If your Modified Adjusted Gross Income (MAGI) exceeds IRS phase-out thresholds, you are barred from making direct contributions to a Roth IRA.
However, high earners can bypass this income ceiling 100% legally through a two-step mechanism known as the Backdoor Roth IRA.
The #1 Trap: The IRS Pro-Rata Rule (Form 8606)
Before executing a conversion, you must ensure your pre-tax IRA balance across all traditional, SEP, and SIMPLE IRAs is exactly $0 by December 31st of the tax year.
The IRS aggregates all traditional IRA balances when determining tax liability:
$$\text{Tax-Free Ratio} = \frac{\text{Total After-Tax Basis}}{\text{Total Balance Across All IRAs}}$$
If you have $93,000 in pre-tax traditional IRAs and make a $7,000 after-tax contribution, 93% of your conversion will be subject to ordinary income taxes.
The 4-Step Execution Checklist
- Open Accounts: Create a Traditional IRA and a Roth IRA at the same custodian (Fidelity, Vanguard, or Schwab).
- Make Non-Deductible Contribution: Transfer after-tax funds into the Traditional IRA.
- Execute Conversion Immediately: Once the cash settles (typically 1–2 business days), click “Convert to Roth”. Do not invest the money while inside the traditional IRA to avoid taxable earnings.
- File IRS Form 8606: Report the non-deductible contribution and conversion on your annual tax return.
Read our accompanying breakdown on how to roll pre-tax IRA balances into an employer 401(k) to eliminate the pro-rata rule.