Is a backdoor Roth IRA for physicians worth the pro-rata paperwork?

Is the backdoor worth it above the Roth IRA phase-out?

Usually, yes, if your income rules out a direct Roth contribution and no pre-tax IRA money will be in your name on December 31. The remaining route is a nondeductible traditional IRA contribution followed by a Roth conversion. Annex Wealth Management starts by checking your tax return and every IRA statement, not by assuming the contribution is tax-free.

For 2026, the IRS Roth IRA income phase-out is $242,000 to $252,000 of modified adjusted gross income (MAGI) for married couples filing jointly, and $153,000 to $168,000 for single filers. The IRS IRA contribution limit is $7,500, or $8,600 at age 50 or older with the $1,100 catch-up. Check the current IRS limit before acting in a later year.

MAGI includes both W-2 salaries and net 1099 profit from locums shifts. A couple like Jun and Patrice is far above the joint phase-out; one year of moonlighting can also push a borderline couple over it. If your income falls below the phase-out during a part-time year or sabbatical, a direct Roth contribution is simpler.

The backdoor route is paperwork, not a special account. If a workplace plan will not accept your pre-tax IRA and the tax cost of converting the whole balance is high, skipping the backdoor for that year can be the sensible choice. Inherited IRAs do not count in this calculation.

What changed for Roth conversions, and what does that mean for an old plan?

Since 2018, nobody can recharacterize a Roth conversion. Once the money lands in the Roth IRA, you cannot send it back to a traditional IRA. A residency-era plan that said to convert and reverse the move if the market fell no longer works. The IRA catch-up is now indexed to inflation; the IRS limit for age 50 or older is $1,100 for 2026.

The conference report to the Tax Cuts and Jobs Act described the contribution-then-conversion sequence as allowed, settling the old “step transaction” concern for most tax preparers. The tax still depends on all relevant IRA balances and your basis, so Annex Wealth Management checks those figures before treating a conversion as clean.

Step 1: Pull the December statement for every IRA in your name

Gather the year-end statement for each traditional, SEP and SIMPLE IRA held in your name. Include the rollover IRA from residency and any SEP-IRA opened for locums income. Find the last Form 8606 you filed; line 14 shows after-tax basis you may already carry forward.

Separate pre-tax money from basis, which is money already taxed. Only the pre-tax portion can move into a 401(k). Roth IRAs, 401(k) and 403(b) balances, inherited IRAs and your spouse's IRAs do not count. Jun's accounts never change Patrice's calculation.

The easy slip is adding up accounts at one custodian and missing a small IRA elsewhere. A forgotten $5,000 balance still changes the taxable share. Annex Wealth Management uses the December 31 snapshot, so include accounts you rarely look at.

Step 2: Get the 401(k) plan's roll-in rules in writing

Find the summary plan description and incoming-rollover form. Ask HR or the recordkeeper whether the plan accepts roll-ins from IRAs, not only transfers from other workplace plans. Ask which investments are available and what they cost before choosing among the three options listed here.

The first option is a direct roll-in of pre-tax IRA money, with no conversion tax on the transfer. The second is converting all $60,000, which creates about $21,000 in tax at an assumed 35% rate. The third is to leave the IRA in place and skip the backdoor. A solo 401(k) for 1099 locums income may be another destination, covered separately.

The tax saved by a roll-in has a price tag. At a 0.4% expense ratio, a $60,000 401(k) investment costs $240 each year; at 0.1% in the IRA, it costs $60. The difference is $180 yearly. Look up the plan's lowest-cost index fund. A high-cost plan and a likely job change can make a roll-in poor value.

Starting in December can leave too little time. Recordkeepers may take weeks to process forms and checks, so begin by October and ask for a direct trustee-to-trustee transfer. A check paid to you can trigger default IRA withholding and starts a 60-day rollover clock.

• Roll pre-tax IRA into the 401(k)
• Convert the full $60,000
• Leave it and skip the conversion

Step 3: Set aside $625 each month, convert, then report it

Put $625 each month in the spending plan as a separate line for the $7,500 annual contribution. Keep it in cash until you contribute, so the money does not come from the house fund or a market sale. Annex Wealth Management builds the monthly cash flow first and fits the portfolio to it. For Patrice, that means the $625 sits next to the mortgage savings line, not underneath it.

