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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 The Roth dollars, unlike tax-deferred dollars, will not be taxed when withdrawn.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 $14,000 most likely takes the place of a portion of your investments that would otherwise be invested in a taxable account.
As long as the money remains in a Roth account, it will grow without tax drag. Currently, my tax drag is nearly 0.6%, but with the right investments (index funds) and an ability to land in the 0% capital gains tax bracket in early retirement, tax drag can be quite close to zero.
Also, as a taxable account appreciates, you can end up with substantial unrealized gains, which may eventually force you into a higher tax bracket as you realize those gains to have spending money in retirement.
Clearly, Roth money is more valuable from a tax perspective than money in a taxable account. I see no reason not to take advantage of this opportunity, as long as it exists, unless you have IRA money that would subject to the pro rata rule, and no good rollover options (such as an employer’s or solo 401(k)).
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Have you taken advantage of the backdoor Roth? What’s holding you back? Don’t forget to view the Backdoor Roth FAQ!
687 thoughts on “Backdoor Roth IRA 2024: A Step by Step Guide with Vanguard”
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Another year, another Backdoor Roth IRA completed with your help. Thanks for keeping this guide up to date!
Hello , Thank you for the post and I did follow these steps for 2023. Need a help! Appreciate your reply!
I incurred 12$ 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.