Backdoor Roth IRA step by step: the pro-rata trap and how to file Form 8606

A backdoor Roth works like this: if your income is above the Roth IRA limit, you contribute after-tax money to a traditional IRA and then convert it to a Roth IRA. The tax code limits Roth contributions by income but not conversions. The big trap is the pro-rata rule: every traditional, SEP and SIMPLE IRA in your name is counted at its December 31 value for the conversion year, and if any of that is pre-tax money, part of your conversion becomes taxable. You report it on Form 8606 every year.

Who needs a backdoor Roth

People over the Roth limit: For 2026, Roth IRA eligibility phases out at $153,000–$168,000 for single filers and $242,000–$252,000 for joint filers. Above the top, you can't contribute directly.

People covered by a workplace plan who can't deduct a traditional IRA: With a 401(k) at work, the traditional IRA deduction disappears above $91,000 single or $149,000 joint. Money left in a nondeductible traditional IRA has taxable growth, so converting it to a Roth is usually better.

Married couples filing separately: If you file separately and lived together at any point in the year, the Roth range is $0–$10,000, so the back door is essentially the only way in.

The steps

Step 1, check for pre-tax IRAs: Look for any traditional IRA, old rollover IRA, SEP or SIMPLE IRA in your own name, not your spouse's. If you find one, plan to get it to zero by December 31 of the conversion year.

Step 2, make a nondeductible traditional IRA contribution: Up to $7,500 for 2026 ($8,600 at 50+), any time from January 1, 2026 through April 15, 2027. Don't claim a deduction on your return.

Step 3, convert: Once the deposit settles, convert the traditional IRA to a Roth IRA at the same custodian. Any interest or gains while you wait are taxable when you convert, usually a small amount.

Step 4, file Form 8606: Part I records your nondeductible basis, and Part II figures the taxable part of the conversion. If the contribution and conversion fall in different tax years, you file for both years.

Step 5, repeat every year: You can do it annually. Each year's 8606 should match your custodian's Forms 1099-R and 5498.

How the pro-rata rule works

The formula: The tax-free share of a conversion is your nondeductible basis divided by the sum of the December 31 value of all your traditional, SEP and SIMPLE IRAs and the amount you converted during the year.

It's per person: Your spouse's IRAs, your 401(k) and inherited IRAs don't count. If one spouse has an old IRA, the other can still do a clean backdoor.

It's the year-end balance: Even if you converted in January, a pre-tax IRA in your name on December 31 pulls the conversion into the pro-rata math. Rolling pre-tax 401(k) money into an IRA later in the year affects the earlier conversion too.

Example: one spouse has a $50,000 old IRA

Example (hypothetical numbers, to show the method): Mr. and Mrs. Wang are both 45, file jointly with MAGI of $300,000, and both have workplace 401(k)s. In March 2026 each contributes $7,500 to a nondeductible traditional IRA and converts it in full a few days later. Assume no earnings before the conversions.

Mr. Wang: No other IRAs, so the tax-free share is 7,500 ÷ 7,500 = 100%, and the conversion is tax-free.

Mrs. Wang: She has a pre-tax rollover IRA worth $50,000 on December 31, 2026. Her tax-free share is 7,500 ÷ 57,500 = 13.0%, so only $975 of the conversion is tax-free and $6,525 is ordinary income, about $1,566 of federal tax at a 24% marginal rate, plus North Carolina tax at 3.99%. The unused $6,525 of basis stays in her IRAs to be used pro rata later and must be carried forward on Form 8606 every year.

The fix: If her employer's 401(k) accepts roll-ins, she moves the $50,000 directly into the 401(k) before December 31, 2026. Her year-end IRA balance is zero and the conversion becomes fully tax-free. A 401(k) can accept only pre-tax money, not nondeductible basis. Ask the plan administrator whether it accepts roll-ins, which forms it needs and how long it takes.

If the 401(k) won't take it: She could convert the $50,000 as well (more tax now, all tax-free later), or skip the backdoor this year.

Two common Form 8606 mistakes

Filing for only one year: If you make your 2026 contribution in March 2027 and convert right away, the contribution goes on your 2026 Form 8606 and the conversion on your 2027 Form 8606. File only one and the IRS may treat the entire conversion as taxable.

Copying the 1099-R: Box 2a of the conversion 1099-R often shows the full amount. Don't treat that as taxable income; Part II of Form 8606 figures the real taxable amount. Failing to file a required 8606 carries a $50 penalty unless you have reasonable cause, and you can file a missing 8606 for an earlier year on its own.

The step-transaction question

Some people worry the IRS could treat "contribute and convert right away" as a direct Roth contribution and assess the 6% excess contribution tax. As of November 2026, we haven't seen the IRS publicly challenge backdoor Roths reported properly on Form 8606, and the conference report on the 2017 tax law, in explaining the rules, noted that people over the income limit can contribute to a traditional IRA and convert. That isn't statutory text or a formal IRS ruling. The usual practice is to report accurately on Form 8606; there's no need to wait a long time just so it looks different.

For the full set of IRA rules, including choosing traditional or Roth, backdoor and mega backdoor Roths, conversions, early withdrawal exceptions, RMDs, inherited IRAs and cross-border status, see our guide to IRAs from first contribution to final withdrawal. To run your own numbers, book a free 15-minute call or add WeChat YCLUSA. YCL CPA doesn't sell financial products or manage investments; we get the tax right and the forms filed, and results depend on your facts and IRS rules.