Can you do a backdoor Roth with a traditional IRA?

The backdoor Roth and the surprise tax bill

The backdoor Roth is supposed to be the clean way around the Roth income limit: you put in money you already paid tax on, then move it into a Roth. The idea is that the move itself is tax-free.

But some people end up with a tax bill from it anyway. A common reason is a traditional IRA they already have.

How the IRS looks at your IRAs

When you move money into a Roth, the IRS adds up all your non-Roth IRAs as of December 31 of that year. It does not just look at the account you moved the money from.

Those balances can hold two kinds of money:

• Pre-tax money: money you deducted when you put it in.
• After-tax money: money you never deducted, like the contribution for a backdoor Roth.

The tax-free share of what you move to the Roth is based on how much of the total is after-tax money. This is known as the pro-rata rule.

A simple example

Take a hypothetical case. You put in $5,000 after tax for your backdoor Roth, and you already have $45,000 of pre-tax money in a traditional IRA. Together, that is $50,000.

When you move your $5,000 to the Roth, only 10% of it is tax-free, because after-tax money is only 10% of the total. The other 90% gets taxed, even though you meant to move only the after-tax money.

So your backdoor Roth stays tax-free only if none of your IRAs have any pre-tax money on December 31. If you are planning one, it is worth checking all your IRA balances before year end, not after.

How we handle it

At Sansone CPA & Financial, we coordinate your tax, investment, and retirement decisions so Roth moves are checked against every IRA you own before the year closes. That starts with retirement income planning in Crystal Lake, IL built around your tax return.