Question 1

What is a backdoor Roth IRA and can I use one?

Accepted Answer

A backdoor Roth IRA strategy involves making a nondeductible traditional IRA contribution, then converting it to a Roth IRA. It can work even when income exceeds direct Roth contribution limits, provided you meet IRA contribution requirements. Existing pretax traditional, SEP, or SIMPLE IRA balances can make the conversion partly taxable under pro-rata rules.

Question 2

Is a backdoor Roth IRA legal?

Accepted Answer

Yes. A backdoor Roth combines two steps that are each allowed under the tax code: a nondeductible contribution to a traditional IRA and a conversion of that IRA to a Roth. Since 2010 there has been no income limit on Roth conversions, which is what makes the strategy work for higher earners. Congress has debated restricting it, so it is worth confirming the current rules each year.

Question 3

What is the pro-rata rule?

Accepted Answer

When you convert money to a Roth IRA, the pro-rata rule treats all of your traditional IRA balances as one pool. You cannot choose to convert only your nondeductible contributions: the conversion's taxable and tax-free portions reflect the pool's mix of pretax money and after-tax contributions. The calculation uses your December 31 balances for the conversion year, along with that year's conversions and other distributions. Some investors reduce or eliminate the pretax IRA balance by rolling eligible pretax money into an employer retirement plan that accepts it before year-end.

Question 4

How do you do a backdoor Roth, step by step?

Accepted Answer

First, make a nondeductible contribution to a traditional IRA. Second, convert that IRA to a Roth IRA, often soon after so little or no growth is taxed. Third, report the nondeductible contribution and the conversion on IRS Form 8606 with your tax return. Before starting, check whether you hold other pretax IRA balances, because the pro-rata rule can make part of the conversion taxable.

What is a backdoor Roth IRA and can I use one?