Roth Conversion Strategies
By Ben Maas, CIS, CIP, CISP
One of our clients wants to make a Traditional IRA contribution and then convert it to a Roth IRA the same day. Can she do this?
In general, yes—as long as your client has eligible compensation. If so, she can contribute up to $7,000 ($8,000 if age 50 or older) to her Traditional IRA for 2025. Because there are no Roth IRA conversion eligibility requirements, your client may immediately convert her Traditional IRA assets to a Roth IRA.
Why would a client choose to make a Traditional IRA contribution and then convert it to a Roth IRA?
While anyone may convert all or part of a Traditional IRA to a Roth IRA, not everyone is eligible to make a regular Roth IRA contribution. To be eligible, a Roth IRA owner must have eligible compensation and have modified adjusted gross income (MAGI) below certain limits. For 2025, these limits are $150,000 for single filers and $236,000 for those who are married, filing jointly. Partial contributions may be made by single filers earning between $150,000 and $165,000 and by those who are married, filing jointly and earning between $236,000 and $246,000. Once the MAGI exceeds $165,000 for single filers and $246,000 for those married, filing jointly, no regular contribution is allowed.
What are the tax implications on a “backdoor Roth” contribution?
The “backdoor Roth” contribution usually has minimal—if any—tax implications. With conversions, IRA owners must pay tax on any pretax money that they convert from a Traditional or SIMPLE IRA to a Roth IRA, but they do not have to pay the 10 percent early distribution penalty tax. Because the backdoor Roth contribution involves making a nondeductible (after-tax) contribution to a Traditional IRA and converting it to a Roth IRA the same day, the client may avoid incurring any tax implications if only after-tax money is being moved to the Roth IRA. Note that if any earnings accrue in the Traditional IRA before the conversion, the earnings will be taxable, but not subject to the 10 percent penalty tax.
So, it’s as easy as that, and anyone can do this?
The backdoor Roth contribution works especially well if your client doesn’t have any other pretax assets in any Traditional (including those holding SEP assets) or SIMPLE IRAs. If she does have other pretax assets, then the IRS requires application of its basis recovery rules. Under the basis recovery rules, distributions (including conversions) are taxed pro rata. For example, if 75 percent of your client’s IRA assets (in aggregate) were pretax assets and 25 percent were after-tax assets, the basis recovery rules result in the conversion consisting of 75 percent pretax assets and 25 percent after-tax assets. Therefore, 75 percent of the conversion amount would be subject to income tax. The IRS does not allow IRA owners to “carve out” their nondeductible Traditional IRA contributions and convert them to a Roth IRA without tax implications. Instead, IRA owners must combine their Traditional and SIMPLE IRAs for distribution purposes—even if their pretax and after-tax assets are held in separate IRAs. Although the Internal Revenue Code and
Treasury regulations don’t preclude the backdoor Roth, there have been a few IRS agents that have frowned on this. So, if clients ask if they can do a backdoor Roth, it is always a good idea to have them check with a tax professional for advice.
Is there any way to convert only after-tax assets?
Possibly. If a Traditional IRA owner also has an employer-sponsored retirement plan that accepts rollovers, then he may directly or indirectly roll over all of the pretax assets from his IRA to his employer-sponsored retirement plan. This transaction would result in only after-tax assets remaining in the Traditional IRA. He could then convert the after-tax assets to a Roth IRA.
How does the backdoor Roth get reported to the IRS?
Your financial organization must report both transactions. First, your organization must report regular Traditional IRA contributions (including catch-up and spousal contributions) in Box 1, IRA contributions, of Form 5498, IRA Contribution Information. Second, your organization must report the conversion on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., using code 1, Early distribution, no known exception, code 2, Early distribution, exception applies, or code 7, Normal distribution, in Box 7, Distribution code(s). To show the assets going into the Roth IRA, your organization reports the conversion amount in Box 3, Roth IRA conversion amount, on Form 5498. IRA owners making nondeductible Traditional IRA contributions (or taking a distribution of nondeductible assets) must report the information on Form 8606, Nondeductible IRAs. Clients also must file Form 8606 in the year they complete a Roth IRA conversion. If they have any tax implications, there may be additional reporting on lines 4a and 4b of Form 1040, U.S. Individual Income Tax Return.
