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In this episode of Motley Fool Money, Motley Fool personal finance expert Robert Brokamp lays out the five steps to contributing to a backdoor Roth IRA and highlights a landmine to avoid. Also in this episode:

• The stock market posted one of its best 10-day returns — what does history say happens next?
• A new study finds that heirs spend inheritances remarkably quickly. What are ways to leave an inheritance that won’t be squandered?
• The input costs for food companies almost doubled in March, and prices may rise even more over the next three to six months.
• Happy 50th birthday to Vanguard’s S&P 500 index fund, the first index fund available to individual investors.

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A full transcript is below.

Robert Brokamp: Getting money in a Roth IRA through the backdoor and the Amazing Inheritance Disappearing Act. That and more on this Saturday’s Personal Finance edition of Motley Fool Money. I'm Robert Brokamp, and this week, I'm going to lay out the five steps to contributing to a backdoor Roth IRA and highlight a couple of potential land mines you definitely want to avoid.

But first, let's look at some headlines from this past week or so. The stock market has shaken off the concerns of war and rising oil prices, and is now near all-time highs. In fact, S&P 500 recently posted a 9.8% 10-day rally. According to the Carson Group, this was the 20th-best 10-day return for the index since 1950. What happened a year after the other 19? Well, the market earned a positive return in 16 of those instances, with the three instances of stocks being down a year later, all occurring during the dot-com crash of the early 2000s. The median 12-month return after all of those 19 essentially double-digit 10-day rallies was 20.8%.

The Facts versus Feelings podcast, the Carson Group’s Ryan Detrick, a previous guest on our show, pointed out that the market hitting new highs in April has nearly the same frequency as those exceptional rallies, it having happened 19 times. In all but one of those instances, the market ended the year in positive territory. As Ryan pointed out, a lot of this is just fun with numbers and not necessarily information you would use to make investing decisions, but the reasons underpinning the rally, namely growing corporate earnings and high profit margins, are good signs.

Next up, what do people do when they inherit money? Apparently, a lot of people spend it. That's the conclusion of a recent study from Cory Thompson of the University of Alabama and Russell James of Texas Tech University. They looked at data from 2010-2018 to investigate how people handle inheritances compared to other windfalls, like gifts, lawsuit rewards, insurance settlements, things like that. The headline finding is that inheritances get burned through remarkably fast. Each inherited dollar increased next-wave net worth by only 61 cents when measured roughly a year later, meaning that nearly 40 cents of every inherited dollar had been spent, and 42% of heirs had completely spent their inheritances. What makes this especially striking is the profile of these inheritors. They averaged nearly $1 million in net worth, half had college degrees, and 89% were homeowners. This isn't a story about financially unsophisticated people. It happened across the wealth spectrum.

Study also found that, controlling for demographics and the amount of money received, people were more likely to spend down inheritances than other types of windfalls. The practical implication may be that the standard estate planning approach of a lump-sum bequest at death may be the worst possible design, since it delivers a large amount of money at precisely the moment beneficiaries are psychologically primed to spend it away. The authors argue for time-phase distribution, so maybe staggered principal releases or spendthrift trust or newitized beneficiary designations, and propose that advisors reframe the estate planning conversation from how much should I leave to how much annual income should my Heirs receive.

Now the number of the week, which is 7.9%. That's how much costs for food companies jumped in March year over year, according to Bank of America Global Research and highlighted by Bloomberg. That's up from 4.2% in February right before the Iran War. The biggest cause for the jump, of course, is the spike in fuel prices. But 3-6 months from now, we could see additional upward pressure from higher costs for packaging, fertilizer, and other items that are either made from petroleum or have seen their shipments significantly curtailed by the closing of the Strait of Hormuz.

Next up, how to get money into a Roth IRA, even if you earn above the income limits when Motley Fool Money continues. People look forward to retirement as a time of fewer obligations. It could also be a time of lower taxes, especially if you have money in Roth retirement accounts. Contributions are not tax deductible, but growth and withdrawals from Roths are tax free as long as you follow the rules. Roths also offer another form of obligation freedom. Unlike traditional retirement accounts, Roth accounts are not subject to required minimum distributions at age 73 or age 75, if you were born in 1960 or later. Does that sound appealing to you that consider contributing to a Roth IRA? In 2026, an individual can contribute $7,500 with an additional $1,100 if you'll be 50 or older by December 31.

Just know that you have to meet some requirements to be able to contribute to a Roth IRA, you or your spouse, if filing jointly, must have taxable compensation at least equal to the contribution, but you can't make too much money. The amount you can contribute gradually phases out, starting at a specific modified adjusted gross income based on your filing status. In 2026, the ability to contribute to a Roth IRA phases out for single filers and head of household filers at incomes between $153,000 and $168,000. Those figures are $242,000-$252,000 for those who are married and filing jointly. Is your income too high? Well, take heart because you can enter through the back door. A backdoor Roth IRA is a strategy that allows high-income workers to fund a Roth IRA by first making a nondeductible contribution to a traditional IRA and then converting the traditional IRA to a Roth IRA.

Here are five steps to doing it. Step 1: Open a traditional IRA, make a contribution. Anyone who has earned income or is married to someone with earned income can contribute to a traditional IRA regardless of the level of that income.

Step 2: Contact your IRA custodian and request a conversion of your new traditional IRA to a Roth. If you don't have a Roth yet, you'll first have to open one, and you may be able to do all this with just a few clicks of a button online. Now, there's some debate about how long you should wait between making the contribution and doing the conversion due to something called the step transaction doctrine, which could lead the IRS to determine that instead of taking the two steps to contribute to a non-deductible traditional IRA and then another step to convert the Roth, for all intents and purposes, you actually just took one step and contributed to a Roth IRA, which you may not have been allowed to do if you earned too much income. Now, the debate has been going on for years in the financial planning and tax communities about how long you should wait before you do the conversion with more and more experts concluding that it's pretty much fine to do it as soon as the money hits your account. As far as I know, no one has ever gotten in trouble with the IRA for converting their backdoor Roth IRA too soon.

