Backdoor Roth bypasses $161,000 (single)/$240,000 (married) MAGI limits by: (1) Making non-deductible $7,000 traditional IRA contribution (no income limit), (2) Converting to Roth IRA immediately (no income limit on conversions).

Catch: Pro-rata rule taxes conversions proportionally if you have existing pre-tax IRA balances. 2025 example: $50k traditional IRA + $7k contribution = 87.7% conversion taxed at 32-37% bracket.

Pro-rata rule forces you to convert pre-tax and after-tax IRA money proportionally across ALL IRAs (traditional/SEP/SIMPLE/rollover).

Formula: Taxable % = (Total Pre-tax Balance) / (Total IRA Balance + New Contribution).

Avoid by: (1) Rolling existing IRAs into 401(k) before conversion (Isolation Strategy - requires 401(k) accepting rollovers), or (2) Converting entire balance to pay tax once (not recommended if >$100k), or (3) Starting with zero IRA balance (Clean Backdoor).

Convert immediately (same day) or within days to minimize taxable gains.

IRS allows immediate conversion since 2010 recharacterization rule changes.

Wait risks: $7,000 contribution growing to $7,200 = $200 taxable gain @ 32% = $64 unnecessary tax.

Year-end conversion timing only matters for: (1) Pro-rata calculation uses Dec 31 IRA balance, (2) Income planning if conversion pushes you into higher bracket.

Most choose immediate conversion (Day 1: contribute, Day 2: convert).

Two Form 8606s required: (1) Part I - Non-deductible traditional IRA contribution ($7,000 basis), (2) Part II - Roth conversion (shows $0 taxable if clean, or pro-rata amount if existing balances).

Also report on Form 1040 Line 4b (taxable IRA distributions) and 1099-R from conversion.

Common mistake: Deducting traditional IRA contribution = double taxation.

Critical: Keep Form 8606 records permanently to prove basis for future withdrawals.

Yes! 401(k) balances DO NOT count for pro-rata rule - only IRA balances matter.

Strategy: (1) Roll existing traditional/SEP/SIMPLE IRAs into 401(k) (if plan accepts incoming rollovers), (2) Do backdoor Roth with zero IRA balance = 100% tax-free conversion.

Bonus: Mega Backdoor Roth if 401(k) allows after-tax contributions ($70,000 total 2025 limit vs $7,000 backdoor limit).

Verify 401(k) accepts: in-service conversions (for mega backdoor) or incoming rollovers (for isolation strategy).

5 costly errors: (1) Deducting traditional IRA contribution = Pay tax on conversion + lose deduction = Double tax ($7k @ 32% = $2,240 wasted). (2) Forgetting pro-rata rule = $50k IRA + $7k contribution = 87.7% taxable, not 0% ($7k × 87.7% × 32% = $1,962 surprise tax). (3) Converting with gains = $7,200 conversion (grew from $7k) = $200 taxable. (4) Not filing Form 8606 = IRS assumes 100% taxable = $7k × 32% = $2,240. (5) Doing backdoor Roth in December with IRA balance = Pro-rata uses Dec 31 balance (roll to 401(k) first or wait until January).