Vanguard Backdoor Roth 2018: a Step by Step Guide

Set For Life

This year, I made my sixth pair of “Backdoor Roth” contributions with Vanguard. If you’ve heard of the Backdoor Roth, that’s great! You’ve been paying attention.

If not, I’ll give you a brief overview, and a number of links to additional articles with more complete descriptions of the history and important caveats.

This post has been updated with fresh screenshots from my 2018 contribution and conversion, which was completed on January 3, 2018. I like to contribute the first day it’s allowed to start the tax-free earnings as soon as possible, but you have until Tax Day in 2019 to make a 2018 Backdoor Roth contribution.

Vanguard is the company I use, and tends to be favored among many index fund investors, so that’s what you’ll see. The process should be similar with other brokerages, but the screens will be different.

 

Backdoor Roth 2018: 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 The Roth dollars, unlike tax deferred dollars, will not be taxed when withdrawn.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 tax-deductible IRA. A modified adjusted gross income (MAGI) of $199,000 for a couple filing jointly, or $135,000 for an individual makes you ineligible to contribute to a Roth IRA in 2018. Many physicians are thus excluded from making either deductible IRA contributions or direct Roth IRA contributions.

Now, that doesn’t mean you can’t get any money into a Roth account. 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 contributions if you’re in the 28% or higher tax bracket.

Another important distinction is that a high-income does not 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 a traditional tax deferred IRA contribution are even lower than the Roth contribution limits. If you participate in a workplace retirement plan, you won’t be eligible to contribute as an individual earning more than $73,000 or as a couple earning more than $121,000 in 2018.

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 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.

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.

If the balances 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.

Here’s how I make my backdoor Roth conversion with Vanguard.

 

Step 1: Make a non-deductible IRA contribution.

 

If you haven’t done so already, you’ll need to open a Traditional IRA. I won’t walk through all the steps, but it should be straightforward. You’ll start by selecting “Open an account” from the top of the page, leading you to a page that looks like this.

 

Since I opened mine years ago, I start by making a contribution to my existing IRA, an account that Vanguard thankfully leaves open, even when the balance is zero.

Open your Traditional IRA account, select “Buy and sell” then “Buy Vanguard Funds”

Backdoor Roth 2018 _01

 

Next, you’ll tell Vanguard where the money is going (and where it’s coming from such as your checking account or a money market). I invest my non-deductible IRA contribution in the Prime Money Market Fund so day-to-day volatility is a non-issue.

 

 

I’ve selected Traditional IRA, and entered $5,500. If I were age 50 or older, I could contribute $6,500. You’ll be asked to consent to the investment you’re making.

 

Backdoor Roth 2018 _03

 

Next, you’ll have a chance to review and submit. Look over everything to be sure everything looks right.

 

Backdoor Roth 2018 _04

Everything looks good. Click Submit and Vanguard will politely thank you.

 

Backdoor Roth 2018 _05

 

You should also receive an e-mail confirmation.

 

Backdoor Roth 2018 _07

 

Step 1.5: Wait?

 

There is a thing called the “step transaction doctrine” that has some people believing it’s best to do nothing for anywhere from one statement cycle (a month) to a full year. Most people move on to step 2 without much of a waiting period, and I’m not aware of anyone having issues with the IRS after doing so. For more on the subject, see this article from Ann Marsh or this recent thread at Bogleheads.

[Update: Congress has officially blessed the steps of the backdoor Roth as allowed under current law in 2018. See forum thread and links in the White Coat Investor Forum.]

 

 

Step 2: Convert to Roth

 

I move on to Step 2 the next day. If you’re presented with a page like this, you won’t find the right option.

 

Backdoor Roth2018 _15

Navigate “My Accounts” “Balances and holdings”

 

Backdoor Roth 2018_16

Scroll to your Traditional or Roth IRA (or open a Roth account if you don’t have one). Click on  “Retirement contributions and distributions.”

 

Backdoor Roth 2018 _08

 

On the next screen, be sure to select the correct tax year. Vanguard defaults to the previous year. If you’re making your 2018 Backdoor Roth contribution, be sure to select Tax Year 2018.

 

Note: if you’ve never done the Backdoor Roth, and you’re financially able, now is a great time to make one contribution for 2017 and another for 2018. If you’ve got an eligible spouse (and by eligible I’m referring to backdoor Roth eligibility), the two of you can sneak $22,000 into Roth accounts this year as long as you complete the 2017 contribution by mid-April, 2018.

 

Backdoor Roth 2018_ 09

 

Look for the dropdown menu in the lower right labeled “I want to…” and select Convert to a Roth IRA.

 

Backdoor Roth2018 _10

 

 

Next, we tell Vanguard where the money is coming from (Traditional IRA) and where it’s going (Roth IRA). I chose the Emerging Markets fund since that is a little underweight based on my desired allocation.

 

Backdoor Roth 2018 _11

 

You’ll be warned that a conversion is a taxable event. This is false because the initial IRA contribution was a non-deductible contribution. This can safely be ignored.

New this year is a warning that the contribution cannot be reversed. Tax Reform has eliminated the ability to undo Roth conversions.

 

Backdoor Roth 2018_ 12

 

Since it’s not actually a taxable event, do not withhold any federal income tax.

 

Backdoor Roth 2018 _13

 

Click “CONTINUE” one last time and you’re done! A polite note from Vanguard appears.

 

Backdoor Roth2018 _14

 

 

 

Step 2.5: Repeat for Spouse (if you’ve got one)

 

Step 3: Fill out Form 8606 in your 1040

 

The IRS has instructions here and the form here. I see no need to repeat them. The Finance Buff tells us it what it should look like in this post, which includes instructions for TurboTax, H&R Block, and Taxact.

 


You’re still not using Personal Capital? That’s how I track the PoF portfolio.


 

Additional Resources

 

If you have additional questions, you may find answers in the following posts.

 

Looking for additional investment opportunities now that you’re maxing out your tax-advantaged space? Look to my Crowdfunded Real Estate Resource Guide.

Earn a $100 bonus with your first investment using promo code Partner100

 

Is the Backdoor Roth Worth the Hassle?

 

I would say “Yes.” If you’re considering the backdoor Roth, the $5,500 or $11,000 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. [Update: According to this Forbes article, Congress has officially sanctioned the Backdoor Roth steps as perfectly legal and legitimate, regardless of the taxpayer’s income.

 

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234 comments

  • Great guide, PoF!

    I will definitely be using this when I make my Backdoor Roth contribution for 2017. Now to just save that $5,500 first…

    • Jenny

      HI, Great step by step guide! We have about 250k in the bank doing nothing but collecting dust. We are considering doing this back door conversion through vanguard. Is there a limit you can convert per year? Do you recommend doing a little each year, how much? Husband’s income has been over 200k last 3 years, I don’t work outside house. And lastly, do we pay taxes on overall income as the amount converted will be added to income? Thanks POF!

      • ikomrad

        it’s limited to whatever your annual IRA contribution is,since a back door Roth is simply a normal non exempt contribution followed by a conversation to the Roth.

        so if your annual contribute limit is $5500/ year, then that is also your backdoor Roth limit.

        • Kpak125

          Dear PoF,
          I heard you can do Backdoor Roth conversions for the previous tax year. I opened up traditional IRAs for my wife and me along with Roth IRAs for us this year 2018 and made contributions for 2017. I did my Roth conversion and I just finished my wife’s conversion on tax day 2018. For form 8606, on line 4 do the contributions I made need to be $5500 for each of us or can they be considered $0? Did I screw up? Thanks!

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  • Nicely done , PoF! This is a great step-by-step guide for any first-time backdoor-er. Also, strong work on the asset location, putting the tax-inefficient (REIT) and high-volatility asset classes (EM, mid-cap, small-cap) in the Roth.

    • Thanks, WaSP.

      And yes, I did my homework before deciding what to keep there. I learned from my somewhat haphazard ways when I was a beginning investor.

      Best,
      -PoF

      • Personal Finance Newbie

        I couldn’t find the place to start a new comment, so I clicked “reply” instead. Last year, I waited too long to convert from traditional to roth IRA, so the $5500 grew to $5502, and I then converted $5500 to roth. This year, I added $5498 to my traditional IRA so the total is $5500. If I convert to Roth now, which portion will I get taxed on? Just the $2? or the entire $5500? Thanks in advance! and Thank you PoF for writing this guide, it’s exactly what I was looking for last year

        • It would be just the $2. I use the money market account for the non-deductible contribution, which isn’t subject to the volatility of many mutual funds.

          Best,
          -PoF

          • Amy Olin

            Hey PoF. After messing up 2016 back door, I figured it out and did it right for 2017 last year. On Jan 2 I put $5500 into my traditional IRA to convert today. I absentmindedly ignored the 54 cent balance in the traditional (suppose I should have put $5499.46 in). So, now I’ve got $5500.54 in the traditional. What do I do about that extra 54 cents? Is it going to screw things up for me? Can I just leave it there and not worry about it? Please tell me I don’t have to roll that 54 cents over into my 401k to avoid the pro rata rule.

    • A.W.

      Agreed except that it IS a taxable event for any earnings incurred on the Traditional IRA before converting. It is incorrect to claim Vanguards statement stating that it is a taxable event is incorrect. Yes, given the approach laid out above where monies are placed in a money market settlement fund and converted on the next day, there will be no taxes incurred. However, if monies are invested in mutual funds or otherwise and achieve earnings before the conversion occurs (for those who don’t do the conversion promptly), they WILL be liable for taxes on those earnings.

  • That was a great explanation of the entire process. I know the back-door Roth conversion gets tossed around quite a bit in this FIRE realm and I’m not sure how many readers truly understand it or understand how to do it. A post well done. And congrats on your successes with the conversion!

    Mrs. Mad Money Monster

  • I made one way back when they first came out. During the dark days of the market crash I converted a defined contribution pension over to a Roth IRA using a simple call to fidelity. Down markets are a great time to roll if there are tax ramifications.

