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In 2024, I made my 12th pair of “backdoor Roth” IRA contributions with Vanguard. It’s a great way for high-income professionals to contribute to a Roth IRA when earning “too much” to contribute directly to a Roth IRA. I do this annually for both my wife’s mutual fund IRA account and my brokerage IRA account, and I’ll highlight the differences in the processes below. Not much has changed for the legacy mutual fund IRA account, but the screenshots look a lot different for those of us who transitioned to (or started with) brokerage IRA accounts.
This post will give you a brief overview of the backdoor Roth, precise step-by-step instructions on how to do this yourself at Vanguard, and you can visit the backdoor Roth FAQ that should answer any lingering questions you have.
I transitioned to a “brokerage IRA account” as requested by Vanguard a few years back, while my wife’s account remains a “mutual fund IRA account.” The latter makes things quicker and easier, although now, there only seems to be a one-day difference between the two different processes for the different account types.* In 2024, Step 1 was nearly identical for the two account types. Step 2 was different, and only a brokerage IRA account requires Step 3 (invest the money), which is done automatically as part of Step 2 with a mutual fund IRA account.
I like to get our backdoor Roth contributions and conversions done early in the year to start the tax-free earnings as soon as possible, but you have until Tax Day in mid-April, 2024 to complete a 2023 Backdoor Roth contribution (and until April, 2025 to make your 2024 contribution).
Vanguard is the company I use, and it’s one that tends to be favored among many index fund investors, so that’s what you’ll see here. The process should be similar with other brokerages, but the screenshots will obviously look different. You can check out our Fidelity Backdoor Roth guide if you’re with Fidelity.
Backdoor Roth IRA: An Overview
Money contributed to Roth accounts does not result in a tax deduction, unlike contributions to tax-deferred accounts. Both Roth and tax-deferred accounts benefit from tax-free growth, unlike a taxable account that is subject to tax drag (which can be minimized). The Roth dollars, unlike tax-deferred dollars, will not be taxed when withdrawn.
One of the first world problems of earning a solid income is the inability to contribute directly to a Roth IRA or a tax-deductible IRA.
A modified adjusted gross income (MAGI) of $240,000 for a couple filing jointly, or $161,000 for an individual makes you ineligible to contribute to a Roth IRA in 2024. Phaseout ranges where you can make a smaller Roth contribution (less than $7,000) start at $230,000 and $146,000 for couples who are married filing jointly and single filers, respectively.
Many physicians are thus excluded from making either deductible IRA contributions or direct Roth IRA contributions.
If there’s even a tiny chance your income might put you into or above those phaseout ranges, you’re better off using the backdoor, just in case. There’s nothing wrong with making your Roth contribution the hard way and finding out later that you didn’t need to take the extra steps. You won’t have to change a thing.
Now, understand that a high income doesn’t mean you can’t contribute directly to a Roth account of some kind. You may have a Roth option within your 401(k) or similar account, although I would argue you’re probably better off with the tax deduction offered by making tax-deferred 401(k) contributions if you’re in the 32% or higher tax bracket.
Another important distinction is that a high income does not currently prevent you from making Roth conversions. The income limits were lifted in 2010, and I took advantage by making a Mega Roth conversion when it was believed the income limits would be reinstated. However, there are still no income limits, and hence, the backdoor remains wide open.
The income limits for the ability to make a traditional tax-deferred IRA contribution are even lower than the Roth contribution limits. If you participate in a workplace retirement plan, you won’t be eligible to contribute as an individual earning more than $87,000 or as a couple earning more than $143,000 in 2023. The deduction actually begins to phase out at a MAGI of $77,000 for single filers and $123,000 for married couples filing jointly.
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Before Attempting a Backdoor Roth
While income limits are a non-issue for the backdoor, there exists one important prerequisite to be able to properly execute the backdoor Roth.
You cannot have tax-deferred money in a traditional IRA, SEP IRA, or SIMPLE IRA in your name.
The list includes traditional IRA, SEP IRA, and SIMPLE IRA, but does not include 401(k), 403(b) or similar accounts. If you do hold tax-deferred IRA dollars on 12/31 of the calendar year in which you made the Roth conversion, you’ll be subject to taxes when making your conversion per the pro-rata rule.
If you do have these types of accounts, you’re not hosed, but you need to have a strategy to move that money elsewhere or you can forget about the backdoor Roth. Note that inherited IRAs are a non-issue.
If the balances in your IRA or IRAs are small and you can afford the taxes on the conversion, you can convert it all to Roth and just pay tax on the conversion. This could be a good idea for those in lower tax brackets — residents and students, for example.
Another option for employees may be to roll the IRA into an employer’s 401(k) plan. Not all plans accept rollovers, but mine does, and this was the route I chose with my SEP-IRA a few years ago. Fortunately, my 401(k) offers institutional Vanguard index funds. If I had lousy options, a rollover might not have been worthwhile.
It might also a good idea to avoid having a SEP IRA in the first place by putting your independent contractor earnings into a solo 401(k) instead. The White Coat Investor covers some of the advantages in this article.
One way employees without a business of their own create one is by obtaining an EIN for a survey-answering business. Earning just a little 1099 money on the side qualifies you as a business owner, and you can open an individual 401(k) a.k.a. solo 401(k) for the business.
As long as the plan accepts rollovers (many do), you’ll be able to roll over traditional IRA, SEP and SIMPLE IRA money into it to circumvent the pro-rata rule and associated taxation when attempting the backdoor Roth.
For healthcare professionals, I’ve found that the simplest side business is one in which you answer medical surveys for dollars. I’ve got a great overview of a handful of survey companies here.
Completing the backdoor Roth with Vanguard:
If you haven’t done so already, you’ll need to open a Traditional IRA and a Roth IRA. I won’t walk through all the steps, but it should be straightforward. Go to the Vanguard homepage and select “Personal Investors” under “OUR SITES“.
Tell Vanguard that, yes, you’d like to start on that page whenever you go to Vanguard.com, and click on “Open an account”.
Next, you’ll be taken to a screen with an explanation of what you’ll need, how long it will take, and there are video walkthroughs to make it really simple.
Since I opened my accounts years ago, I start the backdoor Roth process by making a contribution to my existing traditional IRA, an account that Vanguard thankfully leaves open, even when the balance is zero, which it is about 364 days of the year.
Backdoor Roth Step 1: Make a Non-Deductible IRA Contribution
Vanguard offers two IRA account types: mutual fund and brokerage. As requested by Vanguard, I transitioned my IRA to a brokerage variety, whereas my wife’s IRA is still a mutual fund account. The first step is essentially the same for both, which you’ll see below. The later steps differ, and I’ll show the screenshots for each, as they are quite a bit different.
After logging in to Vanguard, I can access the Traditional IRA from the Dashboard. Select the account by clicking on it. You can tell this is the mutual fund Traditi0nal IRA Account by the “Transition This Account” invitation, which can safely be ignored.
If you’ve been doing the backdoor Roth as we teach it, this will have a zero balance.
Within your Traditional IRA account, click the three dots to the right of “Transact” and select “Contribute to IRA“.
If you have a mutual fund IRA account, you’ll choose from fewer options, but there’s no other difference. Select “Contribute to IRA” just as above. I’d ignore that “Transition this account” button unless they’ve threatened to start charging you $20 a year for failing to transition, which I’ve heard they’ve done for some users.
Vanguard asks if it’s a rollover from another tax-deferred account. It’s not. Select “no“.
Towards the bottom, you’ll choose the YEAR for which you want this contribution to count. This is a 2024 backdoor Roth tutorial, so I put the $7,000 into the 2024 column. Note that $7,000 is $500 more than you could contribute in 2023 and $1,000 more than the maximum 2022 contribution. If you’re 50 or older, you can now contribute $8,000.
Since I already made a 2023 contribution of $6,500, that text entry field is unavailable to me, and for good reason. If you have not yet made a 2023 contribution, you can do so until Tax Day in mid-April of 2024. And you have until mid-April of 2024 to make your contribution for 2024.
If you’ve not done it for either year, and you’ve got the money, you could contribute for both years right now.
Once you’ve chosen how much you’re contributing and for which year, click “Continue” to tell Vanguard where the money is coming from. You’ll have several options. I’ve contributed from a Vanguard taxable brokerage account and from connected checking or savings accounts. In my experience, the source didn’t seem to impact the timing of the money becoming available for conversion.
Next, you may be asked to consent to electronic delivery of fund prospectus. If you haven’t gone paperless, you may not see this option. If you do, click “ACCEPT” and move on.
You’ll be asked to review and submit your IRA contribution. If it looks good and has the correct contribution year, go ahead and click “SUBMIT“.
You’ll get a confirmation and a polite “Thank you” from your friends at Vanguard. Note that in the lower left, you’re told that you have $7,000 in funds available to trade. This isn’t exactly true. It will likely be another business day or two before you can convert that money.
I will break the remaining steps into two distinct tutorials: one for a brokerage IRA account (all newer accounts) and a second for older mutual fund accounts that have not transitioned.
Note that you will likely be harassed to transition. I politely decline every time by clicking the little “x” in the upper-right-hand corner.
Brokerage Account Backdoor Roth Step 2: Convert to Roth IRA
Before the Tax Cuts and Jobs Act went into effect in 2018, some people worried about something called the “step doctrine” and that it may be best to wait a while before making the Roth IRA conversion.
This theoretical concern was put to rest with footnotes 268, 269, 276 and 277 of the Conference Committee’s explanatory report on the Tax Cuts and Jobs Act that provided clarity and validated the backdoor Roth IRA contribution.
As I’ve always done, I convert as soon as Vanguard will let me. Now I do so with zero concerns about the step doctrine.
If you try to convert the same day, however, you’ll hit a roadblock. “This account has no holdings avaiable to convert” despite the displayed balance of $7,000. Typically, it’s not the next day, but the second business day after the contribution that you’re able to convert, at least when funding with a bank account. Using money parked in a Vanguard money market or cash account may save you one day.
Once your IRA shows “Funds available to trade“, go ahead and click that oval saying “Convert to Roth IRA.” There’s a great big warning box stating that I cannot buy stocks, bonds, CDs, or non-Vanguard funds for 7 days. No worries, I’m going to purchase a Vanguard mutual fund. I could also purchase Vanguard ETF with no waiting period.
Next, you’ll see a couple of screens with a pleasing seafoam background warning you about the possibility of a Roth conversion being taxable. In our case, it won’t be. Note that the only thing that makes your traditional IRA contribution non-deductible is what you report to the IRS. Vanguard doesn’t know what your 1040 looks like. Form 8606 becomes important at tax time, but there’s no checkbox at Vanguard to indicate that you won’t be deducting this contribution.
Agree and proceed.
After looking this next screen over, continue.
You’ll be asked if you want to convert some or all of your Traditional IRA to Roth. Typically, you’ll want to convert all of it, assuming you started the process with a zero or near-zero balance. If there are a few dollars of interest in the account, just convert it all. It might cost you a buck or two when you file taxes next year.
If you have tens of thousands of dollars in the IRA, you are going to have an issue with the pro rata rule. Hopefully you figured that out when reading the introduction to this article; if you didn’t, consult with your CPA as what would be best in your particular situation.
Next, select the Roth IRA where the funds will end up. It can be the same Roth IRA you’ve been using for years. It can have a zero balance if you just opened it, or it may have a five-figure or six-figure balance if you’ve had it for some time. Bonus points for those of you with a seven-figure Roth IRA. You’re crushing it!
When you continue, you’ll have yet another chance to agree with the fact that the conversion could be taxable if you weren’t doing a proper backdoor Roth, and to review and submit. When you’ve done so, you’ll get a confirmation that your conversion has been initiated. I was concerned by the language on the right that I might have to wait another couple of days to invest the money, but I was able to make an investment selection immediately upon finishing this step.
In the next step, we’ll invest that money. If for some odd reason, you plan to leave the money in a money market fund, you can be done. But that would be silly.
Brokerage Account Backdoor Roth Step 3: Invest in the Roth IRA
Do not forget to invest the money you converted to your Roth IRA! It’s part of the conversion process when using a mutual fund IRA account, but not when using a brokerage IRA account.
When your account shows the $7,000 or more as an “Available balance“, it’s time to invest that money. I had $48.91 sitting in my settlement fund, so I chose to invest that, too. Once again, I can ignore the “Unavailable shares” warning, and it doesn’t apply to me, and it won’t apply to you if you’re planning to invest in a Vanguard mutual fund or ETF.
Click “Transact” on the right and select the top option, “Buy Vanguard funds.”
I’m given the option to either put more money into one of the three holdings I currently have or search for a new fund. I know from my portfolio tracking spreadsheet that I’m a bit underweight in international stocks, so that’s where I’ll invest this money, in VTIAX. I click the “Buy” button in the lower right.
On the next screen, I choose the dollar amount to buy, which is equal to my “Funds available to trade” and then click “Continue order“.
On the next screen Vanguard advises me that I cannot contribute directly to the Roth IRA because I’ve already maxed out my 2024 contribution. It’s perfectly acceptable to use my settlement fund to make the purchase, which is what I was planning on doing, of course. I wouldn’t be going to all this trouble if I was legally able to contribute directly to the Roth IRA!
One last screen to review, and we’re able to “Submit Order“.
Finally, your order is submitted. Now it’s time to either repeat the process for a spouse or forget about it until this time next year when you’ll return to this page like you’ve been doing for so many years.
Uff da! That was a lot of screens to click through, but it’s not as complicated as it appears. Still, I always come back to this post to do my own backdoor Roth each year. The screenshots change a bit each year, more in some years than others, but the actual process remains the same.
If you need instructions for a mutual fund account, those screenshots are up next. If not, jump to the end for information on spousal IRAs, how to report this at tax time, an estimation of the value of the backdoor Roth, and a thorough FAQ.
Mutual Fund Account Backdoor Roth Step 2: Convert to Roth IRA & Invest
Once your mutual fund Traditional IRA account shows a $7,000 balance (this was on 1/4/2023 for me), you’re ready to convert that money to a Roth IRA. However, unlike you will see with a brokerage account IRA, there’s no “Convert to Roth” button.
Instead, you’re going to “exchange” to a Roth IRA, so go ahead and select the three dots next to “Transact” and select “Exchange (sell to buy) Vanguard funds.”
In the next screen, which should look familiar, select the fund with your IRA contribution and click “Sell all shares” on the left. On the right, you’ll tell Vanguard that the money is going into your Roth IRA.
You’ll be investing simultaneously, and you’ll select which fund gets the $7,000 on the right. My wife’s Roth IRA only has one fund, so her REIT fund gets 100% of the Roth conversion money.
You’ll notice an “Alert” in the screenshot above and several others that follow warning me that my $7,000 hasn’t cleared the bank. I’m making the conversion about 18 hours after the contribution on the next business day. The funds had already been withdrawn from my bank account, and the conversion does indeed go through without a hitch, despite these repeated warnings.
Since this is a non-deductible contribution, we won’t owe any tax on the conversion, assuming you followed the directions and put your contribution into a money market fund and converted as soon as possible.
If you waited a while or chose a more volatile fund, you could have some dollars in earnings. If so, convert it all, and you may owe a few dollars in taxes, but not enough to make withholding necessary.
You’ll once again be asked to accept an electronic fund prospectus, and you’ll be reminded that “A conversion is a taxable event and can’t be changed.” However, it does go on to say that it’s generally true, but if you’ve made a non-deductible contribution (which you have), you may be taxed on only a portion of the contribution (the earnings). No earnings, no tax.
Next, you may see a yellow warning that a conversion can’t be reversed. That’s fine; we know what we’re doing.
Now, you’ll see the screen that shows your new withholding choice of 0%. Check the box next to “Do not send a tax withholding notice” if it’s not already checked by default. New in 2024 was a section for state tax withholding. You presumably won’t see this if your state of residence has no state income tax.
Review the information and submit if you’re happy with what you see.
Finally, you’ll see a confirmation screen similar to the review screen. Your Roth conversion is complete, and your money will be invested in the fund you chose.
Spousal Roth IRA
If you’re married, your spouse can also do the backdoor Roth, even if he or she has no earned income.
You must have at least $14,000 of earned income between the two of you (or $15,000 or $16,000 if one or both of you is at least 50 years old), but all of the income can come from one person.
Note that for pro rata rule issues, your IRA accounts don’t affect your spouse’s ability to do the backdoor Roth, and your spouse’s IRAs don’t affect yours.
Fill out Form 8606 in your 1040
At tax time, you will report these moves in IRS From 8606.
The IRS has instructions here and the form here. I see no need to repeat them. If you use tax software, instructions on filling them out with TurboTax and others can be found on the Backdoor Roth FAQ.
Additional Resources
If you have additional questions, your question is almost certainly among the 40+ questions answered in the all-encompassing Backdoor Roth FAQ. I strongly encourage you to check there first before asking a question below.
Looking for additional investment opportunities now that you’re maxing out your tax-advantaged space? Look to my Real Estate Investing Resources.
For more information, be sure to check out additional articles on the Backdoor Roth:
- Vanguard Backdoor Roth: a Step by Step Guide
- The Marginal Value of the Backdoor Roth. Is it Worth the Trouble?
- Calculating the Value of Your Backdoor Roth Contributions
- The Backdoor Roth Point / Counterpoint: A Must-Do or Meh?
- The Backdoor Roth FAQ
Is the Backdoor Roth Worth the Trouble?
I would say “Yes.” If you’re considering the backdoor Roth, the $7,000 or $14,000 most likely takes the place of a portion of your investments that would otherwise be invested in a taxable account.
As long as the money remains in a Roth account, it will grow without tax drag. Currently, my tax drag is nearly 0.6%, but with the right investments (index funds) and an ability to land in the 0% capital gains tax bracket in early retirement, tax drag can be quite close to zero.
Also, as a taxable account appreciates, you can end up with substantial unrealized gains, which may eventually force you into a higher tax bracket as you realize those gains to have spending money in retirement.
Clearly, Roth money is more valuable from a tax perspective than money in a taxable account. I see no reason not to take advantage of this opportunity, as long as it exists, unless you have IRA money that would subject to the pro rata rule, and no good rollover options (such as an employer’s or solo 401(k)).
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Have you taken advantage of the backdoor Roth? What’s holding you back? Don’t forget to view the Backdoor Roth FAQ!
686 thoughts on “Backdoor Roth IRA 2024: A Step by Step Guide with Vanguard”
Another year, another Backdoor Roth IRA completed with your help. Thanks for keeping this guide up to date!
Hello , Thank you for the post and I did follow these steps for 2023. Need a help! Appreciate your reply!
I incurred 12$ interest in trad IRA by the time I converted all amount to Roth IRA. I am filing out the NJ state tax in turbox tax and where I need to report this conversion. Two questions asked in Turbo. Should I enter like this:
Value of Account on Date of Distribution : 6512$
Contributions Related to This Distribution Previously Taxed by New Jersey : 6500 $
Is this correct? This 2nd question explanation says as below in Turbo. . Is it saying to report only if I had been taxed in 2022?
Enter contributions to the traditional IRA being converted to a Roth IRA that were previously taxed.
If you do not already have a worksheet determining the previously taxed portion of this IRA distribution to Roth IRA conversion, you can use a variation of the IRA Worksheet for each Roth IRA conversion:
A. Determine the total amount of withdrawal(s) made from this IRA in previous years.
B. Total the portion(s) of these previous year withdrawal(s) already reported as income on prior New Jersey tax returns.
C. Subtract the amount of previous year withdrawals reported (on line B) from the total amount of previous year withdrawals (on line A). This difference is the amount of contributions that have been recovered from this IRA account so far.
(blah blah blah…)
Didn’t see the update for 2024
Looking for the same – any changes for 2024?
Hello
in ordeder to execute any converssion you say ”
“You cannot have tax-deferred money in a traditional IRA, SEP IRA, or SIMPLE IRA in your name.’
can one convert /rollover a traditional IRA into 401k while working and getting RMD distribution?
best and health
Don
If you’re now receiving RMDs, that tells me you’re at least 72 or 73 years old in 2023.
If your 401(k) accepts rollovers, this could be a viable option, and it may allow you to reduce or prevent RMDs for a period of time, according to this article from Schwab. As always, I would check with a CPA and your 401(k) plan administrator to ensure this is a possibility.
Cheers!
-PoF
I would like to roll over the pretax money in my traditional IRA into my 403b plan. The plan administrator says that I can do this. However, my accountant is under the impression that under the IRS aggregation rule, you cannot separate pre-tax IRA funds from after tax IRA funds, so I can not roll over the pre-tax money in my IRA without also rolling over some of the after-tax money in the IRA. I am also seeing other sources that state that 403b plans can only accept rollovers of pre-tax funds, leaving only after-tax/nondeductible funds in my IRA, which is exactly what I want for the Roth conversion. Please help me here. Which source is correct?
Hi,
Thank you for your insight! I waited too long and did not contribute to my 2022 traditional IRA until last week. I wouldn’t be able to roll over to a Roth until after the tax deadline of April 18th. Would I still be able to convert my 2022 funds into a Roth, since I technically contributed to the traditional IRA before the deadline? Also, for form 8606, would I fill that out for the 2022 tax year or only 2023 since the conversion happened in 2023?
Thanks 🙂
Hi,
Thank you for your insight! I waited too long and did not contribute to my 2022 traditional IRA until last week. I wouldn’t be able to roll over to a Roth until after the tax deadline of April 18th. Would I still be able to convert my 2022 funds into a Roth, since I technically contributed to the traditional IRA before the deadline? Also, for form 8606, would I fill that out for the 2022 tax year or only 2023 since the conversion happened in 2023?
Thanks 🙂
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Hi,
I left this for too late. If I put money into a traditional IRA now and then convert it into a roth IRA for 2022, will it be too late? I know the money has to get into the IRA before 4/18/23 but does it have to be converted into the roth BEFORE 4/18/23 as well? Thanks! -Nicole
Hi,
I left this for too late. If I put money into a traditional IRA now and then convert it into a roth IRA for 2022, will it be too late? I know the money has to get into the IRA before 4/18/23 but does it have to be converted into the roth BEFORE 4/18/23 as well? Thanks! -Nicole
No, you’re fine. Just get the contribution in ASAP.
It’s best to convert as soon as you can to avoid taxes on any earnings, but there’s nothing that says it has to be this year.
Cheers!
-PoF
Thanks for the amazing article. This is my first time doing Backdoor, and I was really struggling until I found this post.
In January 2023, I deposited $6000 for 2022 and $6500 for 2023 into a Vanguard Traditional IRA. I earned $10.82 in dividends from Vanguard Federal Money Market Fund and transferred all $12,510.82 to a ROTH IRA.
Two questions:
1. When filing my taxes for 2022, do I include the $10.82 in Form 8606? Or that belongs to 2023? I’m imagining I have to pay taxes for that amount.
2. Does TurboTax help fill out Form 8606? Will it ask for info and file it automatically?
Thank you!
Your 2023 Form 8606 is where the conversion is reported. The Finance Buff Harry Sit has some documentation on Turbotax and Form 8606.
Best,
-PoF
Hello Sir!
Thank you for the detailed description.
I have 2 questions on backdoor conversion after Dec. 31, 2022:
1: HR block said you must have the conversion done before Dec. 31, 2022 for year 2022. What’s your opinion?
2: If you contribute and convert after Dec. 31, 2022, you will not get 1099-R form from the broker (in my case, Vanguard) in time. 1099-R is needed in order to get the 8606 form right, what could we do?
Thank you and much appreciated!
Form 8606 is filled out for the year in which the conversion is made. If you did yours after the 1st of the year in 2023, you’ll report the conversion on your 2023 tax return.
Hello Sir!
Thank you for the detailed description.
I have 2 questions on backdoor conversion after Dec. 31, 2022:
1: HR block said you must have the conversion done before Dec. 31, 2022 for year 2022. What’s your opinion?
2: If you contribute and convert after Dec. 31, 2022, you will not get 1099-R form from the broker (in my case, Vanguard) in time. 1099-R is needed in order to get the 8606 form right, what could we do?
Thank you and much appreciated!
Hello thank you for this tutorial. This is my first time doing the backdoor Roth. I want to contribute for both 2022 and 2023. I have transferred $12,500 to traditional IRA. Do I now convert all of that to Roth at once? How do they distinguish between each year’s contribution?
Thank you for your help
Hello thank you for this tutorial. This is my first time doing the backdoor Roth. I want to contribute for both 2022 and 2023. I have transferred $12,500 to traditional IRA. Do I now convert all of that to Roth at once? How do they distinguish between each year’s contribution?
Thank you for your help
You should be able to convert all at once. You should have designated the tax year for the $6,000 (2022) and $6,500 (2023) when you made the contributions.
Your 2023 Form 8606 should provide the info reporting the tax-free conversions.
Best,
-PoF
Contribute 50 dollars less than the limit to the traditional. It avoids any hassles of dividends etc taking it over the limit when you move the monies to the Roth.
I’d rather “risk” owing a buck or two in tax on the conversion of $6,502.78 or whatever than to have $50 less in the Roth IRA that I could have otherwise had. Just contribute to a money market fund and the interest earned between the time you contribute and the time you convert will be minimal (and there’s no risk of a dividend).
Bset,
-PoF
What do you do about the small amount of interest earned? Do you have to file it on your taxes?
Convert it. Whether there’s interest or not, you’ll report the conversion via IRS Form 8606.
What options do I have with my previous 401k which consist of 360k traditional and 70k Roth. It’s still sitting with my previous employers Vanguard account. I don’t want to roll it over to my new employers 401k since the investments are limited and I don’t want to roll it it an IRA because that will trigger Pro Rata when I do my back door Roth each year. Any suggestions? Thanks!
Leaving it where it is sounds like a nice idea, especially if you’re invested in institutional (low ER) funds and the plan has minimal fees.
Cheers!
-PoF
Thanks for the advice! I followed you’re guide on the back door Roth for 2022 and contributed 6k each for my wife and I. I just did it in 2023 for 2022. Will I get 1099R’s for this or will they come next year since I actually contributed in 2023. I waited to do my taxes this year until I did the Roth conversion. Should I be waiting on these 1099R’s? I am using Turbo Tax and want to report the backdoor Roth.
IRS forms are typically generated for the tax year in which the activity occurred. In the case of the 1099-R, that’s generated when you make the conversion, so I would expect you’ll receive it next January and report it when you file taxes for 2023 next year.
I recommend confirming with a CPA, but that’s my understanding.
Best,
-PoF
Got scared using TurboTax Online because it was taxing the $6K but figured it out with this link. https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-backdoor-roth-ira-conversion/L7gGPjKVY_US_en_US#:~:text=You'll%20receive%20a%20Form,it%20on%20your%202022%20taxes
Did you get this prompt from Vanguard? Should I just accept and move forward?
“A conversion is a taxable event and can’t be changed. If you choose to convert to a Roth IRA, your conversion will be final and can’t be recharacterized. Generally, you’ll owe taxes on the amount you convert from any eligible retirement account into a Roth IRA for that calendar year…..
Did you get this prompt from Vanguard? Should I just accept and move forward?
“A conversion is a taxable event and can’t be changed. If you choose to convert to a Roth IRA, your conversion will be final and can’t be recharacterized. Generally, you’ll owe taxes on the amount you convert from any eligible retirement account into a Roth IRA for that calendar year…..
Hi there, First I really appreciate all of the detail and background you provided. Very helpful!
BUUUT, there is one big glaring omission that may seem obvious but wasn’t to me.
After a lot of waiting and getting frustrated on your step 2, it dawned on me that you never specified that you must have a Traditional IRA account AND a Roth IRA account already opened. The gotcha in your instructions are when you click ‘convert to Roth IRA’ I made the assumption that the account would be opened at that point.
Once I actually opened the Roth account I was able to continue going through your steps and was successful!
So thanks again but I would recommend adding a ‘note’ at the beginning of Step 2 to ensure a user has both traditional and roth accounts already opened.
Hi there, First I really appreciate all of the detail and background you provided. Very helpful!
BUUUT, there is one big glaring omission that may seem obvious but wasn’t to me.
After a lot of waiting and getting frustrated on your step 2, it dawned on me that you never specified that you must have a Traditional IRA account AND a Roth IRA account already opened. The gotcha in your instructions are when you click ‘convert to Roth IRA’ I made the assumption that the account would be opened at that point.
Once I actually opened the Roth account I was able to continue going through your steps and was successful!
So thanks again but I would recommend adding a ‘note’ at the beginning of Step 2 to ensure a user has both traditional and roth accounts already opened.
Sure, I can add that. It probably makes more sense to put in Step 1 where I recommend opening the Traditional IRA.
It’s been more than a decade since I did my first backdoor Roth, and even then, I had an existing Roth IRA opened years earlier when I had lower income and could contribute directly as a resident, so it’s not something I’ve had to think about.
