A backdoor Roth is a two-step route into a Roth IRA for people whose income is too high to contribute directly. Step one: contribute to a traditional IRA, up to $7,500 in 2026 (plus $1,100 if 50 or older). At high incomes the contribution is not deductible, so it goes in as after-tax money. Step two: convert the traditional IRA to a Roth IRA. Since the money was already taxed, the conversion owes little or nothing.
The step that trips people up is the pro-rata rule. The IRS looks at all your traditional, SEP, and SIMPLE IRAs together when you convert. If you have $92,500 of pre-tax money in an old rollover IRA and add a $7,500 non-deductible contribution, only 7.5% of any conversion is tax-free. Converting $7,500 would create about $6,900 of taxable income. The usual fix is to roll the pre-tax IRA into a current 401(k) first, leaving the IRA balance at zero before the backdoor.
Done cleanly, it adds $7,500 a year of tax-free growth. Over 25 years at 7%, that is roughly $475,000 that will never be taxed again.
The common mistakes are ignoring the pro-rata rule, forgetting to file Form 8606 to document the non-deductible contribution (which can lead to being taxed twice), and letting the contribution sit uninvested in the traditional IRA long enough to earn taxable gains before converting.