How a Backdoor Roth IRA Works: Steps, Pro-Rata Rule and a Worked Example

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

A backdoor Roth IRA is a two-step move: you put money into a traditional IRA without taking a deduction, then convert that account to a Roth IRA. It exists because Roth IRAs have an income limit for direct contributions, but traditional IRA contributions and Roth conversions do not. For 2026 that means each spouse can move up to $7,500 a year into a Roth, even at an income of $1 million or more, as long as the pro-rata rule does not turn the conversion into a tax bill.

For a California or Washington household earning $750,000 to $3 million, the direct route is closed. The 2026 Roth IRA phase-out for married couples filing jointly runs from $242,000 to $252,000 of modified AGI (IRS Notice 2025-67), so these families cannot contribute to a Roth IRA directly at all. The backdoor is the standard way around that limit, and it is fully reported to the IRS on Form 8606.

Why the backdoor works for high-income W-2 families

Three rules make it possible:

• Anyone with taxable compensation can contribute to a traditional IRA. There is no income ceiling on the contribution itself. At your income the contribution is simply not deductible if you or your spouse is covered by a workplace plan, which is almost always true for employees at Apple, Amazon, Genentech or a hospital system (IRS Publication 590-A).
• A non-working spouse can contribute too. On a joint return, a spouse at home with the kids can fund an IRA based on the working spouse’s compensation, so a one-income family still gets two backdoor Roths.
• There is no income limit on converting. Any traditional IRA balance can be converted to a Roth. You pay ordinary income tax only on the part of the conversion that was never taxed.

If your only IRA money is the nondeductible $7,500 you just put in, almost none of the conversion is taxable. That is the whole point.

The backdoor Roth process, step by step

1. Check every IRA you and your spouse own. List traditional, rollover, SEP and SIMPLE IRAs, each spouse separately. Any pre-tax balance changes the math (see the pro-rata rule below).
2. Contribute to a traditional IRA and do not deduct it. The 2026 limit is $7,500 per person, plus a $1,100 catch-up at age 50 or older (Notice 2025-67). You can make a contribution for a given year until the regular filing deadline, which is April 15 of the following year for most people (Form 8606 instructions).
3. Convert to a Roth IRA. Most custodians let you do this online in a few minutes. Many families convert soon after the cash settles, so there is little or no growth to tax. Any earnings before the conversion are taxable when converted.
4. File Form 8606 for each spouse who did it. Part I records the nondeductible contribution (your “basis”). Part II reports the conversion. You will also receive a Form 1099-R from the custodian showing the conversion as a distribution. Without Form 8606, the IRS has no record that the money was already taxed.
5. Repeat every year. The contribution limit does not carry forward. A year you skip is $7,500 of Roth space per person that is gone.

How the pro-rata rule decides what you owe

This is the part that trips up most physicians and tech employees, usually because of a rollover IRA from a residency program or a former employer. You cannot convert only the after-tax dollars. When you convert, the IRS treats the money as coming proportionally from all of your traditional IRAs combined. Form 8606 uses the total value of all your traditional IRAs, including SEP and SIMPLE IRAs, as of December 31 of the conversion year, plus the amount converted (Form 8606 instructions).

Two details matter:

• It is measured per person, not per couple. Your spouse’s rollover IRA does not affect your conversion, and yours does not affect theirs.
• It is a December 31 snapshot. Rolling an old 401(k) into an IRA in November counts against a conversion you did in February of the same year. Moving pre-tax IRA money into your current employer’s 401(k) before December 31 (if the plan accepts roll-ins) takes it out of the calculation, because 401(k) balances are not part of the formula.

Worked example: a $1 million Bay Area household with a forgotten rollover IRA

Assumptions (illustrative): married filing jointly in California, $1,000,000 of combined W-2 income, both spouses covered by a 401(k) and each deferring the full $24,500 for 2026, which leaves federal and California taxable income of roughly $900,000 to $940,000 after deductions. Spouse A has a $93,000 pre-tax rollover IRA from a prior job. In 2026, Spouse A contributes $7,500 nondeductible and converts $7,500 the same month. There is no growth before December 31, to keep the numbers clean.

The federal rate is the 37% bracket, which for 2026 starts at $768,700 of taxable income for joint filers (Rev. Proc. 2025-32). The California rate uses the 2025 schedule, the latest published, where 11.3% applies to joint taxable income from $891,542 to $1,485,906 (FTB 2025 rate schedules). Your exact rates depend on your deductions.

In the first column, the unused $6,940 of basis stays inside the traditional IRA and is tracked on Form 8606 for future years, so it is not lost. But the family paid about $3,350 for a conversion that could have cost nothing. Spouse B, with no IRAs, does a clean $7,500 backdoor in the same year regardless.

