Backdoor Roth IRA Contributions: A Complete Guide

For those investors seeking additional avenues for retirement savings, the term “backdoor Roth contribution” may have come up in your research.  

This strategy often raises numerous questions: what is it, who is eligible, and most importantly, how do you properly execute it? We answer these questions and more below, and can assist in executing the strategy, should it be right for you. 

What is the Backdoor Roth IRA contribution strategy? 

A Backdoor Roth contribution is a two-step strategy that allows high-income earners to fund a Roth IRA even when their income exceeds the IRS limits for direct Roth IRA contributions. 

Step 1: make a non-deductible contribution to a Traditional IRA. 

Step 2: convert that Traditional IRA to a Roth IRA. 

The Backdoor Roth IRA strategy provides high-income individuals with a means to contribute to a tax-free Roth IRA. This approach can be particularly beneficial for younger investors, as it allows for several years of compound growth, ultimately enabling tax-free withdrawals during retirement.  

The decision to implement this strategy depends on individual circumstances; however, it may be advantageous if there are additional funds available after establishing a fully funded emergency fund and maximizing any employer-sponsored retirement plan matching contributions. 

Who should consider a Backdoor Roth IRA contribution? 

• High-income earners above the Roth IRA income limits. 

• Individuals who have maxed out other retirement savings options.  

• Those who want tax-free growth potential and tax-free withdrawals in retirement. 

The Backdoor Roth strategy tends to be most beneficial for individuals whose 2025 household income exceeds $246,000 for married filing jointly and $165,000 for single filer, as they are fully phased out from making direct contributions to a Roth IRA.  

This strategy is especially relevant for those who do not have any pre-tax balances outside of their employer sponsored plans including Traditional IRAs, Sep IRAs and SIMPLE IRAs. Unlike deductible IRA contributions, which are subject to income limitations, making a non-deductible contribution to a Traditional IRA is unrestricted by income.  

The crucial difference is the fact that a non-deductible contribution can be converted to a Roth IRA without incurring taxes, as it is after-tax money. This means that an investor with income above the Roth IRA contribution limit and no pre-tax funds in an IRA can effectively utilize this strategy without facing tax consequences, provided it is reported accurately. 

How should an investor make sure this strategy is completed correctly?  

4 steps for executing a clean backdoor Roth conversion: 

1. Open a Traditional IRA (if you don’t already have one) 

2. Make a non-deductible contribution to the Traditional IRA  

3. Convert the Traditional IRA to a Roth IRA 

4. File Form 8606 with your tax return to report the non-deductible contribution 

Avoid these common pitfalls: 

• Failing to file Form 8606 to report non-deductible contributions 

• Not considering the impact of existing Traditional IRA balances 

• Waiting too long between contribution and conversion 

• Missing contribution deadlines (generally April 15th of the following year) 

What are the tax implications? 

Completing the non-deductible IRA contribution and subsequent IRA conversion properly is the first step. Then, it is essential to accurately report this strategy on your tax return. 

• The initial Traditional IRA contribution is made with after-tax, non-deductible dollars. 

• If executed properly with no other IRA balances, the conversion should have minimal or no tax impact. 

• The pro-rata rule may result in additional taxes if you have other Traditional IRA balances. The rule requires that all your IRA accounts be considered when determining the tax implications of a conversion. This includes Traditional IRAs, SEP IRAs, and SIMPLE IRAs.

Reporting your non-deductible IRA contribution.

Given that a contribution has been made to an IRA, it is necessary to inform the IRS that this contribution is non-deductible by utilizing IRS Form 8606.  

This form is instrumental in avoiding unnecessary taxation on the Roth conversion, as the IRS would otherwise presume that the converted amount was derived from pre-tax dollars and subject it to full taxation. 

Reporting your Roth conversion.

Your custodian will issue Form 1099-R for your IRA, which will document the Roth conversion. At first glance, the 1099-R may suggest that you have made a taxable IRA distribution. Therefore, it is crucial to file Form 8606 to indicate that the amount converted consists of post-tax dollars, rendering it tax-free.  

If you convert any pre-tax dollars or earnings in addition to your non-deductible IRA contribution, you must still utilize Form 8606 to differentiate the taxable and tax-free portions of the Roth IRA. It is also important to note that if both spouses complete a Backdoor Roth contribution, separate Form 8606 filings are required with their tax returns. 

Determining if a Roth conversion is right for you. 

Our team strongly recommends consulting with a qualified tax professional or your financial advisor before implementing this strategy as there are potential tax consequences to executing the strategy and to ensure it aligns with your specific financial situation and goals.