Backdoor Roth IRA 2019: a Step by Step Guide with Vanguard

This year, I made my seventh pair of “Backdoor Roth” contributions with Vanguard. If you’ve heard of the Backdoor Roth IRA, 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 2019 contribution and conversion, which were completed on January 3rd and 4th, 2019. I like to contribute early in the year to start the tax-free earnings as soon as possible, but you have until Tax Day in mid-April, 2020 to complete a 2019 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 look different.

 

 

Backdoor Roth IRA 2019: a Step by Step Guide with Vanguard

 

Backdoor Roth: 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 The Roth dollars, unlike tax-deferred dollars, will not be taxed when withdrawn.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 $203,000 for a couple filing jointly, or $137,000 for an individual makes you ineligible to contribute to a Roth IRA in 2019. Phaseout ranges where you can make a smaller Roth contribution (less than $6,00) start at $193,000 and $122,000 for married couples and individuals, respectively.

Many physicians are thus excluded from making either deductible IRA contributions or direct Roth IRA contributions. If your income might put you into or above those phaseout ranges, you’re better off using the backdoor, just in case.

Now, a high income doesn’t mean you can’t contribute directly to a Roth account of some kind. You may have a Roth option within your 401(k) or similar account, although I would argue you’re probably better off with the tax deduction offered by making tax-deferred contributions if you’re in the 32% or higher tax bracket.

 

Related: Should You Invest in a Roth or Traditional 401(k)?

 

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 $74,000 or as a couple earning more than $123,000 in 2019.

 

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.

One way employees without a business of their own create one is by obtaining an EIN for a survey-answering business. Earning just a little 1099 money on the side qualifies you as a business owner, and you can open an individual 401(k) a.k.a. solo 401(k) for the business.

As long as the plan accepts rollovers (many do), you’ll be able to roll over traditional IRA, SEP and SIMPLE IRA money into it to circumvent the pro-rata rule and associated taxation when attempting the backdoor Roth.

For healthcare professionals, I’ve found that the simplest surveys that take the least amount of time and pay well per question asked come from InCrowd Answers.

 

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”

 

Vanguard_Backoor_Roth_2019_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 $6,000. If I were age 50 or older, I could contribute $7,000. You’ll be asked to consent to the investment you’re making.

 

Earn quick & easy 1099 income with Incrowd's microsurveys for healthcare professionals. 

 

Vanguard now wants to know where the money is coming from. Knowing I’d be investing in my Roth IRA shortly, I let the late-December dividends from my taxable account stay in my Federal Money Market fund, and there’s enough there to fund today’s non-deductible IRA contribution.

 

 

 

 

You’ll be asked to consent to electronic delivery of the prospectus if you’d opted to go paperless for these, which I recommend you do to save some trees. 

 

 

 

 

 

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

 

 

 

Alternatively, if you’re funding the transaction via Electronic Bank Transfer (as I did in 2018 in the screenshot below), the screen may look like this:

 

Backdoor Roth 2018 _04

 

Note: In recent years, all new IRA accounts at Vanguard have been “brokerage accounts” as opposed to “mutual fund accounts.” There are several differences. The brokerage accounts allow you to purchase individual stocks and funds from other brokerage companies.

The brokerage account also has a settlement fund and a number of people have run into delays of up to 7 days when funding a brokerage account IRA via electronic bank transfer, waiting for the funds to “settle.”

Even when funding directly from a Vanguard money market fund in a taxable (non-qualified) account to their IRA brokerage accounts, friends of mine are seeing delays.

 

 

If you have been with Vanguard for some time, I recommend you keep the mutual fund account if prodded to make the transition to a brokerage account unless you are planning on investing in something other than Vanguard mutual funds in the account. Eventually, all accounts may be transitioned to brokerage accounts, but I’ll hang onto the mutual fund account as long as they’ll allow it.

 

 

Next, click Submit and Vanguard will politely thank you.

 

 

Vanguard_Backoor_Roth_2019_16

 

 

 

 

You should also receive an e-mail confirmation.

 

 

 

 

Step 1.5: Wait?

 

There is a thing called the “step transaction doctrine” that had 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 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. Navigate to “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.”

