can't cherry-pick which dollars to convert.

Example Without Pro-Rata Issue

• Traditional IRA balance: $0
• You contribute $7,000 (non-deductible)
• You convert $7,000 to Roth
• Tax owed: $0 (100% was after-tax money)

Example WITH Pro-Rata Problem

• Existing Traditional IRA: $63,000 (pre-tax, from old 401k rollover)
• You contribute $7,000 (non-deductible)
• Total Traditional IRA: $70,000
• Pre-tax percentage: 90% ($63,000 ÷ $70,000)
• You convert $7,000 to Roth
• Taxable amount: $6,300 (90% of $7,000 is considered pre-tax)

In the second example, you'd owe income tax on $6,300—defeating much of the purpose of the backdoor Roth. This catches many high earners off-guard.

How to Solve the Pro-Rata Problem

Option 1: Roll Traditional IRA into 401(k)
Many employer 401(k) plans accept incoming rollovers. If you roll your Traditional IRA into your 401(k), your Traditional IRA balance becomes $0, and the pro-rata problem disappears. This is the cleanest solution if available.

Option 2: Convert Everything to Roth
Convert all your Traditional IRA money to Roth at once. Yes, you'll owe taxes on the conversion, but then your Traditional IRA is empty and future backdoor Roths work cleanly. This makes sense if your Traditional IRA balance is relatively small or you expect much higher taxes in the future.

Option 3: Accept the Tax
If you can't roll into a 401(k) and don't want to convert everything, you can still do backdoor Roths—you'll just owe some tax each year. Depending on your situation, the long-term benefits of Roth growth may still outweigh the annual tax cost.

Timing: Same Year or Wait?

Some people wonder if they should wait between the contribution and conversion to avoid IRS scrutiny. The short answer: no waiting period is required.

The "step transaction doctrine" has been raised as a theoretical concern—the idea that the IRS could collapse the two steps into one and disallow the strategy. However, the IRS has never challenged a backdoor Roth on these grounds, and tax professionals widely consider immediate conversion acceptable.

In fact, converting immediately is actually cleaner because there's less chance of gains accumulating in the Traditional IRA (which would be taxable upon conversion).

Which Brokers Handle Backdoor Roth Best?

The backdoor Roth process is straightforward at most major brokers, but some make it easier than others:

Fidelity

Excellent for backdoor Roth. Clear online conversion process, good documentation, and customer service that understands the strategy. You can complete the entire process online in minutes.

Schwab

Also handles it well. Similar online conversion process. The thinkorswim integration doesn't matter for IRA administration, but Schwab's core platform works smoothly.

Vanguard

Historically had a clunkier interface for conversions, but has improved. Still works fine—just not quite as polished as Fidelity or Schwab.

Considerations

Since you're already a high earner if you're doing backdoor Roth, you probably value stability and service. Fidelity and Schwab are solid choices. The newer app-based brokers (Robinhood, Webull) work for IRAs but don't have as much experience with backdoor Roth workflows.

Mega Backdoor Roth: The Next Level

If you've maxed out your backdoor Roth and want to save even more in tax-advantaged accounts, the "mega backdoor Roth" is another strategy—but it requires a 401(k) that allows after-tax contributions and in-service distributions or Roth conversions.

The mega backdoor Roth can potentially let you contribute up to $70,000+ per year to Roth accounts, but it depends entirely on your employer's plan features. Check with your HR department about whether your 401(k) supports this strategy.

Common Backdoor Roth Mistakes

Mistake 1: Forgetting About Old IRAs

That rollover IRA from a job 10 years ago? It counts for pro-rata. Review all your accounts.

Mistake 2: Not Filing Form 8606

If you don't file Form 8606, the IRS has no record of your non-deductible contribution. You could end up being taxed twice on that money later.

Mistake 3: Investing Before Converting

If your $7,000 contribution grows to $7,500 before you convert, you owe tax on the $500 gain. Convert quickly.

Mistake 4: Waiting Until Year-End

If you wait until December to contribute and convert, and something goes wrong, you may miss the window. Do it earlier in the year.

The Bottom Line

The backdoor Roth IRA is a powerful strategy for high earners to access tax-free growth. The process is simple: contribute to a Traditional IRA (non-deductible), immediately convert to Roth, file Form 8606.

The critical caveat is the pro-rata rule. If you have existing Traditional IRA balances, address them first—either by rolling into a 401(k) or converting to Roth—before attempting a backdoor Roth.

Done correctly, a backdoor Roth lets you add $7,000-$8,000 per year to a tax-free account, regardless of income. Over a career, that adds up to significant tax-free wealth.