Traditional IRA, Roth IRA, and the Backdoor Roth

Written by: Tushar Sharma

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This article explains how these accounts work, why a Roth IRA can be useful, and how I completed the backdoor Roth process at Schwab.

Last reviewed: October 7, 2026. Contribution limits, income limits, tax rules, and Schwab's screens can change, so verify them before repeating the process.

First, what is an IRA?

IRA stands for Individual Retirement Arrangement, commonly called an individual retirement account. It is a type of account, not an investment.

After adding money to an IRA, I still need to invest it—for example, in a mutual fund, ETF, bond, or stock. Cash left uninvested may earn little and will not automatically participate in the market.

An IRA is also different from a 401(k). An IRA is opened by an individual, while a 401(k) is offered through an employer. Each has its own contribution rules and limits, so contributing to a 401(k) does not prevent me from also contributing to an IRA if I am eligible.

Traditional IRA versus Roth IRA

Both accounts allow investments to grow without a current tax bill each time a fund is sold or pays a dividend. The important difference is how contributions and withdrawals are taxed.

	Traditional IRA	Roth IRA
Money going in	A contribution may be tax-deductible, depending on income and workplace retirement-plan coverage	Contributions are made with after-tax money and are not deductible
While invested	No current tax on trades, dividends, or capital gains inside the account	No current tax on trades, dividends, or capital gains inside the account
Money coming out	Withdrawals are generally taxed as ordinary income	Qualified withdrawals are tax-free
Required minimum distributions	Generally required during the owner's lifetime	None for the original owner under current federal rules

A traditional IRA can be attractive when I qualify for a deduction today and expect to be in a lower tax bracket when I withdraw the money.

A Roth IRA reverses that trade: I receive no deduction today, but qualified withdrawals—including investment growth—can be tax-free. That can be valuable when I have many years for the money to grow, expect a similar or higher future tax rate, or want more tax-free income in retirement.

Neither account guarantees a return. The benefit comes from its tax treatment; the result still depends on what I invest in, its fees, and market performance.

Why not simply contribute to a Roth IRA?

Direct Roth IRA contributions have an income limit based on modified adjusted gross income (MAGI). MAGI is calculated under tax rules; it is not the same as salary or take-home pay.

For 2026, the Roth contribution phaseout is:

Tax filing status	2026 MAGI phaseout
Single or head of household	$153,000–$168,000
Married filing jointly	$242,000–$252,000
Married filing separately and lived with spouse during the year	$0–$10,000

Within the phaseout range, the permitted direct contribution is reduced. At or above its upper end, a direct Roth IRA contribution is not allowed.

If I am eligible to contribute directly to a Roth IRA, that is the simpler choice. If my MAGI is too high, I may be able to use a backdoor Roth IRA instead.

What is a backdoor Roth IRA?

A backdoor Roth is not a special account. It is a two-step process:

Make a nondeductible contribution to a traditional IRA.
Convert the money from the traditional IRA to a Roth IRA.

The income limit that restricts direct Roth contributions does not apply in the same way to Roth conversions. After the conversion, the money sits in an ordinary Roth IRA and can be invested there.

For 2026, the combined contribution limit across all of one person's traditional and Roth IRAs is $7,500, or $8,600 for someone age 50 or older. A person also needs enough eligible compensation. The limit is per person, so spouses use separate IRAs.

The conversion itself is not another contribution and does not use a second contribution limit. For example, if I contribute $7,500 and it earns $2 before conversion, I can convert the full $7,502. In a simple case, the $7,500 of basis is not taxed again, but the $2 of earnings is taxable.

The most important check: the pro-rata rule

Before using the backdoor Roth strategy, I need to check whether I have pretax money in any traditional, rollover, SEP, or SIMPLE IRA—not just the new account at Schwab.

The IRS generally combines these IRA balances when calculating how much of a conversion is taxable. I cannot select only the nondeductible dollars and leave the pretax dollars untouched. This is known as the pro-rata rule.

Workplace accounts such as a 401(k) are not included in this calculation. A spouse's IRAs are also separate from mine.