 

 

 

 

On the next screen, be sure to select the correct tax year. Vanguard defaults to the previous year. If you’re making your 2019 Backdoor Roth contribution, be sure to select Tax Year 2019.

 

Note: if you’ve never done the Backdoor Roth, and you’re financially able, now is a great time to make one contribution for 2018 and another for 2019. If you’ve got an eligible spouse (and by eligible I’m referring to backdoor Roth eligibility), the two of you can sneak $23,000 into Roth accounts this year as long as you complete the 2018 contribution by mid-April, 2019.

 

 

 

 

 

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

 

 

Vanguard_Backoor_Roth_2019_09

 

 

 

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

 

 

 

 

 

You’ll be warned that a conversion is a taxable event. This isn’t true in this case 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 recharacterize (undo) Roth conversions.

 

 

 

 

 

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

 

 

 

 

Click “CONTINUE” one last time.

 

 

Vanguard_Backoor_Roth_2019_14

 

Click “Submit,” and you’re done!

 

Vanguard will say thank you and send you an email of the transaction submission.

 

 

 

You’ll also be able to view the transaction in your Transaction history.

 

 

 

 

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 what it should look like in this post, which includes instructions for TurboTax, H&R Block, and Taxact.

 

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.

 

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Is the Backdoor Roth Worth the Trouble?

 

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, unless you have IRA money that would subject to the pro rata rule, and no good rollover options (such as an employer’s or solo 401(k)).

 

Was this helpful? Please consider subscribing to this site. I’ll give you a spreadsheet full of useful and fun (yes, I said spreadsheet and fun in the same sentence) calculators, and you’ll know when new posts are published.

 

For more information, be sure to check out additional articles on the Backdoor Roth:

 

 


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Have you taken advantage of the backdoor Roth? What’s holding you back?

401 comments

  • 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?

    • Carlos A Villanueva

      I opened the Traditional IRA at Vanguard on Sunday and tried to convert Wednesday (7/18/18) but was not able to do that because “insufficient funds”. I called Vanguard and they told me I had to wait 7 days.

      PoF you mentioned that you converted the next day.

      Wondering if Ming and I did something wrong or if this is a new thing at Vanguard.

      Thanks!

      • Ming

        Nothing wrong with the 7 day wait. I think Vanguard recently started wanting people to convert from traditional mutual fund accounts over to what they call “brokerage accounts.” And AFAIK these brokerage accounts have the 7day wait? I did this brokerage conversion couple of years ago. I mean not a huge issue just have to remember to convert it over after a week…

  • Smith

    Hello – thanks for this. A couple questions:
    1). I have a Rollover IRA that was set up a couple of years ago from funds received from an old 401(k) plan. In thinking through this strategy (and before reading this post), I went ahead and opened a Traditional IRA and a Roth IRA and have not funded either yet. You mention that you cannot have other IRAs opened and funded (i.e. my Rollover IRA) in order to take advantage of the backdoor Roth. Why is this? I would like to avoid rolling my Rollover IRA into my current 401(k) plan.
    2). I will be contributing to my Traditional IRA monthly and not in one lump sum. Can I transfer/convert the contributions from the Traditional to the Roth every month or should I wait and handle the conversion all at once when I’ve reached by $5,500 limit? If the latter, are there any restrictions on converting any earnings I receive on top of the $5,500?

    Thank you!

  • This is an excellent overview which really breaks it down to the granular level. 2018 is the first year I am over the Roth IRA income limit so I was pretty hesitant to attempt the backdoor conversion. Now I’m confident I can pull it off correctly. Thanks for the great information.

  • Spartacus

    Heard you on ChooseFi pdocast 86. Great stuff. lead me to your blog to look up back door roth. Here’s my situation. Company ESOP cashed out and we had to make a decision to roll into 401k /IRA or cash out and incur taxes and 10 % pre-withdrawal penalties. I opted to open a Vanguard traditional IRA. The balance defaulted to a money market account. I have since transferred money market balance to a mix of index funds within the newly setup traditional IRA. Did I screw up and lose out on the opportunity to move $5,500 to backdoor Roth for 2018?

