Backdoor Roth Steps When You Have a Rollover IRA

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

A backdoor Roth takes four steps: clear any pre-tax money out of your traditional, SEP and SIMPLE IRAs (including an old rollover IRA), make a nondeductible traditional IRA contribution ($7,500 for 2026), convert it to a Roth IRA, and report it on Form 8606. The rollover IRA is the step most people miss. If it still holds pre-tax money on December 31 of the year you convert, the pro-rata rule makes most of your “tax-free” conversion taxable.

For a two-earner household at $750,000 to $3 million, a direct Roth IRA contribution is off the table: the 2026 Roth IRA income phase-out for joint filers is $242,000 to $252,000 of MAGI (IRS Notice 2025-67). The backdoor is the usual route around that limit, and it allows $7,500 per spouse for 2026. But many physicians, scientists and tech employees carry a rollover IRA from a prior job, and that one account decides whether the strategy works cleanly.

Why a rollover IRA breaks a backdoor Roth

When you convert IRA money to a Roth, the IRS does not let you pick which dollars you converted. Form 8606 treats all of your traditional, SEP and SIMPLE IRAs as one pool: their combined value on December 31 of the conversion year, plus whatever you converted or withdrew during that year (Instructions for Form 8606). The tax-free share of any conversion equals your after-tax basis divided by that pool.

A few details matter here:

• What counts: every traditional IRA, rollover IRA, SEP IRA and SIMPLE IRA in your name. A SEP IRA from side consulting or a locum stint counts too.
• What does not count: your 401(k), 403(b), 457 plan, existing Roth IRAs, and your spouse’s IRAs. The rule applies to each spouse separately, because each files their own Form 8606.
• The date is December 31, not the conversion date. Converting in February and moving the rollover IRA out in November of the same year still works, because the IRA balance in the pool is measured at year end.

Worked example: a $950,000 California household with a $180,000 rollover IRA

Assumptions (illustrative): married filing jointly, two W-2 earners in the Bay Area with $950,000 of combined wages. One spouse, a biotech scientist, has a $180,000 rollover IRA from a former employer’s 401(k), all pre-tax. After one spouse’s $24,500 401(k) deferral and the $32,200 standard deduction (both 2026), federal taxable income is about $893,000, which puts the household in the 37% federal bracket for 2026 (it starts at $768,700, Rev. Proc. 2025-32). After the same deferral and California’s smaller standard deduction, California taxable income is about $915,000, in the 11.3% bracket (2025 schedule; 2026 California brackets are not yet published, FTB 2025 rate schedules). Growth is ignored to keep the math clear.

How Option A works: the pool is $187,500, the $180,000 still in the rollover IRA on December 31 plus the $7,500 converted during the year. Basis is $7,500, so only 4% of the conversion is tax-free. Of the $7,500 converted, $300 comes out tax-free and $7,200 is taxable. The other $7,200 of basis stays trapped in the rollover IRA. Each year you repeat the backdoor without fixing the rollover IRA, the same thing happens again.

Option B is usually the clean answer for this household. Option C can make sense in a year with unusually low income (a sabbatical, a gap between jobs, a parent stepping back while children are small), but at a $950,000 income it means paying the top federal and near-top California rate on money that could otherwise wait.

The four steps, in order

1. Find every IRA dollar, for each spouse. List every traditional, rollover, SEP and SIMPLE IRA and its expected December 31 balance. Check old employer accounts that were rolled to a brokerage years ago, and any SEP IRA from consulting income.
2. Clear the pre-tax balance before December 31. The usual move is a “roll-in”: a direct trustee-to-trustee transfer of the rollover IRA into your current 401(k) or 403(b). Your plan has to accept incoming rollovers, so ask HR or the plan administrator first. Only pre-tax money can be rolled from an IRA into an employer plan; after-tax basis cannot (IRS Publication 590-A). Before moving the money, compare the 401(k)’s fund menu and costs with what the rollover IRA holds.
3. Make the nondeductible contribution. Contribute $7,500 for 2026 ($8,600 if you are 50 or older, with the $1,100 catch-up) to a traditional IRA. Because both spouses are covered by workplace plans and well above the 2026 deduction phase-out ($129,000 to $149,000 MAGI for joint filers), the contribution is nondeductible. A spouse who is not working can still contribute based on the working spouse’s pay. The deadline for a 2026 contribution is the April 2027 filing deadline, not including extensions (Publication 590-A).
4. Convert, then file Form 8606. Convert the balance to your Roth IRA. Many families hold the contribution in cash until conversion so there are no earnings to tax. Each spouse files Form 8606 with the joint return: Part I records the nondeductible contribution and Part II the conversion. Your custodian will report the contribution and conversion on Form 5498 and the conversion on Form 1099-R.