Thanks for the tip!
-PoF
Hey – I’m trying to do this and I was wondering, when initially creating both IRA and Roth IRA accounts in Vanguard for the first time, do you know how to create the Roth IRA account with a 0 balance and essentially not fund it? It seems like it requires at least $1 to create the account. Any tips? Thanks so much!
Thanks for the helpful tutorial!
I followed your instructions for a backdoor Roth through Fidelity, and thought I was all good, but it looks like I “earned” $1.11 in dividends during the few days it took for the money to become available to convert, and this was deposited into the account on December 29th.
Does this mean that I have now triggered the pro rata rule since I had money in a tax-deferred account on December 31st?
No worries. Whether it’s an extra dollar or $100, just convert it all. Tax could be owed on that small portion, but taxes on $1 likely round to zero.
See our Backdoor Roth FAQ for more information.
Cheers!
-PoF
Thank you for this article! In 2023, I contributed the maximum amount to the Traditional IRA for 2023 ($6500). It earned a $22.06 dividend while in the Traditional IRA.
I think I clicked to “convert the entire account.” I don’t know why, but $22.06 didn’t get converted and remains in the Traditional IRA.
If it means anything to you, the Roth IRA transaction history shows Conversion (incoming) as $6522.06, and the Traditional IRA transaction history shows Conversion (outgoing) as -$6522.06.
I believe I can convert the $22.06 to Roth. When I do so, should I or should I not check the box that says “I elect not to have federal and state taxes withheld from this distribution” ?
Thanks for the helpful tutorial!
I followed your instructions for a backdoor Roth through Fidelity, and thought I was all good, but it looks like I “earned” $1.11 in dividends during the few days it took for the money to become available to convert, and this was deposited into the account on December 29th.
Does this mean that I have now triggered the pro rata rule since I had money in a tax-deferred account on December 31st?
No worries. Whether it’s an extra dollar or $100, just convert it all. Tax could be owed on that small portion, but taxes on $1 likely round to zero.
See our Backdoor Roth FAQ for more information.
Cheers!
-PoF
Thanks–but is there an issue since the backdoor Roth was for 2022 and (mostly) converted in 2022? Now that I’ve noticed the $1.11 that was deposited year-end, I’ve converted it, but we’re in a different year and I’m concerned about the reporting since I technically had money in a traditional IRA in 2022 (for essentially one business day).
It’s a rounding error. I suspect it will disappear when you fill out IRS Form 8606. Did you read the FAQ and linked article on the subject?
It’s a rounding error. I suspect it will disappear when you fill out IRS Form 8606. Did you read the FAQ and linked article on the subject?
I did and thought it was just shy of a rounding error, but just remembered that I also converted my 2021 backdoor in 2022, which does make it a rounding error 🙂
Thanks again for the helpful resources!
I did and thought it was just shy of a rounding error, but just remembered that I also converted my 2021 backdoor in 2022, which does make it a rounding error 🙂
Thanks again for the helpful resources!
Hello!
I have both traditional 401k and Roth 401k amounts sitting in my prior employer’s plan (vanguard). Left that employer a couple of years ago.
I’m planning on doing the backdoor $6500 for each of 2022 and 2023 soon – after these are done, can I rollover my existing Roth 401k (~5k) into my Roth IRA and my traditional 401k (~55k) into the traditional IRA that gets set up as part of the backdoor conversion process without being taxed or messing up future backdoors for the upcoming years? Wondering whether the fact that the traditional IRA holds the rollover 401k funds ruins backdoor for me, because if so, I’d move over to my current employer’s 401k…
Thanks!
Hello!
I have both traditional 401k and Roth 401k amounts sitting in my prior employer’s plan (vanguard). Left that employer a couple of years ago.
I’m planning on doing the backdoor $6500 for each of 2022 and 2023 soon – after these are done, can I rollover my existing Roth 401k (~5k) into my Roth IRA and my traditional 401k (~55k) into the traditional IRA that gets set up as part of the backdoor conversion process without being taxed or messing up future backdoors for the upcoming years? Wondering whether the fact that the traditional IRA holds the rollover 401k funds ruins backdoor for me, because if so, I’d move over to my current employer’s 401k…
Thanks!
Having a non-zero tax-deferred IRA balance on 12/31 does cause pro rata issues with any conversions made in that same calendar year.
Best,
-PoF
Thank you! I have this bookmarked for each year and you never fail to keep it up to date, even with the latest Vanguard site changes.
Thank you for the incredible content!
I failed to roll over my traditional IRA to a i401K before 12/31/2022. Am I correct that this forecloses my ability to do a backdoor Roth contribution and conversion in 2023 for tax year 2022 (I haven’t made any tax year 2022 contributions/conversions yet).
Thank you for the incredible content!
I failed to roll over my traditional IRA to a i401K before 12/31/2022. Am I correct that this forecloses my ability to do a backdoor Roth contribution and conversion in 2023 for tax year 2022 (I haven’t made any tax year 2022 contributions/conversions yet).
The pro rata rule applies to the year in which the conversion was done, not the year for which the IRA contribution was made.
I recommend double-checking with a tax professional, but my understanding is that as long as your IRA balance is zero by the end of 2023, any conversion done in 2023 (which could be converting money contributed for 2022 and/or 2023) should not be subject to taxation based on pro rata, since there is no tax-deferred IRA balance to consider.
Cheers!
-PoF
Finally done with postgrad training and for better or worse, I need to do backdoor roths for 2022.
Just created a traditional IRA on my Vanguard. I already have a Roth IRA since residency years.
3 questions:
1) When is the best time to convert to the Roth? Before the year ends or between Jan-Apr of next year (2023) ?
2) Shall I be buying securities (with those $6000) before or after conversion to Roth?
3) (This is a naive question) so every year I make a conversion to Roth, I need to make another traditional IRA that will become another Roth and I accumulate a bunch of accounts every year? Or do they move the converted funds into my original Roth (from residency) and the traditional IRA empties out upon conversion?
Thank you
1) I would do it as soon as you have the funds to do so. Time in the market…
2) After
3) You only need two accounts. The Roth IRA that you have, and the traditional IRA that will have a zero balance almost all year.
Cheers!
-PoF
Thank you so much. So I guess these conversions are basically transfers from traditional IRA to the Roth IRA.
Can I convert only once per tax year? For example, shall I wait until I contributed all of the $6000 before I convert to Roth, or can I convert them to Roth as I contribute to the traditional IRA (let’s say I put in $1500 every month from Sept-Dec, can I convert each $1500 or I have to wait until I am done because I can only convert to Roth once?)
I think it’s best to keep it simple. When you’ve got $6,000 to contribute, put it in the Traditional IRA in a money market fund and convert it to Roth as soon as you’re able.
That’s not the only way to do it, but it’s the cleanest. You won’t have losses in the IRA and gains will be minimal (pennies or a few dollars) and you can convert it all without worrying about the tax consequence.
Cheers!
-PoF
Hi,
My wife and I would like to do backdoor IRAs for the first time in 2022. We have both had traditional IRA’s. I have been able sell all the shares and roll the cash into my employer’s 403 earlier in the year, so now my tIRA account has $0 in it. Am I good to contribute the $6000 then backdoor it this year?
For my spouse, she has only contributed a grand total of $5500 from one previous year, now the account has some unrealized gain and has the value of $5700. She is unable to roll over because her employer does not have a 403. From what I understand, we are better off just paying the taxes on the $5700 and back door the amount in addition to the $6000 that we will contribute this year? Will the gain make the tax form too complicated?
Thanks
Yes, you’re good to go, and your spouse can go ahead and do a Roth conversion on that $5,700 to clear the way to do backdoor Roth contributions this year and in future years, as long as the tax code continues to allow for it.
Cheers!
-PoF
Thanks for your response. Im wondering, for my spouse, since she is not covered by a 401/ 403 at work, is she better off starting a company and put the $5700 from her tIRA into the i401? or is that not worth the leg work?
Best,
PoF, thank you for the excellent resources on this site.
I’m a high-income earner (32% tax bracket) ineligible for Roth IRA contributions except via backdoor Roth. However, I’ve made a mistake with my retirement contributions this year and am now in a sticky spot :
– In January I made a $6k backdoor Roth IRA contribution & conversion.
– In June 2022 I was laid off. I had a traditional 401k with this employer worth about $20k. I didn’t do proper research about the IRS’s pro-rata rule, and – here’s the error – rolled over the 401k balance into my Vanguard traditional IRA. I now have that $20k in pre-tax dollars sitting in my traditional IRA, after already doing my $6k post-tax backdoor Roth conversion this same year.
I understand that neither of these transactions (backdoor Roth conversion or 401k rollover into trad IRA) is reversible, and as a result of my 401k rollover, I’m now liable for taxes on the majority of my backdoor Roth conversion if my traditional IRA still has this $20k in it as of 31 December 2022.
If my next employer allows a reverse rollover – to carry over the original 401k money into their 401k plan, leaving my traditional IRA balance at 0 – I will do that.
If that’s not an option – what are my other options from here? Is the below correct / is there any other path I should consider?
1) I pay tax on the backdoor Roth conversion. I leave the $20k in the traditional IRA. The pro rata rule will be triggered on any future backdoor Roth conversions (not a good option)
2) I convert the entire trad IRA balance of $20k into the Roth IRA. This will trigger around $5k in immediate taxes, but pro rata will not be triggered on future backdoor roth conversions (as long as I don’t have any other IRA assets). (A lot of tax here – also doesn’t seem like a good option)
3) I could set up a solo 401(K) by starting (for example) a survey-answering business, and move the $20k there before the end of the year, so that my traditional IRA balance is 0 by end of December? Is this still an option for me if I regain W-2 employment this year?
Thanks very much for your thoughts on this problem.
You’ve outlined the problem and potential solutions better than I could have! Clearly, you know the situation. You’ve got some time to get the solo 401(k) going.
However, if you’re going to have a low-income year, and you can convert that $20k to Roth at a marginal tax rate of ~25%, that sounds like a pretty good option to me.
Cheers!
-PoF
Thanks for sharing this information. I also planning to back door Roth for the first time. and i don’t have a traditional IRA account, so it will be straightforward for me, but my spouse is unemployed and has a traditional IRA with $50000 that we contributed 6 to 8 years ago. I am not sure if my spouse can open a solo 401(K). Please advise on the simplest way to do back door Roth for my spouse.
Thank you
If she does not have a 401(k) from a previous employer that accepts rollovers, she can either open a solo 401(k) based on some kind of business (walk dogs via Rover, answer surveys for money, other gig economy stuff), or you can pay the taxes on a Roth conversion of that $50,000, which would probably be in the $10,000 to $20,000+ range depending upon your income.
Cheers!
-PoF
I am planning on doing the back door Roth for the first time. Hi.. Doing this for the first time and I guess I messed up a little. I contributed $5500 in July 2008 and after much thinking back and forth, converted it to Backdoor Roth in March 2009 for tax year 2008. The amount has increased to 4Filmyzilla 575. Now I am adding my 1099-R and have no clue. Will appreciate any help on the matter. I used the Finance Buff’s guide to enter 1099R but when it comes to what is your end of yr balance, he has 0 but I had 5555. Please help!!!
I made one way back when they first came out. During the dark days of the market crash I converted a defined contribution pension over to a Roth IRA using a simple call to fidelity.
Too much informatics I was seeking for Angela Ganote Wikipedia
I am planning on doing the back door Roth for the first time. I never had a traditional IRA account, so it will be straightforward for me, but my spouse is unemployed and has a traditional IRA with $5000 that we contributed 3 to 4 years ago. I am not sure if my spouse can open a solo 401(K). Please advise on the simplest way to do back door Roth for my spouse. Thank you
I’m a little confused about what happened during the backdoor process….
My 2022 Trad IRA contribution was 6000.00 and when I converted to the Roth IRA, it shows the contribution to Roth as 6000.05. Did I overcontribute to the Roth? Was the 5 cents just “gains” while sitting in the federal market fund that I need to pay tax on? Or just withdraw from the Roth?
I’m not exactly sure how to handle those 5 pennies and I don’t want to get penalized from it.
Thanks!
Just convert it all. The pennies disappear when IRS Form 8606 is filled out.
Should my balance on my simple ira account be brought to a zero at the time of the backdoor roth transactions or only by the end of the year to avoid pro rata?
By the end of the calendar year.
I am planning on doing the back door Roth for the first time. I never had a traditional IRA account, so it will be straightforward for me, but my spouse is unemployed and has a traditional IRA with $550 that we contributed 3-4 years ago. I am not sure if my spouse can open solo 401(K). Please advise on the simplest way to do back door Roth for my spouse. Thank you
Just do it and convert the $550 along with the new $6,000 non-deductible contribution. You’ll only owe tax on the $550 converted — maybe a couple hundred bucks.
Best,
-PoF
Hello, I’ve been doing the backdoor Roth IRA for myself for a couple years, but have not done it for my wife since she has a Traditional IRA for $4500. She is now stay at home mom, so she is unable to roll it into her 401k. Since it’s a small amount, I want to convert her existing Traditional IRA to Roth this year. If I get that done in April 2022, can I still contribute $6000 and do a backdoor for 2022 Tax Year? Or would I need to wait until Tax Year 2023 (assuming it’s still allowed) before I can make a $6000 backdoor contribution. I want to avoid the pro-rata rule. Thanks!
Yes. As long as the traditional IRA balance is 0 on 12/31/2022, she should be good to go for a tax-free backdoor Roth (after paying the taxes on the conversion of the $4,500.
Best,
-PoF
One thing to note is that the new version of the Balances & Holding page (with white background) does not seem to show the “Convert to Roth IRA” link. Your screenshots show the old version of that page, which you can get to by selecting My Accounts on the top menu bar, and in the drop down menu from My Accounts, select Balances and Holdings.
Once I did that, it displays in the old brown background version of the Balances & Holding page, and the Convert to Roth IRA link is shown. Weird that you have to play with their website to find the link!
P.S. You need some comment spam detection on your blog, many recent comments are just folks promoting their website (generic comment, link to some site you have never heard of)
Thank you for that p.s. I apparently need better Spam detection, as it’s always been on, but I’ve cleaned up those comments now.
As for the screenshots, they should all be from 2022. Perhaps they’ve changed something in the last few months. I rarely spend any time on the initial page with the white background. Selecting “Balances & Holdings” as I show in the beginning takes me where I want to be.
Cheers!
-PoF
HI, Great step by step guide! We have about 250k in the bank doing nothing but collecting dust. We are considering doing this back door conversion through vanguard. Is there a limit you can convert per year? Do you recommend doing a little each year, how much? Husband’s income has been over 200k last 3 years, I don’t work outside house.
You can each do $6,000 per year or $7,000 if age 50 or older.
You’ve got another 5-6 weeks to get it done for 2021, and you can also do it for 2022, so you could put away as much as $24,000 to $28,000 now depending on your age. This assumes that you have no tax-deferred IRAs that would cause pro rata rule issues.
Cheers!
-PoF
Great step by step guide!
Good day. Thanks for everything you provide to our community.
I currently have a SEP IRA Brokerage Account, Individual IRA Brokerage Account, and Roth IRA Brokerage Account with Vanguard.
I want to do my first ever backdoor Roth contribution this year.
I called Vanguard and spoke to a retirement account specialist and he said I don’t have to empty out my SEP IRA by Dec 31 and that I won’t be subject to the pro-rata rule because there will be no “comingled” funds in the accounts.
What he is saying seems to be contrary to what I’m reading here and on other sites.
Assuming I do need to roll over all of my SEP IRA funds to show zero balance on the account on Dec 31, to where can I roll those over?
I currently do have a 401K and cash balance plan (with another brokerage firm) as a solo owner of my medical practice.
Thanks!
The Vanguard rep may have misunderstood, but you absolutely do have a pro rata rule issue if you have tax-deferred money in any IRA.
If your 401(k) plan accepts rollovers, that’s a perfectly acceptable place to accept your SEP IRA and Individual IRA money.
Best,
-PoF
I am planning on doing the back door Roth for the first time. I never had a traditional IRA account, so it will be straightforward for me, but my spouse is unemployed and has a traditional IRA with $5500 that we contributed 3-4 years ago. I am not sure if my spouse can open solo 401(K). Please advise on the simplest way to do back door Roth for my spouse. Thank you
You can convert that $5,500 and pay the tax due on your 2022 tax return next year. That’s the simplest way.
If she has any kind of business, she could open a solo 401(k) and transfer the money there. This would make sense if the business has significant income and she’ll be funding it routinely. Otherwise, it might be more trouble than it’s worth.
Best,
-PoF
Great guide, PoF!
I will definitely be using this when I make my Backdoor Roth contribution for 2022. Now to just save that $5,500 first…
You mean $6,000, right?
My $ is still stuck in the traditional IRA at Vanguard – made the transaction 1/2/22 and officially moved 1/3/22. When I called Vanguard today, they said it takes 7 calendar days to clear before it can be converted to Roth. I don’t know how you did it on 1/5. So frustrating!
Thanks for putting this together and updating it every year! What would this (“there’s a possibility I may have to undo it if Congress forces my hand…”) even look like since conversions are not something you can undo? Any ideas?
They would have to create a way to do undo it.
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I am planning on doing the back door Roth for the first time. I never had a traditional IRA account, so it will be straightforward for me, but my spouse is unemployed and has a traditional IRA with $5500 that we contributed 3-4 years ago. I am not sure if my spouse can open solo 401(K). Please advise on the simplest way to do back door Roth for my spouse. Thank you
The simplest might be to simply convert her $5,500 to a Roth IRA. If it was a tax-deductible contribution initially, you’ll owe taxes on the conversion, but no more than $2,000 at the most, I would bet.
Cheers!
-PoF
FYI – I’m not sure if Vanguard is testing out differences in their user experience, but your initial step for the Brokerage account scenario doesn’t work for me. You write in Brokerage Account Backdoor Roth Step 1: Find your Traditional IRA brokerage account, and click the arrow to the right of “Buy and Sell,” and select “Buy Vanguard funds.”
That just brings me to a buy page where my only option is to pick funds to purchase. To get to the page you show as a screenshot where I am making a contribution, I have to instead select “Contribute to IRA” in that same dropdown menu.
Just figured I’d share in case that was a typo, or something changed.
It could be that they’re doing some A/B testing or that they’ve changed the process since January. I do update this post every year, so if the screens look different for me next year, those changes should be reflected in this post.
Cheers!
-PoF
Thanks for the super informative info! I am someone with funds in a traditional IRA with Vanguard (an old 401k rollover) that have grown over the years. I am allowed to roll them over into my current employer’s 403b so want to clear out the tIRA so I can do a backdoor Roth.
You state, “If you do hold tax-deferred IRA dollars on 12/31 of the calendar year in which you made the Roth conversion, you’ll be subject to taxes when making your conversion per the pro-rata rule.” Does this mean that I should rollover the existing tIRA this calendar year and wait until next calendar year to do the backdoor Roth conversion?
Thanks!
Do you have to open a separate Roth IRA each year to convert your Traditional IRA into when doing the backdoor Roth conversion? Or can you have the $6,000 each year converted and added to the same Roth IRA? I did my first backdoor Roth conversion for 2020. I am now about to convert my 2021 contribution and I don’t know if I can put it in the same Roth account I set for the 2020 contribution or if I need to open a separate Roth account for each year.
With Vanguard, you only need one traditional IRA (which will have a 0 balance almost the entire year) and one Roth IRA that can hold all of your Roth IRA holdings and accept additional money when you make the annual conversion.
Cheers!
-PoF
Hello, so this is my first time doing roth conversion. I opened traditional IRA and only funded $1000 just because I was scared of moving $6000 at once. But now I realize I should just do it all at once and want to add $5000 more to tIRA before converting to Roth. My question is, when I want to add funds to the traditional IRA, how come you choose the “buy vanguard funds” option vs at the bottom of the drop down menu where it says “contribute to IRA”?
Thank you!
I’m guessing either one would give you the same result.
I was told that the IRS does not allow “reverse rollovers” or rolling a Roth IRA into a 401k Roth. Is this true?
I don’t know if that’s true, but note you’ll want to roll Roth 401k to Roth IRA prior to starting RMD’s since RMD’s are required from Roth 401k.
You are correct on both. A traditional IRA can be rolled over into a 401(k) if the plan accepts it (that’s up to the plan administrator), but the only accounty type that can accept a rollover from a Roth IRA is a different Roth IRA. Here’s the answer from the IRS.
Cheers!
-PoF
I was contributing to Traditional IRA for the past 3/4 years and investing directly there. Infact, lost some money on those investments. This year, I added the $6k to the same account and then moved all of the funds (>20k) to Roth IRA. So,question is: any issue in converting $20k Traditional IRA -> Roth IRA in the same year,even though the yearly limits for Traditional IRA contributions were adhered to ?
Hopefully quick question. I know that the guide says that you shouldn’t already have money in the traditional IRA but what if the only other money in the traditional IRA was a non-deductible contribution from last year? Will the conversion then be taxable??
Thank you for the detailed article, it really explains the conversion process!
I have a question about timing. I had a number of annual non-deductible contributions in a traditional ira. I moved the interest/dividends to an active 401k. I had added the $7k contribution for 2020 to the IRA (in 2020) then converted the whole account (all non-deductible and on my 8606) at the beginning of 2021.
So this year, I want to make my 2021 $7k contribution to the traditional IRA but do I have to worry about timing? So 2021 – I made a conversion in January, will a contribution for 2021 effect this such as the pro-rata rule? Not sure that the IRS see the conversion date and the deposit dates. Also, can you do only one conversion per year?
Thanks,
When I go to file taxes – I’m being taxed on the IRA to Roth “re-characterization”! Any ideas?
Form 8606 needs to be filled out correctly. If it is, and you don’t have a pro-rata rule issue due to a tax-deferred IRA, you should not owe money on the conversion (it’s not a recharacterization).
Best,
-PoF
Thank you for the detailed article! My husband and I are considering filing “married filing separately” for 2020 to reduce his monthly payment under his PAYE repayment plan for his medical school loans. However, we would like to also contribute to a Roth IRA but we would exceed the $10k income limits. Does the backdoor method also help bypass the IRS filing status? Cheers!
Hi
If I am doing 2020 and 2021 back door Roth conversion together in 2021, would you recommend two separate conversions one for 2020 and 2021 both in calendar year 2021?
Or
Convert 12000$ in a single transaction from traditional IRA to Roth IRA ? There is no balance in my traditional IRA as of now. Assuming, I contribute 6000$ to 2020 Trad IRA and another 6000$ in 2021 Trad IRA and fill out 8086 form correctly for 2020 and 2021.
I have the same question for this year 2021 with an excess already for 2022. Bobby, did you get a response from a tax advisor or anyone else?
I can’t see any reason for it to matter if it’s one transaction or two, but it might be cleanest to make two separate transactions.
You may want to discuss with your CPA before making the move.
Hi!
I put after tax money on trad IRA in 2020 which had had 0 balance beforehand. If I do backdoor Roth before tax deadline (4/15/21) do I need report it in my taxes for 2020 or for 2021?
Thank you
I want to do a backdoor ROTH IRA conversion but have money in a SEP and traditional IRA already. That business has an employee so I can’t open a solo IRA. Can I create a new business entity so I can open a solo 401k? Can I move an IRA from one entity into a different entities 401k? How about into my wife’s solo 401K?
Thanks for this fantastic article and for going in depth about each step like this.
Re the 2020 Roth contribution, does it have to be invested in funds by 4/15/2021 to “count” toward 2020 contributions, or is simply leaving it in Money Market fund satisfactory?
I know I won’t earn much if anything in the MM account, but I would like to wait for a dip to invest in one of the stock funds.
(I know this isn’t a very ‘Boglehead’ way to do things, but I have been trading for years and I don’t like the euphoria in the market at 3900 SPX and want to wait for a dip.)
It’s when you make the contribution that matters. You don’t have to invest in a mutual fund ever if you don’t want to. You can invest in bonds, bond funds, individual stocks, publicly traded REITs, REIT funds, etc…
Make it a self-directed IRA and you have a whole slew of alternative investments you can invest in within the Roth IRA.
Cheers!
-PoF
Thanks!
I just did this on Vanguard site. The first step was “Contribute to IRA” rather than “Buy Vanguard Funds” when contributing to IRA Brokerage account. Hope this helps others.
Thanks for the wonderful site and information.
I ran into the same thing. Thanks for the help!
I am planning to contribute to back door Roth for the first time. I have a couple of questions. If you can please help, I tried looking for answers but could not find one
1. I live in Connecticut, would CT withhold taxes while converting? I am trying to understand if all of my $6000 will make it to Roth?Or will it be $6000- tax?
2. Would doing this year over year result in multiple Roth IRA accounts? Or does the conversion go to the same account each year we convert. Basically does “convert to Roth” create a new account or the same Roth account is reused?
No, and no.
Just convert to the same Roth IRA year after year.
Best,
-PoF
Thanks for this helpful post! One question about earnings: I accidentally contributed $6k directly into my Roth IRA in January 2020, and made $2k in earnings in my Roth before I recharacterized the $6k + $2k earnings into a traditional IRA this month. When I reconvert these back into my Roth IRA, do I have to pay tax on the $2k in earnings from the initial Roth contribution? I don’t have additional earnings from when my money was parked in my traditional IRA. Thanks!
I must say that’s one I haven’t seen. I’d consult a CPA, but my assumption would be that you would owe taxes on the earnings, since that money should have been parked in a traditional IRA during that timeframe.
I assume you’ll follow the instructions above in 2021 and will no longer have this issue going forward.
Cheers!
-PoF
So I made the mistake of putting in the $6k to the Roth IRA account directly instead of putting it in the Traditional IRA then converting. What do I do to fix this? Thank you.
Recharacterize the contribution. I’d make a phone call to get things squared away.
If your income doesn’t put you into the phaseout range, however, then there would be nothing to do. Many people are allowed to directly contribute.
Best,
-PoF
Is there a step left out?
maybe obvious and if so I apologize but for me it seems I need to create a Roth IRA to transfer the funds into? When I click the “Convert to Roth” I am greeted with a
There are no available accounts for this conversion.
Click OK to be redirected to the Roth Brokerage IRA conversion help page.”
from Vanguard
If you don’t have a Roth IRA yet, you’ll need one. I’ve had one for many years, so I can’t show that screenshot, but you can easily open any account with Vanguard here.
Best,
-PoF
We currently don’t have a backdoor Roth IRA. We have a sizable Vanguard rollover traditional IRA to which we’re currently not contributing from a previous employer years ago. We also have a sizable Vanguard 401(k) to which we’re currently contributing with our present employer. We wish to start contributing to a backdoor Roth IRA in a strategy that minimizes taxable events. Would you suggest moving the money in the Vanguard rollover traditional IRA to the Vanguard 401(k) first and then funding a new Vanguard traditional IRA with money from our checking account (or post-tax income) which we’d then move to a backdoor Roth IRA? Why or why not? Is there another strategy we’re not considering?
That’s exactly what I would do, as long as your current 401(k) accepts rollovers.
Cheers!
-PoF
Thank you for your advice.
Thanks for this resource. I have used it for the past few years. My spouse’s conversion worked just as you described for a brokerage account. For my account – and perhaps I have a “mutual fund account” – I also followed your directions for the brokerage account. After I made the conversion, I was unable to place an order for mutual funds. The next day the whole amount was in the Roth IRA account in a money market fund, and I simply exchanged the funds (I went with VGSLX too- seems like a bargain and I don’t have REIT options in my work- sponsored retirement). So, as you said in another comment above, there seems to be multiple ways to accomplish this. I’ll be back here in a year!
Thanks for sharing your excellent, detailed how-to guide. In my case, my Roth IRA is in a mutual fund account. My traditional IRA is a newer brokerage account. I always have problems converting the traditional IRA balance to the Roth IRA. Initially, I receive a confirmation that the transfer went through. A few days later, I find out that the money “bounced back” into the traditional IRA brokerage account. I end up finishing over the phone with Vanguard. This year, I’m trying online again. I’m still within the 7-day window for the funds to “settle” in my traditional IRA, and it says the funds are unavailable, just like it does in your example. For me, when I ignore that warning and try to do the conversion anyway, it says the amount exceeds the balance. I think this issue is related to the two different account types in use (brokerage vs. mutual fund). The funds should “settle” tomorrow, so I’ll try again then. It also doesn’t help that I have an extra $0.50 left over in the money market fund from last year when it earned a little interest while I worked on the conversion. So now I’m trying to rollover $7000.50, and that 50 cents is taxable. Probably unrelated to the problem, but it’s an extra wrinkle. Wondering if you’ve heard of this issue.
I’m getting the “The amount you entered exceeds this fund’s balance.” error too.