    • Carlos A Villanueva

      If I understood you correctly, you rolled over money from your ESOP into a traditional IRA. You did not make any new contributions into an IRA.

      If your ESOP money is on a traditional IRA and you make a new traditional IRA contribution with the intention to convert it to a roth, you will end up paying taxes because of the ESOP money that is now held in a traditional IRA.

      In order to be able to do the Roth without having to pay taxes you will have to get the money out of the traditional IRA first and put it on a 401K plan.

      I am not sure if you would have to wait for next year to do the Backdoor roth or not after you move the money out of the IRA.

    • Glad you found me!

      With a traditional IRA existing, you cannot do the backdoor Roth without incurring taxes according to the pro rata rule. The most common workaround is transferring the money to an employer’s 401(k) if it’s an option or an individual 401(k) you set up after obtaining an EIN for any side income you earn. Some suggest filling out surveys as an example.

      Best,
      -PoF

  • Greg

    Something for which I can’t seem to locate info. Maybe my searching attempts are not worded correctly. I am in the process of moving traditional IRA pre-tax funds into my 401k in order to setup for doing backdoor Roth.

    If I move traditional IRA pre-tax monies to my 401k this year to clear out all of my pre-tax IRA funds, do I have to wait until next year to proceed with backdoor Roth process, or can it all be done in the same year so long as the deductible IRA funds are $0 by Dec 31?

    Thank you!

  • Xavier

    Thanks for the education. Greatly appreciated. I am young to investing and have been reading like crazy. I have a couple questions. My wife and I file ” married but withhold at a higher single rate” for student loan purposes. I have a 401 k at with I just contribute the minimum amount to get the match from my employer. My wife is a teacher and I am also considering that she should contribute to a 457(b) retirement savings plan (no match). We both are in our mid-30’s (no kids yet) and we both have over 100K student loans. I make between 120 – 125k annually while wifey makes around 58k. We definitely don’t qualify for a traditional ROTH account. My questions are as follows:

    1. Do I need to focus on paying off student loans before increasing contributions to my 401K?

    2. Should we contribute to a 457(b) even though there is no match?

    3. Do we have to max out 401K and /or 457(b) accounts to the max before contribution to a backdoor ROTH? If yes, why? Is their a hierarchy of which types of retirement accounts to save in?

    4. My wife has retirement funds from a previous employer that we want to get rolled over. Should we roll it over in the 457(b) or should we roll it over in a traditional IRA? Can it be rolled over in my 401K?

    5. I do work an extra side job (1k to 2k per month) but I struggle to decide what to allocate these extra funds to. If I double up on my student loans it would take me around 5 years to pay off. Should I just focus on paying off student loans (interest rate 5.2%), or should I allocate funds to savings/investing? Or, should I pay more on my mortgage (interest rate 3.8%) to get that PMI dropped (saving approx $270/month)? I do really want to get rid of the loans but I also don’t want to miss out on savings and years of cumulative interest.

    Thanks for your responses.

    • If I were you with no kids, I would definitely:

      1. Max out the 401k

      2. Max out the 457. #1 and #2 should decrease your adjusted gross income well below the income limit for a Roth IRA plus will decrease your taxes significantly. If your household gross income is 185 your adjusted gross income would be 185 – 37.5 (401 and 457) -24 (standard deduction)= 124,000. This puts you at a nice 24% marginal tax rate. You really want to get your AGI under 157,000, above which the tax rate jumps all the way to 32%.

      3, With no kids you should be able to live like a king with 50,000 dollars a year. That leaves 74,000 dollars to pay off student loans.

      4. Once your loans are gone, I would:
      – Get rid of PMI
      – Contribute 5,500 each to a traditional IRA (which should decrease your takes by 24% of 11,000)
      – Invest the rest in VTSAX in a Taxable brokerage account at Vanguard, pay your mortgage principal or do a combination of these 2.

      I hope this helps

      Sharp Scalpel

  • Sofia Dial

    Is this article assuming you are a high income earner, unable to contribute to a Roth IRA, so you’re using the Backdoor Roth Contribution just to have the account? Seems like you paid 100% of taxes on the money contributed to the money market, correct?

