Is a Backdoor Roth IRA Right for You?

A Backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA, even if their income exceeds the standard contribution limits. It involves contributing to a traditional IRA (which has no income limitations in terms of the contribution) and then converting those funds to a Roth IRA. This can lead to significant tax benefits as your investments grow tax-free and withdrawals in retirement are also tax-free. It’s crucial to execute this strategy correctly.

Why This Guide?

Form 8606 is where many people stumble. How do you fill it out correctly? What are the common mistakes? Accuracy is vital to avoid issues with the IRS and ensure you’re not overpaying taxes.

This guide breaks down Form 8606, line by line, with a clear example. Keep in mind, I am not a CPA. This information is for general guidance only and not a substitute for professional tax advice. Always consult with a qualified tax professional for personalized advice.

You might be here for one of two reasons:

• You’re completing your first Backdoor Roth IRA and don’t have an accountant.
• You’re concerned about potential errors on your 8606 prepared by your accountant.

The Importance of Accuracy: Real-World Consequences

Errors on Form 8606 are more common than you might think. I’ve seen many tax returns with mistakes, even when prepared by experienced accountants. These errors often stem from a lack of familiarity with the Backdoor Roth IRA process or missing information from the client.

Ultimately, you are responsible for ensuring your tax returns are accurate, even if you hire a professional. This guide helps you understand the form and check your accountant’s work.

Finding the Form 8606 and Instructions

Ready to tackle Form 8606? You can find the official form and instructions on the IRS website. Simply search “8606 IRS” on Google, and it should be the first result.

Here are direct links for your convenience:

• IRS Form 8606 PDF
• IRS Form 8606 Instructions

Take some time to review the instructions carefully. The IRS provides helpful insights that can clarify any confusion.

Red Flag Alert: Spotting Errors on Your 1040

The easiest place to spot potential issues with your Backdoor Roth IRA reporting is on your Form 1040. Look at Line 4a (IRA distributions) on the 2024 form (or the equivalent line on future forms).

What should you see on Line 4a?

• If no growth occurred: The amount of your non-deductible contribution (e.g., $7,000 for 2024).
• If minimal growth occurred: Slightly higher than the contribution amount. This small amount of growth is taxable.

A significantly larger number on Line 4a is a red flag. This could indicate that a Roth conversion was misreported.

Married Filing Jointly: Remember the Individual Forms

If you’re married and filing jointly, and both you and your spouse are completing a Backdoor Roth IRA, remember that each of you needs your own Form 8606. The numbers on Lines 4a and 4b of your 1040 should reflect the combined distributions from both of your IRAs. For example, Line 4a could say $14,010 and Line 4b $10. This represents each spouse completing a Backdoor Roth IRA with $5 in gains.

Example Scenario: Clean Backdoor Roth IRA

To illustrate how to complete Form 8606, let’s walk through a “clean” example. In this scenario, you executed your Backdoor Roth IRA perfectly, with no prior IRA basis or pre-conversion gains. This simplifies the form and makes it easier to understand.

We’ll go through a pre-filled 8606 form, line by line, using this example. Some accountants use a simplified worksheet (Form 590), but we’ll focus on the full form.

Line 1: Non-Deductible Contributions

On Line 1, enter your total non-deductible contributions to traditional IRAs for the tax year. Include any contributions made between January 1st and the tax filing deadline of the following year.

For example, if you’re completing your 2024 taxes, include any contributions you made in early 2025 for the 2024 tax year. If you contributed the maximum for 2024, enter $7,000.

Line 2: Total Basis in Traditional IRAs

“Basis” refers to the amount of contributions you’ve already paid taxes on. If this is a clean Backdoor Roth IRA with no prior non-deductible contributions, Line 2 will be zero.

This line might have a value if you’re doing two years at once.

Line 3: Add Lines 1 and 2

This is simple math. Add the values from Lines 1 and 2. In our example, 7,000 + 0 = 7,000.

Line 4: Contributions Made in Early 2025 for 2024

This line tracks contributions made between January 1st and the tax filing deadline of the following year (early 2025 in our example) for the previous tax year (2024). The conversion must also occur in 2024.

In our clean example, where contributions were made in the same tax year, Line 4 will be zero. This is important for the IRS.

Line 5: Subtract Line 4 from Line 3

Again, simple math. Subtract the value from Line 4 from Line 3. In our example, 7,000 – 0 = 7,000.

