Backdoor Roth IRA: Mistakes I've Seen

I work with clients who have done their homework on the backdoor Roth, gotten the mechanics right, and still ended up with a tax problem because of an old rollover IRA they hadn't thought about in years. The account had been sitting at Fidelity or Vanguard since they changed jobs, and it simply didn't occur to them that it affected anything.

The individual steps are simple. What trips people up is keeping track of every IRA across every institution, filing Form 8606 correctly year after year, and remembering to actually invest the converted balance. None of it is hard in isolation. It's the kind of thing that slips when you're busy and not watching the whole picture. As someone who worked at the IRS, I can tell you errors have a way of surfacing.

1. The Pro-Rata Trap

The pro-rata rule says that if you have any pre-tax IRA money in a traditional IRA, SEP-IRA, or SIMPLE IRA, you can't convert just the after-tax portion. The IRS requires you to treat all your traditional, SEP, and SIMPLE IRA dollars as a single pool. Roth IRAs are not part of this calculation. If 80% of that pool is pre-tax and 20% is after-tax, then 80% of any conversion is taxable, regardless of which dollars you think you're moving.

The version I see most often: people who genuinely don't know they have a pre-tax IRA somewhere. An old rollover from a job they left years ago. A SEP-IRA a CPA set up to reduce self-employment income one year and never mentioned again. These don't show up anywhere obvious until the conversion generates an unexpected tax bill.

If you're planning a backdoor Roth, the first step is a complete inventory of every IRA you hold across every institution. The pro-rata calculation uses your December 31 balance across all IRA accounts combined.

2. Not Filing Form 8606

When you make a nondeductible IRA contribution, you're supposed to file Form 8606 with your tax return. This form tracks your basis: the after-tax dollars you've contributed over the years. Without Form 8606, the IRS's Automated Underreporter program may not have your basis on record, which can make a conversion look fully taxable and trigger a CP2000 notice if the discrepancy is caught.

Filing Form 8606 every year you make a nondeductible contribution is not optional. It's how you establish basis so the IRS knows the conversion isn't new taxable income.

3. Filing Form 8606 Incorrectly

If you do file Form 8606, the most common mistake is not carrying forward basis from prior years. I've seen this most often with people who've been doing the backdoor Roth for three or four years and assumed TurboTax handled the carryforward automatically. That cumulative basis needs to flow forward every year. Miss it and you're effectively paying taxes twice on money you already paid taxes on. If you've been doing backdoor Roths for several years, review your Form 8606 history before continuing.

4. Contributing Directly to a Roth Above the Income Limit

If you contribute directly to a Roth IRA in a year when your income exceeds the limit, that contribution is treated as an excess contribution and can trigger a 6% excise tax for every year the money remains in the account.

This happens most often with people who move from below the income threshold to above it mid-career and don't update how they're contributing. I see this most often in the year someone gets a big raise or a bonus and crosses the threshold without realizing it. Caught early it's fixable. Caught years later, the cleanup is more expensive.

5. Converting but Leaving the Cash Uninvested

This one doesn't generate an IRS notice. It just costs you years of compounding.

After a conversion, the money lands in your Roth IRA as cash. At some custodians it defaults to a money market fund. I've seen this more than once: the conversion was done correctly but the money sat in a money market fund for years because the account defaulted to cash and nobody checked.

After every conversion, confirm the money is invested according to your target allocation. It's a simple step that's easy to skip.

6. Waiting Too Long Before Converting

There's no rule requiring an immediate conversion after contributing, but there's a practical reason not to wait: earnings.

If you contribute $7,500 to a traditional IRA in January and convert it in October, the account may have earned a small amount in the interim. That earnings amount is taxable when you convert, because it was never-taxed growth in the traditional IRA. For most people the amount is small, but it complicates the Form 8606 calculation unnecessarily. Keep the traditional IRA in cash or a money market fund and convert within a day or two of contributing. It keeps the math clean. There's usually no upside to waiting.

If you're a high earner in the Washington, DC area looking for a fee-only, fiduciary advisor who takes both the tax and retirement side of the equation seriously, I'd welcome a conversation. You can schedule a free introductory call.