I’m sorry to hear of your troubles, Dan. Vanguard can fix this, but I can’t. My recommendation would be to go ahead and transition the Roth IRA to a mutual fund account since you can’t have a mutual fund traditional IRA account any longer.
It’s not the ideal solution, but it will save you headaches, phone calls, and time when the time comes to do this again in 2022. And they’ll forcibly transition your account sooner or later. Might as well rip off the bandaid yourself.
Best,
-PoF
Thanks for the reply. I think you meant I need to transition my Roth account to a “brokerage” account. I agree. I tried to do that last year, but Vanguard told me there was no direct conversion method available at that time, and I would have to open a whole new Roth account, then move the funds. It turns out that’s not necessary anymore. Today I saw that my transaction went through without bouncing back. Now I just have to figure out the tax on the extra $0.50! 🙂
thanks so much for this…especially the tip on moving forward even though it says “unavailable shares” I was waiting for this to light up before doing the conversion but as you noted, no need to wait!
Never hurts to try. Lo and behold, I was able to do what I wanted to do anyway, in spite of that alert.
Glad it worked out for you, too.
Cheers!
-PoF
Thanks for doing this every year! Just did my fifth back door Roth conversion and third in Vanguard.
Regards,
Ryan
Congrats!
I mainly do it for myself, to be honest. It’s good to have this to look back on each year. The screens change a little from one year to the next, but not much.
Cheers!
-PoF
I think the starting steps may be incorrect. If I follow your instructions of clicking on “Balances and holdings,” then “Buy vanguard funds,” the balance is $0 with no way to add to the account. I can’t get to the screen you start showing us in this tutorial (the screen of “Where’s the money going?” that has a place that shows 2020 and 2021).
Instead, if I go to “My accounts” and “Balances and Holdings,” I can then go to a “Buy and sell” dropdown where I can click “Contribute to IRA.” THAT actually takes me to the starting point of this tutorial.
It depends on which account type you have, and it’s possible that there’s more than one way to get to the same destination within Vanguard’s site.
Reminds me of EPIC, the clunky electronic health record that, in my opinion, is way too customizable. There are a dozen different ways to review labs and other test results, and everyone’s screen looks different. By trying to make it more user-friendly, they made it far too complicated.
It sounds like you were able to do what you needed to do, so I’m glad to hear that.
Cheers!
-PoF
I think you skipped the step where we put the $6000 into the traditional IRA brokerage account in the first place. I have $0 in my account, so mthe first screen of “Where is the money going?” won’t let me do anything because the balance is $0. It says “If you want to contribute using money from outside Vanguard, go to Contribute to IRA.” Did you contribute money to the Traditional IRA first in order to get to setep 1?
Please help.
I’m not sure why I didn’t run into this question last year (2020), but my traditional IRA is a mutual account and my Roth IRA is now a brokerage account holding VTI.
So I’m assuming I’ll need to do an extra step looking like this for this year:
1. fund the $6000 in the traditional IRA’s money market account
2. Choose convert to Roth IRA, but I can’t directly convert into VTI at this step for some reason, can someone please confirm if this is because it’s a brokerage account? My only choice is the settlement account in the Roth IRA for this step.
3. Once transferred (not sure how long the transfer is) to Roth’s settlement account, I’m assuming I will need to immediately convert the $6000 to VTI.
Much thanks for your help in advance.
It took two business days for my brokerage IRA contributions to be available to convert to Roth.
The steps are the same no matter what kind of account you have and with which broker. It’s the timing and screens that will vary.
As far as semantics, in #3 you refer to a “transfer.” That’s your Roth conversion. Once the money is in the Roth IRA, you can invest in whichever fund you like at any time.
Best,
-PoF
I had a similar experience and posted below. It may be that we both have brokerage accounts for the traditional IRA and “mutual fund” accounts for the Roth IRA. I opened my Vanguard Roth when I was a resident <15 years ago, had let it sit untouched for a while, and then started doing back door Roths a few years ago. So my conversion went to a money market, and then I exchanged the funds. It seems to have worked.
Hello,
Thank you for this detailed post with pictures. Incredibly helpful.
I just made a contribution of 6000$ to my Traditional IRA. After this contribution , my basis is around $30k.
In the Tradition IRa- I have a total of around 100k, which is mixture of this basis and pretax money.
Should I first rollover the entire basis of 30k into roth ira and then transfer out the remaining pre-tax money into my work 401k by dec 31st 2021.
Or
Should I first transfer out the pretax money in my IRA into work 401k and then convert the 30k basis into Roth IRa
Does it matter what comes first?
Thank you all you do.
I think it would be cleaner to separate the comingled money first. You’re going to have some earnings from both the pre-tax and non-deductible contributions, and I believe you’ll have to convert and pay tax on the earnings from the non-deductible contributions.
This is a situation where if it were me, I would make some phone calls to my brokerage and 401(k) people to get guidance from them, while also consulting my CPA. It would be easy to goof things up when doing it myself, and then I’d have the headache of undoing what wasn’t done properly.
Best,
-PoF
Thank you!
Thank you for the lightbulb moment! Lol
We are used to funding via the 401k and have had these old Roth’s sitting.
Now they are another vehicle for us high wage earners with not many more options except brokerage accounts with high capital gains taxes.
Hi, I just backdoored $7000 for 2020 and converted for 2020. How do I know if I pay taxes on this amount? So many examples on 8606 online people are not paying taxes.
Isn’t this taxed as ordinary income? Also, what line on the 1040 does this get reported on?
Of course not. I recommend re-reading the post and also reviewing the Backdoor Roth FAQ.
You’re making an after-tax non-deductible contribution and a conversion on that money. It’s post-tax money, and the point of putting it in a Roth account is to prevent taxes on the growth.
Best,
-PoF
Thank you, to clarify Vanguard did not take out the taxes for me . The $7000 was put into a traditional IRA then all $7000 converted to the ROTH. At no point were taxes taken out.
I will not take a deduction but don’t I owe ordinary income taxes on the $7000 now?
You’re never going to be taxed for contributing to an IRA. You either receive a tax deduction for making a traditional, tax-deferred contribution or you make a non-deductible contribution, but there are no taxes for contributing.
Tax-deferred money is taxed when withdrawn from a tax-deferred IRA (or 401(k), 457(b), etc…
I don’t know where the money came from that you contributed, but presumably it was once a higher sum that was taxed as income at some point. It’s post-tax money already.
I hope that makes sense.
Thanks so much for this run-through on the Roth BD conversion. I’ve been doing them for years but it always feels like a painful process every year. One area I get tripped up is the funding process. in your above steps, you said you fund your MM account ahead of time. Is this your MM fund in your brokerage account at Vanguard? Im assuming so, but I thought the funds had to come from the MM fund IN the non-deductible IRA account that I’m funding. So my issue is I always wait to push the money into Vanguard IRA MMF (funding from a savings account) and that money transfer always take a while (3 days or so). If you can fund across different Vanguard account types that would save me some time. ie: fund the Non Deductible IRA via funds transfer from my Vanguard brokerage account MMF. I thought I tried this one year and it didn’t work.
Disregard. I think I found the issue. My IRA is titled in my name (as it should be). Our Vanguard Brokerage is titled in our Trust so it has both my name and my wife’s titled on the account. Vanguard won’t transfer funds between two different titled accounts for IRA funding.
Hi,
I have a Roth IRA with Vanguard. I currently exceed the income limits to continue contributing to the Roth IRA so I was thinking about doing a backdoor conversion instead. However, I have an old Simple IRA from a previous employer that’s currently in my Fidelity account.
My intention was to open a Traditional IRA in Vanguard and then convert the contribution into my current Roth IRA in Vanguard. However, would I need to first do something with the Simple IRA in Fidelity (eg. do a rollover into my current 401(k))? Or do I only need to be concerned about any existing non-Roth IRA in my Vanguard account?
Thanks in advance!
It doesn’t matter where it is, you want to have a 0 balance in any tax-deferred IRA on 12/31 for the year in which you want to make the Roth conversion step.
It may be too late in the calendar year to roll it over to you 401(k), so your best bet may be a Roth conversion at Fidelity, and you’ll just pay the tax on the amount converted.
Best,
-PoF
Hi there, thanks so much for taking the time to write this post with all the screenshots included – super helpful!!
I know it’s late in the year, but I was thinking of rolling over my previous 403b to an IRA then converting that to a Roth. Adding this amount before the end of 2020 would most likely make my income for the year too high to contribute directly to a Roth so I’m in the midst of making my first contribution via the backdoor (in my 7 day way waiting period now).
I’ll expect to be in the 24% tax bracket this year but foresee falling into the 32% next year. I’m thinking it makes sense to take the tax hit now for the around 60K I have in my 403 to have the taxes taken care of on the amount & allow it to grow tax-free? Thoughts?
My additional question would be – how does the tax payment for my formerly pre-tax contribution work if I go this route? Do I claim the estimated 24% to be withheld when making the Roth conversion? Also, will this affect the non-deductible, already taxed $6k backdoor contribution to the tIRA converted to the Roth in any tax way (will that amount also now be subject to tax, or will it be differentiated since it was already taxed)?
In reference to above, does anyone know of any sample 8606s that show what it might look like if you make more than one conversion in a year?
Lastly, do you think there’s any danger in trying this 403b rollover so close to the end of the year (imagining worst-case scenario… rollover funds get stuck in my tIRA for 7 days that may fall on 12/31… – subjecting myself to the pro-rata rule)
Thanks for any insights!!
Hey DD90,
I think it makes sense to convert in the 24% bracket as long as the conversion doesn’t push you into the 32% bracket — every dollar converted counts as taxable income, of course.
Regarding Form 8606, I personally would defer to a CPA on that. The non-deductible contribution should never be taxed again as long as the paperwork is filled out properly.
As far as withholding, you could either send in an estimated tax payment to the state and IRS from cash, do a withhold when you convert (and the brokerage sends $ to fed & state–but that decreases how much money you have left tax-protected), or possibly adjust your withholdings at your W-2, but it’s a little late in the year to have much of a dent.
Again, I think working with a CPA or tax strategist on this is wise.
Best,
-PoF
me and my wife file jointly but i work fulltime while she is a fulltime stay at home mom. from what i read, i can still do roth for both, correct? seems like i first open a traditional ira account for each of us and contribute there first then do back door roth conversion for both, is this correct?
Does it matter if I do traditional IRA and roth IRA with vanguard vs TDAmeritrade. Use TDAmeritrade as my current brokerage. If not, I am assuming the process to do backdoor roth conversion will be the same for TDAmeritrade as described above for vanguard.
The screens will look very different, but the basic process is the same. Non-deductible contribution followed by a Roth conversion.
Best,
-PoF
Great article, thank you very much for posting! I have a traditional IRA with both pre and post tax dollars/contributions. In order to isolate the basis for clean backdoor conversions, I plan to roll the pre-tax amount to my 401k. What is the best way to determine the amount to roll to the 401k? Would it simply be the full balance less the non-deductible contributions? If so this would be Line 14 from the prior years Form 8606 (+any current year nondeductible contributions), correct?
If the roll to the 401k happens right at year end (for simple illustration purposes), the 12/31 balance in the traditional IRA, last years Line 14, and this years Line 2 and Line 6 on the 8606 should in theory all be the same number. Is that correct?
Thank you
I’ve been contributing to back door Roth IRA for a few years now. My work situation will change next year and I anticipate starting an SEP IRA. My question is, can I start an SEP IRA if I already have money sitting in a Roth IRA. I do understand that I cannot do backdoor Roth IRA once I have an SEP IRA in place. Thank you.
Yes, there’s no issue in starting a SEP IRA with a ROth IRA in place. But I would encourage you to open an individual 401(k) instead. The only advantage of a SEP over a 401(k) that I can think of is the fact that you can open it for the prior calendar year prior to April 15th, whereas a solo 401(k) has to be open by the end of the calendar year if you plan to contribute for that year.
Best,
-PoF
Thank you for the prompt reply, PoF. I cannot do solo 401k as I will have employees.
I see — makes sense.
I have some money left over in an old IRA from 2017, that has appreciated some over that time. I was hoping to back door it before I started the more simpler process you have listed above. Am I able to backdoor the 2017 IRA and do the back door for this year(2020) too? The contribution in 2017 was post tax too. Even though the amount it not a big amount I don’t want to end up paying double tax on that 5500. Also I am guessing I will owe taxes on the appreciated amount since 2017, is the appreciated amount taxed at capital tax rate as it has been in that account for over 1 yr or at regular income? Appreciate your help.
You can convert any IRA money at any point and there’s no limit to how much you can convert. You will owe taxes on the gains from the 2017 contribution, but as long as you or your CPA fills out IRS Form 8606 correctly, you shouldn’t owe tax on the non-deductible contribution from 2017.
Cheers!
-PoF
Thanks PoF for this helpful post! Are there an advantages to rolling over old IRAs into an employer’s 401k vs an individual 401k?
For rollover to the employer 401k, the process is easy. My employer 401k has relatively limited options for funds, but includes a total stock index fund at 0.06% ER which I’m happy with, so rolling over to the employer 401k seems like the easiest option.
However, in the future (when no longer employed as full time employee), I expect to earn some income as an independent contractor, in which case I might want to open an individual 401k anyway. My IRAs total less than the $250k threshold for additional IRS filing requirements, so no hassle there for now, and I expect I might get more control and a greater selection of funds through an i401k with Fidelity or eTrade than through my employer’s plan. There are a few more steps involved for the i401k and the need to generate a small amount of independent income this year to open it, but that seems doable.
What do you think? Is going with the employer 401k for now the obvious choice? Or are there near or long term benefits to taking the i401k approach instead?
Thanks for your insights!
I would stick with the employer option for now. Later on, you can open up a solo 401(k). I use eTrade; it’s free and has lots of fund options. Fidelity is also a good choice.
Cheers!
-PoF
Hi,
This post is old but I just happen to see it, and I post my question just in case you would respond.
My situation follows:
1) I have a Rollover IRA at TD Ameritrade with all pre-tax contributions
2) I have an IRA at Schwab with both pre-tax and after-tax contributions
Now, I like to consolidate my accounts by rolling IRA from Schwab to IRA at TD Ameritrade, but I want to roll over the after-tax money in Schwab account into a ROTH IRA (which I’ll open at TD Ameritrade).
Can I do this without being subjected to pro-rata rule?
Thank you in advance for your reply.
Bee Ngo
Quick Question. I make 100k a year. I am able to contribute the full 6k each year into my ROTH IRA.
Is there a way for me to convert an additional 6k from my traditional IRA into my ROTH IRA making my total annual ROTH IRA contribution to 12k?
I have already completed by backdoor conversion this year and am planning to contribute/convert for my wife before the end of the month. My wife was recently laid off (thanks COVID) so while we’re typically above the income limits for front-door Roth contributions, it’s unclear if we’ll end up hitting the income limit this year. Is there any downside to doing a backdoor Roth conversion even if you’re below the income limits for contributing via the Roth front door? We could wait to the end of the year to see how things shake out with her income, but I’d rather get it taken care of now. Thanks!
There are no negative repercussions to using the backdoor even if it turns out you didn’t need to. I always recommend that people use the backdoor if there’s even a remote chance they might possibly have the income that puts them in the phaseout range.
Sorry to hear about your wife’s layoff.
Best,
-PoF
As a follow up. I have an old 401K from a prior employer and there is about $3,000 in this Vanguard account. I was contemplating whether to either roll this money into my Vanguard IRA and then move it to do my backdoor Roth for 2020 (I already did the backdoor Roth for 2019) vs. rolling the old 401K into my current employer based 401K I have with Fidelity. Or I should I simply leave this $3,000 as is but it really isn’t growing.
Thanks,
Dr. Tirado
I would like to know whether you could have both a backdoor Roth IRA and traditional IRA? I understand you are subject to taxes if you have the traditional IRA. If you do the backdoor Roth IRA can you then only have that investment?
I have an old retirement account with Vanguard from an old employer and I have wondered whether I should use these funds towards a roll over of a backdoor Roth IRA for 2020? I would like some advice.
If the old retirement account is a 401(k) or 403(b) with Vanguard funds, I would leave it be. You could also consider rolling it into a current 401(k) or 403(b) if the current account also has good fund options.
Regarding the traditional IRA, you’re probably earn too much to contribute in a tax-deferred way (see intro), and having it ruins the benefit of the backdoor Roth.
For an overview of the different account types, please see this two part series.
Best,
-PoF
Very helpful step by step article! Two questions for you – I have money in an IRA that I converted from a 401k a while back. If I understood it correctly, I first would have to move all the money that I currently have in my IRA to for example a 401k (which my employer lets me do) before starting the Backdoor Roth plan.
– If I rollover my IRA money to the 401k today , could I still do a Roth conversion for 2019 (or just for 2020)?
– In my 401k the only valid option I have is FXAIX (vs. now I have my IRA money in VTSAX), do you think the upside of being able to do a Backdoor Roth conversion outweigh the potential downsides of investing in FXAIX (vs. VTSAX)
Thanks for sharing your thoughts!
My understanding is that the calendar year in which you do the conversion is what matters. You need to have a 0 balance in any tax-deferred IRA on 12/31/2020 to avoid pro rata issues on any Roth conversions made in 2020.
The S&P 500 fund (FXAIX) is a great option — you’re lucky to have it in the 401(k). Go for it.
Cheers!
-PoF
Hi, I’m a PGY-1 (almost PGY-2) who is starting to learn about investing/retirement accounts and I am trying to make good financial decisions that can prepare me for the F.I.R.E. lifestyle. I recently started investing in my retirement account more aggressively through pre-tax contributions to a 403b Vanguard tax-deferred IRA & investing in index funds through that. Since I am still in a lower tax bracket (making ~$58K,) should I take advantage of the Roth that is offered through my employer since these are probably the last few years I’ll be in a lower tax bracket? I am just trying to decide if it makes the most sense to contribute to the tax-deferred account vs Roth vs 50% of investments into each one. Please advise! Also, I’m doing this in lieu of paying aggressively on student loans ($350k+) because my goal is to qualify for physician loan repayment. Advice/thoughts?
I agree that Roth contributions make good sense when in a low tax bracket.
More on how I think through Roth vs. Traditional.
Cheers!
-PoF
i have been doing backdoor roth for past several year but for my non-working spouse, i am not able to due to approx 50K in traditional ira. would you suggest take a tax bite by converting to roth so that i can do backdoor for my spouse as well? i am in 32% tax bracket.
So you’d be looking at paying ~$16k in taxes on the conversion.
If there’s any kind of small business (and it can be very small — like walking dogs on Rover or answering surveys) that she could start, she could open a solo 401(k) and roll the IRA into it. Paying the tax is not the worst thing to do, either — with all the stimulus money being spent, it’s hard not to imagine taxes going up in the future.
Best,
-PoF
Hi, I just opened a Traditional IRA with Vanguard. I didn’t qualify for the Roth this year, and am a NP. I put in $3000 with plans to add $3000 in June and July. I’m thinking after reading this article that I should have left that $3000 sitting in the money market part of Vanguard until I had the full $6000. Instead I invested in VTSAX! Should I back door the $3000 then repeat with remaining $3000 leaving any gains in money market account there? Any help appreciated!!
I opened a SEP IRA with Fidelity in October 2019, when I was self-employed in 2019. I am now W2 and want to open a Backdoor Roth IRA at Fidelity.
My employer will allow me to open a 401k with them in October 2020.
What do I need to do exactly with my SEP IRA before opening the traditional IRA now and employer 401k in October? Any tax consequences?
Thank you!
As long as your employer allows you to rollover a SEP IRA into their 401(k) (some do, some don’t) AND you’re able to get it done by 12/31/2020, you will be able to do the backdoor Roth for 2020 without pro rata rule issues.
Best,
-PoF
And what if my employer does not allow a rollover into their 401k? What do you do with the SEP IRA before December 31? Thanks!
You may be able to start a solo 401(k) — that’s discussed in this post above.
Best,
-PoF
So I did backdoor Roth this year and ended up with a $1.75 interest payment to my traditional IRA a month later.
What should I do with this?
Leave it? I recall reading that the success of the backdoor Roth is predicated on a $0 traditional IRA balance on 12/31 of the year of the conversion. What would be the implications of leaving it and converting it with my 2021 backdoor Roth? That would give me a $1.75 balance on 12/31/2020.
Convert it now? does that involve another 10-99 form or is it combined with 10-99 from backdoor Roth conversion.
Transfer back to post tax bank account or brokerage? tax implications?
I realize this is a long post about a small amount of money. I don’t want to mess up my ability to perform the backdoor Roth.
Just convert it and you might pay $1 in tax on your 2020 return as a result.
Best,
-PoF
Answer “No” if you didn’t have a Form 8606 basis on 2018 return. TurboTax will generate a Form 8606 for your non-deductible contribution for 2019. That $6000 basis will be “credited” on your 2020 return next year for the Roth conversion made in 2020.
Thanks Wilbur. I’m going to contribute another $6000 to a traditional IRA for 2020 and convert to Roth IRA in 2020. I will need to enter two 1099-R for both conversions for my 2020 tax return right?
Also, I just got a bank interest $0.01 in my traditional IRA account after the conversion. Do I need to convert the interest to Roth IRA as well or it’s fine to leave it in the traditional IRA?
You will receive one or two 1099-R forms for 2020 conversions. If both conversions are from the same TIRA, the custodian might send one form for $12K.
You can convert the $0.01 earnings at any time. Since it’s a small amount, there’s no rush to convert.
Hi, I contributed $6000 (after-tax dollars) to a traditional IRA in 2020 for 2019 and converted to Roth IRA a few days later in 2020. This is my first year contributing to IRA. I’m not sure how to report this in TurboTax for the question below:
For “Any Nondeductible Contributions to IRA?” (Let us know if you made and kept track of any nondeductible contributions to your traditional IRA from 2018 or prior years?) am I supposed to say Yes?
– If Yes, they asked me to provide Total Basis as of December 31, 2018. Should I enter 0 since I never filed Form 8606? (Tried this and I saw Income Is Too High To Deduct an IRA Contribution after I hit continue. Then hit continue again to see Your IRA Deduction Summary) Meaning Form 8606 is generated?
– If No, I saw Income is too High To Deduct an IRA Contribution page as well. Meaning I reported nondeductible contributions automatically?
Thanks
Has the 2019 conversion deadline been pushed back to July 15th, 2020 like the other tax deadlines?
It has! I haven’t updated the post, but I will.
Thank you for the reminder!
-PoF
Hi i want to start a back door roth. But I have close to 30K sitting in a traditional IRA from old employer roll over. I’m wondering if I should pay taxes and covert it to ROTH (but paying $9K in taxes seems too much) or is there another option? Can I convert back to 401k? Thanks a lot for your help! Very useful website!
You can rollover the IRA to a 401(k) IF the 401(k) plan accepts rollovers. Some do; some don’t. You’ll have to ask or check the plan documents to learn whether or not yours does.
Cheers!
-PoF
I think I goofed this up. Going through my taxes now and after entering the info from my 1099-R, FreeTaxUSA said that I owed ~$1,700. The only thing different was attempting the Traditional to Roth IRA conversion. Did I violate the pro-rata rule?
Did I do it incorrectly and just have to eat paying Uncle Sam? Or is there a work-around?
Tough to say without knowing a lot more.
Does FreeTaxUSA have a CPA that can look over the 1040 with you? Is Form 8606 filled out?
The pro rata rule is easy. If you have a tax-deferred IRA in your name, then, yes, you will owe taxes when you attempt the backdoor Roth.
You may want to look into TurboTax — they have CPAs and you can easily find instructions for form 8606 for TurboTax. https://www.physicianonfire.com/turbotax
Best,
-PoF
Great guide, thanks. My cousin is going to retire. She wanted to hire a specialist, but thanks to your leadership, we all understand. I did not know about the limitations of MAGI and ultimately contributed to the Roth IRA account back in November (I am surprised that Vanguard did not warn/did not bother me). What will be the consequences?
Roth contribution can be recharacterized, but I’m not sure on the deadline for that. I would consult with a CPA.
the back-door Roth conversion gets tossed around quite a bit in this FIRE realm
I don’t know if that’s true, but note you’ll want to roll Roth 401k to Roth IRA prior to starting RMD’s since RMD’s are required from Roth 401k.
I have a traditional IRA and Roth IRA through vanguard and would like to to roll them over into my employer 401k. The 401k does have a Roth option. I was told that the IRS does not allow “reverse rollovers” or rolling a Roth IRA into a 401k Roth. Is this true? Is there any way to work around this?
I haven’t looked into it, but it’s tough to come up with a reason you’d want to do move money from the Roth IRA. If you’re going to do the backdoor Roth, you need a Roth IRA, anyway.
Perhaps if the 401(k) has no fees whatsoever, institutional fund choices that could save you a basis point or two, and you’d like to have access to both the contributions and the earnings and you plan to retire between age 55 and 59… then I can see a reason why you might want to do this.
In general, your own ROth IRA will have lower fees, a wider variety of fund options, and you can access the contributions at any age without penalty.
Can I ask why you want to have this option?
Best,
-PoF
I’m not aware of a waiting period. Some folks used to wait between contributing to a TIRA and subsequent conversion since that could be seen as intent to bypass income limitations for Roth contributions. However, the IRS said that backdoor Roth is okay.
Per the outlined instructions, I must move my current balance of IRA to a 401K. Then I can fund a new IRA and transfer to a Roth.
My question is; ” Can I do the 1. IRA to 401K movement AND the 2. Backdoor IRA funding/transfer to a Roth in the same year or is there a waiting period between 1 and 2?
You can actually do it in the reverse order.
What matters is that the IRA balance by 12/31 is zero in the year that you convert. Doesn’t matter if your backdoor Roth moves come beforehand.
Cheers!
-PoF
Informative post! Thank you for sharing.
I have $50k of post tax dollars(salary) in a checking account. I plan to move this to a traditional IRA account and then convert all of this to a Roth IRA using the backdoor Roth approach. I will make sure there are no other funds in my trad IRA ie move all my deductible funds in trad IRA(roll over from prior 401k) to my current 401k account to avoid pro-rated taxes.
My question: is there a limit on how much can I convert to Roth IRA using the backdoor approach? ie can I convert all of the $50k once or do I need to do this in portions of $6,000 per year?
I find some folks doing it in phases, and others converting their entire amount. Can you please confirm. Thanks!
Moving 50K in non-retirement account to Roth IRA will take several years due to $6,000 (or $7,000 for age 50+) annual contribution limit.
Each year, do either:
a) Make contribution to Roth IRA if eligible due to income.
b) Make nondeductible contribution to Traditional IRA (TIRA), then convert entire TIRA account to Roth IRA, paying ordinary income taxes on the (should be small if convert quickly) gains.
Thanks Wilbur. So where exactly is the limit? ie Am I limited to only contribute $6K of post tax dollars to my TIRA? Assuming I had $50k of post tax dollars in TIRA already, then could I have converted ALL of this dollars to Roth IRA?
In other words, it looks like the restriction is on contributing to TIRA(6k a year) and not converting from TIRA to Roth IRA(unlimited amount allowed).
PS: I cannot contribute to Roth IRA directly due to MAGI.
Yes
My previous answer assumed the $50K was in a checking account was in a non-retirenent account. If instead, that $50K was in after-tax portion of 401k, it can be moved in part or whole to Roth 401k or elsewhere depending on 401k plan rules.
I have a Defined Contributions Plan (DCP) through my work where I can invest up to $56,000 after tax dollars into. From what I understand I can take the gains and put them into a ROTH IRA (I think this is the back door ROTH IRA the agent was talking about) at the end of each year. Instead of being taxed on the gains from the DCP. Is this correct?
This post was so helpful, thank you! I have a question – I waited about 2 weeks before I made the conversion and now I have $6,005 in my traditional IRA. I made the conversion and now I have $5 in the traditional IRA. How do I get rid of this $5 so I don’t get penalized? I appreciate the help – read the 17 ways to screw up a backdoor Roth article but I’m not understanding the explanation for this. Thank you for the help!
Hello! Thank you for this post. I want to make sure I understand everything so I don’t mess this up as it would be our first time completing a Roth. We have been filing MFS as my husband is pursuing PSLF.
1. Is it correct that we are forced to do a backdoor Roth since we file MFS?
2. Is it too late to contribute to a backdoor Roth for 2019. I feel like I have read conflicting statements regarding this.
I have a question regarding my 2020 tax. I have ~$4500 in a roll-over traditional Ira from the previous job. I contribute 6k into the traditional IRA. I did a backdoor Roth IRA conversion of this $6000 (income too high for direct Roth contribution). I realized that I should have converted all to Roth, which would simplify things, but I already did by back door roth conversion. Can I just convert this $4500 to the Roth account this year? Is there a limit of how many times i can convert?