    How about an article with pre-tax money? Isn’t there a 5 year waiting period on the contribution to truly be tax-free on the front end in a 401(k)/IRA and back-end with the conversion strategy?

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  • Kevin

    Newbie… Would like to start doing Backdoor Roth… It’s Sept, I’ve made some, but not all, 2018 contributions to my SEP IRA. I have not made 2018 contribution to my traditional IRA. Can I rollover all my IRAs into solo 401k before the end of 2018, then do Backdoor Roth in 2018? Wasn’t sure if I needed to empty out all my IRAs, leave empty through Dec 31st, 2018, and do 2018 Backdoor Roth in Jan 2019.

    • My understanding is that as long as you have a zero IRA balance on 12/31/2018, it doesn’t matter when you do the 2018 backdoor Roth. I would doublecheck with your CPA if you use one, but that’s what I’ve been told.

  • Lee

    I noticed your comments to Mrs. Bita last year about doing both the Mega Backdoor Roth and regular Backdoor Roth in the same year.

    I’ve been contributing up to the federal maximum ($55500 = $18500 401K + Company Match + After-Tax Contribution) and rolling over the after-tax portion + earnings into my Roth IRA for the past four years. I too have been curious about whether doing the additional $5500 non-deductible IRA contribution and subsequent rollover into my Roth IRA during the same year was allowed or not. I haven’t really found any definitive info on the subject other than a few comments here and there. Are there any caveats about doing both in the same year? Does timing matter (do the Mega first then the regular)? Has anyone written about the specifics of doing both during the same year?

    Thanks for your feedback.

  • AL

    Thanks for your article! One question that has confused me is in order to open the IRA you need to apply for an EIN from the IRS. Therefore you need some sort of side income that counts as earned income correct? Other sites that have written about this a lot like WCI, etc and simply tell doctors that they can do this by doing a few online surveys, etc. After that is done are you limited to only contribute IRA money that comes from your side earned income (and not any other money you’ve saved from work salary)? Appreciate any comments, thanks.

    • Anyone can open the IRA but if you have tax deferred money in an IRA you may need to open a solo 401k and that’s where the EIN comes into play. You might not contribute much to the solo 401k but there’s no limit to how much money you can roll over into the solo 401k, as long as the plan you choose accepts rollovers. (Avoid Vanguard for this account).

      • AL

        Wow thanks for the quick reply. No I just have my employer-sponsored 403b currently. I’m looking at opening a traditional IRA with E-trade with goal of doing the backdoor Roth conversion.

  • Tom

    I was wondering if my plan is reasonable. I have SEP IRA, roll over IRA, Roth IRA, traditional IRA and employer 403b all with VG.
    I have the following plan:
    1. roll sep and roll over IRA to 403b
    2. convert trad to roth and move to Roth (accountant to help w forms and taxes)
    3. open solo 401k w VG for future side hussle income
    4. do backdoor roth starting this year
    Thanks so much for help and advice!

    • Yes, sounds reasonable. #2 may be unnecessary. As long as the money us all in the 403b, there’s nothing wrong with keeping it traditional. It may make sense to do some Roth conversions in the 24% tax bracket if you have space there.

  • Eddie

    Hi, great stuff I really appreciate this post!

    My question: Will I able to perform this Backdoor Roth IRA at the beginning of the year (i.e. 2019) even though I might be under/over on the MAGI contribution limit?

    Background: I’m currently working two jobs with an anticipated MAGI that will most likely disqualify me from contributing straight in an Roth IRA. I’m basically right at the border of being disqualify or being phased-out. I would like to invest max $5,500 at the beginning of the year. I also would like to keep the Roth contribution and conversion within the same year (i.e. contribute $5,500 for 2019, convert $5,500 for 2019).

    Thank you for your time and consideration!

    • Go ahead and do the backdoor Roth. If you end up under the MAGI limit, the worst thing that happened is you made a Roth contribution in two steps rather than one. There’s nothing that prevents or penalizes lower-income earners from doing it “the hard way” via the backdoor.

      Cheers!
      -PoF

      • Edward

        PoF,

        Thank you for the reply, I appreciate it!

