The Backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA despite exceeding the income limits for direct contributions. This involves making a non-deductible traditional IRA contribution and then converting it to a Roth IRA.

Why Use a Backdoor Roth?

• Bypass Roth IRA income limits
• Tax-free growth and withdrawals in retirement
• No required minimum distributions
• Tax diversification in retirement
• Estate planning benefits

The Pro-Rata Rule

The pro-rata rule is the most important consideration. When converting, the IRS looks at ALL your traditional IRA balances combined. The percentage that's non-deductible (basis) determines the tax-free portion of your conversion.

Example: $50,000 existing IRA + $7,000 new contribution = $57,000 total. If only the $7,000 is non-deductible, then only 12.3% of any conversion is tax-free.

Important Considerations

• Legislative Risk: Congress has considered eliminating this strategy
• State Taxes: Some states don't allow Roth conversions
• 5-Year Rule: Each conversion has its own 5-year clock for penalty-free withdrawal
• Medicare Premiums: Conversions increase income, potentially raising Medicare costs
• Form 8606: Critical for tracking basis and avoiding double taxation

Best Practices

• Convert quickly to minimize gains
• Keep contribution in money market fund
• File Form 8606 for both contribution and conversion
• Consider rolling existing IRAs to 401(k) first
• Track basis carefully for future reference
• Coordinate with tax professional for complex situations