Lines 6, 7, and 8: The Pro Rata Rule and Aggregation

Here’s where things can get complicated. The pro rata rule comes into play if you have pre-tax money in any traditional IRA (including SEP and SIMPLE IRAs).

If you have pre-tax money in a traditional IRA, a portion of your conversion will be taxable. Lines 6, 7, and 8 are used to calculate the total value of all your traditional IRAs.

In our clean example, where you have no other traditional IRAs, these lines will all be zero. Accountants may use Form 590 for these calculations.

Line 9: Total Value

Add lines 6, 7, and 8.

Line 10: Divide

Divide line 5 by line 9. In our example, this result should be 1.

Line 11: Multiply

Multiply Line 10 by Line 1. It should be 7,000 in our example.

Lines 12, 13, 14, 15A, 15B, and 15C: Remaining Basis

These lines track any remaining non-deductible contributions that haven’t yet been converted to a Roth IRA. In our clean example, where all contributions were converted, these lines will all be zero.

Page 2 / Part II: Roth IRA Conversions

Now, let’s move to the second part of the form, which focuses on Roth IRA conversions. Pay close attention to Line 16 (highlighted).

Line 16: Total Distributions

Line 16 reports the total amount distributed from your traditional IRA (i.e., the amount you converted to a Roth IRA).

In a clean example with no gains, Line 16 will equal the non-deductible contribution (e.g., $7,000). This value must exactly match the amount reported on Line 4a of your 1040.

If there were gains, Line 16 would be higher than the original contribution. This gain will be reflected on your 1040 and 1099.

Example of Gains on the 1040

If you gained even a little bit of interest, this is where this would show up. It must match Line 4a/4b on the 1040. Let’s say Line 4a of your 1040 shows $7,005 (contribution + $5 in interest). In this case, Line 16 of Form 8606 should also be $7,005. Line 4b should show the $5 in gains. Also, remember that each spouse must have their own form.

Line 17: Basis from Prior Years

Zero in our clean example.

The Pro Rata Rule Re-Emphasized

Even though we’ve already discussed it, it’s worth reiterating how the pro rata rule works. If you have pre-tax dollars in a traditional IRA and do a Backdoor Roth IRA, it can be a major issue.

Lines 18 through 25

These lines are used for calculations. Follow along and fill in the blanks.

What a Clean 8606 Should Look Like

Let’s summarize the key characteristics of a correctly completed Form 8606 for a clean Backdoor Roth IRA:

• Line 1: Non-deductible contribution amount.
• Line 2: Zero (no prior basis).
• Lines 6-8: Zero (no other traditional IRAs).
• Line 16: Distribution amount (matching 1040 Line 4a, or slightly higher if there were gains).
• Lines 12-15: Zero (all contributions converted).

Why Always File Form 8606?

This is critical: Even if your Backdoor Roth IRA is “clean” and your accountant advises against filing Form 8606, strongly consider filing it anyway.

Form 8606 serves as a record of your non-deductible contributions and IRA basis. This record is essential if you ever switch accountants or if your current accountant retires.

Without a properly tracked basis, you risk paying taxes twice on the same money. Even if the first accountant tracked everything right, the second may not ask for that old return. As Stephen Jarvis says, if you’ve been making non-deductible contributions, there’s cream in the coffee, and you need to track it.

Backdoor Roth IRA: A Long-Term Strategy

The Backdoor Roth IRA is a powerful long-term wealth-building strategy, especially for high-income earners. It offers the significant benefit of tax-free growth and withdrawals in retirement. Think of the Backdoor Roth IRA as a recurring, annual process.

Checking Your Accountant’s Work

Checking your accountant’s work on Form 8606 is always a good idea. Even experienced accountants can make mistakes due to unfamiliarity with the Backdoor Roth IRA process or missing information from you. Use this guide as a checklist to verify the accuracy of your Form 8606.

Need Help with More Complex Situations?

This guide focuses on a “clean” Backdoor Roth IRA example. If you have more complex situations (prior IRA basis, multiple conversions, etc.), seek professional tax advice. Remember, I am not a CPA, and this guide has limitations.

Hopefully, this will get you through both the 1040 and the 8606. A Backdoor Roth IRA is a very powerful tool. It’s not super sexy in one single year, but if you can do that year in and year out, you get some market growth. It’s a really nice chance to not waste any pre-tax dollars and start to build up those Roth assets.

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