        Quick question – Does the conversion from Traditional IRA to Roth IRA apply to the Roth Conversion Ladder method? As in, does it become characterized as a Roth conversion and will I be able to access/withdraw tax-free/penalty-free for this conversion after the 5 year waiting period ?

        Thanks,
        E

  • Doublefire22

    I put $5500 in. Trad IRA earlier this year then converted to SEP IRA, thinking I wanted to contribute more than $5500 as my 1099 income increased. But now I want to convert to backdoor IRA and start solo 401k. Can i convert my SEP IRA straight into a Roth IRA? Due to market drops it has about $5500 in it again.

    • Yes, you can convert a SEP IRA to Roth (I have) — you’ll owe taxes on the $5,500 as income, of course, unless you made a non-deductible contribution.

      One clarification: the traditional to SEP IRA event would be called a “rollover.” The term “convert” or “conversion” is generally reserved for changing traditional dollars to Roth dollars. It just semantics, but keeps things less confusing.

      Best,
      -PoF

  • grace

    I’m confused about what to do. My husband has a SIMPLE-IRA (balance ~ $50k) and I have a Rollover IRA (~ 70k) from my former employer and a 401k with my current employer.

    So, if I understand the process correctly to avoid the pro-rata calculation, i need to convert our IRAs to 401k. How to do this?

    1. My husband does NOT have a 401k, and he does not have a ‘side-job’ that would allow him to open a 401k. I don’t believe I can roll over HIS SIMPLE-IRA funds to MY 401k. Do I have any other options?
    1b. Can I roll over part of the funds from the SIMPLE-IRA to Roth, and then the leftovers pay taxes on it?

    2. With My Rollover IRA, can I roll over the $5500 to my Roth IRA, then roll over the balance to the 401k at my work (Fidelity). If the fund options aren’t great, is it best to just not do the Backdoor IRA?

    3. We are in a high tax-bracket. We do have funds to pay taxes if needed, but is this a wise strategy? What would be the advantage of paying taxes on it like that?

    Lots of confusion and lots of questions. THank you in advance! 🙂

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  • LibraryMovies

    The backdoor Roth may have gotten even easier – I was following your instructions to do my first-ever backdoor Roth today, and there is now a “Convert to Roth IRA” button available in place of “Retirement contributions and distributions”.

    • Based on the feedback I’ve gotten, I believe that option is there for IRA “brokerage accounts” and not for IRA “mutual fund accounts.”

      The advantage of the mutual fund account is the lack of a settlement fund and no unnecessary delays.

      Cheers!
      -PoF

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  • GM

    Great Article! thanks for the detailed explanation with steps. I have a few questions.

    So, over the last couple of years I have been contributing after tax (non deductible) dollars to my Traditional IRA account. But I didn’t invest the money and it has been sitting as cash (I know, super bad!).

    Can I move this to my Roth IRA (backdoor) all in one shot? I’m thinking I wouldn’t owe any taxes on this converstion because a) the original contribution is after tax & non deductible and b) i have not made any profit on the money I contributed.

    Is my understanding correct?

    What forms will I have to fill out as part of my tax return to make sure I’m conveying what I’m doing to IRS clearly so that I don’t get asked to pay any taxes on this conversion.

    • I believe your understanding to be correct.

      That being said, I would also recommend consulting with a CPA or or other tax professional prior to making the conversion in case there’s something you and I don’t know about that would complicate the issue.

      Best,
      -PoF

      • Gasem

        If you have no other IRA accounts and since the money is already taxed I would just Roth convert the IRA in it’s entirety to the Roth. Cash has probably not grown so the tax hit will be essentially zero. If you have other IRA the Pro Rata will apply and I’d wait to Roth convert to close to RMD time. Since you already paid the tax the pro rata will give you a write off at the time of conversion use the 8606 for for the correct formula or use some tax software. IRA money is also NOT subject to SS or Medicare tax since that tax was already paid when you made the money.

