The Roth IRA was a truly groundbreaking retirement savings option when lawmakers created it almost 20 years ago. Yet for many taxpayers, the Roth IRA was off-limits because of income restrictions. Although some of those limits still exist, investors have learned that with a strategy known as the backdoor Roth, they can now get access to the popular retirement account option. To do so, though, you'll have to get familiar with IRS Form 8606, which is required for those making nondeductible IRA contributions. Let's learn more about the backdoor Roth IRA and the role that Form 8606 plays in making it a reality.

Do you need a backdoor Roth?
Until 2010, income restrictions kept some people out of Roth IRAs entirely. Different limits applied to initial Roth contributions as well as to Roth conversions from traditional IRAs, the net effect was to lock out those earning above certain amounts.

Five years ago, however, the former $100,000 income restriction on Roth conversions got repealed. That allowed high-income taxpayers to convert existing retirement accounts to Roths. Moreover, even though income limits still apply to new contributions -- singles making more than $131,000 and joint filers with incomes above $193,000 can't contribute to a Roth IRA -- the conversion option opened up a strategy whereby high-income taxpayers could add new money to a Roth in a two-step process.

Where Form 8606 comes in
This two-step process involves initially contributing money to a nondeductible regular IRA with the expectation of then converting it to a Roth. Nondeductible IRAs are available to anyone with earned income regardless of how much they make, although few people use them since they don't offer any upfront tax benefit.

As you'll see on Form 8606 itself (link opens a PDF), whenever you contribute to a nondeductible IRA, you have to report your contribution to the IRS. That allows the IRS to track your tax basis in traditional IRAs, which is a vital component of the backdoor Roth strategy. Similarly, when you convert a nondeductible IRA to a Roth IRA, you'll also report that transaction on Form 8606.

The reason the backdoor Roth works is that right after you open it, your basis in your nondeductible IRA is exactly equal to its value. As a result, when you convert the nondeductible IRA to a Roth IRA in the second step of the process, Form 8606 will give you the result that none of the conversion is taxable.

Note, however, that this is only the case if you have no other traditional, SEP, or SIMPLE IRA assets. As you can see on line 6 of Form 8606, you have to add up all your eligible IRA assets in considering how much of a Roth conversion is taxable. If you have other IRAs, then the backdoor Roth doesn't work perfectly, as only a portion of the conversion will be eligible for tax-free treatment. The remaining tax basis from your initial nondeductible IRA contribution will be available for future use, but you won't achieve the original goal of adding money to a Roth without immediate tax consequences.

Using Form 8606 to your advantage
Yet even if you have other IRAs, you might not be out of luck. Notice that on Form 8606, you're not required to include 401(k) money in the calculation of taxable income from a conversion. In some cases, you can transfer traditional IRA money into a 401(k) plan account, taking it out of the reach of Form 8606. That can help you set up for the backdoor Roth IRA with a clean slate.

Some lawmakers see the backdoor Roth as a misuse of the Roth conversion rules, and so this Form 8606-based opportunity might not last forever. For now, though, getting familiar with the backdoor Roth strategy and the role that IRS Form 8606 plays in implementing it could be a great way to give you access to the tax-free retirement savings benefits that Roth IRAs offer.

For more on the ins and outs of IRAs, visit our IRA Center. We offer answers to many IRA questions and can help you make the investing decision that works best for you. 

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.