Roth IRA Income Limits and the Backdoor

MAGI (Modified Adjusted Gross Income) is not the same as your W-2 wages. It adds back certain deductions — student loan interest, traditional IRA deductions, foreign income exclusions — to your adjusted gross income. For most new graduates with straightforward income (salary + 401(k)), MAGI is very close to gross W-2 wages minus pre-tax 401(k) contributions. A large 401(k) contribution can pull your MAGI below the phaseout threshold.

The Backdoor Roth is a two-step process: (1) Make a non-deductible contribution to a Traditional IRA (up to $7,500 in 2026 — the same dollar limit as Roth). (2) Convert that Traditional IRA balance to your Roth IRA. Step 2 is a Roth conversion, not a new contribution — no income limit applies. The IRS has explicitly blessed this approach (IRS Notice 2014-54). You report the non-deductible contribution and the conversion on Form 8606.

If you have any pre-tax money in ANY Traditional IRA account (including rollover IRAs from old employers), the IRS treats all your IRA money as a single pool when you convert. The taxable fraction of the conversion equals pre-tax IRA dollars divided by total IRA dollars. Example: you have $70,000 in a rollover IRA (pre-tax) and add $7,500 non-deductible, then convert $7,500. The taxable fraction is 70,000 / 77,500 = 90.3% — so $6,774 of your $7,500 conversion is taxable income, completely defeating the strategy. The fix: roll your pre-tax IRA money into your current employer's 401(k) before doing the backdoor.

The Mega-Backdoor Roth can add $40,000–$46,000 of additional after-tax Roth space per year — but only if your 401(k) plan allows it. The mechanics: your 401(k) plan must permit (a) after-tax contributions above the employee deferral limit and (b) in-service withdrawals or in-plan Roth conversions. If both are allowed, you can contribute after-tax dollars to the 401(k) beyond the normal $24,500 employee limit and immediately convert them to Roth — the growth is then permanently tax-free. Not all plans support this; check your Summary Plan Description or ask HR.

Form 8606 is mandatory whenever you make a non-deductible IRA contribution or do a Roth conversion. It tracks your basis (after-tax dollars) in the IRA system so you are not taxed twice. File it even in years where you have no conversion. Failure to file Form 8606 means the IRS assumes all IRA distributions are taxable — you will pay double tax on money you already paid tax on.

Step 1: Is your MAGI below the Roth phaseout? → Contribute directly. Done. Step 2: Is your MAGI above the phaseout? → Check: Do you have any pre-tax IRA balances (Traditional, SEP, SIMPLE IRA)? If yes: roll them into your current employer 401(k) first. If no (or after roll): proceed with the backdoor (non-deductible TIRA → convert). Step 3: Does your 401(k) allow after-tax contributions + in-service conversion? → Layer on the mega-backdoor for up to $40,000+ of additional Roth space.

One important caveat: the Roth conversion in the backdoor is irrevocable. Once money is in the Roth, you cannot undo the conversion (the IRS eliminated recharacterizations of conversions in 2018 via the Tax Cuts and Jobs Act). Make sure you have the cash to cover any taxes due on the taxable portion before converting.