Backdoor Roth Annual Cycle — Phase 2 Repeating System
The Question
Once the IRA is clean (ADR-020 complete), what is the repeating annual system?
Answer: Three steps per person, per year. Contribute → convert → file. ~$0 tax. Permanent clean Roth funding.
Capture
With pre-tax IRA balances eliminated (ADR-020), the IRA becomes a temporary pass-through — not a storage vehicle. The annual backdoor Roth cycle runs each year independently for each spouse.
The IRA is never held. It is funded and immediately converted. It is an empty pipe.
The Annual System
Step 1 — Contribute (non-deductible)
Contribute ~$7k per person to the Traditional IRA.
- Mark as non-deductible — this is critical
- Do not take a deduction on the tax return
- Filing status: MFJ at this income level disqualifies direct Roth IRA contributions — this is why the backdoor route is used
- Timing: any time during the calendar year; January is optimal (maximizes time in market)
Step 2 — Convert immediately
Convert the full Traditional IRA balance → Roth IRA.
- Do not wait. Convert within days of the contribution landing.
- If the contribution earns any return before conversion (unlikely with immediate execution), a small amount will be taxable. Acceptable and minimal.
- "Immediately" means: contribution settles → convert the next business day
Step 3 — File Form 8606
File IRS Form 8606 with the annual tax return.
- Reports non-deductible IRA contribution
- Reports Roth conversion
- Establishes that the conversion had $0 taxable basis (or minimal, from Step 2 earnings)
- Required every year this strategy is executed
- One form per spouse per year
Result: ~$14k/year (two spouses) moves into Roth IRA tax-free. Compounds indefinitely, tax-free.
Critical Rules
| Rule | Consequence of violation |
|---|---|
| IRA balance = $0 on Dec 31 | If not zero → pro-rata applies → conversion becomes taxable |
| Contribution marked non-deductible | If deducted → conversion becomes fully taxable (double-counted) |
| Convert quickly after contribution | Delay lets earnings accumulate pre-conversion → small taxable gain |
| File Form 8606 every year | Missing form → IRS treats conversion as fully taxable by default |
| Each spouse runs independently | One spouse's IRA balance does not affect the other |
The System Architecture — One-Line Version per Account
| Account | Role |
|---|---|
| Traditional IRA | Empty pipe — funded and converted immediately, holds $0 |
| Roth IRA | Final destination — never touched except to receive conversions |
| Employer 401(k) | Pre-tax storage — holds rollover, grows tax-deferred |
Annual Calendar Rhythm
| Timing | Action |
|---|---|
| January (optimal) | Contribute ~$7k → Traditional IRA for each spouse |
| Within days | Convert → Roth IRA |
| Tax season | File Form 8606 for each spouse |
| December | Verify IRA balance = $0. If not, convert remainder before Dec 31 |
Never Use SEP IRA Again
The SEP IRA has been rolled into the employer 401(k) (ADR-020). Do not open or fund a new SEP IRA while the backdoor Roth system is active. A SEP IRA contribution would immediately reintroduce a pre-tax IRA balance, triggering pro-rata.
If LLC income later warrants a SEP-like contribution, use the solo 401(k) instead (ADR-022) — it does not affect IRA pro-rata.
Spouse-Specific Notes
The spouse runs the identical process independently. Their IRA must also reach $0 by December 31. Their Form 8606 is separate. Their rollover (ADR-020) must also be complete before Phase 2 is activated for them.
There is no shared execution here. Each person owns their own system.
Why-Not
Why not do the contribution and conversion in the same tax year but different calendar year?
Fine — contribute in December, convert in January of the following year. The form 8606 rules handle this. But "convert immediately" is the simpler execution model and avoids year-end confusion.
Why not let the IRA balance sit and compound for a while before converting?
Every day with a pre-tax IRA balance is pro-rata risk if additional pre-tax amounts are present. With a fully clean IRA, there is no benefit to waiting — the contribution is non-deductible, so conversion is tax-neutral immediately. Waiting gains nothing and adds risk.
Why not contribute directly to Roth IRA?
At the income level of this case, Roth IRA direct contributions are phased out (MFJ phase-out range is approximately $230k–$240k for 2026). The backdoor route is the only legal path to Roth IRA funding at this income level.
Assumptions This Decision Depends On
- IRA → Roth conversion continues to be permitted under current tax law (no "backdoor Roth ban" legislation)
- Pre-tax IRA balance = $0 on December 31 each year (ADR-019 and ADR-020 maintained)
- Annual IRA contribution limit remains at ~$7k per person (verify each year)
- Direct Roth IRA contributions remain phased out at this income level (justifies backdoor route)
Commit
Decision: Execute the three-step annual backdoor Roth cycle for both spouses each year: (1) non-deductible Traditional IRA contribution ~$7k, (2) immediate full conversion → Roth IRA, (3) Form 8606 filed. Both spouses run independently. Never fund SEP IRA again. Verify $0 IRA balance on December 31 every year.
Principle: The IRA is an empty pipe. The Roth is the destination.