I made a mistake and missed the point about the pro rata rule. 2019 I contributed 6k (non-deductible) to IRA then converted to Roth soon after. I have 12k in another traditional IRA. Based on the pro rata rule, the split will be 4k taxable and 2k non taxable. Okay so I want to make sure I do it right now. Steps below work?
1. Rollover 8 of 12k to my employer 401k, leaving the 4k on which I already paid taxes in the IRA.
2. Convert the 4k to Roth right away, this should not be a taxable event since I already paid taxes on this money right?
3. Move forward with backdoor Roth as usual?
Apologize if this was already answered in the comments. I read through them all and I didnt see an explicit note.
I’m afraid that’s above my pay grade. I know how to do it the right way, but don’t know the ins and outs of properly rectifying mistakes in a way that will appease the IRS.
I would ask your CPA (or a CPA) before doing anything further. You should have ’til the end of the calendar year to get it right, so no hurry.
Best,
-PoF
I’m falling in the same boat as poster John and want to make sure I’m understanding correctly. I made my contribution to Vanguard traditional IRA at the end of December 2019 but the funds didn’t clear until early January so I didn’t do my backdoor Roth conversion (using the 2019 traditional IRA contribution) until Jan 2020.
I now have the funds available to do my 2020 traditional IRA contribution and then conversion to roth IRA through back door.
Are there any special considerations when I do my taxes with turbotax given that my 2019 traditional IRA contribution happened in a different year from when I converted it to the backdoor roth IRA in Jan 2020? Am I still allowed to do a 2020 traditional IRA contribution followed by backdoor conversion to Roth IRA for 2020 considering that I converted my 2019 traditional IRA contributions to a roth account in 2020?
Thanks so much. Hopefully my questions make sense,
Dan
As long as Form 8608 is filled out appropriately, you’ve got nothing to worry about. You may have to communicate with Intuit on how to do that properly with Turbotax. I did two years’ worth in the same calendar year the first time I did this back in 2013 or so.
The form isn’t available yet for 2019, but last year it came out mid-February. I doubt it will look much different than last year’s.
Best,
-PoF
Great article. I wasn’t aware of the MAGI limits, and ended up contributing to a Roth IRA account back in November (I’m surprised Vanguard didn’t warn / prevent me). What would be the implications? Can I correct and convert from roth -> traditional -> roth?
I wish I could help you, but the people you need to reach are at Vanguard, not here. There may be something they can do.
Best wishes,
-PoF
I opened a Traditional IRA in November 2019 and contributed $6000 the same month. Now I would like to set up a backdoor Roth IRA in January 2020 and, preferably, have the converted funds count as a contribution for taxable year 2019.
However, I was told that Traditional IRA->Roth IRA conversions needed to occur in the same year as the taxable year during which the Traditional IRA contribution was made or else it wouldn’t count for that taxable year. If that’s correct, does it apply only to backdoor Roth IRAs set up via full Traditional->Roth IRA conversions or also to those set up via Traditional->Roth IRA rollovers?
John, i’m about 98% sure that’s correct. i scramble to do these in december every year based on some research i did several years ago when i started doing these. the conversion is applicable to the year you complete it. so a conversion in 2020, even if prior to 4/15/2020, is a 2020 conversion. it is too late to do a 2019 conversion. i can’t find where it says this on the IRS website, but i did find two reputable sites that say this. i really hope PoF corrects this on this article. would hate for him or anyone else to mess up their taxes by reporting the conversion for the wrong year.
here are the websites i found this on:
https://www.fidelity.com/retirement-ira/roth-conversion-checklists
https://finance.zacks.com/can-roth-conversion-applied-previous-tax-year-2134.html
PoF, if you have information to the contrary, please share…thanks!
What you say is correct. See my reply to John which appears just below.
If I’ve written anything in the article that needs to be corrected or clarified, I’m happy to do so.
Best,
-PoF
You can do that, no problem.
Contributions and conversions are two separate events. You can contribute $6,000 per person per tax year, and you have about 15.5 months in which to do so (beginning of January to mid-April of the following year).
You can convert as much as little as you want, whenever you want.
To keep things simple, I do both in early January each year, but when I did my first backdoor Roth, I did it for both the prior and current years before Tax Day in April.
Note that I referenced this above in the article:
“Note: if you’ve never done the Backdoor Roth, and you’re financially able, now is a great time to make one contribution for 2019 and another for 2020. If you’ve got an eligible spouse (and by eligible I’m referring to backdoor Roth eligibility), the two of you can sneak $24,000 into Roth accounts this year as long as you complete the 2019 contribution by mid-April, 2020.”
Cheers!
-PoF
Does the 5 year rule apply to withdrawals from the Roth? Do I need to keep track (save my 8606 forms) of contributions (I don’t always max my back door contributions)? Want to be prepared when the time comes to start withdrawals.
Thanks SK
The 5-year “seasoning” rule does apply to conversions, which is technically what backdoor Roth contributions are.
Direct Roth contributions (for those that make under the limit) would be available without penalty at any time (but not the earnings).
Personally, I have no plans to touch Roth money unless the taxable account runs dry and tax-deferred withdrawals are not enough. Keep Roth money as long as you can!
Cheers!
-PoF
My tentative plan is to use Roth IRAs as the reserves if I am close to going into the next tax bracket. Let’s say I am $5,000 in taxable income from the next tax bracket. For whatever reason I have an immediate need for $15,000. My 3 choices to get that kind of money in short order is 1) sell taxable accounts and incur a capital gain, 2) withdraw from my 401k or 3) withdraw from my Roth IRA. I would pull at least $10,000 from the Roth to avoid going into the next tax bracket.
You might think that I should exclusively withdraw from the Roth until it is exhausted. However, there is an inevitability to paying taxes on the 401k so my plan is withdraw some of it at the lowest tax bracket each year. It’s possible I may be able to convert 100% of my 401k to a Roth IRA but I am trying to make those conversions in the 22% bracket or lower. Not much gets converted before I bump up to 24%. After 2025, the Trump tax cuts expire so no one know what the brackets will be.
I think it’s a great idea to fill up the lower brackets with taxable income. There is a ton of room in that 24% bracket, especially if married filing jointly, before you hit 32%, which is a much bigger jump.
Sounds like you know what you’re doing and have a plan.
Cheers!
-PoF
So in December 2019 I rolled the balance of an existing rollover IRA (all pre-tax money) into our current 401k. Then the last week of December 2019, I converted our traditional IRA into a Roth. a week later I receive a check dated 1/2/20 for $0.54 from what should have been a zero balance rollover IRA. So now we had a $0.54 balance on 12/31 of the year we completed a conversion! What do I do?
Nothing to do. Rounds off without consequence.
But Pat yourself on the back for doing everything right!
The only thing I would add is that I think it is prudent to wait until you gross $6,000 (or $7,000 if you are over 50) before making your IRA contribution. If you get laid off before grossing that amount and then not work for the rest of the year, you have made an excess contribution and our subject to a penalty on the excess.
I always thought layoffs in January were rare because companies want to take the associated expenses in December. A few years ago, my company had layoffs in January. I was spared but now I wait until after I gross the contribution limit before making the contribution.
Of course, companies typically pay severance packages so even if you are laid off in January & don’t work for the rest of the year, the severance package may push your gross over the limit.
Good article.
Important to remind people that for 2019 the limit was increased to conversetion was $6,000.
Also, I like that you said:
“I invest my non-deductible IRA contribution in the Prime Money Market Fund”
Last year I put in the “Federal Money Market” in my Vanguard account and with the dividends I exceed the limit… Lots of headaches.
GLAD YOU HIGHLIGHTED THIS ISSUE.
if you do the backdoor, put money into a traditional them immediate convert to ROTH, would you still need to file the 8606 for the traditional?
Yes. You must file form 8606.
One point, I have a SEP-IRA and have not had an issue with a Roth conversion. So this should not deter you. I will say as a heads up to people that the IRS doesn’t require any additional documentation to prove your Roth conversion contribution if you convert in full (which you should be doing id you are doing an Roth conversion otherwise you WILL have possible IRA tax liability as the current way this is process doesn’t allow you to “show” the IRS where the money came from. So there is an an audit risk if you do this, I was audited years ago for this for a conversion I did in 2015. It was a pain but i was able to prove where the money came and had to show the IRA contribution, the conversion. My CPA was worthless, my advice to all is know your tax codes and what you are doing, just like in Medicine you are ultimately responsible for you return (before the asinine comments commence, I did not have a SEP in the year of this audit).
My spouse has a defined benefit type 401k from a previous job that we need to roll over somewhere because of the 1% fee and questionable investment options… I’m trying to figure out should we roll it over into spouse’s current job 401k (0.5% fee and Vanguard Target Retirement Funds available) or open a Solo 401k (has a side hustle already) at E-Trade or Fidelity and roll it over there where fees are lower than 0.5%? We are high income earners and want to leave the IRA space free for backdoor Roth conversions. Thoughts? Thank you for such a great post!
I opened one at ETrade and it works well for me. Lots of low-cost funds from Vanguard and Schwab with no purchase fees. Fidelity would be a fine choice, as well.
Best,
-PoF
Uh-oh, I think I’m in trouble. I just did our first back door roth last year but I also rolled over a previous 401K (that was heavy in fees) to a rollover IRA account. What does that mean for my tax liability?
That depends on what you mean by “just.”
If it was in 2020, you’ve got until 12/312020 to move that money into a solo 401(k), employer’s 401(k) or convert to Roth. Otherwise, a 2020 backdoor Roth will have issues with the pro rata rule.
The 2019 backdoor Roth is only at risk of being mostly taxed if the money you rolled out of the 401(k) hit the IRA in 2019.
Best,
-PoF
Hello,
Are you able to do a backdoor roth every year? How do you go about doing this on vanguard? I have a traditional and roth IRA set up.
I just contributed $6000 directly into my roth IRA just now.
Silly question that you and WCI get a ton most likely.
Contributing 6,000 to my backdoor roth ira for tax year 2019 but doing the nondeductible IRA contribution and roth ira conversion in calendar year 2020. It’s 12/31/19 right now and I can’t convert by 1/1/2020.
I still do a tax year 2019 8806 form? What exactly is different with the late conversion vs one in which the tax year and calendar year are the same?
Thanks a lot…sorry for the question but I don’t want to mess it up.
great post- thanks so much! I was wondering if the pro-rata rule will apply to me if it’s my husband’s IRA? For example, I have a solo 401K and will be rolling my existing IRA into there to avoid the tax basis when I do the backdoor Roth IRA. That being said, if my husband has an IRA currently and I do the backdoor Roth, could I expose myself to the pro-rata rule because of his IRA (being that we are married?)
Also, can he participate in my solo 401K as a spouse even though it’s my LLC ?
Thanks, Jen.
You can do the backdoor Roth without any concern of your husband’s IRA. The I is for Individual and what he has doesn’t affect what you can do and vice versa.
Regarding your solo 401(k), that’s yours and not his. If he has 1099 income from your business or any other, he can open his own solo 401(k) (a.k.a. individual 401(k) and contribute on his own.
Cheers!
-PoF
oh thank you! One more question (I think I know the answer to this but just double-checking). if I already have a roth IRA, do I have to roll that into the solo 401(k) as well or will that also be excluded from the pro-rata calculation?
A Roth IRA is not a problem — in fact you need to have one for there to be a landing spot for the money when it’s converted. I only have one Roth IRA and I roll more money into it each and every year.
Best,
-PoF
Great post, I am doing my backdoor roth for the first time this yr. I have opened a traditional ira and i am waiting for the funds to settle before i do a roth ira conversion but the 6000$ that i initially put in the traditional ira now has an extra 100$ as a promotion. Do i move the total 6100$ when i do the conversion or do i only move the 6000$ limit? If i have to do the second option, then what should i do about the 100$ that will be left in the traditional IRA. Thank you.
Can I do this for my wife also?
Do what for your wife, exactly?
Each person can do this. It’s Individual, so she will have to have her own accounts. Bit she does not need earned income.
Cheers!
-PoF
I just did it today.
Vanguard changed some display so now you can just go Balances and holdings –> Convert to Roth IRA and follow the prompts.
Thanks for the article!
Hi, great article! Thanks!
Question:
May 2019 – I rolled over previous 401K ($100K) to a new Rollover IRA account
Early Dec 2019 – I contributed after-tax $6K to my Traditional IRA account (this is non-deductible contribution)
Now (mid Dec 2019) – I wanted to convert $6 to Roth IRA account but realized this Pro Rata rule (I don’t want to pay tax again on part of my $6K)
If I rollover my Rollover IRA account (only the $100K) to my current employer 401K (yes, it allows) and when this is done before Dec 31, 2019, would I still be able to convert $6K from my TIRA to Roth IRA for 2019?
Thanks!
Need some advice. Fresh out of residency and in my new job with no 401k option until I’ve been there a year. So I decided to do a backdoor Roth IRA this year with $6,000, so I can at least get some tax benefits later on. I completely forgot that I had a old traditional IRA with ~$3,000 that I rolled over from a 403 from my intern year.
Not sure what I should do at this point, because I don’t want to get taxed again.
– Open a solo 401k and rollover that traditional IRA into it?
– Is there a way to just ‘undo’ the backdoor Roth?
– Just take the tax hit this year?
– Is rolling the traditional IRA to a Roth an option if I already rolled over $6000 through the backdoor?
In your case, I would convert the $3,000 before the end of the calendar year. Might cost you $1,000 in taxes, probably less. It will only get more expensive to do so in the future as you will presumably be in a higher tax bracket next year.
Best,
-PoF
In terms of executing a back door roth account, your article states You cannot have money in a tax deferred IRA in your name. That includes traditional IRA, SEP IRA, and SIMPLE IRA, but does not include 401(k), 403(b) or similar acounts. If you do hold tax deferred IRA dollars, you’ll be subject to taxes when making your conversion per the pro-rata rule.
No. It’s only an issue if you have tax-deferred money in an IRA and you make a conversion to Roth.
Roth IRA money will never be subjected to tax again (under current tax code, anyway). I realize that could be stated a bit more clearly in the text.
Best,
-PoF
Hi PoF, Great article, thanks for sharing!
I am trying to follow the logic when doing a Roth conversion when you have a Simple IRA; I am a small business owner and we have a Simple IRA in place of a 401K due to the cost of 401K management and the fact that we have employees so an Individual 401K is not permitted.
Because my Simple IRA is my tax deferred 401K equivalent, are you just saying that if I do a Roth conversion I am going to have to pay taxe each year on the $12K that I am converting via the backdoor Roth (married filing jointly) or the $12K + the $13,500, max of the tax deferred Simple IRA as well? If the latter, I can see why this would not make sense while I am in the highest tax bracket I will likely be in so what should my play be here, just avoid doing the Roth conversion until I figure out a different option to the Simple IRA?
For some additional context, my idea of wanting to take advantage of the Roth now is to build my Roth account for early retirement (estimated 10 years). My understanding with the Roth conversion ladder is that you can only convert the maximum Roth limit each year so if I wait to contribute until I am closer to early retirement, I will only be moving roughly $6k or whatever the max is which will not do much for me after the 5-year waiting period. Thanks for any insight that you can offer!
Read up on the pro rata rule. Whatever percent the amount of the conversion is as opposed to the total IRA balance is the amount that wouldn’t be taxed.
Let’s say you have $94,000 in the SIMPLE IRA and you make a $6,000 non-deductible IRA contribution followed by a Roth conversion.
You’d owe tax on 94% of the Roth conversion. So you might as well skip it unless you can find a new home for that SIMPLE IRA balance, like a solo 401(k).
Cheers!
-PoF
Question regarding IRA to Roth conversion and back-door Roth conversion.
In order to start doing the back-door Roth conversions, I first need to convert $36k I have sitting in my traditional IRA today of which all the contributions were non-deductible but has about $8k in gains.
I decided to go ahead and convert the entire IRA balance to a Roth in 2019 and both accounts are in Vanguard which makes it easy.
I’m assuming that the $8k will count as income in 2019.
Now I’m also wondering if I could do a back-door roth contribution this same year.
Meaning after my initial conversion of the $36k, i then contribute another $7k non-deductible to that same IRA and convert it to the IRA the next day.
Will my subsequent back-door conversion be somehow taxed because of the prior taxable gain on the original conversion the same year? Should I wait until next year to start the back-door conversions?
I’ve only recently found out that there is an income cap when using a Roth IRA so I’ve been looking at the back-door Roth. This article has been extremely helpful!
I am married and with our combined gross income we are currently not past that threshold but with our end of the year bonuses we might be (most likely somewhere between $193-$203k). I’ve already contributed $2,400 into my Roth IRA this year prior to knowing the income cap. What would be our best option? Would we still be able to do the back door Roth for the remaining contribution amount ? Only I have contributed to my Roth IRA this year. Thanks for your help!
Can I transfer my total account balance from a roth in one bank to a existing Vanguard roth and also perform a backdoor roth in same year?
I do the backdoor Roth each year using your instructions on this site (which are awesome by the way!!) but recently realized my wife has around 20k in a managed roth with a bank that has been doing nothing and charging her a lot for having the roth.
I want to get her out of this situation and also do my usual backdoor roth in 2019 if possible.
Any advice here would be much appreciated.
Yes, you can. Won’t foul up the backdoor Roth in any way.
Hey, I know this is an old post but hoping to get an answer to my question 🙂
Thanks for posting this! I found it extremely helpful when doing my backdoor last year.
Question- do you close the traditional ira account each year after converting to Roth account? Also, I converted to an existing Roth account that I have had for years…hope that’s ok.
I keep it open with a zero balance and use the same account every year.
Cheers!
-PoF
I currently have a traditional IRA with Vanguard, approximately $500K invested and a Roth with Vanguard $5500. invested;From the article it sounds like I can not use my current IRA to backdoor to my current Roth but can I set-up a traditional IRA and Roth IRA with a different brokerage firm to do the first backdoor roth or did I misunderstand about contributing to a current IRA account.
Great article…
Is a person only limited to only one IRA account whereas they can place $10,000 into the account and let it sit for 20 years and become and automatic millionaire? Or is a person allowed to have multiple IRA accounts to become a millionaire on virtual autopilot tax-free? Your thoughts on this?
You can have multiple accounts, but you’re limited as to how much you can put in each year across all accounts. For simplicity, I only have one traditional IRA that I use to hold money for a day, and one Roth IRA.
Best,
-PoF
Interesting. This is one of many ways the rich get richer and stay sooper richey rich! L 😛 L
If my spouse and I make over the limit to contribute to the Roth are we still able to contribute directly to the Roth through his employer? or will we need to do the backdoor?
I currently have a rollover traditional IRA with mostly pre-tax money. However, I made more than expected last year due to overtime and had to recharacterize my Roth IRA contribution into part Roth, part traditional. Now, I have around 2500 in non-deductible funds in my rollover traditional IRA, with the rest (25k) being pre-tax.
Vanguard has informed me there is no way to roll over only the pre-tax money to an employer 401k even though I am tracking my non-deductible contributions on form 8606. However, as per the linked article – https://www.kitces.com/blog/the-impact-of-the-ira-aggregation-rule-on-after-tax-distributions-roth-conversions-60-day-rollovers-rmds-and-72t-payments/ – I was hoping to roll out the pre-tax funds into my employer 401k and then convert the remaining non-deductible funds (as well as my 2019 contribution).
Am I out of luck? I think my only other option is to remove the non-deductible funds with an excess contribution form and eat the 10% withdrawal penalty before October 15th, unless the Vanguard rep I spoke to is mistaken and they can un-comingle the money. Any thoughts?
Thanks.
In your post you say “You cannot have money in a tax deferred IRA in your name.” Does that mean I have to close my Traditional IRA account after converting the funds into a Roth IRA? Or does the Traditional IRA just have to have a zero balance at the end of the year
Thank you so much for this post. I just started this process and have noticed that when I get to step 2, when I am about to make the conversion, the option for “retirement contributions and distributions” exists as an option in the task bar of my preexisting Roth IRA, but the option in the task bar of my new traditional IRA in it’s place already says “convert to roth IRA.” Did they just cut out some of the steps? Seemingly this would be what I click on, but I wanted to make sure I didn’t miss something. If someone has already asked about this I apologize- I did search and not find anything. Thanks in advance!
Thank you so much for this post. I just started this process and have noticed that when I get to step 2, when I am about to make the conversion, the option for “retirement contributions and distributions” exists as an option in the task bar of my preexisting Roth IRA, but the option in the task bar of my new traditional IRA in it’s place already says “convert to roth IRA.” Did they just cut out some of the steps? Seemingly this would be what I click on, but I wanted to make sure I didn’t miss something. If someone has already asked about this I apolgize- I did search and not find anything. Thanks in advance!
It may look different in a brokerage account versus a mutual fund account, which is what I have.
I suggest you hit the button and find out!
Thanks so much for this great post!
Question ACA subsidies:
If I contribute all my income to a mega backdoor roth, does that reduce my MAGI?
I know contributing to a 401k will reduce my MAGI (as the money doesn’t even show up on a w-2), but I imagine my MAGI is not lowered by any mega backdoor contributions. Can anyone confirm?
Thank you for this information. I have been interested in doing the backdoor roth conversion for a while now, but didn’t know how to. Do you have to convert the entire $6000 from traditional to the roth IRA one time, or can you do multiple conversions? For example, lets say each month I only can afford to put $800 in the traditional roth IRA. Can i convert that $800 each time from the traditional to the Roth IRA up to the yearly limit (which would mean multiple backdoor conversions within the year) or do I have to wait until i get to the maximum of limit within the traditional IRA then convert to roth once a year?
You don’t have to do it all at once, but I imagine the paperwork becomes more complex at tax time. Plus you’ll have to pay tax on earnings converted.
WCI lists this as the #1 way to screw up the backdoor Roth in this post: https://www.whitecoatinvestor.com/17-ways-to-screw-up-a-backdoor-roth-ira/
# 1 Trickling In Contributions
To be fair, this isn’t technically an error. I mean, you can do this if you really want to make your financial life more complicated. I think this error occurs from people trying to automate their financial life a la The Automatic Millionaire. They divide up their $5,500 contribution into 26 biweekly periods and every time they get paid, they put a little money into the IRA. If married, they do it for their spouse too. Maybe it makes their budgeting easier, I don’t know. Perhaps they learned about the benefits of periodic investing/dollar cost averaging and want to try to do that. Some of these people even do the conversion step each time they make a contribution. But by the end of the year, they’ve made over 100 transactions when they could have done four (halve those numbers if you’re single.) I don’t know about you, but I’ve got better things to do with my time than do an extra 100 transactions that I didn’t have to do. Even if you put the contributions on auto-pilot and only do the conversion at the end of the year, you’re still overcomplicating things (not to mention creating some tax drag.) Don’t do this. If you make enough money that you have to contribute to a Roth IRA through the backdoor, you make enough to make the contribution all in one lump sum. Do your Roth IRA in January, your spouse’s in February, and then move on to the 401(k) or 529s or whatever in later months.”
Question, to do the maximum backdoor Roth IRA for TY 2019, can I do the conversion in two equal halves, say $3500 in February 2019 and $3500 in August 2019? If so, does it require one or two Form 8606s? Thanks.
It’s simpler to do it all at once. I like to keep things simple.
Thanks for quick response. I agree simple “all at once” is much better but is it permissible to do in two halves?
Yes. You may owe some tax on the earnings if you have any.
Great post, as always! I will soon describe Backdoor Roth and especially Mega Backdoor Roth as well on my website, http://www.firetobiz.com , as it took me a while to figure them out myself.
Hi POF, I read through the comments but sorry if I’m repeating a question. I tried to do a backdoor ROTH for 2019. I contributed $6000 from my bank account to a Traditional Vanguard IRA. After a few days, I rolled over $6000 from IRA to a Roth-IRA at Vanguard.
Unfortunately, I now have $5 in the IRA account (from interest) and $6000 in the Roth-IRA in the prime money market fund.
1. What can I do with the $5 of interest that remains in the Traditional IRA since we have to zero it by 12/31/2019? Can I roll that small amount into my 403b, 457, or DCP plan to zero out my IRA?
Or do you recommend leaving it in the IRA, or convert the 5 extra bucks to the Roth-IRA (overcontribute)?
Thanks!
You can convert to Roth and pay a dollar or two in tax. No big deal.
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
Hello POF,
Thank you for all the information on the site and this great article.
I am still unclear if I can do a backdoor conversion.
Here’s are the accounts I currently have:
Company 401k I max out
Traditional IRA that has been used as a rollover account for previous 401k’s – no pretax or post tax contributions ever
Roth IRA I maxed out last year and had previous contributions
Brokerage Account
Solo 401k for my business – 0 balance and I reported 2300 in income for 2018
Can perform a backdoor from the IRA to the Roth without tax consequences since there have been no contributions? If so is the max allowed $6000 for tax year 2019?
Or should I transfer the funds from the IRA to the Solo 401k and make the Roth Conversion from that account? If so is the max allowed $6000 for tax year 2019?
hi POF,
Thank you for the guide. I just opened a traditional IRA for 2018 meant for conversion and was told by Vanguard that the contribution part needs to be reported for 2018. However the conversion will only be reported on 2019 tax return since it is converted in the year of 2019. I had thought I had to report both on 2018’s 8606 form. Do you have any experience with this kind of late contribution situation. Thanks.
First, thank you POF for all that you do! I have been referencing your article year after year for the last three years.
So I made a mistake in that I forgot to fill out form 8606 for my husband for 2017. Both my husband and I contributed through a backdoor Roth IRA for 2017, but I realized while filing my taxes this year when determining the basis from previous years that we somehow left out form 8606 for him while one was filled out for me. It appears that I am able to fill out a late 8606 for him for the year 2017. I believe there will be a late filing fee of $50 which I don’t mind paying. I am just wondering if this would be necessary given we leave no money in the traditional IRA as everything is converted into the Roth. Will the IRS actually help keep track of the basis through our 8606? Is it something I need to keep track of year after year? Since distribution from my Roth IRA in retirement will be tax free, I just don’t see how tracking the basis will be relevant. Would you go through the trouble of filling out a late 8606?
Thanks for any insight you might have!
Hello
– In order to be able to do a late BACK DOOR IRA for 2018, last month I did a Roth conversion of an old t-IRA which had mingled money (so could not roll it to 401k)
– I then since opened a t-IRA in Vanguard, contributed the 5500 which has hit the account, and was about to do the Roth conversion but since my accountant says I should not have done the contribution for 2018…
It seems he is not correct, would you agree? or the fact that I did the roth conversion of the old IRA in March ( so by balance was not Zero in 12/31/2018) does not let me to contribute for a back door in 2018
thanks
New do this and big procrastinator, but learning
Hello PoF,
Thanks for your step by step guide. It was extremely helpful and exactly what I was looking for!
Wondering if you or someone else on here could provide some timely insight to my specific situation as I need to get this corrected by April 15. My spouse and I both contributed $5,500 to our Roth IRA’s for 2018. In doing our taxes, we discovered we are over the income limit for contributing directly to our Roths and would now like to take advantage of the backdoor Roth IRA. My spouse’s situation should be pretty straight forward. She does NOT currently have an IRA so I believe all I need to do is recharacterize her Roth contributions to a newly created IRA, then convert that to the Roth IRA. Correct?
My situation differs slightly. Toward the end of 2018, I did a direct rollover of $70K from a previous employer 401(k) into an IRA to take advantage of better fund options. It’s my understanding that in doing the rollover to an IRA, I’m now not able to recharacterize my 2018 Roth IRA contributions so I can take advantage of the backdoor Roth for 2018. Is that correct? What options do I have? Simply withdraw the Roth contributions to fix the situation for 2018? Going forward, what are my best options? Roll the $70K IRA into my current employer 401(k) so I can then take advantage of the backdoor Roth? Any help on this is greatly appreciated!
Hello PoF.
I contributed to my (and spouse’s) Roth IRAs earlier in the year before knowing we’d be over the contribution limit (for the first time ever). I think we’ll be over the contribution limit going forward as well. I need to either remove the contribution back to taxable account or perform a recharacterization to tIRA (which I’ll have to create; we don’t have them currently) then backdoor to Roth.
After reading your Backdoor post, I’m just not sure it is worth the hassle. We aren’t super high earners now and won’t be spending a high amount in retirement, so I am very much on the fence of if we should bother doing the Backdoor this year, or at all in the future. What are your thoughts? We currently max 401Ks, have Roths, and fund taxable. Is it worth the paperwork and tracking and possible mistakes?
Thank you for your time/info.
PoF
I started out the year with the idea of DCA my contributions to my traditional IRA with the intent of converting to Roth at the end of the year. I changed my approach in late January and just decided to lump sum the remaining contribution to my tIRA. During that time the market has gone up and now I am at a point where I have converted $6000 to the roth but still have $200 available in tIra contributions. Is it advisable to contribute that $200 to the traditional and convert to the Roth so I take advantage of the total Traditional allowance? The way I calculate it on 8606 is that I will have to pay taxes on anything that I convert in excess of the $6000
The reason I decided to lump sum going forward was that I waited till 12/30/18 to convert my DCA Traditional 2018 contributions and the value had gone down as had everyones due to the Christmas drop so now I have a basis on my 8606 of around 700.
