If you earn over $161,000, you can't contribute directly to a Roth IRA. The backdoor Roth conversion is a legal workaround that high earners use to access Roth benefits.
Step-by-Step Process
- Step 1: Open a traditional IRA and contribute $7,000 (non-deductible)
- Step 2: Wait 1-2 business days
- Step 3: Convert the traditional IRA to Roth IRA
- Step 4: Report on Form 8606 at tax time
- Warning: pro-rata rule applies if you have other traditional IRA money
The pro-rata rule is the biggest trap. If you have money in any traditional IRA, the conversion is partially taxable. The solution: roll all traditional IRA money into a 401(k) first, leaving the IRA empty.
