The Backdoor Roth IRA: Still Legal, Still Worth It — If You Respect the Pro-Rata Rule
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Once your income crosses the Roth IRA phase-out threshold (in the low-to-mid $200,000s for joint filers; verify the current year’s number), you can no longer contribute to a Roth IRA directly. What surprisingly few high earners know: there has never been an income limit on converting to a Roth. Put those two facts together and you get the backdoor Roth — a two-step maneuver that remains fully available and widely used.
The two steps
1. Contribute to a traditional IRA — a nondeductible contribution, since at your income the deduction is gone anyway. The current annual limit is in the $7,000s, plus a catch-up at 50+.
2. Convert that IRA to a Roth, ideally promptly. Because the contribution was after-tax money and it hasn’t had time to grow, the conversion generates little or no taxable income.
Result: money inside a Roth IRA — tax-free growth, tax-free qualified withdrawals, no required minimum distributions — for someone “over the limit.” Done annually by both spouses, it’s a five-figure yearly addition to the tax-free bucket.
The rule that ruins it: pro-rata
Here’s where DIY attempts go wrong. When you convert, the IRS doesn’t let you point at the specific dollars you’re converting. It looks at all of your traditional, SEP, and SIMPLE IRA balances combined (as of December 31 of the conversion year) and treats the conversion as a proportional slice of the whole.
Example: you make a $7,000 nondeductible contribution, but you also have a $93,000 rollover IRA from an old job. Your IRA world is $100,000, of which only 7% is after-tax. Convert $7,000 and 93% of it is taxable — you’ve prepaid tax on money you thought was moving over cleanly, and Form 8606 has to carry the leftover basis forward for years.
Note what doesn’t count in the calculation: 401(k) balances, including solo 401(k)s. Which leads to the fix.
The cleanup move
If pretax IRA money is blocking the door, you can often roll it into your employer 401(k) or your solo 401(k) (if the plan accepts roll-ins — most do). That removes it from the pro-rata denominator. Do the roll-in first, confirm your traditional/SEP/SIMPLE balances are at or near zero by December 31, and the backdoor runs clean.
This is also a hidden argument for the solo 401(k) over the SEP for business owners: SEP balances poison the pro-rata math; solo 401(k) balances don’t — and the solo 401(k) can absorb the old IRA money too.
Execution notes that matter
• Form 8606 is mandatory in both the contribution and conversion years. Missed or botched 8606s are among the most common errors we fix on new clients’ prior returns — left uncorrected, they cause genuine double taxation.
• Don’t leave the contribution invested in the traditional IRA for months; growth before conversion becomes taxable on conversion.
• New Jersey handles IRA basis under its own rules (NJ never allowed IRA deductions the way federal did), so the state side isn’t a copy-paste of the federal numbers.
• The December 31 balance test means fall is the deadline for cleanup, not April.
Romanchuk CPA LLC coordinates backdoor Roth execution with entity and retirement plan strategy for business owners and high-earning households. If old IRA balances are blocking yours, book a session at rfg.tax before year-end.
This article is general information, not tax or investment advice for your specific situation. Limits and thresholds adjust annually.