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How to do a Backdoor Roth IRA

Updated January 18, 2023

A “backdoor” Roth IRA is really just a transaction that you can perform in order to contribute funds to a regular Roth IRA when your income exceeds the limits for making a regular contribution — I’ve talked to a few people who were looking to open a backdoor Roth but were unable to find a company that offers it.

That’s because what you’re looking for is really just a regular Roth IRA; the backdoor part is how you get the money into the account.

The good news is that it’s pretty simple, as long as you’re willing to do a little extra paperwork. The bad news is that there are a lot of annoying little details and caveats at play, so I’ll do my best to simplify without skipping over too many important bits.

Here’s how to get money into your Roth IRA through the backdoor when your income exceeds the IRS limits. Feel free to ask follow-up questions in the comments!

Quick caveat:

It’s worth mentioning upfront that this works best if you don’t already have a pre-tax (aka traditional) IRA with a balance in it. If you do, you can still do this; you’ll just have tax consequences to deal with due to account aggregation rules (more on this at the end of the piece).

Step 1: Contribute to a traditional IRA

Yes, that’s right, you’re going to start with a traditional IRA. Anyone can contribute to a traditional (also often called “pre-tax”) IRA as long as they have earned income to support the contribution (yes, even billionaires), you just may not be able to deduct the contribution from your taxable income due to having a workplace retirement account such as a 401k or 403b.

Contribute up to the annual limit — for 2023, that’s $6,500 if you're under the age of 50, but you can do less if you can’t afford to tie up $6,500 in a retirement account right now.

Where should you open your account?

If you already have a Roth IRA established, then it’s simplest to just open a traditional IRA with the same provider to complete this step. If not, then decide which investment services provider you want to use to manage your Roth IRA. Examples include Schwab, Fidelity, Vanguard, Wealthfront — I prefer providers that keep their fees low, but if you want investment advice on how to invest, then it’s best to seek out a financial advisor.

Note: it’s a best practice to avoid investing your contribution until you’ve completed all of the steps to avoid paying taxes on any growth that might happen in the meantime.

Step 2: Make sure you file Form 8606 with the IRS

Even if you don’t have a 401k or 403b, if you want to do a tax-free backdoor Roth IRA, then you don’t want to deduct your traditional IRA contribution. In order to go on the record with this intent, you’ll need to report your non-deductible IRA contribution to the IRS using Form 8606 — this is a key step that will avoid unnecessary tax headaches in the future. You can file your 8606 with your tax return, or if you didn’t know you needed to do this, you could file it on its own later.

Step 3: Convert your traditional IRA to a Roth IRA

Even though you can’t contribute money directly to a Roth IRA, there are no income limits to converting money from a traditional IRA to a Roth IRA, which is effectively a transfer when you’re doing a backdoor, Roth. The final step is to either log in to your traditional IRA or call and perform the conversion from traditional IRA to Roth IRA.

Why it works

Typically when you convert money in a traditional IRA to a Roth IRA, the money you convert is taxable because you took a deduction when you put the money in your traditional IRA. But with the backdoor method, because you put money in that you DIDN’T deduct, the conversion is therefore not taxable as well.

And because there are no limitations on converting pre-tax IRAs to Roth IRAs, by depositing the money in the pre-tax IRA first, you’re effectively avoiding the income limits that prevent direct contributions to a Roth IRA.

Won’t the IRS catch wind of this and shut it down?

For a while that was a real concern. Technically any transaction whose only goal is to get around a tax law is disallowed, but an IRS tax law specialist went on the record in 2018 and basically stated that the backdoor strategy is allowed under the law.

How people mess this up

Even though the above steps are relatively simple, there are lots of nuances to consider. Take note, so you don’t end up with unintended consequences. Here are a few ways that I’ve seen people cause themselves unnecessary headaches.

  1. Failing to file Form 8606. This one is tricky because you typically have to proactively file this form — you won’t get a form from your IRA provider that will trigger this, and even the form you do get (Form 5498) doesn’t usually come until after the April tax filing deadline. The only way to prove to the IRS that you didn’t deduct the original contribution to the traditional IRA is to file a Form 8606. If you don’t, when you perform step 3, the IRS is going to expect to see the full conversion amount as taxable income on your tax return for the year you did the conversion. To fix this, file your 8606 form ASAP — ideally, you’d include it with your tax return, but you can send it in separately if you missed that step when you filed.

  2. Investing the funds while in the traditional IRA. This won’t totally undo the transaction, but it could cause you to pay taxes on any growth you have in the investment before you perform the conversion. By waiting until the cash is in your Roth IRA after the backdoor conversion, you can invest, and any growth from there on out will be tax-free.

