The backdoor Roth IRA, step by step

A Roth IRA has an income limit on contributions. It does not have an income limit on conversions. That mismatch is the whole strategy: money that cannot walk in the front door can be contributed to a traditional IRA instead — where anyone with earned income may contribute, whatever they make — and then converted. The result is Roth money in a Roth account, arrived at in two steps rather than one.

Nothing about the sequence is clever or aggressive. It is a widely used, thoroughly documented pair of ordinary transactions, and most large custodians will walk you through both in the same session. The part that goes wrong is not the mechanics. It is a single rule that measures balances you may have forgotten you own, and quietly turns a tax-free maneuver into a taxable one.

Why the door is a back door

Direct Roth IRA contributions phase out above an income threshold. Traditional IRA contributions do not — the income test on a traditional IRA governs whether the contribution is deductible, not whether it is allowed. Someone earning well above the Roth threshold and covered by a workplace plan can still put money in a traditional IRA; they simply get no deduction for it. That non-deductible contribution creates what the tax code calls basis: dollars already taxed, which should never be taxed again.

The second half depends on a change made when Roth conversions were opened to all filers, removing the income cap that had applied to them. Contributions kept their limit; conversions lost theirs. Whether that was intended as a door is beside the point now — congressional committee language accompanying later tax legislation described the sequence as available, and it has been standard practice among high earners ever since.

The steps, in order

1. Check your existing IRA balances first. Before anything else, add up every traditional, SEP and SIMPLE IRA you own. If the total is anything but zero, read the next section before contributing — the fix takes months and has to be finished by year end.
2. Contribute to a traditional IRA and take no deduction. If you are above the deduction threshold this is automatic; if you are below it, you must actively elect not to deduct, which in most tax software is a checkbox rather than a form.
3. Leave the money in cash. Do not invest it yet. Any growth between contribution and conversion is pre-tax money and becomes taxable when converted.
4. Convert the full balance to a Roth IRA. At the same custodian this is an internal transfer that takes a day. Convert everything, including any stray interest, so no residue is left behind.
5. Decline withholding. There should be no tax to withhold, and withheld dollars would count as a distribution rather than a conversion.
6. Invest inside the Roth. This is where the growth belongs, and where it will never be taxed again.
7. File Form 8606 with that year's return. Not optional, and not automatic.

Repeat annually. Each year is its own contribution, its own conversion and its own form.

The pro-rata rule is the whole game

Here is the trap. For the purpose of a conversion, the tax code treats every traditional, SEP and SIMPLE IRA you own as one single account, measured on December 31 of the conversion year. You cannot point at the after-tax dollars and convert only those. Whatever fraction of the combined balance is pre-tax, that same fraction of your conversion is taxable ordinary income.

Take someone with a rollover IRA holding $95,000 from a former employer's plan — all of it pre-tax — who contributes $5,000 to a traditional IRA and converts it immediately.

A move that was supposed to cost nothing costs $1,520. Worse, the $4,750 of basis that did not get used does not disappear — it stays in the traditional IRA and is recovered a few percent at a time across every future distribution, tracked on a form you will still be filing decades from now.

The damage does not scale gently, either. A pre-tax balance only a few times the size of the contribution already eats most of the benefit:

Tax on a $5,000 backdoor conversion, by existing pre-tax IRA balance

	Tax on a $5,000 backdoor conversion, by existing pre-tax IRA balance
No pre-tax IRA	$0
$20,000 pre-tax	$1,280
$95,000 pre-tax	$1,520
$250,000 pre-tax	$1,569

Same $5,000 non-deductible contribution converted in full, taxed at a 32% marginal rate. The curve flattens fast: past roughly four times the contribution, almost the entire conversion is taxable.

The lesson is not that a large pre-tax balance is uniquely bad. It is that even a modest one — a single old rollover from a job two employers ago — removes most of the point.

Clearing the pre-tax balances

The fix is to get the pre-tax money out of IRAs entirely, and the destination is a workplace plan. Employer plan balances are invisible to the pro-rata calculation; only IRAs are counted. Rolling a traditional IRA into a current 401(k), or into a solo 401(k) if you have self-employment income, resets the fraction to zero.

Three practical notes. The plan has to accept incoming rollovers, which most but not all do — ask before you start, because an initiated rollover with nowhere to land is a mess. Compare the plan's menu and fees against what you are leaving; a plan with expensive funds can cost more over a decade than the tax you are avoiding, in which case the honest answer is to skip the backdoor rather than to accept the plan. And the deadline is December 31 of the conversion year, not the conversion date — a rollover completed in December still cleans up a conversion done the previous January.

If no plan will take the money, the alternatives are narrower: convert the entire pre-tax balance and pay the tax, which is a real strategy in a low-income year and the same arithmetic covered in the conversion ladder guide, or simply invest in a taxable brokerage account and accept it. The conversion calculator will show what clearing the balance in one year actually costs.

Run your numbersRoth conversion calculator→

Form 8606 is the whole paper trail

The custodian reports what it sees, and what it sees looks fully taxable. A conversion generates a 1099-R showing the entire amount distributed, usually flagged as taxable amount not determined. The contribution generates a 5498, filed months later, that your tax return never references. Nothing in that paperwork tells anyone the money was already taxed.

Form 8606 is what does. Part I reports the non-deductible contribution and computes your cumulative basis; Part III reports the conversion and applies that basis against it. Both parts, one form, every year you run the strategy. The cumulative basis figure carries forward from the prior year's form, which is why the strategy rewards keeping the returns rather than the summary.

The most common failure is not forgetting the form outright — it is entering the conversion in tax software without entering the contribution, or entering them in different sessions. The result is a return that reports the full conversion as income, and software rarely questions it. After filing, check the taxable amount on the return itself. On a clean backdoor conversion it should be zero, or a few dollars of stray interest. If it is the full amount, something was entered in the wrong order.

The step-transaction question, and the real risk

For years, a doctrinal objection hovered over this: that collapsing two steps performed in sequence for a single purpose should be treated as the one transaction the income limit forbids. It is not an unreasonable argument in the abstract, and it produced a lot of advice about waiting periods, varying the amounts, and generally looking casual.

That worry is now largely settled. Committee reports accompanying tax legislation acknowledged the sequence, no enforcement campaign ever materialized, and every major custodian offers a guided workflow for it. Same-year contribution and conversion is standard practice.

The genuine risk lives elsewhere. Proposed legislation has repeatedly sought to close the route for high earners — barring conversions of after-tax IRA money outright — and although nothing has passed, it has come close enough to be worth noting. Treat the strategy as available now rather than permanently, which mostly argues for using it each year you can rather than deferring it.

Where it fits

A backdoor contribution is small relative to what a high earner saves in a year. Its value is that it is repeatable, and that every dollar of growth it shelters is untaxed permanently — the same case made in the Roth versus traditional comparison, except that here the alternative is not a traditional contribution but a taxable brokerage account paying tax on dividends every year.

Do it after the full employer match, and after filling the workplace plan to whatever level your rate comparison supports. If your plan allows after-tax contributions with in-plan conversion, the mega backdoor moves several times as much money by the same logic and deserves attention first. And if you are not actually over the income threshold, skip all of this and contribute to the Roth IRA directly — the Roth versus traditional calculator will tell you which side the contribution belongs on before you decide how to get it there.