Thanks
As long as you can make it work on the 8606, you might as well take full advantage of the available space.
It’s simpler to save up the $6,000 and make one non-deductible IRA contribution followed shortly thereafter by the Roth conversion. That’s what I recommend going forward, but you should do the best you can with what you’ve got from 2018. If you work with a CPA, I’d run it by him or her, also.
Cheers!
-PoF
Hi! I’m so glad to have found this blog and community… Thank you POF! I’m not a doctor, but I’m in software sales… some pieces of our situations correlate.
This year I can fully contribute to a Traditional IRA for 2018, which I will do, and then I will immediately roll it over to my employer’s 401K. When that’s done, I want to fully contribute to the IRA for 2019.
My question is, my income will likely be at a level this year where some of that contribution will ultimately be tax deductible, but some may not be. Because much of my income is commission, I don’t know exactly how much I will make this year.
How shall I make the contribution for 2019, so that when I do my taxes, the correct amount can be deductible and the rest can be rolled over into a Roth? (Avoiding any taxable events and/or the pro rata rule)
Honestly, if you’re in the phase out range for a traditional IRA (MAGI $64,000 to $74,000 for singles, $103,000 to $123,00 for MFJ in 2019), you’re in a low tax bracket already, and I’d be inclined to go 100% Roth with the IRA contributions.
Best,
-PoF
Thank you PoF. Great article. I was wondering for Mega backdoor (not regular backdoor), is it possible to use solo 401k to contribute after-tax money? my current employer 401k doesn’t allow after-tax contribution. but if the newly created solo 401k can do this, then it would be great. Thanks!
You have to have a specialized individual 401(k) to do this. The off-the-shelf varieties won’t let you.
If you qualify for the 20% QBI deduction based on Sec 199A, you may very well want to start making all Roth contributions rather than tax-deferred. WCI spells this out and has a recommendation for a 401(k) provider in this insightful post.
Cheers!
-PoF
I recently opened an account with Vanguard (looks like it’s a brokerage account) and followed the steps above (contribute 11,500 to traditional IRA, convert to Roth). However, due to the settlement delay there was some accrued interest on the settlement fund, so after converting 11,500 to Roth there is a leftover amount of just under 3 dollars in the traditional IRA. Is this gonna be an issue?
No. Worst case scenario is you’ll owe $1 in tax on the conversion if you convert it all.
I think you can swing that. 😉
Hi.. Doing this for the first time and I guess I messed up a little. I contributed $5500 in July 2018 and after much thinking back and forth, converted it to Backdoor Roth in March 2019 for tax year 2018. The amount has increased to 5575. Now I am adding my 1099-R and have no clue. Will appreciate any help on the matter. I used the Finance Buff’s guide to enter 1099R but when it comes to what is your end of yr balance, he has 0 but I had 5555. Please help!!!
I work with a CPA who fills out the tax forms for me, but I’m assuming you’re talking about Form 8606. The IRS has instructions and a worksheet that may help. https://www.irs.gov/pub/irs-pdf/i8606.pdf
Best,
-PoF
Can you explain this for me?
“if you’ve never done the Backdoor Roth, and you’re financially able, now is a great time to make one contribution for 2018 and another for 2019. If you’ve got an eligible spouse (and by eligible I’m referring to backdoor Roth eligibility), the two of you can sneak $23,000 into Roth accounts this year as long as you complete the 2018 contribution by mid-April, 2019”
Which year would I be deducting on this years taxes, 2018 right. 5500? Why would I want to “sneak” it in rather than just doing the process again next year for 2019?
There is no tax deduction. The benefit is investing in a Roth IRA rather than in a taxable brokerage account, shielding the investment from future tax drag.
Each year on January 1st, a 15.5 month window opens for you to make an IRA contribution. You’re at the tail end of the 2018 window with just over a month to go.
The 2019 window is just 2.5 months old.
There’s no reason you can’t do both now.
In subsequent years, you can get the money in as soon as it’s allowed in the first week of January. Next year, you’ll make your 2020 contribution in January. That makes 3 backdoor Roth contributions in 10 months (or 6 if you’re married).
Best,
-PoF
Thank you for the post, this has been really helpful. I like many others am trying to contribute for both 2018 and 2019. Have a small problem though, I already filed my taxes for 2018. Would I have to amend my 2018 return due to the 2018 conversion, or am I free to report both years’ conversion for my 2019 taxes? Thank you in advance.
You’ll want to file Form 8606 with your 2018 1040. Whether or not that requires an amended return, I cannot say.
The good news is that there won’t be any change in what you owe, since this is a tax-neutral move.
Best,
-PoF
Hello,
Hoping someone can help me with this question: how does Vanguard know if my initial $5,500 contribution is non-deductible or deductible?
For 2018, I might be in the middle of the limit for Roth IRA contribution. To avoid any potential mess altogether, I’d like to designate my entire $5,500 initial contribution as a NON-deductible contribution (even though my income limit may allow for the contribution to be deductible!). How do I tell Vanguard that I want the entire initial contribution to be non-deductible?
Hello,
Thanks for useful step-by step information that helps newbies like me take the first step confidently towards the backdoor IRA.
Can you please clarify how a correct form 1099-R should look like?
Is Box 2a correct??
Gross
distribution -Taxable amount- Taxable Amt not determined- Total distribution
(Box 1) (Box 2a) —— (Box 2b)—— (Box 4) 5,501.72 5,501.72 X X 0.00
Thanks for your feedback.
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This is a wonderful article. I just completed my reverse rollover to take a traditional IRA from Vanguard into my 401k. I will be hoping to make my first back door conversion in Jan 2020.
Thanks for a great article POF. However, I am not very sure if I can attempt this in my current situation.
In Vangaurd, I have a rollover IRA account with my previous employer 401k money in it. Can i open a traditional IRA which will start with 0 balance, fund it with my post taxed dollars and then attempt a backdoor Roth ? Will the pro tax rule apply in this case? I am not sure if Roll over IRA and IRA accounts will be seen separately or not really . Whats the best way to use backdoor in this scenario if at all there is a way to do so. Your response is much appreciated. Thank You !!
Hi, did you get a reply on this?
vikram.malhotra@yahoo.com
Thanks
THANK YOU for your great info on Backdoor Roth IRAs.
I have a quick question for you. My wife is a just finished with all her schooling doctor and finally earning an income. She has limited financial knowledge and has delegated all those duties to me. Her employer right now does not offer a 401k until she has been there for a longer period of time. I suggested that we get her into an IRA so that she is making some tax beneficial investments.
My plan is to do the backdoor method. We are over the income limits for funding directly into a Roth IRA. We use Schwab, not Vangaard, but I have $500 monthly deposits (max out $6k annual total) from her account going into a traditional IRA. I have also set up a separate Roth IRA. My plan is to “convert” or transfer that $500 each month from the traditional IRA into the Roth IRA. At that point those dollars will have only been sitting in the traditional IRA for a couple days, so there will be no capital gains or interest, etc. I don’t plan to invest any funds in the traditional IRA itself. Once I convert those funds into the Roth IRA, I then will make the investments within the Roth IRA.
Is there anything I am missing here? It seems so simple. Is there a tax event when I “convert” / transfer the funds from the traditional IRA to the Roth IRA? These will be “after tax” paycheck dollars, so I want to make sure I am not causing a tax event that in essence would create us paying taxes on the same dollars 2x.
Thank you so much for your guidance.
We communicated offline, but for the benefit of others, I would recommend saving up the $6,000 first and making the non-deductible contribution and subsequent conversion all at once.
Less paperwork, less to account for. If you want to be invested over the time it takes to accumulate $6,000 (which should be much less than 12 months), you can invest in a taxable brokerage account. With no other available space as far as I can see, you’ll need to invest in taxable, anyway.
Look into the possibility of an HSA, as well.
Cheers!
-PoF
If you have an IRA that is funded solely with non deductible contributions can you convert it entirely to a ROTH IRA, then you would have to pay taxes only on the capital gains, right?
That’s essentially correct.
I would replace “capital gains” with “earnings” as it’s all gains including dividends, too, that will be taxed.
Best,
-PoF
Thanks very much for the helpful info. I am interested in doing a Backdoor this year (first time).
I do have a Traditional IRA with not much in it. I found out I can roll this over to my 401K. Since it is March 2019 and I currently have funds in my traditional IRA, am I too late to participate in Backdoor this tax year?
Thanks!
Nope, you can do this for 2019 as long as you have the rollover complete by the end of the year.
If you try to do it for 2018, you will pay some tax.
Best,
-PoF
Hello,
I tried to open an account from Vanguard but the brokerage account application says do not “use this application to covert a traditional IRA to a Roth IRA”.
Did other people encounter such issue too?
thanks,
Sleepy doc
Thanks so much for the tutorial! The screenshots are especially helpful! Just a quick question about the pro rata rule that someone may be able to help me with… I did not do a backdoor roth last year and so would like to contribute for both 2018 and 2019 now. I have an old SEP IRA that I am working on rolling over to a solo 401K. The pro rata rule says my SEP IRA balance has to be down to zero by 12/31/2019 to avoid taxes on the conversion. Will I be subject to the pro rata rule on the 2018 funds if I actually do that contribution and conversion now (in 2019) and if my SEP balance is zero (rolled into the solo 401K) by 12/31/19? Does it matter that the SEP balance was not zero on 12/31/2018 if the contribution and conversion were done in 2019 even if applied for 2018?
It’s too late for 2018, but you can go ahead and take care of 2019 anytime as long as the IRA balance iz zero by the end of the year.
Thank you for the great write up.
My wife has pre-tax 401(k)s from a couple previous employers that we are yet to roll into her 401(k) with her current employer. Are they considered traditional IRAs at this point and subject to the pro rata rule?
This probably seems like an odd question, but is there any way to check whether we have any IRAs we don’t know about?
A 401(k) is not an IRA so those are a non-issue.
Check for an old IRA? I would hope you’re getting some sort of statement in paper or electronic form if you do. You can’t have an IRA through an employer. It has to be something you opened, so it would seem strange to have something like that just floating around that you don’t know about. It’s not like an IRA slips between the couch cushions. 🙂
But hey, I hope you find some hidden money!
Best,
-PoF
Cool, thanks for the info. You never know…I can be pretty careless, and many addresses over the past 20 years can be as concealing as couch cushions. My wife didn’t know about one of those 401(k)s until I asked her to look. If we can keep up this rate of discovery, we won’t need to make new backdoor Roth contributions.
Thanks,
Matt
If I have a traditional IRA with commingled deductible (taxable) and non deductible (non taxable) contributions and my basis in non deductible contributions is 73k and my balance is 198k, will I pay taxes on all of the earnings (appreciates value) as if they were all taxable? Is the non taxable distribution per pro rata rules only the 73/198 (~37%)?
And if eligible for rollover to 401k at work so that I could backdoor roth, what would I need to do?
Really appreciate your answer in advance!!
Amazing information. I’ve been a Vanguard client since 1998 with an existing Roth IRA.
Starting this year I may be ineligible due to income. If I follow this process, would I have to open a new Roth, or would the conversion from the non-deductable IRA be merged into my existing fund. Hope this makes sense 🙂
You can convert into your existing IRA.
Thanks so much 🙂
I am planning on doing the back door roth for the first time. I never had a traditional IRA account, so it will be straight forward for me, but my spouse is unemployed and has a traditional IRA with $5500 that we contributed 3-4 years ago. I am not sure if my spouse can open solo 401(K). Please advise on the simplest way to do back door Roth for my spouse.Thank you
The simplest way, assuming that $5,500 in the traditional IRA is tax-deferred money, is to convert it to Roth and pay the taxes owed. If you don’t want to do that, she’ll need to have some kind of business in order to legitimately open a solo 401(k). Surveys or watching animals on Rover are a couple of easy business ideas.
Best,
-PoF
I found a new way to screw up the Backdoor IRA:
I followed the Turbotax instructions provided in the blog post sometime in January.
Two days ago I imported all of my tax forms from Vanguard to Turbotax (1099-DIV, etc). Turbotax imports at once all of your forms from Vanguard, regardless of the section you were currently working on (i.e, it imports IRA forms even if you were working on dividend income).
Because of the above, the IRA information got duplicated and I was being taxed on the 5,500 Roth distribution.
At the end of the Turbotax Roth IRA tutorial, they showed how to check the actual 1040, which is how I found the mistake.
Wow — that’s a huge oversight on TurboTax’s part.
I’m glad you were able to find the error. That could cost a person $2,000 or more.
Best,
-PoF
Well Vanguard sucks! I regret opening my solo 401 account at Vanguard which does not allow me to roll my SEP-IRA into the 401 K.
If you are thinking of opening up an solo 401K account, don’t do it at Vanguard.
I’ve had all of my investments in Vanguard for the last 20 years. Now I need to transfer my solo K to another institution then move all my SEP-IRA to them before I can even start my back door roth process.
If I am mistaken, please let me know before I start this laborious process.
Vanguard as a company most definitely does not suck, but their individual 401(k) leaves a lot to be desired. You are correct in that it does not accept rollovers, and you’ll have to find a different provider for that. I chose E*trade due to its flexibility and access to great funds including many Vanguard and Schwab funds. I believe Fidelity’s solo 401(k) also accepts rollovers.
Sorry you had to learn the hard way.
Best,
-PoF
Yeah, Vanguard is good. It’s made me hundreds of thousands of dollar over the years. Was a bit frustrated after finding out that I cannot do the roll over.
Another question though. If I do the Roth conversation of $6000 in addition to maxing out my solo 401K of $55000, does that mean I can put $61,000 total a year into tax free growth?
Or does the $6000 in Roth limit my max of $55,000 in solo K. So I end up converting $6000 into Roth, and $49,000 left in solo K?
If it is the former, than is a no brainer.
Those limits are completely different, so using the backdoor Roth option has no effect on your 401(k) contribution limit.
The 2019 limit for the 401(k) is actually $56,000, but if you’re still making contributions for tax year 2018, $56,000 is the correct number to use.
Cheers!
-PoF
Had pretty terrible customer service experiences with Vanguard recently after using them for years. Was trying to roll a “Rollover IRA” with vanguard to an employer 401K at Empower to clean up SEP accounts and enable backdoor in 2020… they were extremely unhelpful and it cost me the ability to do a backdoor in 2020. Additionally, any time you call them now its a minimum 30 min wait to talk to someone who isn’t particularly helpful.
Sorry if this is a dumb question, but if we are doing this for the first time do we have to open a Roth IRA account first before doing the conversion. This is the first time I am doing it and when I select the convert to Convert to Roth IRA, it is prompting me to open a Roth IRA account first. Any help would be appreciated.
Yes, that’s what you need to do. It should be pretty straightforward. I’d walk you through it, but it’s been ages since I did it myself. Vanguard should be able to help if it’s not self-explanatory.
Best,
-PoF
Thanks a ton, PAF!! I just finished my first conversion and all the information that you included here was super helpful!!
Thanks a ton, PoF!! I just finished my first conversion and all the information that you included here was super helpful!!
POF, thank you for all your insights.
I just made non-deductible $5500 contribution to my traditional IRA, and within two days converted the entire amount to Roth IRA. I designated the contribution is to 2018 although I did this just now (Feb/2019). I assume I will receive 5498 form in May but not 1099-R before filing the tax. So How do I do for 2018 tax filing? Should I only file for contribution to traditional IRA but not conversion to Roth IRA?
Love your step by step- I used it last year but it did not help me as well this year (2019) as the screen appearance and links have changed somewhat.
Did you transition from a mutual fund account to a brokerage account, by any chance?
The screenshots in this post are from January of 2019. I still have a mutual fund account, which they are no longer offering to new customers (and will probably eliminate for all of us, eventually).
Best,
-PoF
I got my 1099-R on Vanguard. Last year I rolled over my trad IRA to my employer 401k, then did the back door.
On my 1099-R all the boxes have two row; the rollover and backdoor. There’s no way on turbo tax to add an additional row. Even if I add both rows to get the gross, other boxes that have “x” mark are different in each row as the well as distribution codes. Any advice?
Love it!
Hello,
I just deposited $6000 into my Vanguard Federal Money Market Fund (Settlement Fund) within my Traditional IRA account. Can I just transfer the funds from this account into my Roth IRA or do I need to first invest the funds in my Traditional IRA before transferring?
Thanks for this excellent tutorial! I’ve referred to it each year for the past several years to make sure I don’t make a mistake when making my annual contributions.
FYI, I think there’s a slight error in the following paragraph:
I believe the total is actually $23,000 since the 2019 contribution limit is $6,000 (a $500 increase over 2018). (6000+5500)x2 = 23000.
It’s funny. I went through that exact calculation for someone in the Physicians on FIRE Facebook group yesterday, but I neglected to update it in my own post (and have now rectified the situation). Thanks for catching that!
Hello,
I have a SEP IRA for which I contributed to for 2017, now I am about to contribute to my Roth IRA for the 2018 year by using the backdoor method. Would I be able to do this? I don’t plan on contributing to my SEP for 2018. Or is having a SEP in general kind of preventing me from using the backdoor method.
Thank you!
Read up on the pro rata rule (links above). You’ll owe tax on a prorated basis based on the balance of any IRA (includinga a SEP IRA) if you attempt the backdoor Roth.
If the $6,000 non-deductible contribution represents 10% of the total (let’s say you have $54,000 in the SEP IRA), 90% of the conversion would be taxable.
Consider the option I mention of earning some 1099 income via surveys or another method and opening a olo 401(k) to roll the SEP money into.
Cheers!
-PoF
So I get w2 income from main job but moonlight for 1099 money. I did backdoor Roth for spouse and I and since I had 17k in a sep ira from years back, I just converted it to Roth as well expecting to pay tax on that.
So limit on tradition ira is 6k. Question, can the same back door mechanism be used on my sep ira which has 0 balance now? Do same exact thing as traditional ira back door but have higher limit on how much you can back door to Roth (based on your 1099 income.) TIA.
My money has finally “settled” and I was able to “convert to Roth” but it looks like it is staying in the VMMXX but just in the Roth account now. It’s currently in “pending” and I never got an option to place it into my REIT fund VGSLX.
never got this option…
https://www.physicianonfire.com/wp-content/uploads/2018/01/Vanguard_Backdoor_Roth_2019_11.png
I wonder if it has something to do with the website update or if there’s a different way to make the conversion.
Once cleared I imagine I’ll be able to exchange into VGSLX? Anyone else miss the option to select the fund where the money should go into?
Mayojayo, same with me. My Vanguard screens did not look like PoF’s posted here. I don’t remember it being like that in previous years, but looks like they are making me transfer it to my Roth in the same settlement fund. I suppose I’ll later have to move it into the funds I want in my pre-existing Roth.
thanks for letting me know I’m not the only one!
Same for me, but I attributed it to the difference between the old mutual fund structure and the new brokerage platform.
Yes, you can exchange to another fund in the Roth once the conversion is complete (I just did this).
thank you Larry,
just completed the conversion now. lots more steps involved this year. hopefully Vanguard improves the process for next year!
Guess I goofed. I did a backdoor conversion years ago. Since then, since vanguard never stopped me from directly contributing to the Roth (and my accountant raised no objection) I have been funding it directly without converting from traditional ira. So what now?
It’s not a goof if your income has been under the limit. If you earn too much to contribute directly, this is something that should have been picked up years ago.
Consult with a CPA or tax attorney. If you used one to file your taxes, I’d start there and figure out how this happened.
Best wishes,
-PoF
Thanks!
Thanks for the article! I placed $6000 into my traditional IRA on Jan 1, 2019 from my checking account to a Vanguard Money market account in my traditional IRA. On Jan 3, I wasn’t able to convert to my Roth IRA because there is a “7 day hold” that Vanguard does apparently. Their reps are telling me I can’t convert those funds until Jan 9 — how did you do it the next day? Am I missing something or doing something wrong? Thanks!
I just posted about the same thing without seeing your post first, so i decided to delete my post and piggyback onto your post. Here is my orginal post:
“PoF, it appears you can no longer convert the next day with Vanguard. I am pretty sure I converted the next day last year.
I now have to wait 7 days to convert my traditional IRA to my Roth IRA.
I placed my 6K in both my account and Wife’s yesterday and went to convert today, using the “convert to Roth IRA” button on balances and holdings. After I selected to convert all and hit continue on the next screen, an error message pops up stating “you have elected more shares to convert than are eligible” or something like this.
I called Vanguard, rep confirmed I have to wait 7 days for my funds to “settle.” I didn’t think to ask if this is a new policy.
Interesting.
Did you encounter the same issue this year?
Kinda stinks b/c market is down ~2% so far today!”
That is exactly my situation, and exactly what the Vanguard reps told me (three separate ones!). Was also hoping to lock in todays price but oh well – don’t try and time the market they say 🙂
Vanguard appears to have created this issue with their “new and improved” brokerage accounts that they’re asking everyone to open or switch to as their default IRA accounts.
I still have a mutual fund account and I’ve never had an issue with the next-day conversion. Their site says that if you fund the IRA via Electronic Bank Transfer, they could institute a 7-day hold, however I used EBT last year and was not subject to the waiting period.
This year, to be safe, I funded from a money market fund in taxable. I didn’t have to wait after doing that, either.
From what I hear, there’s no easy workaround if you’ve been subject to that waiting period.
Best,
-PoF
I just did a backdoor on both my wife and my accounts. We have the brokerage accounts. Oddly, I was able to complete the conversion after two days, but she cannot. We asked and were told she is subject to the full seven days. (I asked but no answer yet on why the difference.)
By the way, my Flagship rep also said that their platform will eventually only support the brokerage accounts, but he was unable to say if there was a specific timeline for the transition.
That is odd and interesting.
Did you fund from your bank or from a non-qualified account at Vanguard?
I’ve sensed that mutual fund accounts are dinosaurs target for extinction, but I’m hanging onto mine as long as I can.
Thanks for sharing!
-PoF
Mine was the same way. Mine went through the day after I transferred the money. For some reason there is $1.45 in my tIRA and the full 6k in my rIRA.
My wifes is making me wait the full 7 days. Under one of balance pages it states that the balance will be available for trade on 1/14/19, which is 7 days after i made the deposit. Hope that helps.
From a bank for both.
I don’t truly mind the seven day hold, I just get frustrated by the same transaction getting different treatment in my account and hers. I am impeded from getting an answer directly since Vanguard cannot legally discuss her finances with me, but I have asked them to address the issue hypothetically.
Great Article! thanks for the detailed explanation with steps. I have a few questions.
So, over the last couple of years I have been contributing after tax (non deductible) dollars to my Traditional IRA account. But I didn’t invest the money and it has been sitting as cash (I know, super bad!).
Can I move this to my Roth IRA (backdoor) all in one shot? I’m thinking I wouldn’t owe any taxes on this converstion because a) the original contribution is after tax & non deductible and b) i have not made any profit on the money I contributed.
Is my understanding correct?
What forms will I have to fill out as part of my tax return to make sure I’m conveying what I’m doing to IRS clearly so that I don’t get asked to pay any taxes on this conversion.
I believe your understanding to be correct.
That being said, I would also recommend consulting with a CPA or or other tax professional prior to making the conversion in case there’s something you and I don’t know about that would complicate the issue.
Best,
-PoF
If you have no other IRA accounts and since the money is already taxed I would just Roth convert the IRA in it’s entirety to the Roth. Cash has probably not grown so the tax hit will be essentially zero. If you have other IRA the Pro Rata will apply and I’d wait to Roth convert to close to RMD time. Since you already paid the tax the pro rata will give you a write off at the time of conversion use the 8606 for for the correct formula or use some tax software. IRA money is also NOT subject to SS or Medicare tax since that tax was already paid when you made the money.
The backdoor Roth may have gotten even easier – I was following your instructions to do my first-ever backdoor Roth today, and there is now a “Convert to Roth IRA” button available in place of “Retirement contributions and distributions”.
Based on the feedback I’ve gotten, I believe that option is there for IRA “brokerage accounts” and not for IRA “mutual fund accounts.”
The advantage of the mutual fund account is the lack of a settlement fund and no unnecessary delays.
Cheers!
-PoF
I’m confused about what to do. My husband has a SIMPLE-IRA (balance ~ $50k) and I have a Rollover IRA (~ 70k) from my former employer and a 401k with my current employer.
So, if I understand the process correctly to avoid the pro-rata calculation, i need to convert our IRAs to 401k. How to do this?
1. My husband does NOT have a 401k, and he does not have a ‘side-job’ that would allow him to open a 401k. I don’t believe I can roll over HIS SIMPLE-IRA funds to MY 401k. Do I have any other options?
1b. Can I roll over part of the funds from the SIMPLE-IRA to Roth, and then the leftovers pay taxes on it?
2. With My Rollover IRA, can I roll over the $5500 to my Roth IRA, then roll over the balance to the 401k at my work (Fidelity). If the fund options aren’t great, is it best to just not do the Backdoor IRA?
3. We are in a high tax-bracket. We do have funds to pay taxes if needed, but is this a wise strategy? What would be the advantage of paying taxes on it like that?
Lots of confusion and lots of questions. THank you in advance! 🙂
I put $5500 in. Trad IRA earlier this year then converted to SEP IRA, thinking I wanted to contribute more than $5500 as my 1099 income increased. But now I want to convert to backdoor IRA and start solo 401k. Can i convert my SEP IRA straight into a Roth IRA? Due to market drops it has about $5500 in it again.
Yes, you can convert a SEP IRA to Roth (I have) — you’ll owe taxes on the $5,500 as income, of course, unless you made a non-deductible contribution.
One clarification: the traditional to SEP IRA event would be called a “rollover.” The term “convert” or “conversion” is generally reserved for changing traditional dollars to Roth dollars. It just semantics, but keeps things less confusing.
Best,
-PoF
Hi, great stuff I really appreciate this post!
My question: Will I able to perform this Backdoor Roth IRA at the beginning of the year (i.e. 2019) even though I might be under/over on the MAGI contribution limit?
Background: I’m currently working two jobs with an anticipated MAGI that will most likely disqualify me from contributing straight in an Roth IRA. I’m basically right at the border of being disqualify or being phased-out. I would like to invest max $5,500 at the beginning of the year. I also would like to keep the Roth contribution and conversion within the same year (i.e. contribute $5,500 for 2019, convert $5,500 for 2019).
Thank you for your time and consideration!
Go ahead and do the backdoor Roth. If you end up under the MAGI limit, the worst thing that happened is you made a Roth contribution in two steps rather than one. There’s nothing that prevents or penalizes lower-income earners from doing it “the hard way” via the backdoor.
Cheers!
-PoF
PoF,
Thank you for the reply, I appreciate it!
Quick question – Does the conversion from Traditional IRA to Roth IRA apply to the Roth Conversion Ladder method? As in, does it become characterized as a Roth conversion and will I be able to access/withdraw tax-free/penalty-free for this conversion after the 5 year waiting period ?
Thanks,
E
I was wondering if my plan is reasonable. I have SEP IRA, roll over IRA, Roth IRA, traditional IRA and employer 403b all with VG.
I have the following plan:
1. roll sep and roll over IRA to 403b
2. convert trad to roth and move to Roth (accountant to help w forms and taxes)
3. open solo 401k w VG for future side hussle income
4. do backdoor roth starting this year
Thanks so much for help and advice!
Yes, sounds reasonable. #2 may be unnecessary. As long as the money us all in the 403b, there’s nothing wrong with keeping it traditional. It may make sense to do some Roth conversions in the 24% tax bracket if you have space there.
Thanks for your article! One question that has confused me is in order to open the IRA you need to apply for an EIN from the IRS. Therefore you need some sort of side income that counts as earned income correct? Other sites that have written about this a lot like WCI, etc and simply tell doctors that they can do this by doing a few online surveys, etc. After that is done are you limited to only contribute IRA money that comes from your side earned income (and not any other money you’ve saved from work salary)? Appreciate any comments, thanks.
Anyone can open the IRA but if you have tax deferred money in an IRA you may need to open a solo 401k and that’s where the EIN comes into play. You might not contribute much to the solo 401k but there’s no limit to how much money you can roll over into the solo 401k, as long as the plan you choose accepts rollovers. (Avoid Vanguard for this account).
Wow thanks for the quick reply. No I just have my employer-sponsored 403b currently. I’m looking at opening a traditional IRA with E-trade with goal of doing the backdoor Roth conversion.
I noticed your comments to Mrs. Bita last year about doing both the Mega Backdoor Roth and regular Backdoor Roth in the same year.
