Backdoor Roth IRA
Also: backdoor Roth, backdoor Roth IRA, back-door Roth
A two-step maneuver that funds a Roth IRA when income exceeds the direct contribution limit: contribute to a non-deductible traditional IRA, then convert it to Roth. Subject to pro-rata rules on other pre-tax IRA balances.
The backdoor Roth IRA is a tax-legal workaround for high earners who are above the Roth IRA direct contribution phase-out. Step one: contribute $7,000 (or $8,000 with age-50 catch-up) to a traditional IRA as a nondeductible contribution. Step two: convert that traditional IRA balance to a Roth IRA within a week or so. Because the contribution was nondeductible, only the small earnings accumulated during the waiting period are taxed on conversion. The pro-rata rule under Section 408(d) aggregates all of the taxpayer’s traditional, SEP, and SIMPLE IRAs, meaning any pre-tax IRA balance dilutes the conversion.
Example: a senior engineer contributes $7,000 to a traditional IRA on February 1 and converts it to Roth on February 5. Earnings of $4 are included in the conversion. Taxable amount: $4. She reports the nondeductible contribution and conversion on Form 8606.
Common mistake: doing a backdoor Roth while holding a $200,000 rollover IRA. The pro-rata rule makes roughly 3.4% of the conversion tax-free, and the remainder becomes taxable. Roll pre-tax IRAs into an employer 401(k) first to isolate the backdoor dollar.
Backdoor Roth matters every year at high income, at post-exit cash-rich years, and at Roth build-up for estate tax-free transfer.