  • Nice summary PoF. If you’re a high-income earner and already maxing out a 401k or other tax deferred plan through an employer, a backdoor roth is a good way to get more tax free growth. For me, I have a lot of tax deferred dollars from old 401k plans rolled into an IRA. So I would have to roll it into my company 401k plan. The problem with that is the plan only offers high cost funds (all over 1%). Not a huge deal though, as my focus now after maxing out my 401k is building an after-tax portfolio to access in early retirement.

    • Not all hope is lost, GoFiY.

      Earn a few dollars from your site or mowing lawns or whatever, and open a Solo 401(k) at eTrade or any vendor that allows IRA rollovers.

      Cheers!
      -PoF

      • This is exactly what I need to do. I have about $100K sitting in a private IRA, so before I can implement this strategy I need to open up that solo-401K for my blog and then roll it all over.

        Thanks for the step by step guide.

      • George

        PoF,

        How long do you need to wait after rolling a private IRA into a solo-401K or a company 401K before you can use the back door Roth strategy?

        For instance, if I roll my private IRA into a company 401K today 1/11/2018, will I be able to star the back door roth strategy once that roll over is done…guessing around 1/18/2018? Or because I had a private IRA for the calendar year of 2017, I am not eligible for a back door Roth?

        Can you please elaborate on this edge case?

        Thank you,
        George

        • If you had an IRA with tax-deferred money in it on 12/31/17, you cannot do the Backdoor Roth for 2017 without being subject to tax due to the pro rata rule.

          You can, however, make a contribution for 2018 as long as the IRA is cleared out by the end of the year.

          Best,
          -PoF

          • George

            Thank you PoF!! I wish I read this article before the end of last year

              • Sara Lupina

                Hi PoF! Following the chain above – I also had a simple IRA during all of 2017 that I just (today) rolled over into my 401k.

                Here is the added kicker, in case you happen to know this – I accidentally over-contributed to my Roth IRA for 2017 based on income. Now I am wondering if I can recharacterize that as a Traditional IRA contribution and then follow the back door steps to get it into the Roth IRA.

                Meaning, once I recharacterize my 2017 Roth IRA contribution to a 2017 Traditional IRA contribution, can I roll that over into my Roth IRA as a 2018 roth contribution (now that I have closed my Simple IRA)?

                Hopefully that makes sense. I just found your site and this is the most clear-cut article I have found on this matter, so thank you!

          • Niskayuna-Investor

            Hi PoF,

            The following article discusses the strategy of “isolating the IRA basis”

            http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/isolating-ira-basis/

            Basically, if an individual has an IRA with mixed assets (pre and after-tax assets), the pre-tax assets can be rolled over to a 401k or Solo 401k leaving the after-tax assets in the IRA for the Roth conversion.

            From what I read, it looks like the pro-rata rule will not be applicable under this Roth conversion scenario i.e., IRS will not check the balance of the IRA by 12/31 of prior years when these after-tax (non-deductible) contributions were made. Is my interpretation correct?

            Thank you!

            • Niskayuna-Investor

              Another good article on the same topic; it clearly states that it works!

              https://keenpocock.com/isolating-ira-basis-for-tax-free-distributions-and-roth-conversions/

              Any recommendations for a good provider for a solo 401K? I have not done it before;I found some good reviews about Etrade. Your thoughts will be much appreciated.

              Thank you; this is a great forum!

              • I agree with your assessment.

                I think it’s generally a good idea to keep pre-tax and post-tax assets in different accounts. I’d hate to inadvertently pay tax twice on the same dollars, which could happen if the fact that some of the contributions were post-tax is lost at some point.

                Cheers!
                -PoF

              • I am with E-Trade. Most reviews or threads I’ve read suggest E-Trade or Fidelity.

                Many others are lacking features, some of which may be important, like accepting rollovers, allowing for Roth contributions or conversions, etc… Vanguard’s doesn’t even let you own admiral funds, which is bizarre.

                Best,
                -PoF

              • Niskayuna-Investor

                Great; thank you!

                What happened is I contributed to the spousal IRA but after tax filing the contributions were classified as non-deductible because of income limits per the IRS code. Consequently, we ended up with an IRA with mixed pre and after-tax assets.

                With this strategy, the basis in the IRA can be isolated which will pave the road for Roth conversion.

                I am still trying to figure out what tax forms are needed and how they should be prepared to implement the strategy without any complications!

      • WantToRetireSomeday

        I contributed to a Traditional IRA in 2016, 2017 and 2018. I had a tax deferred IRA (a roll-over from prior 401ks) that I moved to my current company’s 401k in January 2018; this is now completed. When can I convert my traditional IRA to a Roth IRA? Can I do it in this calendar year or do I need to wait until 2019?

        • You can convert a traditional IRA any time. If the contributions were tax-deferred, you’ll owe tax on the conversion (at your marginal tax rate in the year you convert) no matter when you make the Roth conversion.

          If the three traditional IRA contributions were non-deductible contributions, you can convert now as long as you don’t have any tax-deferred money in an IRA on 12/31/18. If you do, the conversion will be taxed in accordance with the pro rata rule.

          Best,
          -PoF

          • WantToRetireSomeday

            Thanks so much for the reply. I will not have any tax-deferred money in an IRA going forward. I did still have it on 12/31/2017 (moved to the 401k this January), so I just wanted to make sure that that wouldn’t matter if I now convert my traditional IRAs.

            Thanks again.

  • Thank you good sir – have been reading more about this since your post a few weeks back.

    Mistake noted! Happy to learn from yours

  • I made my first Mega Back Door Roth conversion in 2015, and love the creative way of building “tax diversification” into retirement funds even if we’re over the income limits!

    Great post, will definately be sharing with some of my friends who I’ve explained the concept to (Thank You, you just did the work with an excellent explanation, saves me having to write a post on the same topic….I’ll just share yours!).

    • Thank you, Fritz.

      I was actually listening to your recent podcast interview as I was doing this, inadvertently neglecting to notice the 2016 tax year.

      So I have you to blame for that one, as far as I’m concerned. 🙂

      Cheers!
      -PoF

  • Nice. I keep my Roth in an E-Trade and Fidelity. Just happened to have legacy accounts prior to discovering Vanguard.

    I believe that there have been multiple finance forums online where some naysayers fear impending elimination of the Roth IRA benefits, but I figure that it would be difficult to reverse any rules for people who already have funds in existing Roths.

    What are your thoughts about using Roth 401k’s? Those might not apply for me (employer doesn’t offer them), but I have heard that some people with large amounts of 401k space who might end up with too much retirement start funding the Roth 401k instead.

    • Hey Smart Money MD. I have a Roth 401k option with my partnership but have decided not to fund it at this point. With my wife’s income, we’re currently in the top tax bracket, so I figure anything I can do to lower our taxable income is the higher priority. If I end up working part-time and our combined income falls enough, I might start funneling contributions to the Roth 401k side. But for now I think we’re better off with the up-front tax break.

      • Agreed. If you are in the higher(ish) tax brackets, it would make sense to lower your taxable income as much as possible. Interestingly, I have colleagues who believe that tax bracket rates will go even higher in the future so they opt to fund their Roth 401k and WL accounts more.

        I’d say that if you truly think that you’d be in a higher income tax bracket at retirement no matter what laws change, you’ve probably done quite well for yourself already.

        • ikomrad

          I’m with you on using tax deductible investments if you are in a high tax bracket, but even then a Roth account isn’t a bad place for an emergency fund.

          it’s been a while since my savings were so low that every unexpected expense was an emergency, but not so far in the past that I don’t feel the need to have an emergency fund. As a mental compromise, I’m slowly moving my emergency fund from a savings account into a Roth account.

          The back door method just became necessary this year , and I’m glad that I found your instructions on how to go about it!

    • Right — it only makes sense to do Roth instead of tax-deferred contributions if, and only if, you anticipate being in a higher tax bracket as a retiree.

      That seems unlikely for most physicians, and almost certainly untrue for an early retiree.

      The backdoor Roth doesn’t take the place of any tax deferred money. It’s an alternative to a portion of your taxable investing.

      Best,
      -PoF

  • I’ve heard of backdoor Roths but never understood the mechanisms of them, so I thank you, sir!

  • I love the Finance Buff’s step by step process to reporting the IRA conversion. I have used it 3 years in a row. I was actually doing my taxes last night (still pending some 1099-M forms) and went through the IRA conversion. It feels good to see the refund stay level despite placing these amounts in.

    Regarding the money market account for the traditional IRA- great idea. I have not done this and some years by the time I have moved monies I am either $20 lower or higher than when I first placed the $5500. I have yet to do my 2017 contributions but now know what to do!

    -EJ

  • Bah! Just yesterday I collected Vanguard screenshots as I did my backdoor Roth for 2016 to write exactly this article . I mean it is a good article and all but I groaned when I saw it appear in my inbox this morning.

    One question that occurred to me yesterday was: I do a mega backdoor Roth for Mr. BITA because his 401k plan allows for it (mine does not) and regular old backdoors for me. Is there a reason that I can’t also do a regular backdoor Roth for Mr. BITA? I think not, and that would mean and extra $5500 a year in Roth space.

    • Mine doesn’t allow it, at least that’s what the last rep said. Of course, he had never heard of it, either, so I had to break it down for him.

      We have a new rep — it might be worth asking again.

      Anyway, the two should not interfere at all. They are mutually exclusive, so to speak.

      Go ahead and write that post, and shoot me a link when you’re done. Yours probably has zero screw-ups!

      Best,
      -PoF

  • Thanks for this step-by-step guide! I’ve heard about the backdoor roth from Mad Fientist in the past, but always seemed to go over my head a bit. This explains it a little more and clarifies some things. I also kept hearing of the mega backdoor roth, but not sure it applies to us.

