Backdoor Roth IRA
Funding a Roth IRA indirectly — an after-tax traditional IRA contribution followed by a conversion — when your income is too high to contribute directly.
Above certain income limits you can't contribute to a Roth directly, so the “backdoor” is to make a non-deductible traditional IRA contribution and convert it to Roth. It's clean only if you have no other pre-tax IRA dollars — otherwise the pro-rata rule makes part of the conversion taxable. A simple-sounding move that quietly depends on your whole IRA picture.
A side door into a Roth
High earners are barred from contributing to a Roth IRA directly. The backdoor is a two-step workaround: make a non-deductible contribution to a traditional IRA, then convert it to a Roth. Because the contribution was after-tax, the conversion of just that amount is generally tax-free, landing the money in a Roth where it grows and is withdrawn tax-free.
The pro-rata rule that surprises people
The conversion isn't clean if you hold other pre-tax IRA money. The pro-rata rule treats all your traditional, SEP, and SIMPLE IRAs as one pool, so the converted amount is taxed proportionally to the pre-tax share across all of them — a large rollover IRA can make a “tax-free” backdoor mostly taxable. The fix is often to move pre-tax IRA balances into a 401(k) first, if the plan allows.
How Formation handles it
Formation sees your IRA balances across custodians, so it can flag when a pre-tax IRA would make a backdoor conversion partly taxable under the pro-rata rule — the exact thing that's invisible when each account lives in a separate login.
A worked example
You contribute $7,000 non-deductible to a traditional IRA and convert it. With no other IRA money, the conversion is essentially tax-free. But if you also hold a $93,000 pre-tax rollover IRA, the pro-rata rule treats your IRAs as one $100,000 pool that's 93% pre-tax — so 93% of the $7,000 conversion is taxable.
Frequently asked
Is the backdoor Roth taxable?
The conversion of an after-tax contribution is generally tax-free on its own — but the pro-rata rule can make it largely taxable if you hold other pre-tax IRA balances.
How do I avoid the pro-rata problem?
A common move is to roll pre-tax traditional, SEP, and SIMPLE IRA balances into an employer 401(k) before converting, leaving only after-tax dollars in IRAs. Whether your plan accepts roll-ins is the gating question.
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