Backdoor Roth Contributions for Firefighters

How to Execute a Backdoor Roth (Step-by-Step Guide)

1. Open a Traditional IRA (if you don’t have one already).

You might already have a Traditional IRA account; if not, you can open one with nearly any brokerage or financial institution. This is going to be the temporary holding bucket for your contribution. If you’re married, your spouse can have their own IRA and do this too, effectively doubling the contribution, as long as one of you has enough earned income to cover both contributions.

2. Contribute to the Traditional IRA – after-tax.

Fund the IRA with your contribution for the year. As a firefighter under 50, you can contribute up to $7,000 (if you’re 50 or older, you get an extra catch-up, typically $1,000 more). Since you likely have a workplace retirement plan (like a 457(b) deferred comp plan) and a decent income, this IRA contribution will be non-deductible on your taxes, and that’s perfectly fine. We actually want it to be after-tax because that’s what makes the next step tax-free.

Pro tip: Don’t invest this money in anything that might generate a big gain just yet. It’s usually smartest to contribute the cash and keep it parked (in a money market fund or similar) for a very short time, because we’re about to move it and we want to avoid any earnings that could create a tax bill.

3. Convert the Traditional IRA to a Roth IRA.

After the contribution clears, you initiate a Roth conversion of that exact amount. You just tell your broker “Hey, move the $7,000 from my Traditional IRA into my Roth IRA.” If you don’t have a Roth IRA yet, you’ll open one to receive the money. This conversion process may be as simple as an online form or a phone call – it’s a routine transaction.

 Because you never took a tax deduction on the $7,000, converting it shouldn’t add to your taxable income for that $7,000 principal. The only thing that might be taxable is any earnings that occurred between contribution and conversion (for example, if that $7,000 sat in the IRA for a month and earned $50 in interest, you’d owe tax on that $50). So, the sooner you convert, the less chance of taxable growth. 

4. File the paperwork (Form 8606) at tax time.

This step is critical. When you do a non-deductible IRA contribution and then convert, you must report it to the IRS properly so they know you already paid tax on that contribution. IRS Form 8606 is used to declare non-deductible IRA contributions and to calculate the taxable and non-taxable portions of conversions. It will show that you put in $7,000 after tax, and then converted $7,000, so the vast majority of that conversion is tax-free. If you use tax software or an accountant, make sure they know you did a Backdoor Roth. Filling out the form correctly ensures you don’t get taxed twice on that money. (It’s not as scary as it sounds – Form 8606 is fairly straightforward, and plenty of guides exist to walk you through it.)

That’s it! You contributed money that was off-limits to a Roth by going through a Traditional IRA first. Now that cash is growing in a Roth IRA, sheltered from taxes forever. And you can repeat this process every year you’re over the Roth income limit, effectively stashing away an extra chunk of money in your tax-free retirement bucket annually.

Pretty straightforward, right? But before you charge in, there are a few pitfalls and cautions to be aware of. The Backdoor Roth is perfectly legal and commonly used, but if you’re not careful, you could trigger unexpected taxes or penalties.

Key Pitfalls of Roth Conversions

Pro-Rata Rule

Here’s where things can get messy fast: the pro-rata rule. If you have any existing Traditional IRA money (from old rollover IRAs, previous non-deductible contributions, or SEP-IRAs from side work), the IRS treats all your Traditional IRAs as one big pot when you do a conversion. Let’s say you’ve got $30,000 in an old rollover IRA (all pre-tax money) and you contribute $7,000 in new after-tax money for your Backdoor Roth. When you convert that $7,000, the IRS doesn’t let you pick and choose which dollars to convert. Instead, they make you convert proportionally. 

In this example, you’d owe taxes on roughly 81% of your conversion ($30,000 ÷ $37,000 = 81% pre-tax money). That $7,000 conversion would trigger about $5,670 in taxable income, potentially defeating the whole purpose. One potential fix is to roll those old Traditional IRA balances into your 457(b) plan before doing the Backdoor Roth, effectively clearing the decks. Most 457 plans accept rollovers, and this move isolates your new after-tax contribution for a clean, tax-free conversion.