    So far we’ve already maxed out the 2016 & 2017 Traditional IRAs so maybe we’ll have to look at this in the future. I’ve also heard in the long run the calculation for traditional vs. roth is exactly the same in the end? Our plan is when we retire to do the roth ira laddering.

    • You’re very welcome.

      I would disagree with the assertion that the Roth v. traditional is the same in the end. If you’re in a lower marginal tax bracket in retirement compared to your working years, traditional, tax-deductible contributions will win out. If you’re in a lower bracket while working compared to retirement, making Roth contributions makes more sense.

      Your traditional IRAs will prevent you from making a backdoor Roth contribution, unless you roll them over into a 401(k).

      Best,
      -PoF

      • HospitalDoc

        Pof,
        Why not convert the Traditional IRA instead of rolling it over to 401k?
        Thanks!
        -HD

        “Your traditional IRAs will prevent you from making a backdoor Roth contribution, unless you roll them over into a 401(k).”

        • If you do so, you’ll be paying taxes on the conversion at your marginal tax rate. For a physician, this is generally unwise, particularly if you plan to retire before accumulating many millions in the 401(k), as your tax bracket when you take money out of the tax deferred accounts will likely be lower.

          Best,
          -PoF

  • Nicely explained process, but I have a question outside of the mechanics of doing that. We built up a lot of cash last year and are looking to dump it somewhere soon. So, if I set up an account, made 2016 and 2017 contributions, then that would cover $11k of it. Here’s where I get tied up with the “why”.

    So, if we already paid taxes on it at our higher tax rate, the bonus of putting it into an IRA and then coverting it is what? That we don’t pay taxes on the growth of that account later on? Sorry to be so dense, I’ve just always gotten hung up on that aspect of it and never had it explained to me. I think you did it sort of in your last paragraph, but before I try to make both of those contributions, I wanted to make sure I understand the “why”.

    Thanks and again, nice article pointing out the mechanics behind it. Timely for us indeed!

    • Yup. You either pay taxes on it now or later. Roth IRA allows you to diversify your investment buckets.

    • Yes. I would describe the advantage as three-fold.

      One, you get tax-free growth (no taxes on dividends throughout the year).

      Two, you’re not locked in to a particular investment. You can trade as much or as little as you like in the Roth account without tax consequences. I’d argue for very little trading, but there can be good reasons to change asset classes.

      Three, you will pay no capital gains taxes when you sell to spend that money, which could be decades later.

      Now, you could have a taxable account that acts a lot like a Roth if you buy a zero-dividend fund /stock (Berkshire Hathaway), remain in the 15% federal tax bracket (no tax on QD & LTCG) and remain in the 15% bracket when you sell.

      Best,
      -PoF

  • Thanks for another great article. I do my Roth IRA at Vanguard too, but my screen shots and steps are different. I’ll have to take a deeper look and see why – but I literally just click a “convert to Roth IRA” button after funding the TIRA.

  • Exactly the reason that I didn’t roll my 401(k) into an IRA was because I wanted to keep the IRA space open in order to give myself the flexibility to do a backdoor Roth since we anticipate our household to earn above the income limit for contributing to a Roth (turns out dentists do pretty well – lawyers…eh).

    The step transaction thing is what’s always slightly concerned me. I once tried to ask a lawyer friend of mine who does tax law about it and he had no idea.

    Being able to roll an IRA into a 401(k) is something I only recently learned was even possible. I was always under the impression that if you had an IRA with money in it, you basically were screwed unless you wanted to take the tax hit and convert it to a Roth.

    And +1 for the solo 401k. It’s exactly why I’m using it for my side hustle income.

  • Thanks for sharing! I was so paranoid about making a mistake the first time I did my Backdoor Roth that I must have cancelled my transaction multiple times. I also find The Finance Buff’s TurboTax tutorial to be quite helpful because apparently I can never remember how to do it correctly.

    • I haven’t done my own taxes yet — maybe someday. I do like to have a CPA to bounce ideas off.

      Cheers!
      -PoF

      • hatton1

        Ha! I thought I was the only one not doing my own taxes. I alas cannot do a backdoor Roth because of a large SEP-IRA. I guess I could start another business open a solo-K at Fidelity and then roll both IRAs into it and then close the business and retransfer the money back to Vanguard or…..just be lazy. I am diversifying with small roth conversions. Cheers.

  • Great step by step guide. I’ll be taking advantage of this for the first time this year 🙂

  • A heads up to your readers-
    Most readers of your site are probably more knowledgeable about finances than their accountants. We do our own taxes now (usually with Turbo Tax) for this reason, as when we tried to use a CPA she was not familiar with a backdoor Roth and we had to file an amended return to add form 8606.

  • complete_newbie

    Question: I was reading somewhere but you CAN take money out of Roth any time without penalty correct? Just can’t take the dividends/capital gains (that has 10% penalty)

    Please let me know. Thank you.

    • Indeed. You can take out your Contributions any time without penalty.

      http://www.rothira.com/roth-ira-withdrawal-rules

      Cheers!
      -PoF

      • complete_newbie

        So got a REALLY dumb question

        Lets say I have 50,000 401K. Can I roll all of that into a traditional IRA and then put ALL 50K into a roth IRA? (backdoor?) Basically, is there a limit on how much per year I can do back door IRA?

        And I have heard about “Mega” back door roth – what is that then?

        Confused!

        • The Backdoor Roth relies on a NON-deductible IRA contribution. The $50K traditional IRA was tax-deductible (and tax deferred), so you would owe taxes at your marginal rate on the converted amount of $50k. You can do it, and it would be wise to do in residency when it’s cheaper to do so, but not so wise as an attending.

          That being said, I did convert a large SEP-IRA and paid a six-figure tax bill to do so back when it looked like the ability to convert regardless of income level was going to be short-lived.

          Mega Back Door Roth is done within a retirement plan. If your plan (401(k) or similar) allows non-deductible contributions and in-plan Roth conversions, you can do the Mega. Mine does not.

          And there are no dumb questions. Only dumb people. 😉 I kid, I kid.

          Best,
          -POF

  • Nice job.
    These are exactly the steps I take each January (although I have done it all over the phone in prior years). It seems routine to me now but I’m sure this will be helpful to people who haven’t done it before.

  • JLL

    My husband and I both have rollover IRA’s containing funds from our 401k’s at previous employers. We also both have traditional IRA accounts that we have been contributing the max to over the last several years. The total for all of these IRA’s is around $440K. I understand that if we wanted to do a backdoor Roth, all of the money would have to be emptied from the current IRAs. What sort of accounts could we move the IRA money to in order to prepare for a backdoor Roth?

    • If you have a current employer’s 401(k) that accepts rollovers, you can roll it over into there.

      If not, you could start a solo 401(k) based on a tiny amount of income earned as an independent contractor. It could be lawn mowing, “consulting,” or filling out online surveys for cash.

      I just opened an ETrade individual 401(k). Here’s a thread on several options and pros and cons.

      • JLL

        Thanks! My group is terminating our hospital employee contracts and moving back to being a physician owned group so we will have a change in our employer offered retirement options in July. I will check out the thread on an individual 401k but probably wait to make any final decisions until I see what my new employer options will be. Appreciate all the info!

  • NewRad

    This is my first attending year, and I have contributed/converted for both 2016, and now 2017.

    My wife does not work. I would like to make a spousal IRA for her. Our MAGI will probably be around $190k for this year. She has an old account rolled into a traditional IRA worth $15k. Do I directly make and contribute to a Roth for her, and not have to worry about the traditional IRA. Or do I have to do the same backdoor method and thus either convert or trigger pro rata?

    Also, I wasn’t able to find if there was a MAGI limit for spousal IRA.

    Thanks in advance!

    • If you can get your MAGI below $186k, then you should be able to contribute directly into a Roth IRA without a backdoor. Otherwise, you will trigger pro rata if there has been any growth inside her Traditional IRA.

  • Drsan1

    Thank you for this. With your post with the screen shots and the post from finance buff with Turbotax screen shots I was able to do it successfully. Thanks again!

  • HospitalDoc

    PoF,
    Are you not worried about the step transaction?
    They are recommending to wait a year before doing the next step.
    Thanks!

  • My wife does not currently earn an income. Can we still both make $5500 non-deductible contributions (total of $11,000) to new traditional IRA’s and then both convert to Roth IRA’s?

    • I ran into that too. The IRA account showed the balance ( $5500 ) but it wasnt’ available for any activities . It had a special status that I should have noted the name of. eventually the funds became available and I was able to complete the “convert to Roth IRA” transaction.

      It was a new IRA acccount create just for the conversion, so that may have had something to do with the delay. Perhaps when I reuse the account next year, the process will go more smoothly.

  • Dean Collins

    Only comment is…..if you fund your initial IRA payment via a bank account Vanguard makes you wait 7 days before making the cash available from your IRA being able to be converted into a ROTH IRA if doing it online.

    Do the online steps and on the last page it will say cannot be completed call 800 XXX XXXX and then tell them you are trying to do a backdoor roth conversion and they’ll be able to manually over ride the system no probs.

  • Casey

    FYI, there is now a Vanguard Federal Money Market Fund (VMFXX) available that has a slightly lower ER than the Vanguard Prime Money Market Fund, but also slightly lower yield. I’m not sure if there are any other major differences as far as this topic is concerned; hopefully it doesn’t matter (I chose to use the Federal Money Market Fund as I wanted to minimize earnings prior to the conversion).

    • I see. I only leave the money in there for a day, and pennies are ignored. If you are worried about the step doctrine, and choose to let the non-deductible contribution sit for awhile, you might as well use the lower cost / lower yield fund.

      Thanks for the heads up!
      -PoF

  • vt

    Great read. I am in the process of rolling over an old 401k and 403b from residency into a rollover IRA with vanguard. Less than 23k in total. Am I allowed to open up a new traditional non deductible IRA and convert to Roth while leaving the rollover IRA intact? Your post stated that one is not allowed to have both an IRA and open a new IRA and convert to Roth. Thanks!