Make the contribution as nondeductible, then convert after the money settles, often within days. Any small gain before conversion is taxable. A contribution counted toward last year can still go in up to the filing due date. A March conversion, however, is tested against the December 31 IRA balance of the calendar year in which you convert.

The 1099-R for a conversion typically arrives in late January, and Form 5498 by May. Form 8606 records basis in Part I and the conversion in Part II. The IRS penalty for failing to file Form 8606 after a nondeductible contribution is $50. Tax software can read box 2a of the 1099-R as taxable without the basis; enter the basis yourself and review the result.

• $625 from monthly cash flow
• Nondeductible IRA contribution
• Form 8606 filed with return

Step 4: Patrice's $60,000 residency IRA, before and after a roll-in

Jun and Patrice (hypothetical) are 44 and 43, and their loans are paid off. Before deciding about a house, Patrice, an emergency physician with W-2 pay and 1099 locums shifts, reviews her $60,000 pre-tax rollover IRA from residency. Her own numbers show why the December balance matters.

She contributes $7,500 after tax and converts it. The pro-rata calculation includes her $60,000 year-end IRA balance plus the $7,500 converted: $60,000 + $7,500 = $67,500. Her tax-free share is $7,500 ÷ $67,500 = 11.1%, or about $833. The remaining $7,500 - $833 = $6,667 is taxable.

At an assumed 35% tax rate, $6,667 × 35% is about $2,333 in tax. Another $6,667 of basis stays in the IRA for later years. That tax can recur with each conversion while the pre-tax balance remains, though the exact calculation changes with account values and later activity.

Now Patrice rolls the $60,000 directly into her hospital 401(k) before December 31. Her year-end IRA balance becomes $0, so the full $7,500 conversion is tax-free apart from any small earnings. Jun's IRAs are figured separately. The table answers the practical question: what changes in tax and recurring fund cost when she rolls the IRA in first?

The tax line can repeat each year the IRA stays put; the roll-in's recurring cost is $180 more each year under the assumed fund expenses. That is the trade-off to weigh, along with plan rules and how long Patrice expects to stay at the hospital.

Step 5: Check what happens if you leave the hospital or open a SEP-IRA

Opening a SEP-IRA for locums income because generic advice calls it the simplest account can put pre-tax money back into the pro-rata calculation. Say Patrice has a $15,000 SEP-IRA from $80,000 of locums income. Her next $7,500 conversion is then measured against $15,000 + $7,500 = $22,500, and $7,500 × $15,000 ÷ $22,500 = $5,000 of it is taxable. At an assumed 35% rate, that is about $1,750 in tax each year the SEP balance stays put.

The same trap follows advice to move an old 401(k) into an IRA after leaving a job. That can recreate the problem once backdoor conversions begin. Check whether a new employer accepts the rollover or leave the old plan where it is. Annex Wealth Management checks this before a job change when possible.

Proposals to restrict conversions of after-tax money by high earners have been floated before. Conversions already completed stay completed, but a future rule could close the route. Keep the $625 monthly line flexible enough to redirect to a taxable account. A disability that ends earned income also ends IRA contributions; a spousal IRA is possible only while the other spouse has earned income.

The decision rule is practical: if you will hold any traditional, SEP or SIMPLE IRA money on December 31 and your workplace plan accepts roll-ins, move the pre-tax portion before converting. If no plan accepts it, compare the one-time tax of converting all the IRA with skipping the backdoor that year.

Step 6: Decide who raises the IRA question at home

In many two-doctor marriages, the spouse who prepares or hands off the tax return raises the backdoor Roth question, often after the CPA asks about Form 8606 or an unexpected 1099-R. Each spouse uses only their own IRA balances for the pro-rata calculation, but the contribution still competes with shared cash needs.

Jun and Patrice should agree where their combined $1,250 each month comes from before it starts competing with money for the house. If one person handles the return, the other should still know where the December statements and prior Form 8606 are kept.

Step 7: Bring the December 31 IRA question to Annex Wealth Management

Ask: will any traditional, SEP or SIMPLE IRA money be in my name on December 31, and will my workplace plan accept it at a fund cost I can live with? Bring the December IRA statements, your last Form 8606 and the plan's rollover rules so Annex Wealth Management can check the answer against your accounts.