Commentary · Tax Strategy

The Backdoor Roth Has a December Deadline.

Written by the William Allan team · Published 2026-11-09

How the pro-rata rule and Form 8606 decide whether a backdoor Roth conversion is taxed

Above a certain income, you cannot contribute to a Roth IRA directly. For 2026, eligibility phases out between $153,000 and $168,000 of modified adjusted gross income for single filers, and between $242,000 and $252,000 for married couples filing jointly. IRS Notice 2025-67

The backdoor Roth is the workaround: a nondeductible contribution to a traditional IRA, followed by a conversion of that money to a Roth IRA. Done cleanly, the conversion costs little or no tax, because the contribution was made with money that had already been taxed.

Whether it was done cleanly is decided on December 31. The IRS figures how much of a conversion is taxable from the value of every traditional, SEP, and SIMPLE IRA you own on the last day of the year you convert. For a conversion made in 2026, that date is December 31, 2026, even if the conversion happened in February.

How the Backdoor Works

The 2026 IRA contribution limit is $7,500, or $8,600 if you are 50 or older, and you need at least that much taxable compensation, yours or your spouse's on a joint return. A contribution for 2026 can be made until April 15, 2027. IRS Publication 590-A

If you or your spouse is covered by a retirement plan at work and your income is above the Roth limit, a traditional IRA contribution is not deductible. It becomes basis: money that has already been taxed and should not be taxed again. If neither of you is covered by a workplace plan, the contribution is deductible at any income, though you can choose to treat it as nondeductible. That changes the math, and that case is worth running with your CPA.

Then you convert. A conversion is reported in the year it happens, and conversions made in 2018 or later cannot be undone. Any earnings between the contribution and the conversion are taxable, which is one reason people tend to convert soon after contributing.

The December 31 Test

You cannot choose to convert only the after-tax dollars. For this calculation, all of your traditional, SEP, and SIMPLE IRAs are treated as one pool, and every dollar you withdraw or convert carries the same share of basis. The main exception is a rollover into an employer plan: it can take only pre-tax money, so it leaves the basis behind in the IRA.

Form 8606 does the math. The share of a conversion that comes out tax-free is your basis, meaning nondeductible contributions made by December 31 of that year, including any from earlier years, divided by the sum of three amounts: the value of those IRAs on December 31, plus any outstanding rollovers; your other IRA withdrawals during the year, not counting rollovers, conversions, or charitable distributions; and the amount you converted. Instructions for Form 8606

What counts toward the December 31 value:

• Traditional IRAs, including rollover IRAs that hold old 401(k) money
• SEP IRAs and SIMPLE IRAs, the traditional pre-tax kind

What does not:

• Balances in 401(k), 403(b), and 457(b) plans and the Thrift Savings Plan
• Roth IRAs
• Your spouse's IRAs, because each spouse files a separate Form 8606
• An IRA you inherited, unless you are a spouse who chose to treat it as your own, because its basis is tracked separately IRS Publication 590-B

A Worked Example

Consider a hypothetical single filer who is covered by a 401(k) at work and has income of about $190,000. In February 2026, this person contributes $7,500 to a new traditional IRA and converts it to a Roth IRA a week later, before it earns anything. There is also a rollover IRA from a former employer's 401(k), worth $92,500 on December 31, 2026.

• The pool on Form 8606: $92,500 at year-end plus the $7,500 converted, or $100,000.
• The basis share: $7,500 divided by $100,000, or 7.5%.
• The tax-free part of the conversion: $562.50. The taxable part: $6,937.50.

In the 24% federal bracket, that is about $1,665 of federal income tax on a move that was supposed to cost almost nothing. The rest of the basis, $6,937.50, is not lost. It stays with the remaining IRA money and comes out tax-free a little at a time in future withdrawals and conversions, under the same formula.

Now suppose the same person moves the $92,500 into a current employer's 401(k) by direct rollover before December 31, 2026. The year-end IRA value is zero, the basis share is 100%, and the whole $7,500 conversion is tax-free. Nothing about the February conversion changed. Only the year-end balance did.

These figures are hypothetical. They assume no nondeductible contributions in earlier years and that the money earned nothing before the conversion, and they leave out state income tax.