    • Sorry, vt. You can do it, but you’ll pay tax on the Roth conversion due to the pro-rata rule. If you can roll that IRA money over again into a 401(k) (individual or employer), you will be eligible to do the Backdoor Roth without any concerns with the pro rata rule.

      Best,
      -PoF

      • vt

        Thanks so much for the prompt response! What would I pay tax on specifically? The 5,500 that I convert from a new non-deductable IRA to a ROTH IRA? Isn’t the money post-tax?

        I would keep the rollover IRA (deductable) where it is without touching it.

        Spoke to an accountant and he said the roll-over IRA has nothing to do with a ROTH conversion from a new deductable IRA that I’d fund with post-tax money this year. Should I be getting a new accountant? =P

        • Marketwatch explains it here, but I can also illustrate.

          Let’s say you have $100,000 in the rollover IRA. You then make a $5,500 non-deductible contribution to a traditional IRA with the intention of converting it to Roth tax-free.

          The IRS considers your IRA money in aggregate. When you make the conversion of $5,500 to Roth, and ~95% of your IRA money is tax-deferred, you will owe income tax on ~95% of the conversion.

          Money in a 401(k) is not considered in aggregate, which is why many high-income earners choose to “shelter” IRA money in one.

          Up to you on the accountant, but I’m just a doctor and I understand the pro-rata rule pretty well.

          Cheers!
          -PoF

  • vt

    Thanks. Yes, he’s a CPA.

    Can I ask another question? I opened up a solo 401K with vanguard. Then realized that Vanguard does not accept roll-overs from employer based 401K an 403b plans. This is why I was thinking of rolling over into an roll-over IRA. At the same time, I was hoping to do a ROTH conversion but it does not seem possible.

    Can I do the following: open up another solo 401K plan with another brokerage firm that allows rollovers from employer based 401K and 403B. Roll over those accounts into the new solo 401K. Then roll over the solo 401K into my current vanguard solo 401k since they accept rollovers from other solo 401K accounts?

    This will allow me to open up an IRA and do a roth conversion with no issues.

    • I would think so. E-trade seems to be the most flexible, and that’s who I went with. Fidelity is another popular option. Vanguard is less popular for the lack of flexibility and the unavailability of Admiral Funds. I assume you have some 1099 / independent contracting income and a tax ID number in order to open the solo 401(k).

      Be sure to doublecheck the rules and also talk to a rep to be sure you’ll be able to do what you intend. You may not want to transfer to Vanguard once you’re aware of your options with a different individual 401(k) provider.

  • Martin

    Yay!!! I love the step by step with pictures. I just did my first one.

  • KC

    I’m predicting my MAGI to be right around the $118,000 income limit for a single filer. I won’t know until the end of the year if I need to do back door roth or front door. Would you recommend opening both a traditional IRA and roth IRA now? Are there any additional fees for having a traditional IRA account open in case I am over the limit one of these years?

  • Justin

    POF,

    I haven’t seen this question being asked, so here goes.

    With my old employer, I previously qualified for and contributed to a Roth 401k. When I left the company, I rolled over all Roth money into a Roth IRA, and all employer contributions into a traditional IRA (approx. $6k). These employer contributions are the only funds held in my traditional IRA.

    I no longer qualify for a Roth IRA or a deductible IRA and so have to go the backdoor route. What do I have to do with the employer contributions being held in my traditional IRA before starting the process of a Backdoor Roth? My understanding is this money is non-deductible so I just need to treat it as my backdoor Roth for this year and convert $5,500 of it this year, and the balance next year toward my backdoor Roth contributions. Once all of the $6k is converted, I can start making up the balance toward my $5,500/year max.

    Thanks!

    • I’m fairly certain the $6k that came from employer contributions is pre-tax, a.k.a traditional and not “non-deductible.” You may not have gotten the tax deduction when it was credited to your account, but I’ll bet your employer did.

      In that case, your options are to roll it over into a current employer’s 401(k), your own solo / individual 401(k) or bite the bullet and pay the tax at your marginal tax rate on a Roth conversion. The first two options are cheaper if available to you.

      Cheers!
      -PoF

      • Justin

        PoF,

        One follow up question – I am going to rollover my traditional IRA into my 401k to clear the way to do Backdoor Roths going forward. I can either start that process now and run the risk of the rollover straddling 2017/2018, or just wait until January to do the rollover. I suspect straddling tax years on the rollover would mess with my taxes, so, assuming that is the case, is there any harm in rolling over my IRA into 401k in the same tax year as I do a Backdoor Roth? I would think not, but wanted to get your thoughts.

        Thanks much. Please keep up this phenomenal site!

        • I would initiate the rollover as soon as possible.

          As Johanna tells us a few comments down the page, 12/31 is the only day that matters. You cannot have any money in the traditional IRA on that date if you want to do a backdoor Roth for 2016. Note that you’ll have until Tax Day in April to actually make the non-deductible contribution and conversion.

          Since rolling the IRA over is a non-taxable event, I wouldn’t be concerned about straddling year messing with taxes. But if it doesn’t get done by the end of 2017, you’d be subject to the pro-rata rule.

          Best,
          -PoF

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  • Nicole

    PoF,

    Great thread. I have been wondering about doing a backdoor Roth for a few months and your post is great!

    I am likely over thinking this but here go my questions…

    My traditional IRA has money I have rolled over from previous employers 401k and money I have contributed myself over the past several years. I am now looking into doing a backdoor conversion as I have a 403b I max out at work and also make too much to get a tax break on the traditional IRA contributions.

    Since I do not get a tax break on these contributions now I am correct in assuming I am getting a deal by doing a backdoor even if I am in a lower tax bracket in retirement? Because to me it seem you are getting double taxed on this money…ie on the way in it is post tax and on the way out it is taxed.

    Also, Do I need to rollover all the money from the traditional IRA into my current employers 403b in order to avoid the pro-rata rule or do I need to figure out the sum that was originally tax deductible?

    Thanks
    Nicole

    • If you have any money in a traditional IRA in your name (which you do), the backdoor Roth won’t work because you’ll be taxed on a portion of the conversion due to the pro-rata rule. If your 403(b) allows rollovers, that would be a great way to “hide” that money so you can take full advantage of the backdoor Roth option.

      Roth money is not taxed when you withdraw it, but it is post-tax money to begin with. The advantage over a taxable account is that the growth is not taxed along the way (dividends) or when you sell (capital gains). So it is definitely worth doing.

      Cheers!
      -PoF

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  • sindy

    Hi POF,
    I was wondering if i can open the second IRA account and use it just for doing the backdoor roth. Since i already have an IRA account with rollover money from the 401k plan , using this account for roth conversions would result in a hefty tax bill. what do you think

    • It won’t matter how many IRA accounts you have. If you have money in any of them, an attempt at the backdoor Roth will trigger the pro-Rata rule and you’ll be subject to income tax on the conversion.

      The best plan is to rollover IRA money into an employer’s 401(k) or an individual 401(k) if you can open one (i.e. if you have any self-employment income).

      Best,
      -PoF

  • DoctorMom

    As a single mom and self-employed physician, your website has opened up a new world for me. Luckily, after I divorced 9 years ago, a friend advised me to open up a Vanguard account. I felt that I was too passive in my participation so enlisted their Personal Adviser services for help a few months ago. Your website has sparked my interest in having a more active role in my investments. After reading about the backdoor Roth, you state that I cannot have a tax-deferred IRA in my name in order to do this. Question: whose name should it be in? I’m confused…

  • little tinder

    POF,

    In order to prepare myself for a backdoor roth conversion, I recently rolled over all my non-Roth IRA accounts to my current employer’s 401(K) to avoid the pro-rata rule, as well as contributed my annual non-deductible $5500 to a tIRA.

    I have 2 questions regarding this:
    1) Am I ready for the backdoor roth conversion? Are there any tax/pro-rata rule implications regarding the timing of my conversion of non-Roth IRA to my employer’s 401(K) and doing the actual backdoor conversion?

    2) What happens if I decide to leave my current employer in the near future and convert my 401k to a Vanguard Rollover IRA? Are there any tax consequences that can be applied retroactively to my previous backdoor roth conversions?

    • Great questions for a CPA experienced in this arena. Paging Johanna Fox.

      • Hi, little tinder,
        To answer your questions:
        1. Yes, you can convert to your backdoor Roth now. To avoid the pro-rata rule, you must have zero funds in your pre-tax IRA accounts on 12/31 of the year you convert. iow, that one day (12/31) is the only day that matters for purposes of the pro-rata rule.
        2. No retroactive consequences. To avoid the pro-rata rule for future conversions, you will need to either roll the IRA into your new employer’s 401k/403b or convert it to a Roth by 12/31 of any year in which you do a conversion.

        Note that this rule does not prevent you from contributing to your nondeductible IRA – you can do this at any time and for as many years as you want w/o paying taxes. However, in the year that you decide to convert the balance of your n.d. IRA to a Roth, you will need to have zero in your pre-tax TIRA on 12/31 to avoid the pro-rata rule. You will also pay taxes on any growth in the n.d. TIRA at conversion.

        This post may help: Explaining Backdoor Roth IRAs at http://bit.ly/2nsfJJ0

  • Ming

    POF,

    Thanks for the tutorial and I just did my first backdoor Roth IRA via vanguard as an attending physician this year with income jumping quite a bit since residency days.

    A quick question/confirmation: Since I converted my vanguard account to their brokerage account, it had me wait 7 days for funds to clear in the money market fund/tIRA before I was able to put it into my Roth IRA. In that time it looks like it earned $1.13 in interest. (Which just showed up today). From the link from WCI here: https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/

    It looks like I’ll need to report on my 8606 I’ll need to report $5501 on line 8/9/16, and $1 on line 18 and pay the few cents in taxes on that extra $1?

