Key takeaways
- For the 2026 tax year the IRS phases out direct Roth IRA contributions between $153,000 and $168,000 of income for a single filer, while a traditional IRA contribution of $7,500 carries no income ceiling at all.
- Section 408 of the tax code treats every traditional, SEP and SIMPLE IRA you own as 1 contract. Form 8606 line 6 asks for their combined value on 31 December.
- Convert $7,500 with no other IRA money and the taxable amount is $0. Hold a $92,500 rollover IRA alongside it and $6,937.50 of the same conversion becomes ordinary income.
- At the 24% rate that runs from $105,700 to $201,750 of taxable income for a single filer in 2026, that surprise is worth $1,665 in federal tax.
- No IRS ruling applies the step-transaction doctrine to this sequence. A 2017 conference report footnote described it, and section 138311 of a 2021 bill would have closed it but never became law.
The two steps take an afternoon. What they cost depends on money you never touched
You earn too much to pay into a Roth IRA, somebody mentioned the back door, and you want to know whether it works and what it costs. Here's the answer before the explanation.
The mechanism is two steps. You pay into a traditional IRA and don't claim a deduction for it. Then you convert that account to a Roth. If every traditional IRA you own is empty at the end of the year, the taxable amount is $0 and the whole thing is paperwork. If you're carrying a rollover IRA from an old job, most of the conversion is ordinary income.
The rule that decides which of those you get is called pro-rata, and it isn't a penalty or a judgement call. It's a fraction printed on the face of one tax form. The number that drives it is not the amount you converted. It's the total of everything you hold in traditional IRA money on 31 December — including accounts you had no intention of touching.
Three 2026 income tests that don't line up, and the gap between them
The back door exists because Congress put an income limit on one thing and not on the two things next to it. All three figures below are for the 2026 tax year, and all three move most years.
Paying into a Roth IRA directly is income-tested. The IRS puts the 2026 phase-out at "between $153,000 and $168,000 for singles and heads of household", and "between $242,000 and $252,000" for married couples filing jointly. For a married individual filing separately the range "is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000", which blocks that filer almost entirely.
Paying into a traditional IRA is not income-tested. Publication 590-A states it flatly: "There is no upper limit on how much you can earn and still contribute." What is income-tested is the deduction. If you're covered by a plan at work, the 2026 phase-out "is increased to between $81,000 and $91,000" for a single filer, and "between $129,000 and $149,000" for a couple filing jointly where the contributing spouse is covered. Above the top of your band the contribution is still allowed. It just buys you nothing today. We've set out how that deduction test compares with a workplace deferral in what each account is actually better at.
Converting is not income-tested either. Publication 590-A notes that "rollovers from traditional IRAs to Roth IRAs (conversions) aren't limited". The 2026 contribution cap is $7,500, or $8,600 if you're 50 or older.
So above roughly $168,000 a single filer can't pay into a Roth, can't deduct a traditional IRA contribution, and can still make that contribution and convert it. That gap is the entire mechanism.
Section 408 treats every traditional IRA you own as one contract
Here's the part that catches people. When you take money out of an IRA, the tax code doesn't look at the account you took it from. Section 408 of the Internal Revenue Code sets out the rule for applying section 72 to IRA distributions, and it's three lines long: "all individual retirement plans shall be treated as 1 contract", "all distributions during any taxable year shall be treated as 1 distribution", and the value "shall be computed as of the close of the calendar year in which the taxable year begins".
A conversion is a distribution for this purpose. Publication 590-B is explicit that although a conversion is treated as a rollover, "it isn't an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them".
Form 8606 turns that statute into a box you fill in. Line 6 asks you to "Enter the value of all your traditional IRAs as of December 31, 2025, plus any outstanding rollovers" — the wording is from the 2025 form, the current version. A note at the top of the form widens it further: "traditional IRA" there "includes traditional SEP IRAs and traditional SIMPLE IRAs".
Two things are outside the fraction, and both matter. Money in a 401(k) or a 403(b) isn't an IRA and doesn't appear on line 6. Nor does your spouse's IRA, because the form says "If married, file a separate form for each spouse required to file 2025 Form 8606." The aggregation is per person, not per household.
How common is the balance that spoils this? IRS Statistics of Income data for tax year 2023, published in June 2026, counts 53.7 million taxpayers holding traditional IRA plans with an end-of-year value of $12.1 trillion. In that single year, 5.5 million taxpayers rolled $652.8 billion into traditional IRAs. Against that, 1.6 million taxpayers made Roth conversions totalling $36.7 billion. The pool of people carrying a legacy rollover balance is far larger than the pool converting.