  3. Claiming the entire conversion as income on their tax return. This is a biggie, especially if you have someone else do your taxes for you — when you do a Roth IRA conversion, your IRA provider will report the conversion on a Form 1099-R as a taxable transaction. If you just give that form to your tax preparer without mentioning that you made a nondeductible IRA contribution before, your tax preparer is likely to include it all as taxable income. That means you’ll pay double tax on the amount you originally deposited to the IRA.

An example

To put all of these together, I’ll share a real-world example. A client contributed $6,000 into a traditional IRA in March 2020, then invested the money and waited until the end of 2020 to convert it to a Roth IRA, when it was worth $6,300.

Their CPA was planning to include the entire $6,300 in the client’s taxable income because the client hadn’t filed a Form 8606 in 2020 to show that the $6,000 contribution was non-deductible.

My correction to the CPA included a few pointers:

  • The client should have filed a Form 8606 and called it a 2019 non-deductible contribution.

  • The client should have performed the Roth IRA conversion as soon as the $6,000 had cleared his traditional IRA, THEN invested the money once it was in the Roth IRA.

  • The client will have $300 of taxable income in 2020, which was when he performed the conversion.

One more thing you need to know - the 5 year rule

Money that is converted from traditional to Roth IRA has a 5-year rule that requires you to wait 5 years from the date of conversion to withdraw ANY of the money, rather than just the growth.

Do you know how regular Roth IRA contributions are accessible at any time without taxes or penalty (it’s just the growth that has to be in there for at least 5 years before you can access it via qualified distributions)? Well, that’s not true with it’s a Roth IRA conversion — you have to wait 5 years before you can withdraw the principal as well.

In other words, if you’re doing a conversion to Roth IRA in order to get at your pre-tax IRA money without an early withdrawal penalty, the IRS says, “We see your game and, um, no.”

Most people engaging in backdoor Roth conversions are doing so for the purpose of funding their future retirements, which are typically 5 years off anyway, so this is not usually an issue, but I’d be remiss if I didn’t point this out.

What to do if you already have money in a traditional IRA

If you want to do a backdoor Roth IRA but already have money in a traditional IRA, then you will have some tax consequences to plan for under the IRS account aggregation rules.

The rules essentially say that you can’t selectively convert contributions to a Roth IRA, so if you have some funds that are pre-tax (aka you deducted them from your taxes when you made the contribution) and some funds that are non-deductible (like the new money you put in to perform the backdoor Roth IRA transaction), then you’ll have pro-rata taxation.

This applies even if you use multiple accounts — you have to add up all your IRAs to figure out what percentage of the conversion is taxable. However, it does NOT include 401k and 403b accounts, nor does it include any of your spouse's accounts.

An example of the pro-rata rules

Let’s say you have a traditional IRA balance of $58,500, and it’s all pre-tax — the contributions were deducted from your income in the years you made the contributions.

Then let’s say you contribute $6,500 as a non-deductible contribution, making your total balance $65,000. 10% of your IRA will be non-deductible, and 90% will be pre-tax.

According to the pro-rata rules, if you then convert $6,500 to a Roth IRA, you’ll actually have to include $5,850 (90%) in your taxable income even though you made a $6,500 non-deductible contribution.

Rather than separating the $6,500 of non-deductible money, it’s more like you added cream to your coffee — it’s impossible to separate it back out, even if you use separate accounts. (I hope it’s not confusing to mention at this point that you could actually convert more than $6,500. If you do that, you’ll just have to pay more taxes — whether that makes sense or not is a whole other discussion and I invite you to schedule a session with me to go over that.)

One way you might be able to avoid this using your 401k

The account aggregation rules only cover IRAs, so if you have money in a 401k or 403b, you won’t have to include those in your pro-rata calculation. With that knowledge, it’s worth exploring whether your 401k or 403b plan will allow you to roll your IRA money into the plan — many do. If your primary objective is to avoid paying any additional taxes while funding your Roth IRA through the backdoor, you might want to take this step first.

There are other things to consider here, like whether you like the investment options in your 401k plan or whether there are fee considerations, but I would be remiss if I didn’t mention that this option exists as well.

It’s worth it to get expert help

Generally speaking, funding your Roth IRA through the backdoor method is quite simple. However, if you’re not totally clear on the rules or have some of the circumstances mentioned above that could complicate it, it’s worth a quick session with an hourly financial planner or coach who is familiar with the rules to guide you through.

Not only can that help you with the process going forward, but there may be some other tax and financial planning moves you could make the optimize your funds that you haven’t realized yet.

Disclaimer: The content of this post is for informational purposes and is intended to be educational only. It does not cover every possible nuance and is general in nature, and should not be relied upon as individual tax or investment advice. For a personalized evaluation of whether this makes sense to you or how to perform the transaction correctly, it’s best to work with a paid professional who can guide you within your personal circumstances.


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