    Thanks

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  • Xrayvsn

    “The income limits for a traditional tax deferred IRA contribution are even lower than the Roth contribution limits. If you participate in a workplace retirement plan, you won’t be eligible to contribute as an individual earning more than $73,000 or as a couple earning more than $121,000 in 2018.”

    Just to clarify this statement. I do have a 401k through my workplace retirement plan which I max out. I have in addition also been putting $5500 into my traditional vanguard IRA (which I have been doing for several yrs) even though my salary has been averaging over $800k/yr during that time. Are you saying I actually am not allowed to put the $5500 in then? And if I am able to, will I be able to have a tax deduction because of it?

    On a separate note, why on earth does the government find in their infinite wisdom that Roth IRA’s should not be accessible by high-income individuals? You would think these individuals would be in the highest tax brackets and thus generate the highest revenue for the govt in the first place. And with backdoor known to everyone, just is a complicated step

    Thanks

    • Good question, and great income!

      I would guess you’ve been making non-deductible contributions, as you’re not allowed to take that deduction due to your salary being well over the limit, but you would want to doublecheck your 1040 for those years (or have a CPA do so). If that’s the case, you should be able to convert that to Roth without any tax due. The $5,500 limit is only on the annual contribution, but not the conversion.

      I have no idea why Roth is discouraged for high-income people. Many of us do have the option of making Roth 401(k) contributions, but I think for most, that would be unwise above the 24% marginal tax bracket.

      Best,
      -PoF

  • Jacq

    I make less than most doctors so I do a front door (regular) Roth. 🙂 This was my first year fully funding it this early in the year. I’m super excited! !! Wishing everyone a great 2018!

  • CA_MD

    Thanks for the great article. I contributed to my 401(a) and 403(b) accounts when I was resident. Now I have a TSP retirement account with my current employer. In this case for backdoor Roth, is a 401(a) treated as a 401(k)? I prefer not to roll over if I don’t have to. Thanks in advance.

  • financial beginner

    I have a basic question; what is the difference between a traditional IRA or a roth IRA
    I was on fidelity’s website and it quoted that I cannot open a roth IRA at my income level
    So why do the rollover

    • A modified adjusted gross income (MAGI) of $199,000 for a couple filing jointly, or $135,000 for an individual makes you ineligible to contribute to a Roth IRA in 2018. I’m guessing you’re over the limits.

      Traditional contributions to a retirement account are tax-deductible when you make the contribution to the account, and taxed when withdrawn.

      Roth contributions are not tax-deductible when you contribute, and are not taxed when withdrawn.

      Both have tax-free growth, unlike a taxable brokerage account where you pay capital gains taxes and taxes on dividends.

      This post on deciding which to use may be helpful.

      Best,
      -PoF

  • This is very practical and will help a lot of people.
    I have never waited more than a day or two before converting to ROTH. What are you planning to do? One of the links was behind a firewall and I’m not sure what the current IRS think on this is.

    • I don’t believe anything has changed regarding the Step Doctrine. It remains a theoretical possibility that the IRS could have a problem with it, but I’m not aware of anyone getting in trouble for it, and this is a well-known “loophole” being employed by hundreds of thousands if not millions of taxpayers annually. As you can see, I only wait a day.

      Best,
      -PoF

  • Renard

    Hey boss, if you have an old traditional IRA with pretax contributions you can also open a new separate traditional IRA solely for the purpose of making an after tax contribution then converting to a Roth. This, of course, assumes you are in a position to make after tax contributions and have maxed out all your pretax options. I’ve been doing it with Vanguard for the last few years and USAA prior to that. There is no limit to the number of IRA accounts you can have, just the funding limits.

    • Renard

      Scratch that…..after further research ….. all IRAs are treated as one. Ugh, I’m going to be doing a few 1040x filings this year.

  • Mark C.

    With the loss of re-characterization in the new tax law, I see little benefit to a Roth. A taxable account appears to make more sense, at least to middle or late stage investors. What do you do with a Roth account that goes down? With a taxable account you can tax loss harvest and deduct $3000 off your income (kinda like a mini-IRA). Also the step-up basis at death, capital gains rates (potentially zero) and gifting possibilities. No restrictions on where and what you can invest in. No pro-rata rules. Cap gains and dividends thrown off every year are really trivial and receive favorable cap gains treatment. Congress appears to love messing with Roths. Gift your cap gains to a DAF and get a deduction.

    • VagabondMD

      Mark, with the new tax law in effect, and the $24k standard deduction, it will be more difficult to benefit from the contributions the the DAF, unless you are donating ten’s of thousands of dollars or more, substantially more than most.

  • SG

    Is form 8606 still supposed to say 2016 on the top right hand corner? I cant seem to find one for 2017 or 2018.

    • VirginiaDoc

      yes, same issue – cannot find the form 8606 for 2017… following … do they wait until close to when taxes are due to publish the 2017 8606?

    • It’s listed as “current” on the website. I imagine you’ll either be able to use that one or a new one will be published shortly. I don’t think it’s changed much or at all really in the five years I’ve been using the “backdoor.”

      Best,
      -PoF

  • Very helpful information. In late December 2017, I did a Roth IRA conversion from my Rollover IRA. The process was straight forward. My both IRA accounts are with the same company. I just made a call, and on the phone they did the position transfer directly. I’ll do another conversion at the end of this year.

    My case is different from yours, as my money in the Rollover IRA is pre-tax. I’ll have to pay the income tax for the converted amount for 2017.

  • C.

    If you were going to donate to a DAF anyway, capital gains can be “gifted” to a charity and you get the full deduction. The DAF won’t increase your wealth. The new tax law doesn’t change much. I suspect most physicians are at the high end or over the 24k standard deduction anyway. By bunching deductions year over year and timely donations to your DAF, you can have the best of all worlds. For a new investor who can get long term compounding from the Roth (if Congress doesn’t mess with it over the next 20-30 years), a Roth might make sense. The rest of us won’t like the restrictions. Loss of re-characterization makes the Roth far less enticing. Index funds throw off minimal CG. You get to choose when you take long term cap gains. At retirement or low income/high deduction years, you could take out at 0% rate. Cap gains give you a lot of options. In the years between retirement and RMD’s, you can save a lot in taxes.

    • I topped mine off late in 2017.

      Without a mortgage, I suspect I’ll be about $14K shy with itemized deductions compared to the $24K standard deduction. So the first $14,000 in charitable giving would not benefit from the deduction. If you’ve got a decent sized mortgage, itemized deductions may approach or exceed the standard deduction.

      I’ve got about twice as much in a taxable account as I do Roth, so I don’t mind shifting as much from taxable to Roth as the government will allow. Another disadvantage to Roth as pointed out above is the inability to tax-loss harvest. I’ll take tax-free growth and no possibility of capital gains over the potential to TLH, though.

      Thank you for your comments,
      -PoF

  • ENT Doc

    When I set up my wife’s TIRA and funded it a few days ago it sent the money to a brokerage account for a TIRA. Menu bars are a bit different and didn’t see where to select the tax year. Advice? Going to probably call them tomorrow to make sure it gets attributed to the correct tax year. It’s in a money market now. Great step-by-step.

    • A phone call is a good idea. You can get to a similar screen by clicking on “Sell” or “Exchange” rather than “Retirement Contributions and Distributions” that doesn’t give you the option to select a tax year.

      I don’t know why different people see slightly different screens, but you’re not the first person to make that observation. Hope it all worked out!
      -PoF

  • fiberguyr1

    I just finished reading your post and The Finance Buff’s posts about backdoor Roth’s. I feel like I have screwed myself because I had initially had an auto deposit started last year for 3 months into my Roth, and then I discovered that I would be over the income limits. So I moved it all to a traditional IRA and stopped the auto bank deposits. Then in late December I added in the additional money to get to 5500 for the year, and then did the transfer back to my Roth (which completed in Jan 2018). We normally use Turbo Tax, and I just imagine what kind of conversation I’m going to have with my tax lady (the wife) when she sits down to do everything.

  • Tim

    I understand that I have until mid-April 2018 to fund and complete the backdoor transaction for 2017 — but do I have to complete it before filing my taxes? I normally file in early February but was going to wait until March or April to fund for 2017. It sounds like the answer is yes due to the tax form that needs to be filled out (other than filing a 1040X later on, which I don’ t want to do), but I just wanted to confirm.

    Thanks!

  • Carmelk6

    PoF, thank you. For the great post and informative replies. All very helpful.

    I understand not having money in any IRA account to perform the backdoor Roth. What if the current employer utilizes only sep-ira? I maximize this contribution every year and have looked into converting the all funds into a 401k for the sole purpose of doing a backdoor Roth, but my accountant and I are unclear how future sep-ira contributions (only employer option) would be viewed.

    What would the timing look like? Make the last annual sep-ira contribution in December and roll the entire years amount into a 401 then do a backdoor?

    Thank you, again!

  • JayCzzz

    Thanks for the tutorial POF. Couple questions, I have a SEP IRA for my independent contracting work. From what I read here, due to pro-rata rule, I cannot do the backdoor without rolling over to a solo-401k correct? So I’m out till then, but can my wife do the backdoor conversion? She has a 401k through work, but will the IRS look at my SEP to enforce the pro-rata rule on her?

  • This is a great example that I refer back to each year. One small nit is that you have to click “Contribute to IRA” not “Buy Vanguard funds”. I guess you can get to Contribute to IRA through clicking on Buy Vanguard funds but it adds a step. Thanks again!

  • stlpdx421

    Thanks! I followed these steps, however I just noticed that when I transferred my 5,500 from my traditional IRA into my Roth IRA account, the amount had somehow gone up by 2 dollars in the 40 hours it was sitting in the IRA account (even though I had it in a money market fund).

