Disclaimer: I am not a tax preparer / CPA, and this is not tax advice. Check all of this yourself or with your accountant for your particular situation. This is only to illustrate the idea behind this method.
If you did a Roth conversion in a year in which you also ended the year with pre-tax IRA money in your own account (spouse IRAs don’t matter for this if married), you now have after-tax cost basis in your Trad IRA.
To get rid of it, you can ship the after-tax basis (convert it) to a Roth IRA and also put the pre-tax IRA amount into an employer 401k. You must do both before the end of the calendar year. Make sure to check with the employer (or self-employed) 401k first to ensure they will accept the incoming pre-tax IRA money. Then, either call your IRA provider to ask them to effect both transactions, or first convert your after-tax basis to Roth IRA, then move the remaining (pre-tax only now) Trad IRA money into the 401k afterward.
For more ways to isolate basis, read this: https://www.kitces.com/blog/roth-ira-conversions-isolate-basis-rollover-pro-rate-rule-employer-plan-qcd/
Method #1: Send the pre-tax money to a 401k (and the after-tax to a Roth IRA)
Let’s say you attempted a backdoor Roth IRA conversion in 2026. You put in $7,500 as a non-deductible Traditional IRA contribution, then turned around and converted the full $7,500 to Roth IRA. You neglected to realize that, at the end of 2026, you still had $22,500 in a different Traditional IRA as of 12/31/2026 (check your year end statement for the balance!)
Thus, you will have to pay taxes on the income of $7,500 * (1 – $7,500 / ($30,000)) = 7,500 * 75% = $5,625 of the conversion. The non-tax portion of the conversion was $1,875. So, your basis was the non-deductible basis portion of the conversion (the entire $7,500) minus the non-tax portion of the conversion ($1,875), which is $5,625. This becomes the new after-tax basis in your remaining $22,500 in your pre-tax IRA.
If your pre-tax IRA is now worth $25,000 in mid-year 2027, you can (1) convert the $5,625 to a Roth IRA and then (2) put the remaining $19,375 into your 401k (assuming your plan allows you to roll in outside funds. Check first before you do step (1)!)
Once you’ve done this, in 2027, you will owe no tax on the $5,625 Roth conversion, ASSUMING you end with a $0 IRA balance across all your pre-tax IRAs (including Traditional, Rollover, or SEP IRAs.)