I’ve been contributing up to the federal maximum ($55500 = $18500 401K + Company Match + After-Tax Contribution) and rolling over the after-tax portion + earnings into my Roth IRA for the past four years. I too have been curious about whether doing the additional $5500 non-deductible IRA contribution and subsequent rollover into my Roth IRA during the same year was allowed or not. I haven’t really found any definitive info on the subject other than a few comments here and there. Are there any caveats about doing both in the same year? Does timing matter (do the Mega first then the regular)? Has anyone written about the specifics of doing both during the same year?
Thanks for your feedback.
Newbie… Would like to start doing Backdoor Roth… It’s Sept, I’ve made some, but not all, 2018 contributions to my SEP IRA. I have not made 2018 contribution to my traditional IRA. Can I rollover all my IRAs into solo 401k before the end of 2018, then do Backdoor Roth in 2018? Wasn’t sure if I needed to empty out all my IRAs, leave empty through Dec 31st, 2018, and do 2018 Backdoor Roth in Jan 2019.
My understanding is that as long as you have a zero IRA balance on 12/31/2018, it doesn’t matter when you do the 2018 backdoor Roth. I would doublecheck with your CPA if you use one, but that’s what I’ve been told.
Is this article assuming you are a high income earner, unable to contribute to a Roth IRA, so you’re using the Backdoor Roth Contribution just to have the account? Seems like you paid 100% of taxes on the money contributed to the money market, correct?
How about an article with pre-tax money? Isn’t there a 5 year waiting period on the contribution to truly be tax-free on the front end in a 401(k)/IRA and back-end with the conversion strategy?
Thanks for the education. Greatly appreciated. I am young to investing and have been reading like crazy. I have a couple questions. My wife and I file ” married but withhold at a higher single rate” for student loan purposes. I have a 401 k at with I just contribute the minimum amount to get the match from my employer. My wife is a teacher and I am also considering that she should contribute to a 457(b) retirement savings plan (no match). We both are in our mid-30’s (no kids yet) and we both have over 100K student loans. I make between 120 – 125k annually while wifey makes around 58k. We definitely don’t qualify for a traditional ROTH account. My questions are as follows:
1. Do I need to focus on paying off student loans before increasing contributions to my 401K?
2. Should we contribute to a 457(b) even though there is no match?
3. Do we have to max out 401K and /or 457(b) accounts to the max before contribution to a backdoor ROTH? If yes, why? Is their a hierarchy of which types of retirement accounts to save in?
4. My wife has retirement funds from a previous employer that we want to get rolled over. Should we roll it over in the 457(b) or should we roll it over in a traditional IRA? Can it be rolled over in my 401K?
5. I do work an extra side job (1k to 2k per month) but I struggle to decide what to allocate these extra funds to. If I double up on my student loans it would take me around 5 years to pay off. Should I just focus on paying off student loans (interest rate 5.2%), or should I allocate funds to savings/investing? Or, should I pay more on my mortgage (interest rate 3.8%) to get that PMI dropped (saving approx $270/month)? I do really want to get rid of the loans but I also don’t want to miss out on savings and years of cumulative interest.
Thanks for your responses.
If I were you with no kids, I would definitely:
1. Max out the 401k
2. Max out the 457. #1 and #2 should decrease your adjusted gross income well below the income limit for a Roth IRA plus will decrease your taxes significantly. If your household gross income is 185 your adjusted gross income would be 185 – 37.5 (401 and 457) -24 (standard deduction)= 124,000. This puts you at a nice 24% marginal tax rate. You really want to get your AGI under 157,000, above which the tax rate jumps all the way to 32%.
3, With no kids you should be able to live like a king with 50,000 dollars a year. That leaves 74,000 dollars to pay off student loans.
4. Once your loans are gone, I would:
– Get rid of PMI
– Contribute 5,500 each to a traditional IRA (which should decrease your takes by 24% of 11,000)
– Invest the rest in VTSAX in a Taxable brokerage account at Vanguard, pay your mortgage principal or do a combination of these 2.
I hope this helps
Sharp Scalpel
Something for which I can’t seem to locate info. Maybe my searching attempts are not worded correctly. I am in the process of moving traditional IRA pre-tax funds into my 401k in order to setup for doing backdoor Roth.
If I move traditional IRA pre-tax monies to my 401k this year to clear out all of my pre-tax IRA funds, do I have to wait until next year to proceed with backdoor Roth process, or can it all be done in the same year so long as the deductible IRA funds are $0 by Dec 31?
Thank you!
Heard you on ChooseFi pdocast 86. Great stuff. lead me to your blog to look up back door roth. Here’s my situation. Company ESOP cashed out and we had to make a decision to roll into 401k /IRA or cash out and incur taxes and 10 % pre-withdrawal penalties. I opted to open a Vanguard traditional IRA. The balance defaulted to a money market account. I have since transferred money market balance to a mix of index funds within the newly setup traditional IRA. Did I screw up and lose out on the opportunity to move $5,500 to backdoor Roth for 2018?
If I understood you correctly, you rolled over money from your ESOP into a traditional IRA. You did not make any new contributions into an IRA.
If your ESOP money is on a traditional IRA and you make a new traditional IRA contribution with the intention to convert it to a roth, you will end up paying taxes because of the ESOP money that is now held in a traditional IRA.
In order to be able to do the Roth without having to pay taxes you will have to get the money out of the traditional IRA first and put it on a 401K plan.
I am not sure if you would have to wait for next year to do the Backdoor roth or not after you move the money out of the IRA.
Glad you found me!
With a traditional IRA existing, you cannot do the backdoor Roth without incurring taxes according to the pro rata rule. The most common workaround is transferring the money to an employer’s 401(k) if it’s an option or an individual 401(k) you set up after obtaining an EIN for any side income you earn. Some suggest filling out surveys as an example.
Best,
-PoF
This is an excellent overview which really breaks it down to the granular level. 2018 is the first year I am over the Roth IRA income limit so I was pretty hesitant to attempt the backdoor conversion. Now I’m confident I can pull it off correctly. Thanks for the great information.
Happy to help! And congrats on your income. Having to use the backdoor is a great problem to have.
Cheers!
-PoF
Hello – thanks for this. A couple questions:
1). I have a Rollover IRA that was set up a couple of years ago from funds received from an old 401(k) plan. In thinking through this strategy (and before reading this post), I went ahead and opened a Traditional IRA and a Roth IRA and have not funded either yet. You mention that you cannot have other IRAs opened and funded (i.e. my Rollover IRA) in order to take advantage of the backdoor Roth. Why is this? I would like to avoid rolling my Rollover IRA into my current 401(k) plan.
2). I will be contributing to my Traditional IRA monthly and not in one lump sum. Can I transfer/convert the contributions from the Traditional to the Roth every month or should I wait and handle the conversion all at once when I’ve reached by $5,500 limit? If the latter, are there any restrictions on converting any earnings I receive on top of the $5,500?
Thank you!
POF,
I did my backdoor Roth IRA just this past week. For some reason there was a 7 day waiting period per vanguard and after I moved the money from my non-deductible tIRA to Roth IRA, I see a $2.67 balance in my tIRA account under Vanguard Federal Money Market Fund (Settlement Fund).
Is this because I had to wait 7 days to convert over and someone the money market grew this amount from my 5500?
Should I go ahead and convert this $2.64 over to the Roth IRA as well?
I opened the Traditional IRA at Vanguard on Sunday and tried to convert Wednesday (7/18/18) but was not able to do that because “insufficient funds”. I called Vanguard and they told me I had to wait 7 days.
PoF you mentioned that you converted the next day.
Wondering if Ming and I did something wrong or if this is a new thing at Vanguard.
Thanks!
Nothing wrong with the 7 day wait. I think Vanguard recently started wanting people to convert from traditional mutual fund accounts over to what they call “brokerage accounts.” And AFAIK these brokerage accounts have the 7day wait? I did this brokerage conversion couple of years ago. I mean not a huge issue just have to remember to convert it over after a week…
Hi,
Trying to really understand this backdoor option…Please correct me if I am wrong.
I have an IRA (rolled over from prior employer’s 401K,and an old SEP iRA- it is in traditional ira now) of about 200K. Does this mean I am ineligible for a backdoor conversion until this money is converted first?
Sorry if this is a dumb question. But I am trying to take advantage of the standard deduction increase from 2018. ( I don’t have any debt including mortgage and may have a MAGI of 230K or higher for 2018. Tax software sends me to standard deduction because my itemized does not reach even 8k)
Thanks!
Hi! Is tax deferred income included in the pro rata rule? I work for a large pharma company and they allow me to defer my bonus tax deferred. My 2017 bonus is currently deferred until 2024 and is invested in a deferred account in Fidelity. Thanks!
Thanks for this post. I have a 401 a account from work in addition to my 403 b. Does the 401 a work like an SEP meaning I have to transfer the money or be subjected to pro rata tax rules? Or does the 401 a work like my 403 b & can be left alone? Also, I know it’s almost late, but can you still do a 2017 backdoor roth on 4/16 & 4/17 if the 401 a won’t hurt me? Thanks!
401(k) is a non-issue. As long as you make the 2017 contribution ASAP, you’re good. The conversion can take place after the tax day deadline.
Best,
-PoF
I know that 401 K is a non issue, but I’m asking about a 401 A. I have a 403 B and a 401 A. I’m worried about the tax implications of having the 401 A if I do the Backdoor Roth. Do you know anything about the 401 A? Thanks.
Not a problem. Only an IRA would invoke the pro rata rule.
Thanks for this post. I have a 401 a account from work in addition to my 403 b. Does the 401 a work like an SEP meaning I have to transfer the money or be subject to pro rata tax rules? Or does the 401 a work like my 403 b & can be left alone? I’m nervous about that account as I don’t really understand its tax implications. Also, I know it’s almost late, but can you actually do the backdoor for 2017 contributions as late as 4/16 and 4/17 if the 401 a won’t hurt me? Thanks!
Hi, I noticed in your guide above that when cash is contributed to the Traditional IRA it goes into a Vanguard fund. Then when the conversion to Roth IRA is done, it goes into another Vanguard fund. Is this just how Vanguard’s system is set up, or is there a requirement that for the backdoor conversion to work it cannot be in cash? I am looking at Schwab and they allow the initial contribution into the Traditional IRA be in cash and they said it is possible to convert the cash in Traditional IRA into the Roth IRA, and then I would be able to purchase whatever fund I wanted to. (Not expecting you to be familiar with Schwab’s system, but just curious if you had any insights into the cash vs fund thing.)
I believe it depends on whether the account is set up as a “brokerage account” or a “mutual fund account.” There’s some discussion here.
The Vanguard fund I hold the money in is a money market account, which isn’t much different than cash. A few pennies of interest, but the IRS disregards pennies, so it’s essentially the same.
Just what I was looking for PoF, thanks for this. Is the comment about doubling up for first-timers in 2018 really correct? I’ve read elsewhere that while an IRA contribution before April 15th can be applied to the previous calendar year, a rollover must be done before Dec 31. What is your understanding?
-Mike
I created a traditional IRA with Vanguard for the first time this year. First problem is that Vanguard is now making the “Brokerage Accounts.” Second problem is that you can’t direct where you put the money; it automatically goes into the Vanguard Federal Money Market Fund (which is technically ok since the value doesn’t really fluctuate). Third problem is that because of this “Brokerage Account” thing (according to the person I spoke to at Vanguard, the money has to stay in the account for 7-10 days before it is eligible to be converted to a Roth. Fourth issue is that when you go to convert it to the Roth, it has to stay inside the Federal Money Market Fund and cannot be directed into the mutual funds in your Roth IRA; you then have to go back in the next day to your Roth to exchange it to your preferred funds. So, I do not know how everyone seems to be able to do this so smoothly “the next day” as in your example. Maybe there are new rules. Maybe I messed something up. However, the people on the help line at Vanguard said I was doing everything correctly. This was my first year to try the backdoor Roth, and so far it has not been smooth at all! (I’m still waiting for the funds in the traditional to become available, so am hoping that this will work out next week)
That sounds like a real headache. It should all work in the end, but the process I’ve been using for years has worked well without the waitin periods and limitations.
I know that some people have mutual fund accounts and the new accounts are brokerage accounts. I wish they would have left things alone — it gets confusing when we’re looking at different screens in trying to accomplish the same thing. Perhaps in 2019, I’ll open a new traditional IRA account to see if I have the same issues you and others have had.
Best,
-PoF
How many backdoor Roth IRA conversions can I make in one calendar year?
Tldr:
Can I:
1. Rollover $11,250 of 403b funds from my previous employer into a non-deductible traditional IRA, then do a backdoor Roth IRA conversion with that money?
And follow that, in the same calendar year with a:
2. $5,500 contribution to my non-deductible traditional IRA, then do a backdoor Roth IRA conversion with THAT money… without being penalized?
The long version:
The vendor for my 403b account with my previous employer refuses to distribute/release the funds to my current 403b vendor with my current employer because my former and current TPAs reserve the right to NOT sign other vendors forms. They’ve indicated they will both release (former TPA) and accept (current TPA) the money, but will not sign paperwork that Is not theirs. It’s been a 5 month stalemate, with my money being held hostage in my old 403b.
So now I’ve been given another idea… Perhaps I can just rollover the money from my previous 403b to my non-deductible traditional IRA. But there’s a problem. I do backdoor Roth IRA conversions each year, meaning I can not have any money in a traditional IRA at the end of the year. So my questions are:
1. can I rollover my 403b money into a non-deductible traditional IRA, then use that money and do a backdoor Roth IRA conversion?
And follow it with my regularly scheduled contribution to my non-deductible traditional IRA, which I would then do another backdoor Roth IRA, without being penalized??
The third option of course is to leave my 403b money in my old vendor. I don’t like that bc my old vendor is now charging $60/year just for it to sit there. But I also don’t want to be penalized at tax time, if there is such a penalty for rolling over 403b funds into a non-deductible traditional IRA, then converting that to a Roth IRA… Or if there are penalties for doing more than one backdoor Roth IRA in a calendar year.
I understand this is long, and complex. I appreciate any response you might be able to provide me with. Thank you.
The 403(b) money is presumably tax-deferred contributions. In that case, if you rollover to an IRA, it will remain tax-deferred and the pro-rate rule would apply. If you are able to rollover to an IRA, you could then roll it over to your current employer’s 403(b), using the IRA as a rest stop. Could that work?
$60 a year isn’t terribly expensive (pretty cheap actually), but it’s best to consolidate if you can.
Good luck!
-PoF
Hi,
when I am trying to convert my traditional to roth ira. I do not see the section “retirement and contributions “. Instead I see the convert to Roth IRA option, And when I do go through that option , I do not see any way to choose between 2017 or 2018. Am I doing something wrong here?
I’ve learned that not everyone’s Vanguad screens look the same, which is a bummer since we’re all using the same brokerage. The year matters most for the contribution. That should be specified when you contribute the money to Vanguard. You’ll report the conversion in the tax year in which it was done via the 1040 (form 6086).
If you still have questions, I would call Vanguard to make sure you get the steps right.
Best,
-PoF
Both conversions took place in 2018, and there’s nothing wrong with that. As long as you assigned the contributions to the correct years (one $5,500 sum in 2017 and another in 2018), you’re fine.
The conversions will be reported on your 2018 taxes next spring.
Best,
-PoF
Hello,
Thank you for such an informative post.
I was going to go through this now before mid-April but saw the following noted on IRS website. Can you please clarify if this means we cannot use the backdoor approach any longer?
————- IRS website————-
Can I recharacterize a rollover or conversion to a Roth IRA?
Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.
How does the effective date apply to a Roth IRA conversion made in 2017?
A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018. A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized. For details, see “Recharacterizations” in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).
No need to worry. The elimination of recharacterizations has nothing to do with the Backdoor Roth. Congress recently blessed the Backdoor steps as perfectly legit.
What this does eliminate is the Roth “horse race” in which people would convert a certain amount of money (say $10,000 each) in a variety of asset classes, and “undo” or recharacterize all but one at the end of the year, leaving the conversion on the asset the had the best return alone. Always sounded like a lot work to me, but I suppose could be worth it if you’re converting larger sums. Anyway, it’s not allowed anymore.
Best,
-PoF
How important is it to select the right tax year? Am I bound to file per the 5498 and 1099-R forms that are received or can i adjust as necessary based on what I know was the intent (eg. even though i show a conversion on the 2017 tax form it really belongs to tax year 2016 since it was done before mid April 2017).
You must select the tax year in which your transactions are reportable. The IRS matching system will compare the forms and amounts associated with your TINs (Taxpayer Identification Numbers) for each year to what you actually report for those years. You will receive a notice if your numbers don’t agree with IRS expectations. Trust me – it can be a real bummer when you don’t live up to the IRS’ expectations 🙂
Thanks much for the reply. Is it possible to correct tax forms once they’ve already been published? Or am I really just hosed?
Not hosed (in most cases). You can always file an amended return (1040X and whatever the form is for your state) if you’re within the SOL (Statute of Limitations). See http://tax.findlaw.com/tax-problems-audits/what-is-the-irs-statute-of-limitations-or-deadline-for-action-on-.html
Hi Johanna,
Thank you for your informative responses!
I have a challenging problem here, perhaps you could help with, and I would like to potentially fix this problem with 1040X’s for 2016 and 2015.
I mistakenly over-converted from my SEP IRA into my Roth IRA (twice, in fact *facepalm*).
On 04/25/2016, I converted $7400 into my Roth IRA, which was the sum of my 2015 SEP Employer (deducted contribution of $1900)+ 2015 Personal (non-deducted contrib. of $5500). I should have just converted my personal.
Possible Fix: Through a 2015 1040X, would it be possible to revise my 8606 to “split” my 04/25/2016 conversion into: $5500 for TY 2015 and leave $1900 for my 8606 in TY 2016? (I’m not sure of the TY 2015 Roth conversion deadline)
Furthermore, could I do the same thing with a 2016 1040X to resolve a $7400 over-conversion I made on 10/30/2017, and revise my 8606 to “split” that conversion into: $3600 for TY 2016 and $3800 for TY 2017? I still have the chance to recharacterize the 10/30/2017 conversion as well, if that is an easier route. (also not sure of the TY 2016 conversion deadline)
Overall Goal is to get my conversions going in TY 2015 (and not carry the tax basis forward) while also correcting the problem of over-contributing by $1900 and keep that in my SEP IRA. This would, theoretically, also get me a refund of about $500 for TY 2016 (since that extra $1900 was included in my 2016 8606 as taxable).
Huge thank you for any help on resolving this. I hope I clarified the birds-nest problem.
Great walk through! When filing my 2017 taxes I found out I wasn’t eligible for a regular Roth IRA as I was in years past. I went ahead and re-characterized my 2017 contribution ($5500), as well as the earnings ($1000) to traditional IRA (non deductible) after rolling my other IRA funds into my 401k. I then completed my 2017 return.
Now, when I’m ready to convert the traditional IRA ($6500) to Roth, do I list it as 2017 if I do between 1/1/2018 and 4/17/2018 since the money was originally a 2017 Roth contribution? Or do I now list as 2018 because the calendar year has changed…and if this is the case, will that impact my new 2018 contributions for IRAs?
Also, regarding the $1000 in gains, I assume I convert them to Roth as well, and I will pay ordinary income tax on them when filing my 2018 tax return?
Conversions are counted on a calendar year basis. It does not matter when the funds were originally contributed to the TIRA. So, this conversion will be for 2018. You will receive a 1099-R in January 2019 to report on your 2018 income tax return and the $1,000 will be ordinary taxable income.
My 401 K allows in-service withdrawal. I rolled over all my after tax contributions, about 50K, to a Roth IRA and the associated pre-tax gains (about 11K) to an IRA. The IRA has previously pre-tax assets; does this have any tax liability?
Thank you!
The pre-tax gains would be subject to the pro-rata rule. You could convert to Roth, pay the tax, and then you should be good to go for the backdoor Roth.
Best,
-PoF
Thank you PoF for your prompt response.
The pre-tax gains went to an IRA and was added to existing pre-tax assets in that IRA; I do not understand how the pro-rata rule will apply; please, clarify.
My understanding is as follow:
1. The pro-rata rule is applied when the in-service withdrawal was done; that’s why two separate checks were issued when the direct rollover was done; one for the after-tax money going to the Roth IRA and the other for the pre-tax gains going to a traditional IRA.
2. If I want to do a backdoor Roth conversion, I should get rid of all the pre-tax assets in the IRA; that includes the existing pre-tax assets + pre-tax gains(10 K in this case) associated with the in service withdrawal of the after-tax contributions. In order to do that , three options are available:
A. To convert all the pre-tax assets to Roth but in this case I have to pay the taxes based on my Marginal Tax Rate.
B. Roll the entire pre-tax assets to the pre-tax portion of the 401K; however, I am not exactly sure if it’s possible to do that since the pre-tax gains of the after-tax contributions are part of the total pre-tax assets in the IRA.
C. Roll over the pre-tax assets (excluding the pre-tax gains of the after tax contributions) to the pre-tax section of the 401k; the remaining pre-tax gains (10K)can be converted to Roth but the taxes should be paid.
Your clarification and comments are highly appreciated.
Thank you!
If you can roll over all the pre-tax dollars into the 401(k), that would be ideal. I would speak with the plan administrator to get a clear answer of what exactly you can do. Option B is probably the best, assuming you’re in a high marginal tax bracket now and plan to be in a lower bracket later.
Best,
-PoF
Thanks again!
I had a lengthy conversation with the plan administrator; she confirmed that the roll-over of all the pre-tax assets to the pre-tax portion of the 401k is possible. That should clean the IRA from any pre-tax assets.
One good thing that I learnt through the process is; it’s not necessary to roll-over existing pre-tax assets in an IRA to your 401K if you plan to perform only in-service withdrawal of the after-tax contributions and then convert the after-tax contributions to a Roth IRA.
In this case, to avoid paying the due taxes on the pre-tax gains of the after-tax contributions, just roll the gains to over to an IRA; it does not matter whether the IRA has existing pre-tax assets or not.
However,if you plan to use the backdoor Roth strategy, then it’s handled differently. All the existing pre-tax assets in all IRAs, Simple, SEP etc. (except Roth) should be rolled over to the pre-tax portion of the 401K to avoid the pro rata rule when converting the non-deductible contribution to Roth. The IRS looks at the balance of your IRAs by12/31; so, make sure that it is zero by that time.
Thanks again!
Quick question. I cannot find the answer to this online. Can you do the backdoor Roth if you hold an inheritance IRA from a deceased, non-spouse relative? The issue is I cannot get rid of that IRA without losing half its value in taxes.
According to this post from Harry Sit, The Finance Buff, the inherited IRA should not count as your IRA unless you’ve taken some action to make it so, like contributing to it or re-titling it. Otherwise, it should not be an issue.
Best,
-PoF
Thank you. Makes sense.
What do you suggest people do if they are in the cut off range (married filing jointly) of 189,000 to 199,000?
I would take the extra step and make your contributions via the backdoor. I’m not aware of any reason it would be a problem to “backdoor it” even if you earned well under the range and qualified to make direct contributions. It’s just a little more complicated. But better safe than sorry.
Best,
-PoF
Hello PoF!
I made two separate NON-deductible IRA contributions for Tax Years 2016 and 2017 in March 2017, $11,000. Apparently, I waited too long to convert these contributions to ROTH. Now I have $11088.66 sitting in the Traditional IRA account. Would I still convert these contributions to ROTH for Tax Years 2017 and 2018?
Good question, Kirk.
I encourage converting shortly after the contribution (I wait a day).
You should be able to make those conversions, paying tax on the $88 in gains. You’re not limited on how much you can convert in any given year. Only how much you can contribute.
As far as filing the 8606, if you work with a CPA, I’d be sure they are well aware of what you’re doing. I’d probably run it by them before proceeding.
Best,
-PoF
I did this last year, and had not read this article. My question is that you state this is not a taxable event when we convert the traditional IRA to the Roth. The problem is, and maybe it is how I did it, but I received a 1099-R from Vanguard that shows $5500 in box 2a.
I did convert the entire amount to a Roth IRA. So did I bungle a step and when I am filing taxes how do I deal with the 1099-R
Looks like you’re not alone. Here are a couple threads that appear to address the issue you’ve encountered. If the answer isn’t there, I would suggest consulting with a tax professional to make sure you don’t pay undue taxes.
Intuit thread
Bogleheads thread
Best of luck,
-PoF
That really did help out. I also found some other walk-throughs for online tax preparation programs to help with this exact problem.
Thank you!!!!!
Hello-
I am a long time reader of both your blog and WCI. I’ve been entertaining the idea of a backdoor Roth IRA for a while for both myself and my spouse. With some hard work, I have been able to pay down student loan debt, maximize retirement savings in a solo 401k, max funding HSA, etc… Now this year, I finally have gotten to a point where I could contribute to a backdoor Roth IRA for both myself and my wife.
So, I setup a traditional IRA’s for both myself and my spouse at vanguard, as well as a Roth IRA at vanguard for my wife. I already had a Roth IRA for myself at vanguard from previous investments as a resident/med student.
I followed your instructions as above (thanks!). Seems to have worked flawlessly.
However, I have come across one (hopefully minor) snag. After funding both my own and my wife’s traditional IRA w/ the $5500 max, the funds settled into the Vanguard Money Market Fund. Approximately 1 week later, I converted 100% of the money to the Roth IRA’s per your instructions. I didn’t realize it at the time, but when I did this there was actually $5501 dollars in each of the traditional IRA’s (due to money market account interest accumulation I guess), so I inadvertently converted $5501 to each roth IRA.
Did I just do something bad? Am I going to be penalized by the IRS for this? Seems ticky-tacky to fret over 1 dollar but it is the IRS after-all.
Thanks in advance
Congrats on your recent successes, Adam! Sounds like you’re in good shape. Don’t fret over the $1 in gain. It’s a rounding error that more or less disappears when you file. I believe I read you won’t pay taxes on it until the gain is $3, and in that case, the tax would only be a dollar or so.
Best,
-PoF
1099-R is issued for this backdoor IRA and mentioned it is taxable income; but it is after tax money. How to deal with this situation on filing the tax returns ?
Vanguard will mention that it is (could be) a taxable event, but since you’re converting an after-tax IRA contribution, the tax owed is $0.
Cheers!
-PoF
Hello! I just got back from giving my tax forms to my accountant (judge me for paying 240.00 a year for accounting help if you must!) – and she said with the new tax law I am not allowed to do the backdoor roth anymore due to the rule of no recharactsrizations? I already did it – which now makes me panic. She said I should call vanguard monday and see if they can either cancel it or change it to a traditional IRA and kick the can on paying taxes till I retire. I have been doing the backdoor roth for many years and she’s well aware of that and has been good with that.
Is there truth I can no longer do this process as outlined above due to the new tax law? again – I already have done it for 2018 (empty traditional IRA and then dump in 5500 to mine and 5500 in my wife’s and then convert….. thanks, Ken
No, the Backdoor Roth is alive and well. It is true that recharacterizations are not allowed, but I’ve never had a reason to undo a Roth conversion, so losing that option doesn’t bother me a bit.
I don’t judge you for paying $240 for accounting help — I pay more for tax help every year. But, you shouldn’t be paying hundreds of dollars for misinformation and bad advice.
I’ll add this to the post, but congress recently “blessed” the backdoor Roth as perfectly legit.
Cheers!
-PoF
Thanks for the directions. I have just one question. How can a couple contribute $22,000 for 2017? I thought the max was 11,000 a year per couple. My husband is under the impression that you can over contribute to a Roth via the backdoor process. Is this what you are doing? Knowing what the complete limits are would help me immensely. Thanks so much!
If you haven’t done it for 2017, you can now contribute $5,500 per person for both 2017 and 2018 for a total of $22,000. It’s two years worth of backdoor Roth contributions, but it can be done in the same year, since there is overlap from January to mid-April.
Best,
-PoF
OK Thanks. What do you suggest people do if they are in the cut off range (married filing jointly) of 189,000 to 199,000?
My spouse does not work and my GAI is 175000 . I am 59 so I can contribute 18 plus 6500 catch up to a 401 or roth 401 .My spouse is ver 50 so we can contribute 6500 to a roth in his name.
Two questions: if my husband has an inherited ira does that complicate matters
Second question: Are we allowed to do the backdoor roth for the same amount 6500
and if so is that the max we can do and does it matter who’s name it is in or can it be in both names. Thanks very much
Hi there, Great article!!! i have a sep ira, is my only option to pay the taxes initially? it doesn’t have a tremendous balance, only about 30K. Thanks!
That’s not the only option, but it might not be a terrible option, depending on your marginal tax bracket. If it’s 24% or lower with the new tax brackets in 2018, I wouldn’t sweat the conversion.