    So now I have 5,502 dollars in a money market fund in my Roth IRA — is this considered an over contribution now? How can I fix this to avoid any penalties or audit triggers? Thanks!

  • Riley

    I noticed while following these steps that after opening/contributing to the Traditional IRA, on Vanguard’s Balances and Holdings” page, there’s a small button labeled “Convert to Roth IRA.” My funds haven’t settled yet, so I can’t fully perform the conversion, but it looks like it’s designed exactly for this. I called Vanguard and they confirmed as much, and also let me know that that flow will not close the source Traditional IRA, only withdraw as much as specified, allowing you to reuse it next year. The representative said that the button is only available on brokerage accounts.

  • tubelight

    Hi Pof,
    Great blog and thank you for all the effort and expertise in putting this together. For physicians like me who lack the aptitude to understand these things, thank you for simplifying complicated issues. I have been reading your blog non-stop for a few days (though reading doesn’t mean comprehending :). I have a TIRA at vanguard (Collection of former 401k’s) and a current 401k through my employer at Fidelity (with a broad choice of their index funds and accepts rollovers) + a 457b. Also through work as a independent contractor, have a defined benefit pension plan (mostly invested at Vanguard as well). I max out the 401k/457b and DB.
    If you wouldn’t mind helping with a couple of issues-

    – Considering, I haven’t rolled over the TIRA to my 401k yet (past 12/31), does that mean I now should aim to fund the backdoor for 2018 only. Assuming 2017 is out even though taxes haven’t been filed yet.

    – May not be the right place to ask, but should I roll it over at all? Have been at the new employer (fidelity 401k) less than a year and as a rough approximation, my TIRA at Vangaurd in the 3 fund strategy seems to have done better. Its not a good comparison as the 401k was funded slowly while the TIRA was already there.

    Thank you and again great job

  • Thanks for the detailed run-through and info on backdoor Roths. I’ve been doing them for years and can’t believe they didn’t take this loophole away in the new tax bill. But glad they didn’t

    Good news for me, now that I’m part time this year I shouldn’t have to do a backdoor anymore! With my salary cut in half I now fall comfortably back under the Roth salary limit. Unless my blog income takes off of course but since it hasn’t made anything yet I don’t see that happening 🙂

  • Xrayvsn

    I have been doing more research and this really does make sense for me but I have some specifics I was hoping someone might help advise me on.

    Unfortunately I have not taken advantage of the backdoor Roth conversion in the past and have been putting in money for awhile into a traditional IRA. Now what I am to understand is that because these contributions were using after tax money (since my income phased out the deductions available) I have established a basis (which I assume is total amount I have from all the Form 8606s in past.

    My current traditional IRA balance is higher than this basis due to capital gains etc. For simplicity sake lets say I have $25,000 in after tax money that I contributed and the account is worth $100k.

    Can I do this to help minimize my tax burden with a conversion?:
    1) Convert assets totaling (or slightly under) the $25,000 basis I have into a Roth IRA this year (and essentially pay no taxes on conversion)
    2) In order to avoid the pro rata rule on the balance of $75k left, then roll the remaining assets into my 401k

    Appreciate the help.

    • What you’re describing makes perfect sense, and I believe it should work as long as it is recorded and reported on the 1040 properly. I would consult with a CPA / tax professional before making any moves, however.

      It is too bad you didn’t convert to Roth each year, though. The income limit on conversions was lifted back in 2010. I had made some non-deductible IRA contributions prior to that, and I believe I just paid the tax on the earnings when I converted to Roth back then.

      Best,
      -PoF

  • Step by step guides might be one of the greatest things ever imagined by mankind. I mean, how can you get it wrong after a solid post like this? Thanks PoF for crushing this one.

  • nephron

    Dear PoF.
    first time poster but long time follower and I absolutely love your stuff. My sunday mornings start with your sunday best!
    I want to do backdoor Roth but I have some 20K between my traditional IRA and sep-ira (with vanguard) and need to roll these into something before I can do them. I thought about rolling them into fidelity solo 401K (as vanguard i401K which is what I have doesn’t accept them), but the process to start another i401K is too cumbersome.
    I wanted to know what is the process to convert them to straight Roth through vanguard itself. There is “convert to roth” option but I wanted to know how much taxes I would owe on this money. I make about 325K (between my w-2 and 1099 incomes).

    Thanks so much for your help

  • Harvi

    Dear PoF. This is very helpful post. Thanks again for this amazing website. I am new to backdoor roth and new to vanguard.

    I followed your steps and contributed $5,500 to vanguard IRA (Prime Money market) according to step 1. I waited for 1 day and am about to do backdoor roth.

    I have two questions:
    (a) Do I need to create a new roth account, before doing the step 2.
    (b) I followed vanguard recommendations of directly converting IRA to roth (without creating new roth account). I opted Emerging Markets fund. It says: “This fund has a purchase fee of 0.75%”. This reduces the net buy amount to $5,458.75.
    I hope I am doing this right.

    Thanks again.

    • Is that the Emerging Markets Government Bond Index? I see a 0.75% purchase fee on that fund, but the Emerging Markets Stock Index has no purchase fee.

      I’m not a fan of purchase fees (aka front-end loads), personally.

      Best,
      -PoF

      • Harvi

        Thanks you. I was using Emerging Markets Government Bond Index.
        Emerging Markets Stock Index has no purchase fee. I will use this one.

        While doing the Step 2: when I click on “Where’s the money going?”. I don’t see “Roth IRA” section but see only my “Traditional IRA brokerage” account.
        Looks like I need to also open a new Roth account, before doing this backroth from IRA.

        • If you do not yet have a Roth IRA, you’ll need to set one up so this conversion has a place to go. Ideally, you’ll also keep the traditional IRA with a zero balance so you don’t have to open a new one when you do this next year.

          • Harvi

            Thanks you PoF. Very helpful.

            • Harvi

              I did the roth conversion successfully.
              I exchanged $5,500 from IRA (vanguard prime money market fund) to Roth (Vanguard Emerging Markets Stock Index Fund Investor Shares).

              This fund had a recent decline and my money went down to $5,382.64.

              Looks like I need to start learning more about investment.

  • David

    Dear PoF, I have converted $5500 from Traditional IRA to Roth IRA, then I found I have earned $1.65 dividend and now there is $1.65 sitting in my traditional IRA. Can I continue to convert this $1.65 to IRA ? What should I deal with this $1.65? Thanks

  • Excellent step by step guide, thanks for taking the time to make this post!

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  • DJ

    Just when I think I have this all figured out…

    I have an employer 401k at Fidelity that allows in service withdrawals that I can move post tax contributions to a Roth IRA also at Fidelity. (Mega Backdoor Roth conversion). I did this for 2017 and will do in 2018 and beyond.

    Then I have a taxable account and Rollover IRA from previous employer 401k at Vanguard. Can I open a new Traditional IRA and second Roth IRA at Vanguard and contribute $5500 for 2017 and $5500 for 2018, then transfer the entire $11k to the newly opened Roth at Vanguard?

    I’m confused with the zero balance and pro rata verbiage I’m reading above.

  • Steve

    My spouse and I began this process for our 2017 IRAs yesterday on 1/20/2018 when we initiated a transfer from our back into a traditional IRA. Today, I read conflicting information from another site that the effective deadline for a backdoor conversion for a 2017 IRA is 12/31/2017.

    Did I already mess this up or can I still convert the 2017 traditional IRAs into 2017 Roth IRAs? I’ve seen other comments mention that it’s important to make sure that there isn’t a balance on 12/31 for pro-rata reasons, but I was under the impression that my wife and I are safe to do both 2017 and 2018 backdoor Roth contributions between Jan 1 and Apr 17.

    Thanks for the clarification! I’m sweating bullets thinking that I’ve stumbled out the gate trying as we embrace FIRE.

    • As you noticed, 12/31/17 is the date on which you must have no money in an IRA to avoid the pro rata rule. You do, however, have until tax day (mid-April, 2018) to make your 2017 contribution and conversion.

      Best,
      -PoF
      p.s. Best of luck on your FIRE journey!

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  • John

    My tax pro said backdoor roths are not allowedgoing forward into 2018 due to new tax law. Is this true?

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  • newbie

    Hi – great article and thank you for sharing. I noticed you mentioned that if say today is 28 Jan one could potentially make 2017 and 2018 contributions to Traditional IRA’s if one has never had IRA before and done before April 2018. Would step 1.5 be an issue if a 2017 contribution was made in Jan then converted in April? Would this be seen as sufficient time? Thanks!

  • Brad

    Hi there, Great article!!! i have a sep ira, is my only option to pay the taxes initially? it doesn’t have a tremendous balance, only about 30K. Thanks!

    • That’s not the only option, but it might not be a terrible option, depending on your marginal tax bracket. If it’s 24% or lower with the new tax brackets in 2018, I wouldn’t sweat the conversion.

      Another option could be to roll the SEP-IRA over into a plan that accepts rollovers. Many employer’s 401(k) plans will (that’s what I did most recently) and you may be able to set up an individual 401(k) if you continue to earn 1099 income somehow. I have one with eTrade that accepts rollovers, including from a SEP-IRA.

      Best,
      -PoF

  • My spouse does not work and my GAI is 175000 . I am 59 so I can contribute 18 plus 6500 catch up to a 401 or roth 401 .My spouse is ver 50 so we can contribute 6500 to a roth in his name.
    Two questions: if my husband has an inherited ira does that complicate matters

    Second question: Are we allowed to do the backdoor roth for the same amount 6500
    and if so is that the max we can do and does it matter who’s name it is in or can it be in both names. Thanks very much

  • AF

    Thanks for the directions. I have just one question. How can a couple contribute $22,000 for 2017? I thought the max was 11,000 a year per couple. My husband is under the impression that you can over contribute to a Roth via the backdoor process. Is this what you are doing? Knowing what the complete limits are would help me immensely. Thanks so much!

