Backdoor Roth: The One Rule People Miss

If you earn too much to contribute to a Roth IRA directly, the backdoor Roth is a well-known workaround. The idea is simple:

1. Put money into a nondeductible traditional IRA.
2. Convert that money to a Roth IRA.

Two steps, done. Except there's a catch that surprises a lot of people — and it can turn a "tax-free" move into a taxable one.

The catch: the pro-rata rule

When you convert, the IRS does not just look at the money you contributed this year. On December 31, it adds up all your traditional, SEP, and SIMPLE IRAs together and treats them as one big pot.

That matters because it decides how much of your conversion is tax-free. If every dollar in your IRAs is already after-tax, the conversion is clean. But if you're holding pre-tax IRA money — say, an old 401(k) you rolled into an IRA — the math changes.

A quick example

Say you make a $7,500 nondeductible contribution to a traditional IRA for the backdoor Roth. But you also already have $67,500 in a pre-tax rollover IRA.

The IRS looks at the whole pot:

• Total IRA money: $75,000
• After-tax portion: $7,500 ÷ $75,000 = 10%

Now you convert $7,500 to Roth. You don't get to say "I'm only converting the new after-tax money." The IRS treats every conversion as the same 10%/90% blend:

Portion of the $7,500 conversion	Tax treatment
10% = $750	Not taxable
90% = $6,750	Taxable as ordinary income

So even though your fresh $7,500 was already taxed, you'd likely owe income tax on about $6,750 of the conversion. That's the pro-rata surprise.

One way people work around it

The rule only counts IRAs — it ignores money sitting in an employer 401(k). So a common move is to roll pre-tax IRA money into a current 401(k) first, if the plan accepts it. That empties the pre-tax IRA pot, and a later backdoor Roth converts cleanly.

Bottom line

A backdoor Roth is cleanest when you have no other pre-tax traditional, SEP, or SIMPLE IRA money. If you do, the pro-rata rule can make part of the conversion taxable — so the order you do things in, and the timing, really matter. This is one worth walking through with a tax professional before you contribute or convert.