Backdoor Roth IRA
Backdoor Roth IRA is a strategy where high-income individuals make nondeductible Traditional IRA contributions and convert to Roth, with pro-rata rule applying to existing pretax IRA balances.
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Exam Tip
Backdoor = nondeductible contribution + conversion. Pro-rata rule traps most people! Roll pretax IRA to 401(k) first.
What is a Backdoor Roth IRA?
The Backdoor Roth IRA strategy allows high-income earners to fund a Roth IRA indirectly by contributing to a nondeductible Traditional IRA and then converting to Roth.
The Two-Step Process
| Step | Action |
|---|---|
| Step 1 | Contribute to nondeductible Traditional IRA |
| Step 2 | Convert to Roth IRA (ideally soon after) |
Pro-Rata Rule Warning
If you have existing pretax IRA balances, the pro-rata rule applies:
Example with $94,000 pretax IRA:
- Convert $6,000 nondeductible contribution
- Total IRA: $100,000 ($94,000 pretax + $6,000 after-tax)
- Taxable portion: 94% of $6,000 = $5,640 taxable
- Only $360 is tax-free
Solution: Clean Slate
Roll existing pretax IRA into 401(k) before doing backdoor strategy.