Backdoor Roth IRA for High-Income Tech Couples: A Kestrel Bay Retirement Advisors Walkthrough

Steps one to four: check income, clear pre-tax IRAs, contribute

Jonah (46) is a product director at a chip maker with ISOs and NSOs. Mei (44) left a startup and holds early-exercised shares. They have two kids in middle school, and they're our hypothetical household for the rest of this article. Here are the first four steps as they'd work through them.

Step 2 trips up more people than any other, because IRAs can't be joint. Each spouse runs a separate pro-rata calculation, so Mei's IRA doesn't dilute Jonah's, and the reverse is also true. We'd rather you spend the first hour on this list than on picking a custodian: a forgotten rollover IRA changes the tax on every later step.

• Step 1: Confirm that your 2026 modified adjusted gross income on a joint return is above the $242,000-$252,000 phase-out. An NSO exercise or an RSU release counts, so Jonah's equity income can push the couple over even in a year with no bonus.
• Step 2: List every traditional, SEP and SIMPLE IRA balance in both names. Each spouse has a separate pro-rata calculation. 401(k) money is not counted.
• Step 3: If a pre-tax IRA exists, roll it into a 401(k) that accepts incoming rollovers, and finish before December 31, since the pro-rata test uses that date.
• Step 4: At one custodian, open a traditional IRA and a Roth IRA for each spouse. Put up to $7,500 each into the traditional IRA and mark it nondeductible. Earned income must cover it, and a spousal IRA works for a spouse with little pay.

How do you convert and report it?

You convert by leaving the contribution in cash or a money market fund until it settles, then asking the custodian to move the whole amount to the Roth IRA. Waiting for growth is a mistake, because any gain before conversion is taxable. Most custodians let you do this online in about 30 minutes per spouse.

The paperwork comes later, and it's where the tax gets decided. In January a Form 1099-R arrives showing the conversion, and it will not say how much is taxable. In the spring a Form 5498 shows the contribution. The number that counts comes from Form 8606, which each spouse files with the joint return.

Part I of Form 8606 records the nondeductible basis, and Part II calculates the conversion. Keep a copy of every one in a folder, because basis can sit in an IRA for decades and the custodian won't track it.

• Step 5: Hold the contribution in cash or a money market fund until it settles, then convert the whole amount to the Roth IRA.
• Step 6: Expect a Form 1099-R in January and a Form 5498 in the spring. The 1099-R won't state the taxable part.
• Step 7: Each spouse files Form 8606 with the tax return (Part I for basis, Part II for the conversion).
• Step 8: Repeat each year and file every Form 8606 in one folder.

How does Kestrel Bay Retirement Advisors test the pro-rata rule for Mei?

Before suggesting any conversion, Kestrel Bay Retirement Advisors puts a tax figure on it. We add every pre-tax IRA balance to the $7,500 and divide the basis by that pool. Mei holds a $67,500 rollover IRA from her startup's 401(k), so her pool is $67,500 + $7,500 = $75,000. Basis is $7,500 of that, which is 10%, so $750 of her conversion is tax-free and $6,750 is taxable. At an assumed 30% rate, that's about $2,025 of tax. Jonah has no pre-tax IRA, so his conversion is tax-free. This is hypothetical and for illustration only.

Look at how fast the taxable share climbs in the table below. It's 0% with no pre-tax IRA, 90% at $67,500 and about 96% at $200,000.

The leftover basis doesn't vanish. Mei's unused $6,750 of basis stays with her remaining IRA and is tracked on Form 8606 until she withdraws it. And if she rolls the $67,500 into a 401(k) that accepts it before December 31, her taxable amount drops to $0.

How do age and account size change the answer?

Account size is the main variable. The same $7,500 conversion is 75% taxable against a $22,500 pre-tax IRA and about 96% taxable against $200,000. A small old IRA can usually be rolled out of the way, while a large one needs a plan.

Age changes the limit. At 50 or older each spouse can contribute $8,600 instead of $7,500, but Jonah (46) and Mei (44) are still at $7,500 each, $15,000 as a couple.

