What is the backdoor Roth strategy and who should use it?

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AcadiFi · Accepted Answer

High earners are phased out of direct Roth IRA contributions (2026: phase-out starts at $150K single, $236K MFJ). The backdoor Roth uses two legal steps: first make a non-deductible contribution to a traditional IRA (no income limit on non-deductible contributions), then immediately convert that traditional IRA to Roth IRA (no income limit on conversions). Net effect: $7,000 per year ($8,000 if 50+) into Roth despite being above the direct-contribution income limit. Critical pitfall: the pro-rata rule. When converting, the IRS treats your conversion as drawing pro-rata from all traditional IRA balances. If you have a pre-tax traditional IRA balance of $140K and make a $7K non-deductible contribution, converting $7K results in only $7K * ($7K / $147K) = $333 of after-tax basis applied, and $6,667 becomes taxable. The backdoor strategy fails. Fix: roll pre-tax traditional IRA balances into your 401(k) before executing the backdoor (employer plans don't count for pro-rata). Alternatively, execute with zero pre-tax traditional IRA balance. Timing: contribute and convert in quick succession to avoid taxable growth between steps. No 'step transaction doctrine' concern - IRS explicitly blessed the backdoor in Notice 2023-54 and prior guidance. ```mermaid graph LR A[After-tax
contribute] --> B[Traditional
IRA] B --> C[Convert] C --> D[Roth IRA] ```

What is the backdoor Roth strategy and who should use it?

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