Backdoor Roth IRA

A Backdoor Roth IRA is a multi-step process that allows high-income taxpayers to fund a Roth IRA when their AGI exceeds the direct-contribution limit.

The steps

1. Make a non-deductible contribution to a Traditional IRA (up to $7,000 in 2026, $8,000 if 50+)
2. Convert the Traditional IRA to a Roth IRA — ideally immediately, before any gains
3. Report on Form 8606 to establish basis and demonstrate the contribution was non-deductible

The pro-rata rule trap

Under IRC Section 408(d)(2), Roth conversions are taxed pro-rata across all your Traditional IRA balances. If you have $93K of pre-tax money in an existing Traditional IRA + $7K of new non-deductible contributions, only 7% of the conversion is tax-free; 93% is taxed.

To make Backdoor Roth work cleanly, you must:

• Have no pre-tax Traditional IRA balances (consolidate into your 401(k) first), or
• Accept that a portion of the conversion is taxed

Mega-backdoor variant

Some employer 401(k) plans allow after-tax contributions (different from Roth 401(k)) of up to ~$46K (depending on employer match). When combined with in-plan Roth conversion or in-service rollover to a Roth IRA, this creates a "mega-backdoor Roth" — potentially $40K+/year of Roth funding.

Why it matters

Roth balances grow tax-free forever, have no required minimum distributions, and pass to heirs tax-free. For a high-earning founder or executive, getting more dollars into Roth is one of the highest-impact retirement-planning moves available.