The Two-Step Backdoor Roth IRA Process
- Step 1: Open and fund a Traditional IRA with a non-deductible contribution ($7,000 or $8,000 for 50+ in 2025). Income limits do not apply to non-deductible Traditional IRA contributions — anyone with earned income can do this.
- Step 2: Convert the Traditional IRA to a Roth IRA. Contact your broker/custodian and request a Roth IRA conversion. If done promptly (before any investment gains), the conversion is nearly tax-free — you already paid tax on the contribution.
- Step 3: File IRS Form 8606 (Non-deductible IRAs) with your tax return to track your basis and document the conversion.
- Repeat annually for ongoing Roth IRA funding despite high income.
If you have other Traditional IRA funds (pre-tax money) besides your backdoor contribution, the conversion is taxed proportionally — you cannot just convert the after-tax dollars. Example: if you have $93,000 in a Traditional IRA and add $7,000 non-deductible, converting $7,000 is only 7% tax-free (7/100). The other 93% of any conversion is taxable.
The Pro-Rata Rule in Detail
The IRS treats all your Traditional IRAs as a single pool for conversion purposes. If you have pre-tax IRA money (deductible contributions or rollover IRA funds), any Roth conversion is taxed in proportion to the pre-tax portion of all your IRAs. The formula: Taxable % = (Total Pre-Tax IRA Funds) ÷ (Total IRA Funds Including After-Tax). If you have $100,000 in pre-tax IRA + $7,000 non-deductible: converting $7,000 means 93.5% is taxable.
Pro-rata rule impact on backdoor Roth IRA taxation
| Scenario | Pre-Tax IRA Funds | New Non-Deductible Contribution | Converting $7,000 — Taxable Amount |
|---|---|---|---|
| No existing IRA (clean backdoor) | $0 | $7,000 | $0 taxable (perfect backdoor) |
| Small existing IRA | $20,000 | $7,000 | ~$7,000 × (20/27) = $5,185 taxable |
| Large existing IRA | $93,000 | $7,000 | ~$7,000 × (93/100) = $6,510 taxable |
| Roll all IRA to 401k first | $0 (rolled out) | $7,000 | $0 taxable (cleaned up) |
How to Avoid the Pro-Rata Problem
- Best solution: roll your pre-tax Traditional IRA funds into your employer’s 401(k) or 403(b) plan — most plans accept incoming IRA rollovers
- After rolling existing IRA into 401(k): your IRA balance is $0 before the backdoor contribution, making the conversion fully tax-free
- Alternative: if your plan does not accept IRA rollovers, you must pay tax on the pro-rata portion at conversion or choose not to do the backdoor
- Do not roll SEP IRA or SIMPLE IRA funds into the mix — these are treated as traditional IRA funds for pro-rata purposes
Project Your Backdoor Roth IRA Growth
Calculate the long-term tax-free value of your annual backdoor Roth IRA contributions.