Backdoor Roth IRA

A backdoor Roth IRA is a mechanism similar to the megabackdoor Roth 401(k), but applied to your Roth IRA. The general process is as follows:

1. Make sure you have no Traditional IRA balance across all of your IRA accounts (see Pro-rata taxation)
2. Contribute the amount you intend to contribute to a traditional IRA. It does not need to be a new account, but it does need to be opened as a traditional IRA for tax purposes.
3. Once the money has cleared the account, you need to perform a “Roth conversion” on that amount. Make sure any gains that occurred while in the traditional account are also converted. Typically, brokerages have an online process to do this.
4. Do so throughout the year, but ensure that you are able to complete the conversions before December 31st. This differs from the contribution deadline of tax day for IRAs in general, as conversions are noted in the calendar year.
5. Your brokerage will provide you with a 1099-R representing the conversion being a distribution from an IRA and notes that it was distributed into an IRA (thus not taxing the full withdrawal, just the gains).
6. The conversion will require you to have a Form 8606 for your tax filings to denote the conversion and calculation of taxes owed on said conversion.

Pro-rata taxation

Pro-rata taxation occurs when a partial conversion of an IRA is performed (see How the IRS views IRAs). The IRS isn’t able to determine which dollars were converted and is unable to ensure that you are paying the appropriate income taxes on the distribution (the conversion being said distribution). As a result, the IRS taxes you a ratio of the untaxed dollars (the traditional balance) and the taxable conversion. I found this article to be the most concise way of calculating what the cost of pro-rata taxation would cost on a backdoor Roth IRA.

To avoid pro-rata on the backdoor Roth IRA, you can do a few things:

1. Roll your traditional IRA into your 401(k) or another account type that allows roll ins.
   1. This is initiated by calling your broker for the destination account
   2. Funds should be distributed by your IRA custodian (generating a 1099-R)
   3. The funds are generally sent directly to the account custodian that is being rolled into, some may send you a check to then forward
2. Convert your traditional IRA along with the backdoor Roth. You will pay taxes on the full balance of the traditional IRA as it was deducted in previous years. This should generally be done if the balance is relatively small and you plan on doing backdoor IRAs for quite awhile