The same $7,500 conversion, priced with and without a rollover IRA
Work it through on the 2025 Form 8606, using the 2026 contribution limit. Assume you pay $7,500 into a traditional IRA, claim no deduction, and convert the whole amount to a Roth in the same year.
Case one: no other traditional IRA money. Line 5 carries your basis of $7,500. Line 6, the value of all traditional IRAs on 31 December, is $0. Line 7, the distributions you didn't convert, is $0 too. Line 8, the net amount converted, is $7,500. Line 9 adds lines 6, 7 and 8 to give $7,500. Line 10 divides line 5 by line 9 and the instruction is to enter "the result as a decimal rounded to at least 3 places. If the result is 1.000 or more, enter 1.000". You get 1.000. Line 11 multiplies line 8 by line 10, giving $7,500 of nontaxable conversion. Line 18 subtracts line 17 from line 16: $0 taxable.
Case two: a $92,500 rollover IRA from a previous employer. Nothing about the contribution or the conversion has changed. Line 5 is still $7,500. But line 6 is now $92,500, so line 9 is $100,000. Line 10 becomes 7,500 divided by 100,000, or 0.075. Line 11 multiplies $7,500 by 0.075 and returns $562.50 of nontaxable conversion. Line 18 leaves $6,937.50 as ordinary income.
That's 92.5% of the conversion taxed, on money you moved from one of your own accounts to another. Price it at the 24% rate, which the 2026 tables apply to taxable income "Over $105,700 but not over $201,750", and $6,937.50 of extra income costs $1,665 in federal tax. At 32%, the band running from $201,750 to $256,200, the same conversion costs $2,220. Your own rate depends on your taxable income, not on the income test that sent you through the back door in the first place.
The chart plots the taxable share of a $7,500 conversion across six pre-existing balances. It rises fast and then flattens: $25,000 of old IRA money already makes 76.9% of the conversion taxable, and by $250,000 it's 97.1%. There's no threshold to stay under. The fraction starts biting at the first dollar.
The basis doesn't vanish. It moves to line 14 and stays there
The $562.50 that came out tax free is the only basis you used. Line 14 subtracts line 13 from line 3, and in case two that leaves $6,937.50 of basis in traditional IRAs "for 2025 and earlier years". You get it back eventually, a slice at a time. Publication 590-B puts it plainly: "Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable."
That carry-forward is a filing obligation for as long as the basis exists. The instructions to Form 8606 attach two penalties to getting it wrong. If you're required to file the form to report a nondeductible contribution and don't, "you must pay a $50 penalty, unless you can show reasonable cause". If you overstate your nondeductible contributions, "you must pay a $100 penalty". The penalties are small. The cost of losing the record isn't, because unrecorded basis is taxed a second time on the way out.
This is the same species of surprise as the wash sale rule, where a purchase inside an IRA reaches across and disallows a loss in a taxable account you thought was separate. We've traced that one in the wash sale rule and its IRA trap. In both cases the account boundary you can see isn't the boundary the tax code uses.
Emptying the traditional IRA before 31 December is the only lever in the formula
Line 6 is a snapshot, not a running total. A conversion in March and a rollover in November land in the same measurement, because what the form asks for is the value on 31 December. That timing is the whole of the flexibility the rule allows.
Moving the legacy balance into an employer plan is what removes it from line 6. Publication 590-A describes the route: "You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan", including the Federal Thrift Savings Plan, section 457 plans and section 403(b) plans. Crucially, "the part of the distribution that you can roll over is the part that would otherwise be taxable", and a special rule "treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or don't roll over is at least equal to your basis". The pre-tax money goes to the plan; the basis stays in the IRA.
Two constraints sit on that. The publication adds that "Qualified plans may, but aren't required to, accept such rollovers", so the option belongs to the plan document rather than to you. And it swaps an IRA's open investment menu for whatever the plan offers, which is a real cost that the tax arithmetic doesn't price.
The strongest case that pro-rata isn't a trap at all
Read the two cases again and there's a serious objection to calling case two a disaster. Nothing was confiscated. You converted $6,937.50 of pre-tax money into a Roth and paid tax on it at a rate you know today, instead of at an unknown rate decades from now. Your remaining basis of $6,937.50 is intact and still recoverable. What you bought is a permanent change in which bucket the money sits in.