    • If you haven’t done it for 2017, you can now contribute $5,500 per person for both 2017 and 2018 for a total of $22,000. It’s two years worth of backdoor Roth contributions, but it can be done in the same year, since there is overlap from January to mid-April.

      Best,
      -PoF

  • Ken S.

    Hello! I just got back from giving my tax forms to my accountant (judge me for paying 240.00 a year for accounting help if you must!) – and she said with the new tax law I am not allowed to do the backdoor roth anymore due to the rule of no recharactsrizations? I already did it – which now makes me panic. She said I should call vanguard monday and see if they can either cancel it or change it to a traditional IRA and kick the can on paying taxes till I retire. I have been doing the backdoor roth for many years and she’s well aware of that and has been good with that.

    Is there truth I can no longer do this process as outlined above due to the new tax law? again – I already have done it for 2018 (empty traditional IRA and then dump in 5500 to mine and 5500 in my wife’s and then convert….. thanks, Ken

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  • Jen

    1099-R is issued for this backdoor IRA and mentioned it is taxable income; but it is after tax money. How to deal with this situation on filing the tax returns ?

  • Adam

    Hello-

    I am a long time reader of both your blog and WCI. I’ve been entertaining the idea of a backdoor Roth IRA for a while for both myself and my spouse. With some hard work, I have been able to pay down student loan debt, maximize retirement savings in a solo 401k, max funding HSA, etc… Now this year, I finally have gotten to a point where I could contribute to a backdoor Roth IRA for both myself and my wife.

    So, I setup a traditional IRA’s for both myself and my spouse at vanguard, as well as a Roth IRA at vanguard for my wife. I already had a Roth IRA for myself at vanguard from previous investments as a resident/med student.

    I followed your instructions as above (thanks!). Seems to have worked flawlessly.

    However, I have come across one (hopefully minor) snag. After funding both my own and my wife’s traditional IRA w/ the $5500 max, the funds settled into the Vanguard Money Market Fund. Approximately 1 week later, I converted 100% of the money to the Roth IRA’s per your instructions. I didn’t realize it at the time, but when I did this there was actually $5501 dollars in each of the traditional IRA’s (due to money market account interest accumulation I guess), so I inadvertently converted $5501 to each roth IRA.

    Did I just do something bad? Am I going to be penalized by the IRS for this? Seems ticky-tacky to fret over 1 dollar but it is the IRS after-all.

    Thanks in advance

    • Congrats on your recent successes, Adam! Sounds like you’re in good shape. Don’t fret over the $1 in gain. It’s a rounding error that more or less disappears when you file. I believe I read you won’t pay taxes on it until the gain is $3, and in that case, the tax would only be a dollar or so.

      Best,
      -PoF

  • Darrin

    I did this last year, and had not read this article. My question is that you state this is not a taxable event when we convert the traditional IRA to the Roth. The problem is, and maybe it is how I did it, but I received a 1099-R from Vanguard that shows $5500 in box 2a.

    I did convert the entire amount to a Roth IRA. So did I bungle a step and when I am filing taxes how do I deal with the 1099-R

  • Kirk

    Hello PoF!

    I made two separate NON-deductible IRA contributions for Tax Years 2016 and 2017 in March 2017, $11,000. Apparently, I waited too long to convert these contributions to ROTH. Now I have $11088.66 sitting in the Traditional IRA account. Would I still convert these contributions to ROTH for Tax Years 2017 and 2018?

    • Good question, Kirk.

      I encourage converting shortly after the contribution (I wait a day).

      You should be able to make those conversions, paying tax on the $88 in gains. You’re not limited on how much you can convert in any given year. Only how much you can contribute.

      As far as filing the 8606, if you work with a CPA, I’d be sure they are well aware of what you’re doing. I’d probably run it by them before proceeding.

      Best,
      -PoF

  • AF

    What do you suggest people do if they are in the cut off range (married filing jointly) of 189,000 to 199,000?

    • I would take the extra step and make your contributions via the backdoor. I’m not aware of any reason it would be a problem to “backdoor it” even if you earned well under the range and qualified to make direct contributions. It’s just a little more complicated. But better safe than sorry.

      Best,
      -PoF

  • John

    Quick question. I cannot find the answer to this online. Can you do the backdoor Roth if you hold an inheritance IRA from a deceased, non-spouse relative? The issue is I cannot get rid of that IRA without losing half its value in taxes.

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  • Niskayuna-Investor

    My 401 K allows in-service withdrawal. I rolled over all my after tax contributions, about 50K, to a Roth IRA and the associated pre-tax gains (about 11K) to an IRA. The IRA has previously pre-tax assets; does this have any tax liability?

    Thank you!

    • The pre-tax gains would be subject to the pro-rata rule. You could convert to Roth, pay the tax, and then you should be good to go for the backdoor Roth.

      Best,
      -PoF

      • Niskayuna-Investor

        Thank you PoF for your prompt response.

        The pre-tax gains went to an IRA and was added to existing pre-tax assets in that IRA; I do not understand how the pro-rata rule will apply; please, clarify.

        My understanding is as follow:

        1. The pro-rata rule is applied when the in-service withdrawal was done; that’s why two separate checks were issued when the direct rollover was done; one for the after-tax money going to the Roth IRA and the other for the pre-tax gains going to a traditional IRA.

        2. If I want to do a backdoor Roth conversion, I should get rid of all the pre-tax assets in the IRA; that includes the existing pre-tax assets + pre-tax gains(10 K in this case) associated with the in service withdrawal of the after-tax contributions. In order to do that , three options are available:

        A. To convert all the pre-tax assets to Roth but in this case I have to pay the taxes based on my Marginal Tax Rate.

        B. Roll the entire pre-tax assets to the pre-tax portion of the 401K; however, I am not exactly sure if it’s possible to do that since the pre-tax gains of the after-tax contributions are part of the total pre-tax assets in the IRA.

        C. Roll over the pre-tax assets (excluding the pre-tax gains of the after tax contributions) to the pre-tax section of the 401k; the remaining pre-tax gains (10K)can be converted to Roth but the taxes should be paid.

        Your clarification and comments are highly appreciated.

        Thank you!

        • If you can roll over all the pre-tax dollars into the 401(k), that would be ideal. I would speak with the plan administrator to get a clear answer of what exactly you can do. Option B is probably the best, assuming you’re in a high marginal tax bracket now and plan to be in a lower bracket later.

          Best,
          -PoF

          • Niskayuna-Investor

            Thanks again!

            I had a lengthy conversation with the plan administrator; she confirmed that the roll-over of all the pre-tax assets to the pre-tax portion of the 401k is possible. That should clean the IRA from any pre-tax assets.

            One good thing that I learnt through the process is; it’s not necessary to roll-over existing pre-tax assets in an IRA to your 401K if you plan to perform only in-service withdrawal of the after-tax contributions and then convert the after-tax contributions to a Roth IRA.

            In this case, to avoid paying the due taxes on the pre-tax gains of the after-tax contributions, just roll the gains to over to an IRA; it does not matter whether the IRA has existing pre-tax assets or not.

            However,if you plan to use the backdoor Roth strategy, then it’s handled differently. All the existing pre-tax assets in all IRAs, Simple, SEP etc. (except Roth) should be rolled over to the pre-tax portion of the 401K to avoid the pro rata rule when converting the non-deductible contribution to Roth. The IRS looks at the balance of your IRAs by12/31; so, make sure that it is zero by that time.

            Thanks again!

  • FIRE_guy

    Great walk through! When filing my 2017 taxes I found out I wasn’t eligible for a regular Roth IRA as I was in years past. I went ahead and re-characterized my 2017 contribution ($5500), as well as the earnings ($1000) to traditional IRA (non deductible) after rolling my other IRA funds into my 401k. I then completed my 2017 return.

    Now, when I’m ready to convert the traditional IRA ($6500) to Roth, do I list it as 2017 if I do between 1/1/2018 and 4/17/2018 since the money was originally a 2017 Roth contribution? Or do I now list as 2018 because the calendar year has changed…and if this is the case, will that impact my new 2018 contributions for IRAs?

    Also, regarding the $1000 in gains, I assume I convert them to Roth as well, and I will pay ordinary income tax on them when filing my 2018 tax return?

    • Conversions are counted on a calendar year basis. It does not matter when the funds were originally contributed to the TIRA. So, this conversion will be for 2018. You will receive a 1099-R in January 2019 to report on your 2018 income tax return and the $1,000 will be ordinary taxable income.

  • Amir

    How important is it to select the right tax year? Am I bound to file per the 5498 and 1099-R forms that are received or can i adjust as necessary based on what I know was the intent (eg. even though i show a conversion on the 2017 tax form it really belongs to tax year 2016 since it was done before mid April 2017).

    • You must select the tax year in which your transactions are reportable. The IRS matching system will compare the forms and amounts associated with your TINs (Taxpayer Identification Numbers) for each year to what you actually report for those years. You will receive a notice if your numbers don’t agree with IRS expectations. Trust me – it can be a real bummer when you don’t live up to the IRS’ expectations 🙂

      • Amir

        Thanks much for the reply. Is it possible to correct tax forms once they’ve already been published? Or am I really just hosed?

        • Not hosed (in most cases). You can always file an amended return (1040X and whatever the form is for your state) if you’re within the SOL (Statute of Limitations). See http://tax.findlaw.com/tax-problems-audits/what-is-the-irs-statute-of-limitations-or-deadline-for-action-on-.html

          • Goofus

            Hi Johanna,

            Thank you for your informative responses!

            I have a challenging problem here, perhaps you could help with, and I would like to potentially fix this problem with 1040X’s for 2016 and 2015.

            I mistakenly over-converted from my SEP IRA into my Roth IRA (twice, in fact *facepalm*).

            On 04/25/2016, I converted $7400 into my Roth IRA, which was the sum of my 2015 SEP Employer (deducted contribution of $1900)+ 2015 Personal (non-deducted contrib. of $5500). I should have just converted my personal.

