The IRS Doesn’t Want You to Have Nice Things (But There’s a Workaround)
You’re a senior engineer. Your TC is north of $200k. You tried to contribute to a Roth IRA this year, and your brokerage either rejected the contribution or, worse, accepted it and sent you a letter in January about an excess contribution penalty. Welcome to the income phase-out.
In 2026, the Roth IRA income limits are:
- Single filers: phase-out begins at $150,000 MAGI, fully phased out at $165,000
- Married filing jointly: phase-out begins at $236,000, fully phased out at $246,000
If your Modified Adjusted Gross Income (MAGI) sits above those upper limits, you literally cannot contribute directly to a Roth IRA. The IRS will charge you a 6% excise tax on any contribution you make and leave in there.
But here’s what nobody explains in onboarding: there is no income limit on Roth conversions. You just can’t contribute directly. Nothing stops you from contributing to a traditional IRA and then converting it to Roth. That’s the backdoor. It’s legal, the IRS knows about it, and tens of thousands of high-income people use it every year.
What You’re Actually Doing (And Why It Works)
A Roth IRA contribution is subject to income limits. A Roth conversion is not. So you take the long way around: contribute to a traditional IRA (no income limit on contributions, though it’s non-deductible at your income level), then immediately convert that traditional IRA to a Roth.
The IRS has known about this since the Roth conversion rules were written. They haven’t closed it. The Tax Cuts and Jobs Act of 2017 actually explicitly removed the ability to “recharacterize” conversions back to traditional, which some read as Congress acknowledging and cementing the backdoor’s existence. It’s not a loophole in the “someone forgot to close it” sense, it’s a feature of how the law is written.
The annual contribution limit in 2026 is $7,000 (or $8,000 if you’re 50 or older). That’s per person, not per household, a married couple can do $14,000 total, $7,000 each.
Step 1: Contribute to a Traditional IRA (Non-Deductible)
Open a traditional IRA if you don’t have one. Fidelity, Vanguard, and Schwab all work fine. Contribute $7,000 (or $8,000).
At your income level, this contribution is non-deductible, you get no tax break for making it. You’re contributing after-tax dollars. This matters a lot for the next steps, so internalize it now: the $7,000 going in is money you’ve already paid income tax on.
At Fidelity specifically:
- Log in → Accounts & Trade → Transfer
- Select your traditional IRA as the destination
- Contribute from your linked bank account
- When asked about deductibility, select non-deductible (or just leave it alone: the tax treatment is determined by your income, not a checkbox in the UI)
Step 2: The Wait (And the Step Transaction Doctrine)
Once the contribution settles, you can convert it. The question everyone argues about on Reddit: how long do you wait?
The concern is the step transaction doctrine, an IRS principle that says if two steps together achieve a result that would otherwise be prohibited, the IRS can collapse them into a single transaction and tax accordingly. In theory, if you contribute to a traditional IRA and immediately convert it, the IRS could argue you made a direct Roth contribution (which you weren’t allowed to do), and assess the 6% penalty.
In practice, the IRS has never actually pursued this on backdoor Roths. It’s a theoretical risk, not a documented one. Most tax attorneys who’ve written about this say the step transaction doctrine doesn’t apply here because the two steps, contributing to a traditional IRA and converting it, are both individually legal, and the IRS has repeatedly acknowledged the strategy in publications without flagging it as abusive.
The common advice: let it sit for a day or two. Some people wait for the contribution to show as “settled.” Some people convert the same day. The “wait a few days” camp is being cautious; the “same day is fine” camp has the weight of tax attorney opinion behind them. Pick your comfort level. The more important thing is actually doing it before December 31.
One practical note: do not invest the money while it’s sitting in the traditional IRA. Leave it as cash. If it grows at all before conversion, you’ll owe tax on the growth (because only the principal is after-tax basis, gains are pre-tax). Keep it in a money market fund or just leave it uninvested for those few days.
Step 3: Convert to Roth
At Fidelity:
- Go to Accounts & Trade → Roth Conversion
- Select your traditional IRA as the source
- Select your Roth IRA as the destination (if you don’t have one, Fidelity will prompt you to open one)
- Convert the full balance: you want to move everything so you’re not leaving taxable gains sitting in the traditional IRA
The conversion itself is not a taxable event for the after-tax principal you contributed. You already paid tax on that $7,000. The only thing that gets taxed is any growth that happened between contribution and conversion, which, if you converted within a few days, is essentially zero.
After the conversion, invest the money in whatever you’d normally hold in your Roth: a total market index fund, a target date fund, VTSAX, VOO, whatever your allocation calls for. The money is now in Roth, it grows tax-free, and qualified withdrawals in retirement are tax-free.