Another option could be to roll the SEP-IRA over into a plan that accepts rollovers. Many employer’s 401(k) plans will (that’s what I did most recently) and you may be able to set up an individual 401(k) if you continue to earn 1099 income somehow. I have one with eTrade that accepts rollovers, including from a SEP-IRA.
Best,
-PoF
Awesome! Thanks so much for the advice and great article, keep up the good work.
Cheers,
B
Hi – great article and thank you for sharing. I noticed you mentioned that if say today is 28 Jan one could potentially make 2017 and 2018 contributions to Traditional IRA’s if one has never had IRA before and done before April 2018. Would step 1.5 be an issue if a 2017 contribution was made in Jan then converted in April? Would this be seen as sufficient time? Thanks!
My tax pro said backdoor roths are not allowedgoing forward into 2018 due to new tax law. Is this true?
Are you sure he’s a “pro”? Because the answer is quite the opposite. Congress has affirmed that the move is indeed allowed. Any concerns we had about the step doctrine (Step 1.5 Wait?) have been nullified. Further reading at Forbes.
Roth recharacterizations are no longer allowed. Once you convert to Roth, the conversion can’t be undone as they were in the past. Perhaps that what the tax pro was talking about.
Best,
-PoF
He is right: https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions
The website was updated on January 23rd, 2018.
I can’t tell if you’re agreeing or disagreeing with me, but as I stated, the “pro” is wrong about the Backdoor Roth and correct about recharacterizations.
Losing the ability to recharacterize has no impact on the backdoor, but does eliminate the “horse race” method some used to get the maximum tax benefit from any contribution or conversion.
Best,
-PoF
My spouse and I began this process for our 2017 IRAs yesterday on 1/20/2018 when we initiated a transfer from our back into a traditional IRA. Today, I read conflicting information from another site that the effective deadline for a backdoor conversion for a 2017 IRA is 12/31/2017.
Did I already mess this up or can I still convert the 2017 traditional IRAs into 2017 Roth IRAs? I’ve seen other comments mention that it’s important to make sure that there isn’t a balance on 12/31 for pro-rata reasons, but I was under the impression that my wife and I are safe to do both 2017 and 2018 backdoor Roth contributions between Jan 1 and Apr 17.
Thanks for the clarification! I’m sweating bullets thinking that I’ve stumbled out the gate trying as we embrace FIRE.
As you noticed, 12/31/17 is the date on which you must have no money in an IRA to avoid the pro rata rule. You do, however, have until tax day (mid-April, 2018) to make your 2017 contribution and conversion.
Best,
-PoF
p.s. Best of luck on your FIRE journey!
Just when I think I have this all figured out…
I have an employer 401k at Fidelity that allows in service withdrawals that I can move post tax contributions to a Roth IRA also at Fidelity. (Mega Backdoor Roth conversion). I did this for 2017 and will do in 2018 and beyond.
Then I have a taxable account and Rollover IRA from previous employer 401k at Vanguard. Can I open a new Traditional IRA and second Roth IRA at Vanguard and contribute $5500 for 2017 and $5500 for 2018, then transfer the entire $11k to the newly opened Roth at Vanguard?
I’m confused with the zero balance and pro rata verbiage I’m reading above.
Excellent step by step guide, thanks for taking the time to make this post!
Dear PoF, I have converted $5500 from Traditional IRA to Roth IRA, then I found I have earned $1.65 dividend and now there is $1.65 sitting in my traditional IRA. Can I continue to convert this $1.65 to IRA ? What should I deal with this $1.65? Thanks
Dear PoF. This is very helpful post. Thanks again for this amazing website. I am new to backdoor roth and new to vanguard.
I followed your steps and contributed $5,500 to vanguard IRA (Prime Money market) according to step 1. I waited for 1 day and am about to do backdoor roth.
I have two questions:
(a) Do I need to create a new roth account, before doing the step 2.
(b) I followed vanguard recommendations of directly converting IRA to roth (without creating new roth account). I opted Emerging Markets fund. It says: “This fund has a purchase fee of 0.75%”. This reduces the net buy amount to $5,458.75.
I hope I am doing this right.
Thanks again.
Is that the Emerging Markets Government Bond Index? I see a 0.75% purchase fee on that fund, but the Emerging Markets Stock Index has no purchase fee.
I’m not a fan of purchase fees (aka front-end loads), personally.
Best,
-PoF
Thanks you. I was using Emerging Markets Government Bond Index.
Emerging Markets Stock Index has no purchase fee. I will use this one.
While doing the Step 2: when I click on “Where’s the money going?”. I don’t see “Roth IRA” section but see only my “Traditional IRA brokerage” account.
Looks like I need to also open a new Roth account, before doing this backroth from IRA.
If you do not yet have a Roth IRA, you’ll need to set one up so this conversion has a place to go. Ideally, you’ll also keep the traditional IRA with a zero balance so you don’t have to open a new one when you do this next year.
Thanks you PoF. Very helpful.
I did the roth conversion successfully.
I exchanged $5,500 from IRA (vanguard prime money market fund) to Roth (Vanguard Emerging Markets Stock Index Fund Investor Shares).
This fund had a recent decline and my money went down to $5,382.64.
Looks like I need to start learning more about investment.
Dear PoF.
first time poster but long time follower and I absolutely love your stuff. My sunday mornings start with your sunday best!
I want to do backdoor Roth but I have some 20K between my traditional IRA and sep-ira (with vanguard) and need to roll these into something before I can do them. I thought about rolling them into fidelity solo 401K (as vanguard i401K which is what I have doesn’t accept them), but the process to start another i401K is too cumbersome.
I wanted to know what is the process to convert them to straight Roth through vanguard itself. There is “convert to roth” option but I wanted to know how much taxes I would owe on this money. I make about 325K (between my w-2 and 1099 incomes).
Thanks so much for your help
Step by step guides might be one of the greatest things ever imagined by mankind. I mean, how can you get it wrong after a solid post like this? Thanks PoF for crushing this one.
I have been doing more research and this really does make sense for me but I have some specifics I was hoping someone might help advise me on.
Unfortunately I have not taken advantage of the backdoor Roth conversion in the past and have been putting in money for awhile into a traditional IRA. Now what I am to understand is that because these contributions were using after tax money (since my income phased out the deductions available) I have established a basis (which I assume is total amount I have from all the Form 8606s in past.
My current traditional IRA balance is higher than this basis due to capital gains etc. For simplicity sake lets say I have $25,000 in after tax money that I contributed and the account is worth $100k.
Can I do this to help minimize my tax burden with a conversion?:
1) Convert assets totaling (or slightly under) the $25,000 basis I have into a Roth IRA this year (and essentially pay no taxes on conversion)
2) In order to avoid the pro rata rule on the balance of $75k left, then roll the remaining assets into my 401k
Appreciate the help.
What you’re describing makes perfect sense, and I believe it should work as long as it is recorded and reported on the 1040 properly. I would consult with a CPA / tax professional before making any moves, however.
It is too bad you didn’t convert to Roth each year, though. The income limit on conversions was lifted back in 2010. I had made some non-deductible IRA contributions prior to that, and I believe I just paid the tax on the earnings when I converted to Roth back then.
Best,
-PoF
Thanks for the detailed run-through and info on backdoor Roths. I’ve been doing them for years and can’t believe they didn’t take this loophole away in the new tax bill. But glad they didn’t
Good news for me, now that I’m part time this year I shouldn’t have to do a backdoor anymore! With my salary cut in half I now fall comfortably back under the Roth salary limit. Unless my blog income takes off of course but since it hasn’t made anything yet I don’t see that happening 🙂
The front door certainly is simpler. The benefits of earning less.
Hi Pof,
Great blog and thank you for all the effort and expertise in putting this together. For physicians like me who lack the aptitude to understand these things, thank you for simplifying complicated issues. I have been reading your blog non-stop for a few days (though reading doesn’t mean comprehending :). I have a TIRA at vanguard (Collection of former 401k’s) and a current 401k through my employer at Fidelity (with a broad choice of their index funds and accepts rollovers) + a 457b. Also through work as a independent contractor, have a defined benefit pension plan (mostly invested at Vanguard as well). I max out the 401k/457b and DB.
If you wouldn’t mind helping with a couple of issues-
– Considering, I haven’t rolled over the TIRA to my 401k yet (past 12/31), does that mean I now should aim to fund the backdoor for 2018 only. Assuming 2017 is out even though taxes haven’t been filed yet.
– May not be the right place to ask, but should I roll it over at all? Have been at the new employer (fidelity 401k) less than a year and as a rough approximation, my TIRA at Vangaurd in the 3 fund strategy seems to have done better. Its not a good comparison as the 401k was funded slowly while the TIRA was already there.
Thank you and again great job
I noticed while following these steps that after opening/contributing to the Traditional IRA, on Vanguard’s Balances and Holdings” page, there’s a small button labeled “Convert to Roth IRA.” My funds haven’t settled yet, so I can’t fully perform the conversion, but it looks like it’s designed exactly for this. I called Vanguard and they confirmed as much, and also let me know that that flow will not close the source Traditional IRA, only withdraw as much as specified, allowing you to reuse it next year. The representative said that the button is only available on brokerage accounts.
I’ve heard about this button, but never have seen it. I have a Vanguard brokerage account, but all it holds is my investment in BRK.B.
The process I use leaves the traditional IRA open, too, even with a zero balance.
Thanks for the tip!
-PoF
Thanks! I followed these steps, however I just noticed that when I transferred my 5,500 from my traditional IRA into my Roth IRA account, the amount had somehow gone up by 2 dollars in the 40 hours it was sitting in the IRA account (even though I had it in a money market fund).
So now I have 5,502 dollars in a money market fund in my Roth IRA — is this considered an over contribution now? How can I fix this to avoid any penalties or audit triggers? Thanks!
Not a big deal. You’re allowed to convert the extra two dollars. You’ll just owe a tiny bit of tax. Less than a dollar.
I can’t imagine that would be an audit trigger.
Best,
-PoF
This is a great example that I refer back to each year. One small nit is that you have to click “Contribute to IRA” not “Buy Vanguard funds”. I guess you can get to Contribute to IRA through clicking on Buy Vanguard funds but it adds a step. Thanks again!
Thanks for the tutorial POF. Couple questions, I have a SEP IRA for my independent contracting work. From what I read here, due to pro-rata rule, I cannot do the backdoor without rolling over to a solo-401k correct? So I’m out till then, but can my wife do the backdoor conversion? She has a 401k through work, but will the IRS look at my SEP to enforce the pro-rata rule on her?
Your wife is in the clear. An IRA is an Individual Retirement Arrangement, so yours won’t affect her.
However, your SEP will invoke the pro-rata rule if you attempt this.
As long as you have no IRA money in the SEP or anywhere else on 12/31/2019, you’re OK to to the backdoor Roth in 2019.
I hope that clears things up for you.
Cheers!
-PoF
PoF, thank you. For the great post and informative replies. All very helpful.
I understand not having money in any IRA account to perform the backdoor Roth. What if the current employer utilizes only sep-ira? I maximize this contribution every year and have looked into converting the all funds into a 401k for the sole purpose of doing a backdoor Roth, but my accountant and I are unclear how future sep-ira contributions (only employer option) would be viewed.
What would the timing look like? Make the last annual sep-ira contribution in December and roll the entire years amount into a 401 then do a backdoor?
Thank you, again!
My understanding is that the IRS only cares about what you have in an IRA on 12/31. If you have a zero balance in the SEP IRA on that day each year, you should be OK.
Best,
-PoF
I understand that I have until mid-April 2018 to fund and complete the backdoor transaction for 2017 — but do I have to complete it before filing my taxes? I normally file in early February but was going to wait until March or April to fund for 2017. It sounds like the answer is yes due to the tax form that needs to be filled out (other than filing a 1040X later on, which I don’ t want to do), but I just wanted to confirm.
Thanks!
Yes, don’t file your taxes until all 2017 transactions are complete.
Best,
-PoF
I just finished reading your post and The Finance Buff’s posts about backdoor Roth’s. I feel like I have screwed myself because I had initially had an auto deposit started last year for 3 months into my Roth, and then I discovered that I would be over the income limits. So I moved it all to a traditional IRA and stopped the auto bank deposits. Then in late December I added in the additional money to get to 5500 for the year, and then did the transfer back to my Roth (which completed in Jan 2018). We normally use Turbo Tax, and I just imagine what kind of conversation I’m going to have with my tax lady (the wife) when she sits down to do everything.
Well, that sounds fun! From now on, hopefully you can just do the backdoor Roth as I outlined here, and not have to do a run-around with the money.
Cheers!
-PoF
Yes. And I already apologized to my wife about giving her extra work to do when filing the taxes 🙂
When I set up my wife’s TIRA and funded it a few days ago it sent the money to a brokerage account for a TIRA. Menu bars are a bit different and didn’t see where to select the tax year. Advice? Going to probably call them tomorrow to make sure it gets attributed to the correct tax year. It’s in a money market now. Great step-by-step.
A phone call is a good idea. You can get to a similar screen by clicking on “Sell” or “Exchange” rather than “Retirement Contributions and Distributions” that doesn’t give you the option to select a tax year.
I don’t know why different people see slightly different screens, but you’re not the first person to make that observation. Hope it all worked out!
-PoF
Hi, I have the same issue. That button is replaced with “Convert to Roth IRA” instead of “Retirement Contributions and Distributions.” It too, does not allow me to select a tax year and I am trying to do a 2018 and 2019 for me and my spouse this month for our first ever conversion. Any ideas on how to proceed? Is it necessary to pick a tax year or will it just know? Thanks
Ryan
I don’t think it will “just know.” What happens when you click that button? I would hope you then get the opportunity to choose in which year the contribution is credited.
I just did the conversion for $6,000. The 5500 for 2018 is still in limbo and not cleared yet. When I clicked submit, it took me to the contribution page you show above where it shows the two tax years, 2018 and 2019. But this only was available AFTER I submitted 2019. When I click on the links, it shows the 6k went over for 2019. Once the other 5500 is available, I hope it also knows that is for 2018. If only I could get to this page BEFORE submitting. *I tried to take a screenshot of the page, but it will not let me insert it for everyone to see*
UPDATE***
I figured a workaround to the button differences. Hover over “My Accounts” On the left side of the drop down there is a link called “Retirement Contributions, Distributions and RMDs.” That takes you to the screen you have above. I hope that helps someone else down the road.
Send me the screenshot and I can post [and will remove any identifying information]. pof at physicianonfire dot com
I’m also performing 2018/2019 backdoor Roth before 4/15/19. When contributing to TIRA I was able to select tax years. When converting to Roth I am given no options to select a year. When i converted my $5500 2018 contribution it showed $5500 under 2018 TIRA contributions, with $5500 (plus some interest) under 2019 ROTH rollover (although this was a conversion not rollover I thought…).
This threw me off as I thought the conversion would be under Roth 2018, but the conversion did take place in 2019 so it ended up under Roth 2019. I was worried that when I contibute $6000 to 2019 TIRA then convert to Roth it would hard stop me for going over the 2019 Roth contribution limit. I asked Vanguard and they responded to my inquiry stating “The Roth conversion process doesn’t offer the option to select a year. Roth IRA conversions are tax reportable in the calendar year they are completed, even if you’ve converted previous year contributions.”
So it appears that it is only important to select the year correctly when contributing to TIRA (and Vanguard won’t let you over contribute), but when you convert to a Roth there is no year to select…conversions occur in the year they occur. I just did the $6000 2019 conversion so I’ll see what it looks like in Vanguard when it goes through. Hopefully this might help someone or I royally screwed up and caused myself a tax headache. Maybe both.
If you were going to donate to a DAF anyway, capital gains can be “gifted” to a charity and you get the full deduction. The DAF won’t increase your wealth. The new tax law doesn’t change much. I suspect most physicians are at the high end or over the 24k standard deduction anyway. By bunching deductions year over year and timely donations to your DAF, you can have the best of all worlds. For a new investor who can get long term compounding from the Roth (if Congress doesn’t mess with it over the next 20-30 years), a Roth might make sense. The rest of us won’t like the restrictions. Loss of re-characterization makes the Roth far less enticing. Index funds throw off minimal CG. You get to choose when you take long term cap gains. At retirement or low income/high deduction years, you could take out at 0% rate. Cap gains give you a lot of options. In the years between retirement and RMD’s, you can save a lot in taxes.
I topped mine off late in 2017.
Without a mortgage, I suspect I’ll be about $14K shy with itemized deductions compared to the $24K standard deduction. So the first $14,000 in charitable giving would not benefit from the deduction. If you’ve got a decent sized mortgage, itemized deductions may approach or exceed the standard deduction.
I’ve got about twice as much in a taxable account as I do Roth, so I don’t mind shifting as much from taxable to Roth as the government will allow. Another disadvantage to Roth as pointed out above is the inability to tax-loss harvest. I’ll take tax-free growth and no possibility of capital gains over the potential to TLH, though.
Thank you for your comments,
-PoF
Very helpful information. In late December 2017, I did a Roth IRA conversion from my Rollover IRA. The process was straight forward. My both IRA accounts are with the same company. I just made a call, and on the phone they did the position transfer directly. I’ll do another conversion at the end of this year.
My case is different from yours, as my money in the Rollover IRA is pre-tax. I’ll have to pay the income tax for the converted amount for 2017.
Is form 8606 still supposed to say 2016 on the top right hand corner? I cant seem to find one for 2017 or 2018.
yes, same issue – cannot find the form 8606 for 2017… following … do they wait until close to when taxes are due to publish the 2017 8606?
It’s listed as “current” on the website. I imagine you’ll either be able to use that one or a new one will be published shortly. I don’t think it’s changed much or at all really in the five years I’ve been using the “backdoor.”
Best,
-PoF
With the loss of re-characterization in the new tax law, I see little benefit to a Roth. A taxable account appears to make more sense, at least to middle or late stage investors. What do you do with a Roth account that goes down? With a taxable account you can tax loss harvest and deduct $3000 off your income (kinda like a mini-IRA). Also the step-up basis at death, capital gains rates (potentially zero) and gifting possibilities. No restrictions on where and what you can invest in. No pro-rata rules. Cap gains and dividends thrown off every year are really trivial and receive favorable cap gains treatment. Congress appears to love messing with Roths. Gift your cap gains to a DAF and get a deduction.
Mark, with the new tax law in effect, and the $24k standard deduction, it will be more difficult to benefit from the contributions the the DAF, unless you are donating ten’s of thousands of dollars or more, substantially more than most.
Hey boss, if you have an old traditional IRA with pretax contributions you can also open a new separate traditional IRA solely for the purpose of making an after tax contribution then converting to a Roth. This, of course, assumes you are in a position to make after tax contributions and have maxed out all your pretax options. I’ve been doing it with Vanguard for the last few years and USAA prior to that. There is no limit to the number of IRA accounts you can have, just the funding limits.
Scratch that…..after further research ….. all IRAs are treated as one. Ugh, I’m going to be doing a few 1040x filings this year.
This is very practical and will help a lot of people.
I have never waited more than a day or two before converting to ROTH. What are you planning to do? One of the links was behind a firewall and I’m not sure what the current IRS think on this is.
I don’t believe anything has changed regarding the Step Doctrine. It remains a theoretical possibility that the IRS could have a problem with it, but I’m not aware of anyone getting in trouble for it, and this is a well-known “loophole” being employed by hundreds of thousands if not millions of taxpayers annually. As you can see, I only wait a day.
Best,
-PoF
I have a basic question; what is the difference between a traditional IRA or a roth IRA
I was on fidelity’s website and it quoted that I cannot open a roth IRA at my income level
So why do the rollover
A modified adjusted gross income (MAGI) of $199,000 for a couple filing jointly, or $135,000 for an individual makes you ineligible to contribute to a Roth IRA in 2018. I’m guessing you’re over the limits.
Traditional contributions to a retirement account are tax-deductible when you make the contribution to the account, and taxed when withdrawn.
Roth contributions are not tax-deductible when you contribute, and are not taxed when withdrawn.
Both have tax-free growth, unlike a taxable brokerage account where you pay capital gains taxes and taxes on dividends.
This post on deciding which to use may be helpful.
Best,
-PoF
Thanks for the great article. I contributed to my 401(a) and 403(b) accounts when I was resident. Now I have a TSP retirement account with my current employer. In this case for backdoor Roth, is a 401(a) treated as a 401(k)? I prefer not to roll over if I don’t have to. Thanks in advance.
As long as it doesn’t have IRA in the name (IRA, SEP IRA, Simple IRA), there should be no issue with taxation due to the pro rata rule.
Cheers!
-PoF
I make less than most doctors so I do a front door (regular) Roth. 🙂 This was my first year fully funding it this early in the year. I’m super excited! !! Wishing everyone a great 2018!
Congratulations on that! And yes, the front door is a bit simpler. Glad you were able to front-load one yourself!
“The income limits for a traditional tax deferred IRA contribution are even lower than the Roth contribution limits. If you participate in a workplace retirement plan, you won’t be eligible to contribute as an individual earning more than $73,000 or as a couple earning more than $121,000 in 2018.”
Just to clarify this statement. I do have a 401k through my workplace retirement plan which I max out. I have in addition also been putting $5500 into my traditional vanguard IRA (which I have been doing for several yrs) even though my salary has been averaging over $800k/yr during that time. Are you saying I actually am not allowed to put the $5500 in then? And if I am able to, will I be able to have a tax deduction because of it?
On a separate note, why on earth does the government find in their infinite wisdom that Roth IRA’s should not be accessible by high-income individuals? You would think these individuals would be in the highest tax brackets and thus generate the highest revenue for the govt in the first place. And with backdoor known to everyone, just is a complicated step
Thanks
Good question, and great income!
I would guess you’ve been making non-deductible contributions, as you’re not allowed to take that deduction due to your salary being well over the limit, but you would want to doublecheck your 1040 for those years (or have a CPA do so). If that’s the case, you should be able to convert that to Roth without any tax due. The $5,500 limit is only on the annual contribution, but not the conversion.
I have no idea why Roth is discouraged for high-income people. Many of us do have the option of making Roth 401(k) contributions, but I think for most, that would be unwise above the 24% marginal tax bracket.
Best,
-PoF
POF,
Thanks for the tutorial and I just did my first backdoor Roth IRA via vanguard as an attending physician this year with income jumping quite a bit since residency days.
A quick question/confirmation: Since I converted my vanguard account to their brokerage account, it had me wait 7 days for funds to clear in the money market fund/tIRA before I was able to put it into my Roth IRA. In that time it looks like it earned $1.13 in interest. (Which just showed up today). From the link from WCI here: https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
It looks like I’ll need to report on my 8606 I’ll need to report $5501 on line 8/9/16, and $1 on line 18 and pay the few cents in taxes on that extra $1?
Thanks
POF,
In order to prepare myself for a backdoor roth conversion, I recently rolled over all my non-Roth IRA accounts to my current employer’s 401(K) to avoid the pro-rata rule, as well as contributed my annual non-deductible $5500 to a tIRA.
I have 2 questions regarding this:
1) Am I ready for the backdoor roth conversion? Are there any tax/pro-rata rule implications regarding the timing of my conversion of non-Roth IRA to my employer’s 401(K) and doing the actual backdoor conversion?
2) What happens if I decide to leave my current employer in the near future and convert my 401k to a Vanguard Rollover IRA? Are there any tax consequences that can be applied retroactively to my previous backdoor roth conversions?
Great questions for a CPA experienced in this arena. Paging Johanna Fox.
Hi, little tinder,
To answer your questions:
1. Yes, you can convert to your backdoor Roth now. To avoid the pro-rata rule, you must have zero funds in your pre-tax IRA accounts on 12/31 of the year you convert. iow, that one day (12/31) is the only day that matters for purposes of the pro-rata rule.
2. No retroactive consequences. To avoid the pro-rata rule for future conversions, you will need to either roll the IRA into your new employer’s 401k/403b or convert it to a Roth by 12/31 of any year in which you do a conversion.
Note that this rule does not prevent you from contributing to your nondeductible IRA – you can do this at any time and for as many years as you want w/o paying taxes. However, in the year that you decide to convert the balance of your n.d. IRA to a Roth, you will need to have zero in your pre-tax TIRA on 12/31 to avoid the pro-rata rule. You will also pay taxes on any growth in the n.d. TIRA at conversion.
This post may help: Explaining Backdoor Roth IRAs at http://bit.ly/2nsfJJ0
As a single mom and self-employed physician, your website has opened up a new world for me. Luckily, after I divorced 9 years ago, a friend advised me to open up a Vanguard account. I felt that I was too passive in my participation so enlisted their Personal Adviser services for help a few months ago. Your website has sparked my interest in having a more active role in my investments. After reading about the backdoor Roth, you state that I cannot have a tax-deferred IRA in my name in order to do this. Question: whose name should it be in? I’m confused…
You would need to roll it over into a 401(k) or similar or convert to Roth and pay the taxes. I’ve done both in the past. Read up on the pro-rata rule for more details.
Best,
-PoF
Hi POF,
I was wondering if i can open the second IRA account and use it just for doing the backdoor roth. Since i already have an IRA account with rollover money from the 401k plan , using this account for roth conversions would result in a hefty tax bill. what do you think
It won’t matter how many IRA accounts you have. If you have money in any of them, an attempt at the backdoor Roth will trigger the pro-Rata rule and you’ll be subject to income tax on the conversion.
The best plan is to rollover IRA money into an employer’s 401(k) or an individual 401(k) if you can open one (i.e. if you have any self-employment income).
Best,
-PoF
PoF,
Great thread. I have been wondering about doing a backdoor Roth for a few months and your post is great!
I am likely over thinking this but here go my questions…
My traditional IRA has money I have rolled over from previous employers 401k and money I have contributed myself over the past several years. I am now looking into doing a backdoor conversion as I have a 403b I max out at work and also make too much to get a tax break on the traditional IRA contributions.
Since I do not get a tax break on these contributions now I am correct in assuming I am getting a deal by doing a backdoor even if I am in a lower tax bracket in retirement? Because to me it seem you are getting double taxed on this money…ie on the way in it is post tax and on the way out it is taxed.
Also, Do I need to rollover all the money from the traditional IRA into my current employers 403b in order to avoid the pro-rata rule or do I need to figure out the sum that was originally tax deductible?
Thanks
Nicole
If you have any money in a traditional IRA in your name (which you do), the backdoor Roth won’t work because you’ll be taxed on a portion of the conversion due to the pro-rata rule. If your 403(b) allows rollovers, that would be a great way to “hide” that money so you can take full advantage of the backdoor Roth option.
Roth money is not taxed when you withdraw it, but it is post-tax money to begin with. The advantage over a taxable account is that the growth is not taxed along the way (dividends) or when you sell (capital gains). So it is definitely worth doing.
Cheers!
-PoF
POF,
I haven’t seen this question being asked, so here goes.
With my old employer, I previously qualified for and contributed to a Roth 401k. When I left the company, I rolled over all Roth money into a Roth IRA, and all employer contributions into a traditional IRA (approx. $6k). These employer contributions are the only funds held in my traditional IRA.
I no longer qualify for a Roth IRA or a deductible IRA and so have to go the backdoor route. What do I have to do with the employer contributions being held in my traditional IRA before starting the process of a Backdoor Roth? My understanding is this money is non-deductible so I just need to treat it as my backdoor Roth for this year and convert $5,500 of it this year, and the balance next year toward my backdoor Roth contributions. Once all of the $6k is converted, I can start making up the balance toward my $5,500/year max.
Thanks!
I’m fairly certain the $6k that came from employer contributions is pre-tax, a.k.a traditional and not “non-deductible.” You may not have gotten the tax deduction when it was credited to your account, but I’ll bet your employer did.
In that case, your options are to roll it over into a current employer’s 401(k), your own solo / individual 401(k) or bite the bullet and pay the tax at your marginal tax rate on a Roth conversion. The first two options are cheaper if available to you.
Cheers!
-PoF
PoF,
One follow up question – I am going to rollover my traditional IRA into my 401k to clear the way to do Backdoor Roths going forward. I can either start that process now and run the risk of the rollover straddling 2017/2018, or just wait until January to do the rollover. I suspect straddling tax years on the rollover would mess with my taxes, so, assuming that is the case, is there any harm in rolling over my IRA into 401k in the same tax year as I do a Backdoor Roth? I would think not, but wanted to get your thoughts.
Thanks much. Please keep up this phenomenal site!
I would initiate the rollover as soon as possible.
As Johanna tells us a few comments down the page, 12/31 is the only day that matters. You cannot have any money in the traditional IRA on that date if you want to do a backdoor Roth for 2016. Note that you’ll have until Tax Day in April to actually make the non-deductible contribution and conversion.
Since rolling the IRA over is a non-taxable event, I wouldn’t be concerned about straddling year messing with taxes. But if it doesn’t get done by the end of 2017, you’d be subject to the pro-rata rule.
