The Backdoor Roth, Briefly

Direct Roth IRA contributions have income limits. For 2025, the phase-out starts at $150,000 for single filers and $236,000 for married filing jointly. If you earn more than that, you can’t contribute directly. The workaround: contribute to a traditional IRA with after-tax dollars, then convert the balance to a Roth. No income cap applies to conversions.

When done correctly — with no pre-tax traditional IRA balances — the conversion generates almost zero taxable income. You contributed after-tax money, and converting basis isn’t a taxable event. Any earnings that accrue between contribution and conversion are taxable, but if you convert within a few days, that amount is usually a few cents.

Why California’s 13.3% Rate Changes the Math

Most people think about Roth conversions in terms of federal tax brackets. In California, the state tax picture matters just as much. California is one of the few states that fully taxes traditional IRA and 401(k) withdrawals in retirement — the same way it taxes wages. There’s no exclusion, no special rate, no break for being over 65.

That means if you retire in California with a traditional IRA, every withdrawal is subject to state income tax at whatever bracket you fall into. For high earners, that’s 9.3% to 13.3% on top of federal rates. A couple pulling $300,000 per year from traditional retirement accounts in LA is paying roughly $25,000+ per year just in California state tax on those withdrawals.

Roth withdrawals? Zero state tax. Zero federal tax. The money comes out completely tax-free as long as the account has been open for five years and you’re 59-1/2 or older.

The Pro-Rata Rule for California Filers

California conforms to the federal pro-rata rule. If you have pre-tax money in any traditional IRA — including SEP-IRAs from self-employment income or old rollover IRAs — the IRS and the FTB both calculate your taxable conversion proportionally across all IRA balances.

Example: you have $200,000 in a rollover IRA (all pre-tax) and you contribute $7,000 after-tax for the backdoor. Your total IRA balance is $207,000, and only $7,000 (about 3.4%) is after-tax basis. If you convert $7,000, about $6,762 of it is taxable at both federal and California rates.

The fix is the same everywhere: roll your pre-tax IRA money into an employer 401(k) plan before doing the backdoor Roth. This zeroes out your traditional IRA balance and makes the conversion clean. If you’re self-employed and have a Solo 401(k), that works too.

Entertainment Industry and Freelancer Considerations

A significant number of LA residents work in entertainment, media, and freelance roles. Many of these professionals have SEP-IRAs or SIMPLE IRAs from years of self-employment. Those balances create the pro-rata problem we just described.

If you’re an actor, writer, producer, or any kind of 1099 worker with a SEP-IRA, the backdoor Roth requires some advance planning. You’ll want to set up a Solo 401(k) (assuming you have no full-time employees other than a spouse), roll the SEP money into it, and then do your backdoor contribution into an empty traditional IRA. The whole process takes a few weeks of paperwork but saves you from the pro-rata mess indefinitely.

One thing worth noting: California’s Franchise Tax Board (FTB) follows the same IRA reporting as the IRS. Your Form 8606 (tracking nondeductible contributions) carries through to your California return. Keep that form filed accurately every year — it’s your proof that you already paid tax on the conversion basis.

What If You Leave California?

California is aggressive about taxing departing residents. The FTB has been known to audit people who claim they’ve moved to a no-tax state, checking for continued California ties — property, business interests, family, driver’s license, voting registration. If you convert to Roth while still a California resident, the conversion income is taxed by California in that year. But the future Roth withdrawals are completely free of California tax, even if you later move back.

People who are definitively leaving California sometimes accelerate Roth conversions in their final year of residency, reasoning that they’re paying California tax one last time in exchange for permanently tax-free withdrawals. Whether that makes sense depends on the size of the conversion, your departure timeline, and your overall tax picture that year.