The backdoor Roth IRA is a two-step maneuver that gets money into a Roth IRA for taxpayers whose income exceeds the direct contribution limits: contribute to a traditional IRA on a nondeductible basis (no income limit applies), then convert that IRA to Roth (also no income limit). Done cleanly, the conversion is nearly tax-free because the contribution was already after-tax. The trap is the pro rata rule: all of a taxpayer's pre-tax IRA balances (traditional, SEP, SIMPLE) count in one pot, so converting when large pre-tax balances exist makes most of the conversion taxable. The standard fix is rolling pre-tax IRA money into a 401(k), which is excluded from the calculation, before converting. Form 8606 tracks the nondeductible basis and must be filed each year. The related mega backdoor Roth uses after-tax 401(k) contributions and in-plan conversions to move much larger amounts.
Backdoor Roth IRA
Primary authority: IRC §408A(d)(3); Form 8606
The authority behind it
IRC §408A(d)(3); Form 8606
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A consultant earning $400,000 contributes $7,000 to a nondeductible traditional IRA in January and converts it to Roth in February. With no other IRA balances, the conversion generates a few dollars of taxable growth at most, and the $7,000 now compounds tax-free.
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