Backdoor Roth IRA Guide
In brief
The commonly used term “backdoor Roth IRA” describes a nondeductible traditional IRA contribution followed by a Roth conversion; each step is governed by existing IRA contribution, conversion, aggregation, and reporting rules.
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The main idea
The transaction is simple only when eligibility, existing IRA balances, basis records, timing, and Form 8606 reporting have all been checked.
At a glance
Step one
Nondeductible IRA contribution
Contribution eligibility and the annual combined IRA limit still apply.
Internal Revenue Service ↗Step two
Roth conversion
Converted earnings and pre-tax IRA amounts can create taxable income.
Internal Revenue Service ↗Tax record
Form 8606
The form tracks nondeductible basis and reports the conversion.
Internal Revenue Service ↗It is two transactions, not a special account
The label does not create a separate statutory account type. The taxpayer makes a traditional IRA contribution and then converts eligible traditional IRA assets to a Roth IRA. The contribution can be nondeductible, while taxable income may arise from earnings or other pre-tax IRA money.
A direct Roth contribution and a Roth conversion have different eligibility and reporting rules. Do not treat the conversion as a way to ignore the annual combined IRA contribution limit.
The aggregation calculation is the common complication
Form 8606 uses year-end values and distributions from traditional, SEP, and SIMPLE IRAs to determine the nontaxable portion when basis exists. Holding pre-tax IRA money elsewhere can therefore affect the conversion’s taxable amount.
Timing, employer-plan rollover options, state treatment, and filing details can be consequential. Verify the transaction with a qualified tax professional when existing IRA balances or incomplete basis records are involved.
Before acting
Questions to verify
- Confirm compensation and IRA contribution eligibility.
- Check the combined annual IRA limit.
- Inventory traditional, SEP, and SIMPLE IRAs.
- Preserve Forms 8606 and basis records.
- Do not describe the result as tax-free without calculating it.
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