If I have a substantial pretax IRA balance, the conversion may create a larger tax bill than expected. That is the point at which I would pause and consult a tax professional before proceeding. I would also think carefully before rolling a former employer's 401(k) into an IRA during the conversion year.

How I do it at Schwab

I need two accounts in my name:

a Schwab Traditional IRA (shown as Contributory IRA in my account); and
a Schwab Roth IRA (shown as Roth Contributory IRA).

The process is then straightforward.

1. Contribute cash to the traditional IRA

From Schwab's transfer workflow, I select my bank or taxable brokerage account as the source and the traditional IRA as the destination. I enter the contribution amount and choose the correct tax year.

The contribution must be cash. If the money is invested in a taxable brokerage account, selling an investment first may create a taxable gain or loss.

Schwab does not need to label the transfer as “nondeductible.” I establish that tax treatment when filing my return.

2. Wait until the cash is available

I leave the contribution in cash and wait until Schwab makes it available to convert. There is no special investment I need to buy in the traditional IRA. Keeping this interval short can minimize earnings that would be taxable upon conversion.

An operational hold is not a reason to submit the contribution again. I check the account history instead.

3. Convert it to the Roth IRA

In Schwab's transfer workflow, I choose:

Setting	Selection
From	Traditional/Contributory IRA
To	Roth Contributory IRA
Transaction type	Roth conversion
Amount	Full available amount intended for conversion
Amount type	Before taxes (gross)
Federal withholding	0%
State withholding	No withholding, when available and appropriate

Schwab's wording may differ between the website and app. On my screen, the transaction displayed Distribution Code 2—Roth Conversion under age 59½.

4. Review before submitting

I verify the source, destination, contribution year, conversion amount, and withholding. I submit once and save the confirmation.

The withholding choice is especially important. When I reviewed a $7,500 conversion, Schwab initially showed $750 of federal withholding and $300 of North Carolina withholding. Had I accepted those defaults, only $6,450 would have reached the Roth.

I normally want the full amount converted and would pay any tax due with money outside the IRA. Choosing zero withholding does not mean the conversion has no tax consequences; it only means Schwab will not remove taxes from the transfer.

5. Invest inside the Roth IRA

Once the conversion arrives, I buy the investments I want inside the Roth IRA. The transfer alone does not invest the money.

I also check the traditional IRA again later. If a small interest payment arrives after the conversion, I can convert that residual amount too. It is an additional conversion, not an excess contribution, although the earnings are generally taxable.

Tax reporting I should not forget

A backdoor Roth creates paperwork even when little or no tax is due.

Form 1099-R: Schwab reports the conversion from the traditional IRA.
Form 8606: I report the nondeductible contribution, track its basis, and calculate the taxable part of the conversion.
Form 5498: Schwab reports IRA contribution information. This form may arrive after the tax-filing deadline and is generally kept for my records.

The contribution and conversion can also fall in different tax years. A 2026 IRA contribution can generally be made by the 2027 tax-filing deadline, but a conversion completed in 2027 is a 2027 conversion. Completing both steps in the same calendar year usually makes the records easier to follow.

For a clean example—with no prior IRA basis, no other traditional/SEP/SIMPLE IRA money, and no investment gain—a $7,500 nondeductible contribution followed by a $7,500 conversion would generally result in no taxable conversion income. I would still report both steps correctly on Form 8606.

My annual checklist

Verify the current IRA contribution and Roth MAGI limits.
Account for contributions already made to any traditional or Roth IRA for the year.
Check all traditional, rollover, SEP, and SIMPLE IRA balances for the pro-rata rule.
Contribute cash to the traditional IRA for the correct tax year.
Convert the available balance to the Roth IRA with zero withholding.
Save the confirmation, invest the Roth cash, and check later for residual interest.
Keep Forms 1099-R and 5498, and file Form 8606 correctly.

A backdoor Roth is mechanically simple, but the pro-rata rule and tax reporting matter. My summary is: contribute after-tax cash to a traditional IRA, convert it to a Roth IRA, invest it, and report both steps.

Sources

Tax rules depend on individual circumstances. This article documents my understanding and process; it is not individualized tax advice.