What is a backdoor Roth IRA?
Direct Roth IRA contributions phase out at higher incomes (2024: $146K to $161K single, $230K to $240K MFJ). The backdoor Roth is a workaround: you contribute up to $7,000 ($8,000 if 50+) to a non-deductible Traditional IRA, then convert it to a Roth IRA. Conversions have no income limit. The catch is the IRS pro-rata rule, if you hold any pre-tax money in any Traditional, SEP, or SIMPLE IRA at year-end, the conversion is partially taxable, prorated across all pre-tax balances.
You earn $250,000 and have a $50,000 rollover IRA from a prior 401(k). You contribute $7,000 to a new non-deductible IRA and convert it. Because pre-tax IRA money is in the mix, the IRS sees your ‘single IRA’ as $57,000 total with $50,000 pre-tax. ~88% of the $7,000 conversion ($6,140) is taxable, against the entire point of the move. Fix: roll the $50,000 pre-tax balance into your current employer 401(k) (if it accepts incoming rollovers) before December 31. The pro-rata rule then sees zero pre-tax IRA money and the conversion is fully clean.
Doing the contribution and conversion without checking for existing pre-tax IRA balances. The pro-rata trap turns a routine tax move into a surprise tax bill at filing. Always check Form 8606 instructions and your IRA aggregate before pulling the trigger.
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