Best,
-PoF
I’m predicting my MAGI to be right around the $118,000 income limit for a single filer. I won’t know until the end of the year if I need to do back door roth or front door. Would you recommend opening both a traditional IRA and roth IRA now? Are there any additional fees for having a traditional IRA account open in case I am over the limit one of these years?
Yay!!! I love the step by step with pictures. I just did my first one.
Thanks. Yes, he’s a CPA.
Can I ask another question? I opened up a solo 401K with vanguard. Then realized that Vanguard does not accept roll-overs from employer based 401K an 403b plans. This is why I was thinking of rolling over into an roll-over IRA. At the same time, I was hoping to do a ROTH conversion but it does not seem possible.
Can I do the following: open up another solo 401K plan with another brokerage firm that allows rollovers from employer based 401K and 403B. Roll over those accounts into the new solo 401K. Then roll over the solo 401K into my current vanguard solo 401k since they accept rollovers from other solo 401K accounts?
This will allow me to open up an IRA and do a roth conversion with no issues.
I would think so. E-trade seems to be the most flexible, and that’s who I went with. Fidelity is another popular option. Vanguard is less popular for the lack of flexibility and the unavailability of Admiral Funds. I assume you have some 1099 / independent contracting income and a tax ID number in order to open the solo 401(k).
Be sure to doublecheck the rules and also talk to a rep to be sure you’ll be able to do what you intend. You may not want to transfer to Vanguard once you’re aware of your options with a different individual 401(k) provider.
Great read. I am in the process of rolling over an old 401k and 403b from residency into a rollover IRA with vanguard. Less than 23k in total. Am I allowed to open up a new traditional non deductible IRA and convert to Roth while leaving the rollover IRA intact? Your post stated that one is not allowed to have both an IRA and open a new IRA and convert to Roth. Thanks!
Sorry, vt. You can do it, but you’ll pay tax on the Roth conversion due to the pro-rata rule. If you can roll that IRA money over again into a 401(k) (individual or employer), you will be eligible to do the Backdoor Roth without any concerns with the pro rata rule.
Best,
-PoF
Thanks so much for the prompt response! What would I pay tax on specifically? The 5,500 that I convert from a new non-deductable IRA to a ROTH IRA? Isn’t the money post-tax?
I would keep the rollover IRA (deductable) where it is without touching it.
Spoke to an accountant and he said the roll-over IRA has nothing to do with a ROTH conversion from a new deductable IRA that I’d fund with post-tax money this year. Should I be getting a new accountant? =P
Marketwatch explains it here, but I can also illustrate.
Let’s say you have $100,000 in the rollover IRA. You then make a $5,500 non-deductible contribution to a traditional IRA with the intention of converting it to Roth tax-free.
The IRS considers your IRA money in aggregate. When you make the conversion of $5,500 to Roth, and ~95% of your IRA money is tax-deferred, you will owe income tax on ~95% of the conversion.
Money in a 401(k) is not considered in aggregate, which is why many high-income earners choose to “shelter” IRA money in one.
Up to you on the accountant, but I’m just a doctor and I understand the pro-rata rule pretty well.
Cheers!
-PoF
Thanks again for your response. Your reply makes perfect sense to me. I spoke to my accountant once again. He said in the example described on marketwatch, all the transactions were done within the same IRA account. If there are separate IRA accounts (ie. Rollover IRA and a separate traditional non deductible IRA), then there’s no tax on the conversion. Does this make sense? Maybe I can find more convincing information for him on the IRS website. Much appreciated!
vt
Really? He said that? The pro rata rule is pretty straightforward, and what he says doesn’t hold water. This Kitces article is more thorough. Is your accountant a CPA? https://www.kitces.com/blog/the-impact-of-the-ira-aggregation-rule-on-after-tax-distributions-roth-conversions-60-day-rollovers-rmds-and-72t-payments/
FYI, there is now a Vanguard Federal Money Market Fund (VMFXX) available that has a slightly lower ER than the Vanguard Prime Money Market Fund, but also slightly lower yield. I’m not sure if there are any other major differences as far as this topic is concerned; hopefully it doesn’t matter (I chose to use the Federal Money Market Fund as I wanted to minimize earnings prior to the conversion).
I see. I only leave the money in there for a day, and pennies are ignored. If you are worried about the step doctrine, and choose to let the non-deductible contribution sit for awhile, you might as well use the lower cost / lower yield fund.
Thanks for the heads up!
-PoF
Only comment is…..if you fund your initial IRA payment via a bank account Vanguard makes you wait 7 days before making the cash available from your IRA being able to be converted into a ROTH IRA if doing it online.
Do the online steps and on the last page it will say cannot be completed call 800 XXX XXXX and then tell them you are trying to do a backdoor roth conversion and they’ll be able to manually over ride the system no probs.
Thanks for the tip, Dean! I haven’t run into that issue.
Can anyone confirm this works? I just funded the wife’s account via check (don’t ask) and it shows deposited into settlement fund but shows “unavailable dollars” and says to wait 7 days. I would like to do this now/today and avoid any timeline garbage with the holidays coming up. If I do all the steps and call they will proceed?
My wife does not currently earn an income. Can we still both make $5500 non-deductible contributions (total of $11,000) to new traditional IRA’s and then both convert to Roth IRA’s?
Yes! Check out rules on Spousal IRA.
Best,
-PoF
I ran into that too. The IRA account showed the balance ( $5500 ) but it wasnt’ available for any activities . It had a special status that I should have noted the name of. eventually the funds became available and I was able to complete the “convert to Roth IRA” transaction.
It was a new IRA acccount create just for the conversion, so that may have had something to do with the delay. Perhaps when I reuse the account next year, the process will go more smoothly.
PoF,
Are you not worried about the step transaction?
They are recommending to wait a year before doing the next step.
Thanks!
Kitces recommends waiting, but no one seems to be aware of a taxpayer running afoul of tax law by converting the next day. The Step Doctrine is a theoretical risk, in my opinion.
Best,
-PoF
Thank you for this. With your post with the screen shots and the post from finance buff with Turbotax screen shots I was able to do it successfully. Thanks again!
This is my first attending year, and I have contributed/converted for both 2016, and now 2017.
My wife does not work. I would like to make a spousal IRA for her. Our MAGI will probably be around $190k for this year. She has an old account rolled into a traditional IRA worth $15k. Do I directly make and contribute to a Roth for her, and not have to worry about the traditional IRA. Or do I have to do the same backdoor method and thus either convert or trigger pro rata?
Also, I wasn’t able to find if there was a MAGI limit for spousal IRA.
Thanks in advance!
If you can get your MAGI below $186k, then you should be able to contribute directly into a Roth IRA without a backdoor. Otherwise, you will trigger pro rata if there has been any growth inside her Traditional IRA.
My husband and I both have rollover IRA’s containing funds from our 401k’s at previous employers. We also both have traditional IRA accounts that we have been contributing the max to over the last several years. The total for all of these IRA’s is around $440K. I understand that if we wanted to do a backdoor Roth, all of the money would have to be emptied from the current IRAs. What sort of accounts could we move the IRA money to in order to prepare for a backdoor Roth?
If you have a current employer’s 401(k) that accepts rollovers, you can roll it over into there.
If not, you could start a solo 401(k) based on a tiny amount of income earned as an independent contractor. It could be lawn mowing, “consulting,” or filling out online surveys for cash.
I just opened an ETrade individual 401(k). Here’s a thread on several options and pros and cons.
Thanks! My group is terminating our hospital employee contracts and moving back to being a physician owned group so we will have a change in our employer offered retirement options in July. I will check out the thread on an individual 401k but probably wait to make any final decisions until I see what my new employer options will be. Appreciate all the info!
That’s what I’m here for!
And I hope the transition is for the best.
Cheers!
-PoF
Nice job.
These are exactly the steps I take each January (although I have done it all over the phone in prior years). It seems routine to me now but I’m sure this will be helpful to people who haven’t done it before.
It’s very helpful. The best article on the subject I’ve come across while trying to learn more about it! Love the screen shots.
Question: I was reading somewhere but you CAN take money out of Roth any time without penalty correct? Just can’t take the dividends/capital gains (that has 10% penalty)
Please let me know. Thank you.
Indeed. You can take out your Contributions any time without penalty.
http://www.rothira.com/roth-ira-withdrawal-rules
Cheers!
-PoF
So got a REALLY dumb question
Lets say I have 50,000 401K. Can I roll all of that into a traditional IRA and then put ALL 50K into a roth IRA? (backdoor?) Basically, is there a limit on how much per year I can do back door IRA?
And I have heard about “Mega” back door roth – what is that then?
Confused!
The Backdoor Roth relies on a NON-deductible IRA contribution. The $50K traditional IRA was tax-deductible (and tax deferred), so you would owe taxes at your marginal rate on the converted amount of $50k. You can do it, and it would be wise to do in residency when it’s cheaper to do so, but not so wise as an attending.
That being said, I did convert a large SEP-IRA and paid a six-figure tax bill to do so back when it looked like the ability to convert regardless of income level was going to be short-lived.
Mega Back Door Roth is done within a retirement plan. If your plan (401(k) or similar) allows non-deductible contributions and in-plan Roth conversions, you can do the Mega. Mine does not.
And there are no dumb questions. Only dumb people. 😉 I kid, I kid.
Best,
-POF
A heads up to your readers-
Most readers of your site are probably more knowledgeable about finances than their accountants. We do our own taxes now (usually with Turbo Tax) for this reason, as when we tried to use a CPA she was not familiar with a backdoor Roth and we had to file an amended return to add form 8606.
Great point, Julie.
If you use a CPA, I would share one of the links on this page with him or her. I know I did when I did it the first time a few years ago.
Cheers!
-PoF
Great step by step guide. I’ll be taking advantage of this for the first time this year 🙂
Welcome to the big leagues, Investing Doc!
Thanks for sharing! I was so paranoid about making a mistake the first time I did my Backdoor Roth that I must have cancelled my transaction multiple times. I also find The Finance Buff’s TurboTax tutorial to be quite helpful because apparently I can never remember how to do it correctly.
I haven’t done my own taxes yet — maybe someday. I do like to have a CPA to bounce ideas off.
Cheers!
-PoF
Ha! I thought I was the only one not doing my own taxes. I alas cannot do a backdoor Roth because of a large SEP-IRA. I guess I could start another business open a solo-K at Fidelity and then roll both IRAs into it and then close the business and retransfer the money back to Vanguard or…..just be lazy. I am diversifying with small roth conversions. Cheers.
Exactly the reason that I didn’t roll my 401(k) into an IRA was because I wanted to keep the IRA space open in order to give myself the flexibility to do a backdoor Roth since we anticipate our household to earn above the income limit for contributing to a Roth (turns out dentists do pretty well – lawyers…eh).
The step transaction thing is what’s always slightly concerned me. I once tried to ask a lawyer friend of mine who does tax law about it and he had no idea.
Being able to roll an IRA into a 401(k) is something I only recently learned was even possible. I was always under the impression that if you had an IRA with money in it, you basically were screwed unless you wanted to take the tax hit and convert it to a Roth.
And +1 for the solo 401k. It’s exactly why I’m using it for my side hustle income.
Yep — you might be able to roll your old 401(k) into your solo 401(k), but it depends on the company. I believe Vanguard’s does not accept rollovers, at least not from IRA.
Cheers!
-PoF
Thanks for another great article. I do my Roth IRA at Vanguard too, but my screen shots and steps are different. I’ll have to take a deeper look and see why – but I literally just click a “convert to Roth IRA” button after funding the TIRA.
Interesting… we’ll see what Mrs. BITA’s look like. I click “convert to Roth IRA,” but it’s in a drop down box in the lower right corner.
Cheers!
-PoF
When I do mine through Vanguard it says ‘exchange’ from tIRA to Roth IRA .
There was a thread on Bogleheads about this. You can do it either way. WCI did both.
Cheers!
-PoF
Nicely explained process, but I have a question outside of the mechanics of doing that. We built up a lot of cash last year and are looking to dump it somewhere soon. So, if I set up an account, made 2016 and 2017 contributions, then that would cover $11k of it. Here’s where I get tied up with the “why”.
So, if we already paid taxes on it at our higher tax rate, the bonus of putting it into an IRA and then coverting it is what? That we don’t pay taxes on the growth of that account later on? Sorry to be so dense, I’ve just always gotten hung up on that aspect of it and never had it explained to me. I think you did it sort of in your last paragraph, but before I try to make both of those contributions, I wanted to make sure I understand the “why”.
Thanks and again, nice article pointing out the mechanics behind it. Timely for us indeed!
Yup. You either pay taxes on it now or later. Roth IRA allows you to diversify your investment buckets.
Yes. I would describe the advantage as three-fold.
One, you get tax-free growth (no taxes on dividends throughout the year).
Two, you’re not locked in to a particular investment. You can trade as much or as little as you like in the Roth account without tax consequences. I’d argue for very little trading, but there can be good reasons to change asset classes.
Three, you will pay no capital gains taxes when you sell to spend that money, which could be decades later.
Now, you could have a taxable account that acts a lot like a Roth if you buy a zero-dividend fund /stock (Berkshire Hathaway), remain in the 15% federal tax bracket (no tax on QD & LTCG) and remain in the 15% bracket when you sell.
Best,
-PoF
Thanks for this step-by-step guide! I’ve heard about the backdoor roth from Mad Fientist in the past, but always seemed to go over my head a bit. This explains it a little more and clarifies some things. I also kept hearing of the mega backdoor roth, but not sure it applies to us.
So far we’ve already maxed out the 2016 & 2017 Traditional IRAs so maybe we’ll have to look at this in the future. I’ve also heard in the long run the calculation for traditional vs. roth is exactly the same in the end? Our plan is when we retire to do the roth ira laddering.
You’re very welcome.
I would disagree with the assertion that the Roth v. traditional is the same in the end. If you’re in a lower marginal tax bracket in retirement compared to your working years, traditional, tax-deductible contributions will win out. If you’re in a lower bracket while working compared to retirement, making Roth contributions makes more sense.
Your traditional IRAs will prevent you from making a backdoor Roth contribution, unless you roll them over into a 401(k).
Best,
-PoF
Pof,
Why not convert the Traditional IRA instead of rolling it over to 401k?
Thanks!
-HD
“Your traditional IRAs will prevent you from making a backdoor Roth contribution, unless you roll them over into a 401(k).”
If you do so, you’ll be paying taxes on the conversion at your marginal tax rate. For a physician, this is generally unwise, particularly if you plan to retire before accumulating many millions in the 401(k), as your tax bracket when you take money out of the tax deferred accounts will likely be lower.
Best,
-PoF
Bah! Just yesterday I collected Vanguard screenshots as I did my backdoor Roth for 2016 to write exactly this article . I mean it is a good article and all but I groaned when I saw it appear in my inbox this morning.
One question that occurred to me yesterday was: I do a mega backdoor Roth for Mr. BITA because his 401k plan allows for it (mine does not) and regular old backdoors for me. Is there a reason that I can’t also do a regular backdoor Roth for Mr. BITA? I think not, and that would mean and extra $5500 a year in Roth space.
Mine doesn’t allow it, at least that’s what the last rep said. Of course, he had never heard of it, either, so I had to break it down for him.
We have a new rep — it might be worth asking again.
Anyway, the two should not interfere at all. They are mutually exclusive, so to speak.
Go ahead and write that post, and shoot me a link when you’re done. Yours probably has zero screw-ups!
Best,
-PoF
I did write the post (I just couldn’t let all my screenshots go to waste). Here you go:
http://www.bayalisistheanswer.com/backdoor-roth/
And thanks for confirming that my little epiphany was not off the mark. Mr. BITA is now going to have a regular and a mega backdoor (that just sounds kinky).
I love the Finance Buff’s step by step process to reporting the IRA conversion. I have used it 3 years in a row. I was actually doing my taxes last night (still pending some 1099-M forms) and went through the IRA conversion. It feels good to see the refund stay level despite placing these amounts in.
Regarding the money market account for the traditional IRA- great idea. I have not done this and some years by the time I have moved monies I am either $20 lower or higher than when I first placed the $5500. I have yet to do my 2017 contributions but now know what to do!
-EJ
I’ve heard of backdoor Roths but never understood the mechanisms of them, so I thank you, sir!
Nice. I keep my Roth in an E-Trade and Fidelity. Just happened to have legacy accounts prior to discovering Vanguard.
I believe that there have been multiple finance forums online where some naysayers fear impending elimination of the Roth IRA benefits, but I figure that it would be difficult to reverse any rules for people who already have funds in existing Roths.
What are your thoughts about using Roth 401k’s? Those might not apply for me (employer doesn’t offer them), but I have heard that some people with large amounts of 401k space who might end up with too much retirement start funding the Roth 401k instead.
Hey Smart Money MD. I have a Roth 401k option with my partnership but have decided not to fund it at this point. With my wife’s income, we’re currently in the top tax bracket, so I figure anything I can do to lower our taxable income is the higher priority. If I end up working part-time and our combined income falls enough, I might start funneling contributions to the Roth 401k side. But for now I think we’re better off with the up-front tax break.
Agreed. If you are in the higher(ish) tax brackets, it would make sense to lower your taxable income as much as possible. Interestingly, I have colleagues who believe that tax bracket rates will go even higher in the future so they opt to fund their Roth 401k and WL accounts more.
I’d say that if you truly think that you’d be in a higher income tax bracket at retirement no matter what laws change, you’ve probably done quite well for yourself already.
I’m with you on using tax deductible investments if you are in a high tax bracket, but even then a Roth account isn’t a bad place for an emergency fund.
it’s been a while since my savings were so low that every unexpected expense was an emergency, but not so far in the past that I don’t feel the need to have an emergency fund. As a mental compromise, I’m slowly moving my emergency fund from a savings account into a Roth account.
The back door method just became necessary this year , and I’m glad that I found your instructions on how to go about it!
Right — it only makes sense to do Roth instead of tax-deferred contributions if, and only if, you anticipate being in a higher tax bracket as a retiree.
That seems unlikely for most physicians, and almost certainly untrue for an early retiree.
The backdoor Roth doesn’t take the place of any tax deferred money. It’s an alternative to a portion of your taxable investing.
Best,
-PoF
I made my first Mega Back Door Roth conversion in 2015, and love the creative way of building “tax diversification” into retirement funds even if we’re over the income limits!
Great post, will definately be sharing with some of my friends who I’ve explained the concept to (Thank You, you just did the work with an excellent explanation, saves me having to write a post on the same topic….I’ll just share yours!).
Thank you, Fritz.
I was actually listening to your recent podcast interview as I was doing this, inadvertently neglecting to notice the 2016 tax year.
So I have you to blame for that one, as far as I’m concerned. 🙂
Cheers!
-PoF
Thank you good sir – have been reading more about this since your post a few weeks back.
Mistake noted! Happy to learn from yours
Nice summary PoF. If you’re a high-income earner and already maxing out a 401k or other tax deferred plan through an employer, a backdoor roth is a good way to get more tax free growth. For me, I have a lot of tax deferred dollars from old 401k plans rolled into an IRA. So I would have to roll it into my company 401k plan. The problem with that is the plan only offers high cost funds (all over 1%). Not a huge deal though, as my focus now after maxing out my 401k is building an after-tax portfolio to access in early retirement.
Not all hope is lost, GoFiY.
Earn a few dollars from your site or mowing lawns or whatever, and open a Solo 401(k) at eTrade or any vendor that allows IRA rollovers.
Cheers!
-PoF
This is exactly what I need to do. I have about $100K sitting in a private IRA, so before I can implement this strategy I need to open up that solo-401K for my blog and then roll it all over.
Thanks for the step by step guide.
PoF,
How long do you need to wait after rolling a private IRA into a solo-401K or a company 401K before you can use the back door Roth strategy?
For instance, if I roll my private IRA into a company 401K today 1/11/2018, will I be able to star the back door roth strategy once that roll over is done…guessing around 1/18/2018? Or because I had a private IRA for the calendar year of 2017, I am not eligible for a back door Roth?
Can you please elaborate on this edge case?
Thank you,
George
If you had an IRA with tax-deferred money in it on 12/31/17, you cannot do the Backdoor Roth for 2017 without being subject to tax due to the pro rata rule.
You can, however, make a contribution for 2018 as long as the IRA is cleared out by the end of the year.
Best,
-PoF
Thank you PoF!! I wish I read this article before the end of last year
Better late than never!
Hi PoF! Following the chain above – I also had a simple IRA during all of 2017 that I just (today) rolled over into my 401k.
Here is the added kicker, in case you happen to know this – I accidentally over-contributed to my Roth IRA for 2017 based on income. Now I am wondering if I can recharacterize that as a Traditional IRA contribution and then follow the back door steps to get it into the Roth IRA.
Meaning, once I recharacterize my 2017 Roth IRA contribution to a 2017 Traditional IRA contribution, can I roll that over into my Roth IRA as a 2018 roth contribution (now that I have closed my Simple IRA)?
Hopefully that makes sense. I just found your site and this is the most clear-cut article I have found on this matter, so thank you!
Hi PoF,
The following article discusses the strategy of “isolating the IRA basis”
Basically, if an individual has an IRA with mixed assets (pre and after-tax assets), the pre-tax assets can be rolled over to a 401k or Solo 401k leaving the after-tax assets in the IRA for the Roth conversion.
From what I read, it looks like the pro-rata rule will not be applicable under this Roth conversion scenario i.e., IRS will not check the balance of the IRA by 12/31 of prior years when these after-tax (non-deductible) contributions were made. Is my interpretation correct?
Thank you!
Another good article on the same topic; it clearly states that it works!
https://keenpocock.com/isolating-ira-basis-for-tax-free-distributions-and-roth-conversions/
Any recommendations for a good provider for a solo 401K? I have not done it before;I found some good reviews about Etrade. Your thoughts will be much appreciated.
Thank you; this is a great forum!
I agree with your assessment.
I think it’s generally a good idea to keep pre-tax and post-tax assets in different accounts. I’d hate to inadvertently pay tax twice on the same dollars, which could happen if the fact that some of the contributions were post-tax is lost at some point.
Cheers!
-PoF
I am with E-Trade. Most reviews or threads I’ve read suggest E-Trade or Fidelity.
Many others are lacking features, some of which may be important, like accepting rollovers, allowing for Roth contributions or conversions, etc… Vanguard’s doesn’t even let you own admiral funds, which is bizarre.
Best,
-PoF
Great; thank you!
What happened is I contributed to the spousal IRA but after tax filing the contributions were classified as non-deductible because of income limits per the IRS code. Consequently, we ended up with an IRA with mixed pre and after-tax assets.
With this strategy, the basis in the IRA can be isolated which will pave the road for Roth conversion.
I am still trying to figure out what tax forms are needed and how they should be prepared to implement the strategy without any complications!
I contributed to a Traditional IRA in 2016, 2017 and 2018. I had a tax deferred IRA (a roll-over from prior 401ks) that I moved to my current company’s 401k in January 2018; this is now completed. When can I convert my traditional IRA to a Roth IRA? Can I do it in this calendar year or do I need to wait until 2019?
You can convert a traditional IRA any time. If the contributions were tax-deferred, you’ll owe tax on the conversion (at your marginal tax rate in the year you convert) no matter when you make the Roth conversion.
If the three traditional IRA contributions were non-deductible contributions, you can convert now as long as you don’t have any tax-deferred money in an IRA on 12/31/18. If you do, the conversion will be taxed in accordance with the pro rata rule.
Best,
-PoF
Thanks so much for the reply. I will not have any tax-deferred money in an IRA going forward. I did still have it on 12/31/2017 (moved to the 401k this January), so I just wanted to make sure that that wouldn’t matter if I now convert my traditional IRAs.
Thanks again.
I made one way back when they first came out. During the dark days of the market crash I converted a defined contribution pension over to a Roth IRA using a simple call to fidelity. Down markets are a great time to roll if there are tax ramifications.
can you comment if we can do the backdoor Roth for tax year 2019 if we have already filed taxes in march 2020 for tax year 2019? is it worth it to do an amendment?
You can, but you’ll have to file Form 8606. Up to you (and your CPA / tax prep person if you have one) as to whether or not it’s worth it.
I’ve calculated the value of doing the backdoor Roth, which isn’t much initially. Over time, though, when you do it year after year for decades, the value can really add up.
Best,
-PoF
That was a great explanation of the entire process. I know the back-door Roth conversion gets tossed around quite a bit in this FIRE realm and I’m not sure how many readers truly understand it or understand how to do it. A post well done. And congrats on your successes with the conversion!
Mrs. Mad Money Monster
Nicely done , PoF! This is a great step-by-step guide for any first-time backdoor-er. Also, strong work on the asset location, putting the tax-inefficient (REIT) and high-volatility asset classes (EM, mid-cap, small-cap) in the Roth.
Thanks, WaSP.
And yes, I did my homework before deciding what to keep there. I learned from my somewhat haphazard ways when I was a beginning investor.
Best,
-PoF
I couldn’t find the place to start a new comment, so I clicked “reply” instead. Last year, I waited too long to convert from traditional to roth IRA, so the $5500 grew to $5502, and I then converted $5500 to roth. This year, I added $5498 to my traditional IRA so the total is $5500. If I convert to Roth now, which portion will I get taxed on? Just the $2? or the entire $5500? Thanks in advance! and Thank you PoF for writing this guide, it’s exactly what I was looking for last year
It would be just the $2. I use the money market account for the non-deductible contribution, which isn’t subject to the volatility of many mutual funds.
Best,
-PoF
Hey PoF. After messing up 2016 back door, I figured it out and did it right for 2017 last year. On Jan 2 I put $5500 into my traditional IRA to convert today. I absentmindedly ignored the 54 cent balance in the traditional (suppose I should have put $5499.46 in). So, now I’ve got $5500.54 in the traditional. What do I do about that extra 54 cents? Is it going to screw things up for me? Can I just leave it there and not worry about it? Please tell me I don’t have to roll that 54 cents over into my 401k to avoid the pro rata rule.
Not a big deal, Amy. You can either roll the full balance over and you might pay 30 or 40 cents on the extra dollar (IRS rounds off). You could also leave the 54 cents in the IRA, but either way, you should be OK.
Best,
-PoF
Won’t the $0.54 complicate taxes with the pro rata rule?
Even if you do have to pay tax on it, it’s pennies. A non-issue in my book.
Could you clarify this for me? I made a contribution and conversion of $5500 in the fall of 2018. I looked at the TRIA Vanguard Money Market Settlement Fund today (1/4/19) and see that there is $2.14 in it. Should I have done something with that money before December 31st, 2018? If so, what? And…what should I do with it now? Can it sit there until I make my 2019 contribution?
I would just leave it. If it continues to grow and you convert it eventually, you might owe a dollar of tax on it. No big deal.
Best,
-PoF
Agreed except that it IS a taxable event for any earnings incurred on the Traditional IRA before converting. It is incorrect to claim Vanguards statement stating that it is a taxable event is incorrect. Yes, given the approach laid out above where monies are placed in a money market settlement fund and converted on the next day, there will be no taxes incurred. However, if monies are invested in mutual funds or otherwise and achieve earnings before the conversion occurs (for those who don’t do the conversion promptly), they WILL be liable for taxes on those earnings.
Great guide, PoF!
I will definitely be using this when I make my Backdoor Roth contribution for 2017. Now to just save that $5,500 first…
HI, Great step by step guide! We have about 250k in the bank doing nothing but collecting dust. We are considering doing this back door conversion through vanguard. Is there a limit you can convert per year? Do you recommend doing a little each year, how much? Husband’s income has been over 200k last 3 years, I don’t work outside house. And lastly, do we pay taxes on overall income as the amount converted will be added to income? Thanks POF!
it’s limited to whatever your annual IRA contribution is,since a back door Roth is simply a normal non exempt contribution followed by a conversation to the Roth.
so if your annual contribute limit is $5500/ year, then that is also your backdoor Roth limit.
Dear PoF,
I heard you can do Backdoor Roth conversions for the previous tax year. I opened up traditional IRAs for my wife and me along with Roth IRAs for us this year 2018 and made contributions for 2017. I did my Roth conversion and I just finished my wife’s conversion on tax day 2018. For form 8606, on line 4 do the contributions I made need to be $5500 for each of us or can they be considered $0? Did I screw up? Thanks!
So what do I do if when I converted the whole account, I received a $0.25 dividend and thus the deposit was $6,000.25, thus putting me over the allowed amount? Thanks!
Just convert it all. No tax as it rounds down to zero.
I’m in a similar situation. I put $6,000 into the Traditional, and it sat long enough there to make $20.00 in interest. Since the $6k has already been taxed, but I don’t believe the $20 has, should I only convert $6,000 to Roth? Or, can I convert the full $6,020? Thanks!
Im in the same situation with $20. following