A Backdoor Roth IRA conversion is a legal strategy for high-income earners to contribute to a Roth IRA, even if they exceed the IRS income limits for direct Roth contributions. It involves making a non-deductible contribution to a Traditional IRA, then converting those funds to a Roth IRA.
Here’s a step-by-step procedure:
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✅ Procedure: Backdoor Roth IRA Conversion
📋 Prerequisites
• You earn too much to contribute directly to a Roth IRA (2025 limit: $161,000+ for single filers, $240,000+ for joint).
• You have little or no pre-tax money in other Traditional IRAs, SEP IRAs, or SIMPLE IRAs (to avoid complex taxes due to the pro-rata rule).
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Step 1: Open a Traditional IRA (if you don’t already have one)
• Choose a brokerage (e.g., Vanguard, Fidelity, Schwab).
• Open a Traditional IRA account.
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Step 2: Make a Non-Deductible Contribution to the Traditional IRA
• In 2025, you can contribute up to:
o $7,000 if under 50
o $8,000 if 50 or older
• Designate this as a non-deductible contribution when filing your taxes using Form 8606.
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Step 3: Wait Briefly (Optional)
• Some advisors suggest waiting a few days to avoid the IRS viewing this as a “step transaction.”
• Others do the conversion immediately. Check with your tax advisor.
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Step 4: Convert the Funds to a Roth IRA
• Ask your broker to convert the Traditional IRA to a Roth IRA.
• You may owe taxes on any gains that occurred between contribution and conversion.
• You’ll receive a 1099-R for this.
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Step 5: File IRS Form 8606
• This form reports:
o The non-deductible contribution to the Traditional IRA
o The Roth conversion
• It ensures you’re not double-taxed on the after-tax money you contributed.
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⚠️ Important Considerations
🧮 Pro-Rata Rule
If you have other Traditional, SEP, or SIMPLE IRA balances, the IRS may apply the pro-rata rule, which can cause part of your conversion to be taxable.
To avoid this:
• Consider rolling over other IRA assets into a 401(k), if allowed by your employer.
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🧾 Example
• You contribute $7,000 after-tax to a Traditional IRA.
• The next day, you convert it to a Roth IRA.
• No gains occurred.
• You report the contribution and conversion on Form 8606.
• No tax is due on the conversion.