Age also changes access. Each conversion starts a separate five-year period for the 10% early-withdrawal penalty. If Jonah, at 46, takes out a converted amount within five years, the penalty applies. After five years, the converted principal can come out penalty-free even before 59½. Earnings are a different matter: they generally stay locked up until 59½, and the account must also have been open five years.

The original owner never has to take distributions from a Roth IRA. Jonah and Mei, starting in their mid-40s, give each contribution roughly 15 years to compound untaxed before most people stop working. That is a long enough run that the extra Form 8606 work usually pays for itself. Investing involves risk, including loss of principal, so that growth isn't guaranteed.

Backdoor Roth myths, and what is true

Four misunderstandings come up in almost every review we do. Each one is easy to fix once you know where to look.

• Myth: my 401(k) balance counts in the pro-rata rule. Fact: only traditional, SEP and SIMPLE IRA balances count, which is why rolling an IRA into a 401(k) clears it.
• Myth: the $7,500 limit is per couple. Fact: it applies to each person, so a couple can contribute $15,000 if each has earned income or a spousal IRA is available.
• Myth: the conversion is automatically tax-free. Fact: it is tax-free only to the extent of basis, and any growth between contribution and conversion is taxable.
• Myth: the rules can never change. Fact: Congress has discussed limiting the strategy before, so we treat it as available now and don't count on it forever.

Pros and cons side by side

The backdoor is a modest move, and we'd say so plainly. Each spouse can move only $7,500 a year into a Roth this way ($8,600 at 50 or older). If a large option exercise or other tax bill will use your cash this year, it can wait. It's also pointless for anyone below the phase-out, who can contribute to a Roth IRA directly.

• Pro: $15,000 a year (both spouses, 2026) goes into an account whose growth and qualified withdrawals are tax-free, with no required distributions during the owner's life.
• Pro: It takes about 30 minutes of custodian paperwork per spouse once the pre-tax IRA is cleared, and uses no income-limited rule at all.
• Con: Any pre-tax IRA balance makes the conversion partly taxable, and a rollover to a 401(k) depends on whether the plan accepts it.
• Con: It requires a Form 8606 every year, and a missed form carries a $50 penalty and risks paying tax twice on the same money.

What should you ask an advisor before doing it, and what does Kestrel Bay Retirement Advisors check first?

Our test is short. Look at what each spouse holds in pre-tax IRAs, counting traditional accounts plus any SEP or SIMPLE IRA. If those will total $0 on December 31, or can be rolled into a 401(k) by then, go ahead with the backdoor. If they can't be cleared, most of the converted $7,500 will be taxed. In that case, pause and weigh that tax cost against the Roth benefit first.

Converting while a pre-tax IRA is still open is the costly error. With a $200,000 rollover IRA, roughly $7,229 of the $7,500 is taxable, and skipping Form 8606 then risks paying tax on the same basis twice. Kestrel Bay Retirement Advisors starts with the tax bill: it estimates what the conversion adds to this year's income before suggesting any move.

• Which of our IRAs hold pre-tax money on December 31, and can they roll into a 401(k) at either of our jobs?
• What does the conversion cost in tax this year if I can't clear the balance, and would I rather skip a year?
• Who files Form 8606 and keeps the basis record, and where is it stored?

What can you do this week?

Start with the list, since it takes under an hour and settles whether the backdoor makes sense. If you'd like a second set of eyes, Kestrel Bay Retirement Advisors can check the balances with you. We meet over video or phone; to ask, use the contact form on kestrelbayretirement.com. Related topics, such as Roth conversion planning and equity compensation, come up when we review your income. This is general education, and tax law can change.

• Log in to every custodian and write down each traditional, SEP and SIMPLE IRA balance in both spouses' names.
• Ask each employer's 401(k) administrator in writing whether the plan accepts rollovers of pre-tax IRA money, and how long they take.
• Estimate this year's joint income, including any option exercise or RSU release, to confirm you are above $252,000.
• Send a request through the contact form on kestrelbayretirement.com if you want us to check the balances with you.