How the tax plays out in California and Washington

California. California generally taxes a conversion the same way the federal return does, unless your California IRA basis differs from your federal basis (FTB Publication 1005). The taxable part is ordinary income, and the state has no lower rate for any type of gain (FTB). At this income level that means 9.3% to 12.3% (2025 brackets), plus 1% on taxable income over $1,000,000. A clean backdoor costs nothing in California; a pro-rata mistake costs the state rate on top of the federal rate. California SDI (1.3% for 2026) applies to wages, not IRA conversions.

Washington. Washington has no individual income tax for 2026, so a conversion adds only federal tax (WA DOR). Retirement accounts are also exempt from the state’s capital gains tax. One change to plan for: Washington enacted a 9.9% tax on AGI over $1,000,000 starting January 1, 2028. How retirement distributions and conversions will be treated is pending Department of Revenue guidance, so a family considering a large conversion has a reason to watch for that guidance before 2028.

The backdoor next to the mega backdoor Roth

The IRA backdoor is small: $15,000 a year for a couple. Many large employers in California and Washington also allow after-tax 401(k) contributions with in-plan Roth conversion, the “mega backdoor Roth.” For 2026 the total annual additions limit is $72,000 per person. With a $24,500 pre-tax or Roth deferral and, say, a $12,000 employer match, that leaves $35,500 of after-tax room per spouse (Notice 2025-67). Roll-ins and the mega backdoor live in the same plan, so it is worth checking both at once with your benefits team. Our retirement and employee benefits work covers how these fit together.

Common mistakes

• Forgetting a SEP IRA or a small old IRA. Even $20,000 of pre-tax money makes a large share of the conversion taxable.
• Rolling the IRA into the 401(k) in January. That fixes next year, not the conversion you already did last year.
• Skipping Form 8606. Without it, the IRS has no record of your basis, and the conversion can look fully taxable. Tax software often handles the contribution and conversion as separate entries; check that both appear.
• Expecting to undo a conversion. Roth conversions can no longer be recharacterized back to a traditional IRA (Publication 590-A).
• Investing before converting. Earnings between contribution and conversion are taxable at your top rate.
• Withdrawing early. Before age 59½, each conversion has its own five-year period; taking out the taxable part of a conversion within five years can trigger the 10% additional tax (IRS Publication 590-B). For a clean backdoor, almost none of the conversion is taxable.

What to write down for the family

A backdoor Roth leaves a paper trail that matters for decades: each year’s Form 8606, the basis figure, which accounts were rolled where, and why you chose to roll in rather than convert. Keep those in one place your spouse can find. Roth IRAs have no lifetime required minimum distributions for the owner (IRS RMD FAQs), so this money may well pass to your children. A one-page note on why the family funds Roth accounts every year, and what the money is meant for, gives them the reasoning along with the account. Conversations fade. Documentation compounds. Our family governance work helps families keep that record.

Questions families ask

Does my 401(k) count in the pro-rata rule?

No. The pro-rata calculation on Form 8606 uses only traditional, SEP and SIMPLE IRA balances. Money in a 401(k), 403(b) or 457 plan is left out. That is exactly why rolling a pre-tax rollover IRA into your current employer plan before December 31 works: the money stays tax-deferred, but it leaves the IRA pool that drives the calculation.

If my spouse has a rollover IRA, does it affect my backdoor Roth?

No. The pool is calculated per person, and each spouse files a separate Form 8606 even on a joint return. If one spouse has a large rollover IRA and the other has none, the spouse with no IRA can do a clean backdoor this year while the other sorts out a roll-in. Joint filing does not combine the two pools.

Should we just convert the rollover IRA to a Roth instead?

Sometimes. A full conversion makes sense in a low-income year, such as a sabbatical or a career break, or when the balance is small. In a normal year at $750,000 or more, the taxable amount is added at a 35% or 37% federal rate (2026 brackets) plus California rates of 9.3% or more (2025 brackets), which is why a roll-in is usually the first thing to check.

Next step

Before you contribute for 2026, list every IRA each spouse owns and its likely December 31 balance, and ask your plan administrator whether your 401(k) accepts roll-ins. If you want a second set of eyes on the full picture, including equity compensation and the mega backdoor, our Tax & Wealth Assessment covers it. Related reading: withdrawing nondeductible IRA contributions and how MAGI is calculated.

This is general education, not individual tax advice; the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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