Understanding Backdoor Roth IRA Conversions

A backdoor Roth IRA conversion is a strategy used to fund a Roth IRA for high-income earners, allowing them to bypass traditional income limits. This process involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA. However, if an individual has existing pre-tax IRA assets, such as a rollover IRA or SEP IRA, they risk facing tax implications due to the pro-rata rule. To execute this effectively, individuals should consider eliminating these existing IRA assets, either by cashing them out or rolling them into an employer-sponsored retirement plan, before initiating the conversion.