Backdoor Roth conversion and the pro-rata rule
A high-earning single employee makes a nondeductible traditional IRA contribution and converts it to a Roth, the classic backdoor Roth. But she also holds an old pre-tax rollover IRA, so the pro-rata rule on Form 8606 decides how much of the conversion is taxable.
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Taxpayer facts
Who this is and what their year looked like.
Celeste is single, 41, and lives in Nashville, Tennessee. She is an IT program director at a hospital system, where she participates in the 401(k) plan. Her pay is too high to contribute to a Roth IRA directly or to deduct a traditional IRA contribution.
In February 2025 she put $7,000 into a new traditional IRA as a nondeductible contribution for 2025, then converted that $7,000 to her Roth IRA two weeks later. What she did not think about: a rollover IRA she opened in 2019 with her old employer's 401(k), all pre-tax money, still sits at a different custodian. She takes the standard deduction.
Source documents
The 5 documents you will prepare the return from: W-2 (Wage and Tax Statement), 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.), 5498 (IRA Contribution Information (traditional IRA)), 5498 (IRA Contribution Information (rollover IRA)), 5498 (IRA Contribution Information (Roth IRA)).
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Objectives
What a correct return should capture.
- File as Single and report W-2 box 1 wages on Form 1040, line 1a.
- Confirm she cannot contribute to a Roth IRA directly: compare her modified AGI (which leaves out the conversion income) to the 2025 single Roth phase-out range of $150,000 to $165,000.
- Confirm the traditional IRA contribution is fully nondeductible: she is covered by a workplace plan (W-2 box 13) and her income is above the 2025 single deduction phase-out range of $79,000 to $89,000. Take no IRA deduction on Schedule 1, and report the contribution on Form 8606, line 1, with her basis from prior years (if any) on line 2.
- Complete Form 8606 Part I. Line 6 is the 12/31/2025 value of every traditional, SEP and SIMPLE IRA she owns at every custodian, including the rollover IRA and the small balance left in the backdoor account. Leave the Roth IRA out. Line 8 is the amount converted.
- Divide line 5 by line 9 for the line 10 ratio (as a decimal rounded to at least 3 places), then work out the nontaxable part of the conversion on line 11 and the basis she carries into 2026 on line 14.
- Complete Form 8606 Part II to find the taxable amount of the conversion on line 18, and carry it to Form 1040, line 4b, with the gross conversion amount on line 4a.
- Recognize that 1099-R distribution code 2 means no 10% additional tax applies to a conversion, so there is no Form 5329 and nothing on Schedule 2.
- Apply the standard deduction, compute the tax with the exact bracket formula (taxable income is over $100,000), and reconcile the W-2 withholding to the refund or balance due.
- Note that Tennessee has no state income tax, so there is no state return here.
Check your work
The answer key and the complete return, the way a real client receives it: the 1040 and its schedules, the workpapers behind every number, and the signature forms.
Stuck? Work through it with Yehuda
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