            Possible Fix: Through a 2015 1040X, would it be possible to revise my 8606 to “split” my 04/25/2016 conversion into: $5500 for TY 2015 and leave $1900 for my 8606 in TY 2016? (I’m not sure of the TY 2015 Roth conversion deadline)

            Furthermore, could I do the same thing with a 2016 1040X to resolve a $7400 over-conversion I made on 10/30/2017, and revise my 8606 to “split” that conversion into: $3600 for TY 2016 and $3800 for TY 2017? I still have the chance to recharacterize the 10/30/2017 conversion as well, if that is an easier route. (also not sure of the TY 2016 conversion deadline)

            Overall Goal is to get my conversions going in TY 2015 (and not carry the tax basis forward) while also correcting the problem of over-contributing by $1900 and keep that in my SEP IRA. This would, theoretically, also get me a refund of about $500 for TY 2016 (since that extra $1900 was included in my 2016 8606 as taxable).

            Huge thank you for any help on resolving this. I hope I clarified the birds-nest problem.

  • AJ

    Hello,
    Thank you for such an informative post.
    I was going to go through this now before mid-April but saw the following noted on IRS website. Can you please clarify if this means we cannot use the backdoor approach any longer?

    ————- IRS website————-
    Can I recharacterize a rollover or conversion to a Roth IRA?

    Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

    How does the effective date apply to a Roth IRA conversion made in 2017?

    A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018. A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized. For details, see “Recharacterizations” in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).

    • No need to worry. The elimination of recharacterizations has nothing to do with the Backdoor Roth. Congress recently blessed the Backdoor steps as perfectly legit.

      What this does eliminate is the Roth “horse race” in which people would convert a certain amount of money (say $10,000 each) in a variety of asset classes, and “undo” or recharacterize all but one at the end of the year, leaving the conversion on the asset the had the best return alone. Always sounded like a lot work to me, but I suppose could be worth it if you’re converting larger sums. Anyway, it’s not allowed anymore.

      Best,
      -PoF

  • Both conversions took place in 2018, and there’s nothing wrong with that. As long as you assigned the contributions to the correct years (one $5,500 sum in 2017 and another in 2018), you’re fine.

    The conversions will be reported on your 2018 taxes next spring.

    Best,
    -PoF

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  • N Raj

    Hi,

    when I am trying to convert my traditional to roth ira. I do not see the section “retirement and contributions “. Instead I see the convert to Roth IRA option, And when I do go through that option , I do not see any way to choose between 2017 or 2018. Am I doing something wrong here?

    • I’ve learned that not everyone’s Vanguad screens look the same, which is a bummer since we’re all using the same brokerage. The year matters most for the contribution. That should be specified when you contribute the money to Vanguard. You’ll report the conversion in the tax year in which it was done via the 1040 (form 6086).

      If you still have questions, I would call Vanguard to make sure you get the steps right.

      Best,
      -PoF

  • Jessica

    How many backdoor Roth IRA conversions can I make in one calendar year?

    Tldr:

    Can I:
    1. Rollover $11,250 of 403b funds from my previous employer into a non-deductible traditional IRA, then do a backdoor Roth IRA conversion with that money?
    And follow that, in the same calendar year with a:

    2. $5,500 contribution to my non-deductible traditional IRA, then do a backdoor Roth IRA conversion with THAT money… without being penalized?

    The long version:
    The vendor for my 403b account with my previous employer refuses to distribute/release the funds to my current 403b vendor with my current employer because my former and current TPAs reserve the right to NOT sign other vendors forms. They’ve indicated they will both release (former TPA) and accept (current TPA) the money, but will not sign paperwork that Is not theirs. It’s been a 5 month stalemate, with my money being held hostage in my old 403b.

    So now I’ve been given another idea… Perhaps I can just rollover the money from my previous 403b to my non-deductible traditional IRA. But there’s a problem. I do backdoor Roth IRA conversions each year, meaning I can not have any money in a traditional IRA at the end of the year. So my questions are:

    1. can I rollover my 403b money into a non-deductible traditional IRA, then use that money and do a backdoor Roth IRA conversion?
    And follow it with my regularly scheduled contribution to my non-deductible traditional IRA, which I would then do another backdoor Roth IRA, without being penalized??

    The third option of course is to leave my 403b money in my old vendor. I don’t like that bc my old vendor is now charging $60/year just for it to sit there. But I also don’t want to be penalized at tax time, if there is such a penalty for rolling over 403b funds into a non-deductible traditional IRA, then converting that to a Roth IRA… Or if there are penalties for doing more than one backdoor Roth IRA in a calendar year.

    I understand this is long, and complex. I appreciate any response you might be able to provide me with. Thank you.

    • The 403(b) money is presumably tax-deferred contributions. In that case, if you rollover to an IRA, it will remain tax-deferred and the pro-rate rule would apply. If you are able to rollover to an IRA, you could then roll it over to your current employer’s 403(b), using the IRA as a rest stop. Could that work?

      $60 a year isn’t terribly expensive (pretty cheap actually), but it’s best to consolidate if you can.

      Good luck!
      -PoF

  • dr

    I created a traditional IRA with Vanguard for the first time this year. First problem is that Vanguard is now making the “Brokerage Accounts.” Second problem is that you can’t direct where you put the money; it automatically goes into the Vanguard Federal Money Market Fund (which is technically ok since the value doesn’t really fluctuate). Third problem is that because of this “Brokerage Account” thing (according to the person I spoke to at Vanguard, the money has to stay in the account for 7-10 days before it is eligible to be converted to a Roth. Fourth issue is that when you go to convert it to the Roth, it has to stay inside the Federal Money Market Fund and cannot be directed into the mutual funds in your Roth IRA; you then have to go back in the next day to your Roth to exchange it to your preferred funds. So, I do not know how everyone seems to be able to do this so smoothly “the next day” as in your example. Maybe there are new rules. Maybe I messed something up. However, the people on the help line at Vanguard said I was doing everything correctly. This was my first year to try the backdoor Roth, and so far it has not been smooth at all! (I’m still waiting for the funds in the traditional to become available, so am hoping that this will work out next week)

    • That sounds like a real headache. It should all work in the end, but the process I’ve been using for years has worked well without the waitin periods and limitations.

      I know that some people have mutual fund accounts and the new accounts are brokerage accounts. I wish they would have left things alone — it gets confusing when we’re looking at different screens in trying to accomplish the same thing. Perhaps in 2019, I’ll open a new traditional IRA account to see if I have the same issues you and others have had.

      Best,
      -PoF

  • MikeC

    Just what I was looking for PoF, thanks for this. Is the comment about doubling up for first-timers in 2018 really correct? I’ve read elsewhere that while an IRA contribution before April 15th can be applied to the previous calendar year, a rollover must be done before Dec 31. What is your understanding?
    -Mike

  • Jim

    Hi, I noticed in your guide above that when cash is contributed to the Traditional IRA it goes into a Vanguard fund. Then when the conversion to Roth IRA is done, it goes into another Vanguard fund. Is this just how Vanguard’s system is set up, or is there a requirement that for the backdoor conversion to work it cannot be in cash? I am looking at Schwab and they allow the initial contribution into the Traditional IRA be in cash and they said it is possible to convert the cash in Traditional IRA into the Roth IRA, and then I would be able to purchase whatever fund I wanted to. (Not expecting you to be familiar with Schwab’s system, but just curious if you had any insights into the cash vs fund thing.)

    • I believe it depends on whether the account is set up as a “brokerage account” or a “mutual fund account.” There’s some discussion here.

      The Vanguard fund I hold the money in is a money market account, which isn’t much different than cash. A few pennies of interest, but the IRS disregards pennies, so it’s essentially the same.

  • Sofia Dobrin

    Thanks for this post. I have a 401 a account from work in addition to my 403 b. Does the 401 a work like an SEP meaning I have to transfer the money or be subject to pro rata tax rules? Or does the 401 a work like my 403 b & can be left alone? I’m nervous about that account as I don’t really understand its tax implications. Also, I know it’s almost late, but can you actually do the backdoor for 2017 contributions as late as 4/16 and 4/17 if the 401 a won’t hurt me? Thanks!

  • Sofia

    Thanks for this post. I have a 401 a account from work in addition to my 403 b. Does the 401 a work like an SEP meaning I have to transfer the money or be subjected to pro rata tax rules? Or does the 401 a work like my 403 b & can be left alone? Also, I know it’s almost late, but can you still do a 2017 backdoor roth on 4/16 & 4/17 if the 401 a won’t hurt me? Thanks!

  • Jake

    Hi! Is tax deferred income included in the pro rata rule? I work for a large pharma company and they allow me to defer my bonus tax deferred. My 2017 bonus is currently deferred until 2024 and is invested in a deferred account in Fidelity. Thanks!

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  • Yoma

    Hi,
    Trying to really understand this backdoor option…Please correct me if I am wrong.
    I have an IRA (rolled over from prior employer’s 401K,and an old SEP iRA- it is in traditional ira now) of about 200K. Does this mean I am ineligible for a backdoor conversion until this money is converted first?

    Sorry if this is a dumb question. But I am trying to take advantage of the standard deduction increase from 2018. ( I don’t have any debt including mortgage and may have a MAGI of 230K or higher for 2018. Tax software sends me to standard deduction because my itemized does not reach even 8k)

    Thanks!

  • Ming

    POF,

    I did my backdoor Roth IRA just this past week. For some reason there was a 7 day waiting period per vanguard and after I moved the money from my non-deductible tIRA to Roth IRA, I see a $2.67 balance in my tIRA account under Vanguard Federal Money Market Fund (Settlement Fund).

    Is this because I had to wait 7 days to convert over and someone the money market grew this amount from my 5500?

    Should I go ahead and convert this $2.64 over to the Roth IRA as well?

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