Done cleanly by both spouses, that is $15,000 a year into Roth accounts for 2026. If it earned a hypothetical 6% a year for 20 years, $15,000 a year would grow to roughly $550,000, all of it available tax-free in retirement once the Roth rules are met. That is an illustration, not a projection.

California versus Washington: how the conversion is taxed

In California, the taxable part of a conversion is ordinary income, taxed at the same marginal income tax rate as your salary. California has no lower rate for capital gains, and for taxable income above $1,000,000 the 1% Behavioral Health Services Tax applies on top of the 12.3% bracket, for a 13.3% top rate (FTB 2025 Form 540 booklet). That is why the pro-rata cleanup above is worth doing before the first conversion, not after.

In Washington, there is no individual income tax for 2026, so only federal tax applies to a taxable conversion (Washington DOR). That changes for high earners: Washington has enacted a 9.9% income tax on AGI over $1,000,000, effective January 1, 2028, with details still pending from the Department of Revenue. A Washington family weighing a large conversion of old pre-tax IRA money has a reason to look at the timing before 2028. A routine $7,500 backdoor with no pre-tax balance is unaffected either way.

The mega backdoor Roth: the bigger lever for many W-2 families

The $7,500 IRA backdoor is useful, but many large employers in tech and biotech also allow after-tax 401(k) contributions with in-plan Roth conversion. For 2026, total additions to a 401(k) can reach $72,000, including your $24,500 elective deferral and your employer’s contributions (Notice 2025-67). If your employer contributes $12,000, the after-tax room is $72,000 minus $24,500 minus $12,000, or $35,500. That is nearly five times the IRA backdoor, per spouse, if both plans allow it. Check your plan’s summary plan description; the feature has to be offered by the plan.

Common backdoor Roth mistakes

• Forgetting a SEP IRA or old rollover IRA. Consulting income or a small side practice often leaves a SEP IRA that quietly makes most of the conversion taxable.
• Not filing Form 8606. The IRS charges a $50 penalty for failing to file it when required for a nondeductible contribution, and $100 for overstating nondeductible contributions, unless you show reasonable cause (Form 8606 instructions). The bigger cost is losing track of basis and paying tax twice.
• Contributing to the Roth directly by mistake. At your income, a direct Roth IRA contribution is an excess contribution, which carries a 6% excise tax each year it stays in the account (Pub 590-A). Fix it before your filing deadline.
• Withdrawing converted money early. Each conversion has its own five-year clock. Taking converted amounts out within five years and before age 59½ can trigger the 10% additional tax (IRS Publication 590-B). For families in their 30s and 40s, this is long-term money.
• Treating it as a one-time project. The value comes from doing it every year, for both spouses, with the paperwork filed correctly each time.

Why a Roth matters for what your children inherit

Roth IRAs have no required minimum distributions during the owner’s lifetime (IRS RMD FAQs), so the money can keep compounding untouched. Once the five-year period is met, qualified withdrawals, including those by heirs, are generally free of federal income tax (Pub 590-B). For a family that expects to leave retirement accounts to children, that is a cleaner asset to pass on than a pre-tax IRA.

The account is only half of it. Write down, in a page, why you chose to pay tax now rather than later, how the backdoor works, and where the Form 8606 copies live. Your kids, or whoever settles your estate, will need that record. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Frequently asked questions

Is the backdoor Roth IRA legal?

Yes. It uses two separate rules that are both in the tax code: nondeductible traditional IRA contributions and Roth conversions with no income limit. The IRS expects the conversion to be reported on Form 8606, and the form’s instructions walk through exactly how the taxable portion is calculated. What creates problems is skipping the form or ignoring other IRA balances, not the strategy itself.

Can I avoid the pro-rata rule?

The common way is to move pre-tax IRA money into your current employer’s 401(k) or 403(b) before December 31 of the year you convert, if the plan accepts incoming rollovers. Once your traditional, SEP and SIMPLE IRA balances are zero at year-end (apart from the new contribution), the conversion is almost entirely tax-free. Check plan rules and investment options first.

Should I do a backdoor Roth before or after maxing my 401(k)?

A common order for high-income W-2 families is: capture the full employer match, max the $24,500 elective deferral for 2026, do a backdoor Roth for each spouse, then use after-tax mega backdoor room if the plan offers it. The right sequence still depends on cash flow, RSU vesting and other goals such as 529 funding.

Next step

Before your next contribution, pull the December 31 statement for every IRA each spouse owns and add up the pre-tax balances. If the total is zero, the backdoor is straightforward. If it is not, decide on the rollover first. Our tax management and retirement and employee benefits work covers this, including the mega backdoor review, as part of the Tax & Wealth Assessment. For related reading, see withdrawing nondeductible IRA contributions, where to find MAGI on Form 1040 and ways to reduce modified adjusted gross income.

This is general education, and 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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