But if you want to be a little bit more cautious, here's the advice from CPA, Sean Mullaney, who is a former guest on the show and has really dug into this topic. He suggests that you wait until the end of a month passes before doing the conversion. That way, you have the previous months statement showing money in the traditional IRA. Just know that any earnings that accumulate in the traditional IRA before the conversion will be taxable upon conversion, but it shouldn't be very much.

Let's move on to Step 3, which is, once the money lands in your Roth IRA, put it to work. Don't just let it sit there in cash. The whole point is tax-free growth, and that requires actually investing the money in stocks, funds, ETFs, or whatever your long-term strategy calls for.

Step 4: Include the contribution and conversion in your tax returns. You'll receive Form 5498, which reports the IRA contribution, and Form 1099R, which reports the conversion. At tax time, file Form 8606, this tells the IRA that you made a non-deductible after-tax contribution to your traditional IRA. This creates a paper trail showing that this money has already been taxed, so you won't be taxed on it again when you convert. If you work with a tax professional, make sure you tell her or him that the contribution was after tax, so she or he will notify Form 8606.

Step 5: Repeat every year as appropriate. The backdoor Roth IRA isn't a one-time trick. It's a strategy that you can execute every single year you have earned income if that's the right move for your circumstances. Those are the five steps. Not too difficult, but there's one big ugly fly in the ointment, known as the pro rata rule.

If you have other money in other traditional IRAs, doing a backdoor Roth IRA gets a lot more complicated. Here's why. When you convert money from a traditional IRA to a Roth IRA, the IRAs doesn't just look at the specific dollars you're converting. It looks at the total balances of all your traditional IRAs, including SEP IRAs, simple IRAs, and rollovers from 401(k)s, and then calculates what percentage of that total is after-tax money versus pre-tax money? This is known as the pro rata rule.

Here's an example. Suppose you contribute $7,500 in after-tax money for your backdoor Roth conversion, but you also have a rollover IRA with $67,500 of pre-tax money from an old 401K. Your total traditional IRA balance is now $75,000. Only 7,500 or 10% is after tax. The other 90% is pre-tax. When you convert $7,500 to a Roth IRA, the IRAs says, "Well, only 10% of that conversion is after tax. The other 90% is pre-tax and is taxable." The result is that $6,750 of the conversion or 90% will be taxed as ordinary income. Only $750 is tax free.

Fortunately, there is a way around the pro rata rule. If your employer's 401K or 403B accepts incoming rollovers from traditional IRAs, you can roll your pre-tax money into that plan. This removes those pre-tax dollars from the pro rata calculation. After the rollover, your only traditional IRA balance is the $7,500 after tax contribution you just made. Your conversion is now 100% tax free. The downside to this strategy is that you would likely have to sell all the investments in your traditional IRA before doing the rollover, and then once the money lands in your 401K or 403B, choose from among the investment options in your employer-sponsored plan, which are often much more limited. This may not be a trade-off you're willing to make, especially if you like investing in individual stocks, and your 401K doesn't have a brokerage account feature.

Here are three other notes about the pro rata rule. Number 1, the IRS cares about the balances in your IRAs as of December 31 of the year of the conversion. Let's say you do a backdoor Roth IRA conversion in June when you don't have any other money in a traditional IRA, you think that you don't have to worry about the pro rata rule. But then in December, you roll over money in a pre-tax 401K to a traditional IRA, and the money is there on December 31. Now the pro rata rule comes into play.

Number 2, you only have to consider money, and your traditional IRAs, your spouse's IRAs aren't part of the calculation.

Number 3, inherited IRAs are also generally ignored when doing the pro rata calculation. One exception, you inherit an IRA from your spouse and you choose to make it your own IRA rather than keep it as an inherited IRA, and only spouses have this type of option. A close by pointing out that contributing to an IRA isn't the only way to increase the amount of money you have for Roth accounts. Nowadays, most employer-sponsored plans offer the Roth option. If yours doesn't ahead and ask for it. No reason not to offer it.

There are no income restrictions on a Roth 401K, 403B, or the Federal this Savings Plan. Anyone can contribute. Also, the annual contribution limits are much higher. For 2026 for 401Ks, the contribution limit is $24,500, if you will be 49 or younger by the end of the year, $32,500 between the ages of 50 and 59 or 65 and older, and $35,750 if between the ages of 60 and 63. If your plan allows for after-tax contributions and in-plan Roth conversions, you can contribute even more via a strategy known as the mega backdoor Roth, which is a whole other ball of wax.

Finally, you can always convert traditional assets to Roth assets and just pay the consequent tax bill. This may make sense if you expect to be in a higher tax bracket in retirement and/or you expect your eventual RMDs to be quite large. The backdoor Roth IRA is just one way to build up your tax-free Roth assets. However you do it, your future self will thank you.

Time to get to Den Fools, and this week, I suggest you evaluate your mutual funds and stock picking prowess in light of the fact that this year is the 50th anniversary of the launch of Vanguard's S&P 500 Index Fund, the first index fund available to individual investors. To mark the occasion, Vanguard recently released 50 stats about indexing, including the fact that since its launch, the Vanguard 500 has earned an annualized 11.58%. If you had invested $10,000 in the fund at its inception, today, you'd have nearly $2.2 million as of the end of February. It's tough to be in an index fund, partially due to rock-bottom fees. If you invest in actively managed funds or pick investments yourself, make sure you're keeping yourself honest by monitoring whether those funds or you are outperforming a relevant in