Step 4: File Form 8606, Don’t Skip This
Every year you do a backdoor Roth, you must file IRS Form 8606 with your tax return. This form tracks your non-deductible IRA contributions (your “basis”). If you don’t file it, the IRS has no record that you already paid tax on that money, and you could end up paying tax on it again when you take distributions in retirement.
Form 8606 is straightforward. In TurboTax or H&R Block, tell it you made a non-deductible traditional IRA contribution and then converted it to Roth. The software generates the form automatically. If you use a CPA, tell them explicitly, “I did a backdoor Roth this year”, so they include it.
Keep your prior-year Form 8606s. They’re your proof of basis. Losing them is a headache.
The Pro-Rata Rule: The Part That Ruins Everything (If You’re Not Careful)
Here’s where tech workers get blindsided. If you have other pre-tax traditional IRA money sitting around anywhere, the backdoor Roth gets complicated and potentially expensive.
The IRS doesn’t care which specific dollars you’re converting. It looks at the total balance across all your traditional IRAs on December 31 of the conversion year and applies a blended tax rate to your conversion. This is the pro-rata rule.
Example: You have $93,000 in a rollover IRA from a previous job (pre-tax) and you just contributed $7,000 non-deductible. Your total traditional IRA balance is $100,000. Your after-tax basis is $7,000, that’s 7% of the total. When you convert $7,000 to Roth, only 7% of it ($490) is tax-free. The other 93% ($6,510) is taxable income.
That’s not a disaster, but it’s not the clean zero-tax conversion you expected. And if you have $200,000 in a rollover IRA, the taxable portion gets worse proportionally.
The Fix: Roll Your Pre-Tax IRA Into Your 401k
If your employer’s 401k plan accepts incoming rollovers (many do, check your plan documents or call your 401k provider), you can roll your pre-tax traditional IRA balance into the 401k before December 31. Once that money is out of your IRA and sitting in your 401k, it no longer counts in the pro-rata calculation.
The sequence:
- Check whether your 401k accepts IRA rollovers (this is plan-specific: ask your HR or plan administrator)
- Initiate a direct rollover from your IRA to your 401k (Fidelity NetBenefits has this under Rollovers)
- Complete the rollover before year-end
- Now your traditional IRA balance at year-end is just the $7,000 you contributed non-deductibly
- Convert it: the full $7,000 is after-tax basis, zero taxable income
Not every 401k accepts rollovers. Smaller company plans sometimes don’t. If yours doesn’t, you’re stuck either paying the pro-rata tax or leaving the pre-tax IRA alone and not doing the backdoor until you change jobs and can roll it into a new employer’s plan.
Annual Backdoor Roth Checklist
Do this every year before December 31:
- Verify your MAGI will exceed the phase-out limit (if it’s borderline, you might not need the backdoor at all)
- If you have pre-tax traditional IRA money, roll it into your 401k before contributing
- Contribute $7,000 (or $8,000) to your traditional IRA: non-deductible
- Wait for settlement, then convert the full balance to Roth immediately
- Do not invest the traditional IRA funds before converting
- File Form 8606 with your taxes in April
- Invest the converted Roth funds in your target allocation
Common Mistakes
Forgetting Form 8606. You’ll pay tax twice on that money someday. Don’t do this.
Converting only part of your traditional IRA balance. If you have leftover pre-tax money in a traditional IRA from prior years, converting only the new non-deductible contribution is still subject to pro-rata. You can’t “pick” which dollars to convert.
Investing in the traditional IRA before converting. If the money earns $50 in dividends before you convert, that $50 is taxable. Keep it in cash.
Waiting until January. IRA contributions can be made up until the April tax deadline for the prior year. Contributions can be made for 2026 anytime before April 2027. But the conversion has to happen in the same tax year you want it to count. If you contribute in January 2027 for tax year 2026 and then convert in February 2027, that’s a 2027 conversion, Form 8606 timing gets complicated. Easier to just do the whole thing in the same calendar year.
Not having a Roth IRA open. This is a one-time annoyance, open it now, even if empty, so there’s no delay when you go to convert.
The Math in Your Favor
Backdoor Roth contributions compound the same as any Roth IRA. $7,000 per year for 20 years at 8% average annual return grows to roughly $346,000, tax-free. That isn’t hypothetical money. It’s the compound interest table applied to consistent $7k annual contributions.
Your 401k gives you the deduction now. Your Roth gives you the tax-free exit later. The backdoor is how you get both, even once your income crosses the IRS’s arbitrary threshold.
The paperwork takes about 20 minutes once you know what you’re doing. The first time takes longer because you’re checking plan documents and figuring out the Fidelity interface. The second time takes less time than writing a code review.
Do it.
