✅ Step-by-Step Yearly Backdoor Roth Conversion Strategy

Are you interested in Backdoor Roth Conversions? Here are some things to think about:

1. Understand the Pro-Rata Rule

The IRS requires that when you do a Roth conversion, the portion that's taxable is based on the ratio of pre-tax to post-tax (non-deductible) IRA funds across all your IRAs (traditional, SEP, and SIMPLE). You can't just convert the non-taxable portion without including a prorated share of pre-tax funds.

Example:

$80,000 in deductible (pre-tax) IRA funds
$20,000 in non-deductible (post-tax) IRA funds
If you convert $10,000 → 80% is taxable ($8,000)

This is why simply doing a backdoor Roth can trigger unexpected taxes unless your traditional IRA balance is near $0.

2. Zero Out Pre-Tax IRA Balances (if possible)

To minimize tax, try to eliminate or reduce pre-tax IRA balances before doing a conversion:

Two options:

Option 1: Roll Pre-Tax IRA funds into a 401(k)If you have access to a 401(k) (or solo 401(k) if self-employed), and it allows IRA roll-ins, transfer the pre-tax IRA balance there. This isolates the non-deductible basis in your traditional IRA and lets you convert it tax-free.
Option 2: Gradual Conversion Plan. If you cannot roll funds into a 401(k), accept that some conversions will be partially taxable and work to minimize tax by converting in low-income years or keeping conversions within a specific tax bracket.

3. Establish a Standard Annual Conversion Procedure

Step A: Contribute to a Non-Deductible Traditional IRA Each Year

Contribution limit in 2025: $7,000 (under 50), $8,000 (50+)
Report this contribution on Form 8606 to establish a cost basis (non-taxable).

Step B: Convert to Roth IRA Shortly After Contribution

Wait a few days after contribution to avoid triggering the "step transaction doctrine."
Convert the full balance of the non-deductible contribution to your Roth IRA.
Again, file Form 8606 with your tax return to indicate how much of the conversion was basis (non-taxable).

4. Strategic Roth Conversions Beyond the Backdoor

If your income and tax bracket allow, consider converting additional pre-tax IRA funds each year:

Conversion Amount Guidelines:

Estimate your marginal tax bracket and calculate how much room you have before moving into a higher bracket.
Convert just enough each year to "fill up" your current tax bracket (especially 12%, 22%, or 24%).
Do this from ages 59½ to 73 (before RMDs), or even earlier if you're in a gap period (e.g., early retirement).

5. Track Your Basis and Conversions Carefully

Maintain accurate records of all non-deductible contributions and conversions.
File Form 8606 every year that you contribute non-deductible amounts or do conversions.
Make sure your tax preparer understands how to apply the pro-rata rule correctly.

6. Watch Out for Timing and Market Swings

Doing conversions when markets are down can reduce taxes (you convert a smaller balance that may recover tax-free in the Roth).
If possible, convert early in the year to maximize Roth growth potential.
Don’t forget that Roth conversions increase your Adjusted Gross Income (AGI), which can affect other tax credits or Medicare premiums (IRMAA).

Would you like help calculating an ideal yearly conversion amount based on your tax bracket or income estimates?

Here is what I would need from you:

Estimated taxable income for 2025 (excluding any Roth conversions):This helps determine your current marginal tax bracket.
Filing status (e.g., Single, Married Filing Jointly, Head of Household):This determines the income thresholds for tax brackets.
Age:This affects IRA contribution limits and Medicare premium considerations.
Total balance in all Traditional, SEP, and SIMPLE IRAs (rough estimate is fine):This affects how the pro-rata rule applies.
How much of your IRA balance is from non-deductible contributions (your “basis”):Reported on Form 8606 if you've tracked it.
Do you have access to a 401(k) that allows IRA roll-ins?This could help reduce pre-tax balances before a backdoor Roth conversion.
Do you expect your income to increase, decrease, or stay the same in future years?This helps us consider long-term Roth conversion timing.

If you would like to book a tax advisory session with us to have your questions answered, you can schedule online here.

https://www.caslerfinancial.com/scheduling

These calculations mentioned here would be beyond the scope of the 30 minute zoom consultation but having all this information ready and available could allow us to do some rough calculations for you and we could talk about best strategy moving forward.

✅ Top Benefits of a Roth IRA in Retirement

1. Tax-Free Withdrawals

Qualified withdrawals from a Roth IRA (after age 59½ and held for at least 5 years) are 100% tax-free, including both contributions and investment growth.
This gives you tax diversification — you can manage your tax liability by choosing whether to pull from taxable, traditional (tax-deferred), or Roth accounts.

2. No Required Minimum Distributions (RMDs)

Unlike traditional IRAs and 401(k)s, Roth IRAs do not require RMDs during your lifetime.
This allows your money to continue growing tax-free for a longer time and gives you greater control over how and when you take withdrawals.

3. Estate Planning Advantages

Roth IRAs can be a great wealth transfer tool. Your heirs will receive the account tax-free (though they must take distributions over 10 years).
Because RMDs aren’t required during your lifetime, you can preserve more wealth for beneficiaries.