On that reading the pro-rata rule isn't a trap. It's the tax code refusing to let you cherry-pick the untaxed dollars out of a pot that contains both. The surprise is the problem, not the economics.
The objection is fair, and it has a limit. Whether accelerating the tax was worth it depends on your marginal rate now against your marginal rate in retirement, and nobody has that second number. The case for paying tax early rests on decades of untaxed compounding afterwards, which is the arithmetic we've worked through in when returns overtake contributions. If your rate later turns out lower than 24%, the conversion cost more than it saved. That's a forecast, not a fact, and this piece can't settle it.
The step-transaction question the IRS has never answered
The doctrine is old and simple. Where a taxpayer takes a series of steps that only make sense as one transaction, a court can collapse them and tax the end result. Applied here, a nondeductible contribution followed promptly by a conversion would be recast as what it functionally is: a Roth contribution the taxpayer wasn't allowed to make.
What does the IRS say about that? Nothing directly. There's no ruling, regulation or notice applying the doctrine to this sequence, and we could not find one. That absence is the honest state of play, and anybody offering you a bright line here is filling a gap the IRS has left open.
Two pieces of primary evidence exist, and they point the same way without settling anything. The first is the conference report on the Tax Cuts and Jobs Act, in December 2017. Footnote 276 addresses the repeal of recharacterisation and says: "The provision does not preclude an individual from making a contribution to a traditional IRA and converting the traditional IRA to a Roth IRA. Rather, the provision would preclude the individual from later unwinding the conversion through a recharacterization." An identically worded footnote covers the Senate amendment. Congress described the sequence, in writing, and left it alone.
The second is what happened in November 2021. Section 138311 of the Build Back Better Act, as it passed the House, would have amended the code so that a conversion rule "shall not apply if any portion of the plan being converted would be treated as not includible in gross income", applying "to distributions, transfers, and contributions made after December 31, 2021". That is a direct shot at converting after-tax money. It never became law.
Read one way, that's two chances to close the door and no closure, which is about as much comfort as legislative history offers. Read the other way, a committee footnote isn't a statute and doesn't bind the IRS, and an unenacted bill establishes nothing at all. Both readings are available, which is precisely the point.
One asymmetry is worth knowing. Since 2018 the exit is gone. Publication 590-A confirms that a conversion made in a tax year beginning after 31 December 2017 "cannot be recharacterized as having been made to a traditional IRA". Before that rule, a conversion that went wrong could be unwound. Now it can't be.
What this arithmetic can't tell you
Start with the limitations of the worked example. It converts the contribution immediately and ignores any earnings between the contribution and the conversion, which are taxable in full. It assumes the $92,500 balance is entirely pre-tax; a legacy IRA holding its own basis produces a different fraction. And it uses the 2025 Form 8606, because that's the current version. Line numbers move between form years, and the 2026 limits used here sit inside a form that hasn't been published yet.
The tax rates are federal only. State income tax is not modelled and changes the bill materially in some states. Nothing here addresses the 10% additional tax on early distributions, which Publication 590-A ties to withdrawals before age 59 1/2, or the separate 5-year period that runs from each individual conversion.
The IRS Statistics of Income figures describe tax year 2023 and were published in June 2026. They tell you how many people hold rollover balances. They tell you nothing about your own line 6, which is the only balance that matters — and it's a single number covering everything you hold in traditional IRA money on one day, whether you track it in a spreadsheet or in LedgerTouch.
Above all, the calculation is arithmetic, not a recommendation. It prices a conversion; it doesn't say whether the conversion is worth making.
What would change the conclusion
If the pre-existing balance reaches zero before 31 December. Line 10 returns 1.000, line 11 covers the whole conversion, and line 18 shows $0. The entire trap turns on one number on one date.
If Congress enacts something like section 138311. The 2021 text would have barred converting amounts not includible in income, and a future version could do the same with a similarly short effective date.
If the IRS issues guidance on the step-transaction question. That would put past years in play, and since 2018 there's no recharacterisation available to unwind a conversion after the fact.
If your marginal rate in retirement lands below 24%. The case for paying now weakens, and the 92.5% taxable share in case two stops being a surprise and starts being a mistake.
The number to watch isn't line 1, where your $7,500 goes in. It's line 6 — the one that measures accounts you weren't thinking about when you decided to do this.