Roth IRA and the backdoor Roth for NRI families: limits, Form 8606 and the India view

Many families on H-1B, L-1 or a green card hear about the Roth IRA and the "backdoor Roth" from colleagues. This guide explains, as general information only, how the income limits work, what the backdoor route involves, which form records it, and what changes for a family that may move back to India. It is not investment advice and does not say whether you should open a Roth.

The income limits

A Roth IRA is funded with after-tax money. Qualified withdrawals later are free of federal income tax. Your right to contribute directly phases out as your modified adjusted gross income (MAGI) rises. The IRS figures are:

Above the top of the range you cannot contribute directly. Inside the range the allowed amount is reduced. The IRA limit is shared across all your traditional and Roth IRAs, and you also need taxable compensation of at least the amount you put in. Pay that you exclude from US income, such as foreign earned income, does not count as compensation.

Why high earners use the backdoor route

There is no income limit on converting money to a Roth IRA. So a higher-income taxpayer can make a non-deductible contribution to a traditional IRA and then convert it to a Roth IRA. This two-step route is commonly called the backdoor Roth. It is not a loophole in the sense of being hidden: both steps are reported on your return. But the result depends on the next rule.

Form 8606 and the pro-rata rule

Form 8606 records non-deductible contributions (your "basis") and works out how much of a conversion is taxable. The IRS instructions say you generally must file it if you made non-deductible traditional IRA contributions, took distributions from a traditional IRA that has basis, or converted to a Roth IRA. Missing a required Form 8606 carries a $50 penalty unless you show reasonable cause.

The pro-rata rule is the catch. On Form 8606 the conversion is not treated as coming only from the non-deductible money. The form looks at the total value of all your traditional IRAs at 31 December of the year, and SEP and SIMPLE IRAs count too. If you hold pre-tax money in any of them, including a rollover IRA from an old employer plan, part of every conversion is taxable.

A 401(k) balance that stays in the employer plan is not part of that calculation. Families who plan a backdoor Roth therefore often keep rollover money in the employer plan rather than in an IRA, but that choice has its own costs and is a decision for your adviser.

Recharacterising (undoing) a conversion is not allowed for conversions made in 2018 or later, so a conversion cannot be reversed if you dislike the tax bill.

How a conversion is taxed

The taxable part of a conversion is added to your income for the year of the conversion. It is reported on Form 8606 and flows to Form 1040. A conversion of a large pre-tax balance can push you into a higher bracket and affect other items. Remember also that your state may tax it. See the state guides, for example California and New Jersey.

The five-year rules

There are two separate clocks.

• Qualified withdrawals. Earnings come out tax-free only if the withdrawal is made after the 5-year period that begins with the first tax year for which you made a Roth IRA contribution, and you are 59 and a half, disabled, deceased, or buying a first home (up to $10,000 lifetime).
• Each conversion. A separate 5-year period applies to every conversion. If you take out a converted amount within that period, the 10% additional tax can apply to the part you had to include in income, even though you paid ordinary tax on the conversion, unless an exception or age 59 and a half applies.

Non-qualified withdrawals come out in a set order: regular contributions first, then conversions oldest first, then earnings. Form 5329 is used for the 10% tax or an exception.

Roth 401(k) and in-plan conversion

Many employers offer a Roth 401(k). There is no income limit on contributing, and the 401(k) limit is shared with the pre-tax option: $23,500 for 2025 and $24,500 for 2026. Some plans also allow an in-plan conversion of pre-tax money to the Roth side of the same plan. That conversion is taxable in the same way. Plan rules vary, so read your plan document and ask the plan administrator.

US mutual funds inside a Roth

The passive foreign investment company (PFIC) rules are aimed at investments in non-US funds. They do not apply to ordinary US mutual funds or ETFs, including those held inside a Roth IRA. Indian mutual funds are a different matter and are covered elsewhere on this site.

If you are a non-resident alien or may return to India

To contribute you need US earned income, so a non-resident alien with US wages can have that income, while someone with only foreign pay cannot. Residency for tax purposes is not the same as immigration status; see the residency guide.

The India side deserves care. The US treats qualified Roth withdrawals as tax-free, but India does not necessarily follow that. We have not found official Indian guidance that treats a Roth IRA as exempt. For a person who is a resident and ordinarily resident in India, growth in a foreign retirement account may be taxed on the Indian side, and the treaty position is not settled. During the years you are a resident but not ordinarily resident (RNOR), foreign income that you do not receive in India is generally outside Indian tax, which is why timing matters. Section 89A deferral applies only to accounts that qualify, and a Roth account may not.

If you leave the US, the account stays with you. For other leaving topics see the exit tax guide and the EPF, PPF and NPS guide.

A short checklist

1. Check your MAGI against the range for the year.
2. Find out whether you hold any pre-tax IRA, SEP or SIMPLE money.
3. Keep every Form 8606 you file, with the year-end balances.
4. Note the year of your first Roth contribution and of each conversion.

A conversion, a Roth contribution made from a joint return with a foreign spouse, or a plan to retire in India should be reviewed by a US CPA before you act, because the cost of a wrong Form 8606 or a mistimed conversion is hard to reverse. We are an Indian CA firm and this page is general information, not advice.