I've heard of backdoor Roth IRAs, but I have messed up my situation and would like some advice.
Back in 2018 I maxed my 401k and didn't know what to do, so I opened a traditional IRA because I was over the income limit for a Roth. I knew nothing of backdoors (and still basically know nothing). I dutifully threw the max in every year into the trad IRA every January.
I've now got a trad IRA with ~70k in it, and no Roth. I have not yet contributed for 2026. What are my options? Can/should I put $7500 in and immediately move it to a new Roth? Is that what a backdoor is? Is there anything I should do with the rest of the money in the existing IRA, even if it means a tax penalty this year?
IRA backdoor for dummies (I'm the dummy)
byu/yertle38 inpersonalfinance
Posted by yertle38
9 Comments
You can’t do a clean backdoor Roth with existing pre-tax funds in a Traditional IRA. If you deducted all of the Traditional IRA contributions you’ve made every January, then your entire Traditional IRA is pre-tax. If you haven’t been deducting those contributions, those contribution amounts are nondeductible basis and are not pretax, but the rest of the account is.
If you want to do a backdoor Roth, you’ll need to either roll all pre-tax amounts to your 401(k), if permitted and available, or convert your entire Traditional IRA into a Roth IRA, and pay income taxes on all pre-tax amounts.
You cannot do a Roth conversion on just the $7500 while ignoring the other $70k. The entire IRA balance is considered when doing a Roth conversion.
Did you take a deduction for all of your prior IRA contributions? Based on your income/401k plan, maybe not? But if so, you would need to pay income tax on all of that money before you convert it. That can be a huge tax bill and is generally not a good idea. What is your current income / tax bracket?
Every year you contribute to Traditional IRA, you are *required* to declare whether the contribution is **deducted** (on [Schedule 1](https://www.irs.gov/pub/irs-pdf/f1040s1.pdf) line 20) or **nondeductible** (on [Form 8606](https://www.irs.gov/pub/irs-pdf/f8606.pdf) line 1). If you forgot to do these for any of these years, go back and file them. Form 8606 can be filed on its own by mail.
Hint: If you were above Roth IRA MAGI limit, you were also above Trad IRA MAGI limit; hence all of the contributions should be declared nondeductible.
Add up all nondeductible contributions so far:
* 2018: $5,500
* 2019: $6,000. Accumulated: $5500 + $6000 = $11500
* 2020: $6,000. Accumulated: $17500
* 2021: $6,000. Accumulated: $23500
* 2022: $6,000. Accumulated: $29500
* 2023: $6,500. Accumulated: $36000
* 2024: $7,000. Accumulated: $43000
* 2025:
* 2026:
No matter what, you’re probably going to be paying some taxes on a Roth conversion if you chose to convert to Roth. The question is: how much
When you did the trad IRA contributions, did you file form 8606 with your tax return each year to document the non-deductible contributions?
If yes, you’re only going to be paying taxes on any investment/interest gains your contributions have earned.
If you never invested the contributions you made, even better. It means there are no gains to tax and you can convert everything with almost no additional tax.
If you didn’t file form 8606, your first step is to amend the tax returns you can to add that in. It doesn’t change anything about how much tax you owed or your refund, it’s just documentation for how much post tax money you’ve put in an IRA.
When you convert an IRA to Roth, you have to pay taxes based on the portion that is pretax and gains vs post tax. So you want that post tax number to be as high as possible to reduce the percentage that is considered taxable.
You need to deal with the $70k IRA balance, otherwise your $7,500 backdoor Roth will be mostly taxable thanks to the “pro rata rule”.
Read #5 for a fix https://www.whitecoatinvestor.com/fix-backdoor-roth-ira-screw-ups/
If you were covered by a 401k at work, and over the contribution limits for Roth, then I think it’s likely that most if not all of your traditional IRA contributions were non-deductible. You’d need to review your tax returns to make sure you didn’t take the deduction when you shouldn’t have.
In that case, you should have been tracking the non-deductible basis in your traditional IRA. Where you convert it or wait until retirement to withdraw it, you don’t want to pay ordinary income tax on it again.
I don’t know what percentage of the 70K is your basis, but it would be excluded from the taxable amount on a conversion. If you’re willing to pay your marginal rate on the remainder you could consider conversion.
If you have a large non-deductible basis I would hesitate to roll that over to a 401k because I don’t know if/how you continue to keep track of that. It’s your job to track the basis with an IRA, the custodian doesn’t do it for you.
Either way, conversion or rollover, you can’t really separate gains from contributions and whatever action you take would apply to both in proportion.
The most important question – did you ever put pre-tax money into this IRA? Either from a 401k rollover or anything like that at all?
If all the money in this account was deposited post-tax (which sounds right with the $7k x 8 years + interest gains), then you’re actually totally fine, and can do the following.
The backdoor IRA process has two parts, that each require paperwork:
* The traditional IRA deposit, which you need to specifically indicate is non-deductible (meaning you did not gain any tax benefit from the deposit). You already didn’t receive a tax benefit, but you need to specifically fill the form to say it. As others have indicated, you’re perfectly fine to do this retroactively for each year of deposits.
* The rollover from trad to Roth IRA. This is its own form, and there’s no problem to rollover multiple years of IRA deposits at once.
Did you deduct the $70k worth of Traditional IRA contributions over all this time? If not, you can just convert all of it to a Roth tax free right now and continue doing so for future back doors.
If you DID deduct those contributions from your taxable income for those years, you will be hit with the pro rata rule. Basically, until your Traditional ITA is at 0$, any conversion you make will be taxed as normal income, minus the percentage of that conversion that is equal to the after tax basis divided by the total IRA balance.
So if you had $70k before tax/deducted in the traditional IRA then add $7500 after tax and convert it, you would do $7500/$70k=0.107, so roughly 10.7 percent of that conversion is tax free, around $803.57, but the entire remaining conversion will be added to your taxable income and you will need to pay taxes on that.
It will go down over time, but you’ll face a hefty tax bill each time. If you convert ALL of it right now, you’re looking at raising your taxable income by $77k, with a tax bill of upwards of $15k due on that conversion depending on what your other earnings are for the year.
the basic idea is. pre-tax saves you money now. roth …saves you money when you retire in that the income/money isn’t taxable (but you pay all the taxes on that money now)
to do a backdoor roth, you contribute to a trad IRA. don’t claim the tax benefit, and then can shift that moola to a roth. –seeing as you took no tax benefit this allows you to loophole/cheat the income cap for Roth.
IF you have been claiming the trad ira/pretax/benefit. you can’t move to a roth without coughing up that tax money to uncle sam.
the first question is. IF you make enough money to max a 401k and max a trad IRA you’re probably the sort of person who will benefit from pre-tax savings, being able to cut 20-30k off your tax liability.
or… if 70k is sitting in the trad ira, just leave it.
open a new IRA at a brokerage/bank that offers the backdoor/roth conversion. fund that new account THIS year. and do the backdoor/swap going forward with that new acct.