Backdoor Roth IRA: Step-by-Step for High Earners

The Two-Step Mechanics

The IRS prohibits high earners from contributing directly to a Roth IRA. However, there are zero income caps on making non-deductible contributions to a Traditional IRA, and zero income caps on converting a Traditional IRA to a Roth IRA.

1. Step 1: Contribute up to $7,000 (or $8,000 if age 50+) of post-tax money into a Traditional IRA. Explicitly do NOT claim a tax deduction for this contribution.
2. Step 2: Wait 1-2 business days for the funds to settle in the money market cash reserve (do not invest it yet).
3. Step 3: Execute a Roth Conversion transferring the $7,000 cash balance directly into your Roth IRA.
4. Step 4: Invest the money inside the Roth IRA where all future capital gains and dividends grow 100% tax-free forever.

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The Dreaded Pro-Rata Rule (Beware!)

Under IRS Section 408(d)(2), you cannot cherry-pick only non-deductible dollars if you already hold pre-tax money across any Traditional, SEP, or SIMPLE IRAs as of December 31 of the conversion year.

Example of Pro-Rata Trap: If you have $93,000 in a rollover Traditional IRA (pre-tax) and contribute $7,000 non-deductible (post-tax), your total IRA balance is $100,000. When converting $7,000, only 7% ($490) is tax-free! The remaining 93% ($6,510) is taxed as ordinary income.

Solution: Roll over all existing Traditional IRA pre-tax balances into your employer 401(k) prior to conversion. 401(k) assets are excluded from the pro-rata calculation.

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Tax Filing: IRS Form 8606

Every year you execute a Backdoor Roth, you must file IRS Form 8606 with your Form 1040 tax return:

• Part I records your non-deductible contribution (establishing tax basis).
• Part II documents the Roth conversion.
• Properly filled, line 18 will show $0 taxable conversion amount.