Where the Year-End Balance Comes From

An old 401(k) rolled into an IRA is a common source. Changing jobs in the fall and rolling the old plan into an IRA in December puts the whole balance into the test. Leaving it in the old plan, or moving it into the new employer's plan, keeps it out. Which is better depends on the plans themselves, which we cover in our piece on old 401(k)s from previous jobs.

A SEP or SIMPLE IRA counts too. Business owners who fund a SEP IRA every year carry a balance the test includes. Some move to a solo 401(k) or another plan that accepts incoming rollovers, which is a plan-design decision with its own costs and deadlines and part of our planning for business owners. A SIMPLE IRA generally cannot be rolled into anything but another SIMPLE IRA during the first two years of participation.

A small IRA opened years ago and forgotten still counts, dollar for dollar.

So does a rollover in transit. Money taken out of an IRA after November 1 and rolled back into an IRA within 60 days, after the new year starts, is added to the December 31 value. Instructions for Form 8606

Before December 31

If you made a backdoor conversion this year, or plan to make one before year-end:

• List every traditional, SEP, and SIMPLE IRA you own and what each will hold on December 31.
• If there is pre-tax IRA money, ask your current employer's plan whether it accepts incoming rollovers, and compare its investments and costs before moving anything. Only the pre-tax part of an IRA can be rolled into an employer plan, and plans are not required to accept rollovers. IRS Publication 590-A
• Use a direct transfer, and ask both custodians for their year-end cutoffs. Moving money between firms can take weeks.

If you have not contributed yet and cannot clear the balance this year, a 2026 contribution can still be made until April 15, 2027. Tell the custodian it is a 2026 contribution, or it may be recorded as one for 2027. Converting it in 2027 makes December 31, 2027, the date that counts.

You can also convert the pre-tax IRA money and pay the tax on purpose. That is an ordinary Roth conversion decision, not a backdoor one, and it depends on what the year's income can carry. Our Roth conversion and IRMAA planner shows how much room a year has before the next bracket, and our piece on the Roth conversion window covers the timing.

Form 8606 Is the Record

Your custodian reports the conversion, but it generally does not know how much of your IRA money was already taxed. Form 8606 is where that is recorded. You file it for each year you make a nondeductible contribution and for each year you convert, and spouses who both need one file separately. Not filing can carry a $50 penalty and overstating nondeductible contributions a $100 penalty. Instructions for Form 8606 Without the form, a conversion can be taxed as if none of it had been taxed before. IRS Publication 590-A

The paperwork can split across two returns. A 2026 contribution made in February 2027 goes on the 2026 Form 8606, while converting it that same month goes on the 2027 form. That split is easy to miss.

Keep every Form 8606 you file. Your basis carries forward until the last dollar leaves your IRAs.

Congress has considered ending the backdoor Roth before, most visibly in 2021, and it remains available under current law as of November 2026.

Where an Advisor Fits

A backdoor Roth is a small contribution with a year-end test attached, and it reaches into your other accounts: old employer plans, a business's retirement plan, and any larger conversion you are weighing. That is the kind of decision we work through in our tax planning approach, where the tax work and the investment decisions happen in the same conversation.

William Allan is fee-only and is paid directly by clients. The firm does not earn commissions for selling investments, insurance, or proprietary products.

Schedule a free introductory call with Ian, who handles first conversations for William Allan. The call is not advice; its purpose is to understand your situation and help arrange the right next step with the advisory team.

This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results. The example is hypothetical, is not based on any client, and does not represent any investment's performance. Rules and figures were checked November 9, 2026, against IRS Notice 2025-67, the 2025 Publications 590-A and 590-B, and the 2025 Form 8606 and its instructions along with the 2026 drafts, and can change; 2027 IRA contribution and income limits had not been published at that time. Whether a contribution is deductible and how a conversion is taxed depend on your income, filing status, workplace plan coverage, and every IRA you own, so confirm your situation with your tax professional. William Allan does not provide tax or legal advice; tax preparation and tax advice, when provided, are through affiliated Crawshaw CPAs under a separate engagement. William Allan is an investment adviser registered with the SEC; registration does not imply any specific level of skill or training.