  • stlpdx421

    Thanks for the article! I placed $6000 into my traditional IRA on Jan 1, 2019 from my checking account to a Vanguard Money market account in my traditional IRA. On Jan 3, I wasn’t able to convert to my Roth IRA because there is a “7 day hold” that Vanguard does apparently. Their reps are telling me I can’t convert those funds until Jan 9 — how did you do it the next day? Am I missing something or doing something wrong? Thanks!

    • ERdoc

      I just posted about the same thing without seeing your post first, so i decided to delete my post and piggyback onto your post. Here is my orginal post:

      “PoF, it appears you can no longer convert the next day with Vanguard. I am pretty sure I converted the next day last year.

      I now have to wait 7 days to convert my traditional IRA to my Roth IRA.

      I placed my 6K in both my account and Wife’s yesterday and went to convert today, using the “convert to Roth IRA” button on balances and holdings. After I selected to convert all and hit continue on the next screen, an error message pops up stating “you have elected more shares to convert than are eligible” or something like this.

      I called Vanguard, rep confirmed I have to wait 7 days for my funds to “settle.” I didn’t think to ask if this is a new policy.

      Interesting.

      Did you encounter the same issue this year?

      Kinda stinks b/c market is down ~2% so far today!”

      • Stlpdx421

        That is exactly my situation, and exactly what the Vanguard reps told me (three separate ones!). Was also hoping to lock in todays price but oh well – don’t try and time the market they say 🙂

    • Vanguard appears to have created this issue with their “new and improved” brokerage accounts that they’re asking everyone to open or switch to as their default IRA accounts.

      I still have a mutual fund account and I’ve never had an issue with the next-day conversion. Their site says that if you fund the IRA via Electronic Bank Transfer, they could institute a 7-day hold, however I used EBT last year and was not subject to the waiting period.

      This year, to be safe, I funded from a money market fund in taxable. I didn’t have to wait after doing that, either.

      From what I hear, there’s no easy workaround if you’ve been subject to that waiting period.

      Best,
      -PoF

      • Larry Ragman

        I just did a backdoor on both my wife and my accounts. We have the brokerage accounts. Oddly, I was able to complete the conversion after two days, but she cannot. We asked and were told she is subject to the full seven days. (I asked but no answer yet on why the difference.)

        By the way, my Flagship rep also said that their platform will eventually only support the brokerage accounts, but he was unable to say if there was a specific timeline for the transition.

        • That is odd and interesting.

          Did you fund from your bank or from a non-qualified account at Vanguard?

          I’ve sensed that mutual fund accounts are dinosaurs target for extinction, but I’m hanging onto mine as long as I can.

          Thanks for sharing!
          -PoF

        • Ryan

          Mine was the same way. Mine went through the day after I transferred the money. For some reason there is $1.45 in my tIRA and the full 6k in my rIRA.

          My wifes is making me wait the full 7 days. Under one of balance pages it states that the balance will be available for trade on 1/14/19, which is 7 days after i made the deposit. Hope that helps.

        • Larry Ragman

          From a bank for both.

          I don’t truly mind the seven day hold, I just get frustrated by the same transaction getting different treatment in my account and hers. I am impeded from getting an answer directly since Vanguard cannot legally discuss her finances with me, but I have asked them to address the issue hypothetically.

  • Uncle Pecos

    Guess I goofed. I did a backdoor conversion years ago. Since then, since vanguard never stopped me from directly contributing to the Roth (and my accountant raised no objection) I have been funding it directly without converting from traditional ira. So what now?

    • It’s not a goof if your income has been under the limit. If you earn too much to contribute directly, this is something that should have been picked up years ago.

      Consult with a CPA or tax attorney. If you used one to file your taxes, I’d start there and figure out how this happened.

      Best wishes,
      -PoF

  • mayojayo

    My money has finally “settled” and I was able to “convert to Roth” but it looks like it is staying in the VMMXX but just in the Roth account now. It’s currently in “pending” and I never got an option to place it into my REIT fund VGSLX.

    never got this option…
    https://www.physicianonfire.com/wp-content/uploads/2018/01/Vanguard_Backdoor_Roth_2019_11.png

    I wonder if it has something to do with the website update or if there’s a different way to make the conversion.

    Once cleared I imagine I’ll be able to exchange into VGSLX? Anyone else miss the option to select the fund where the money should go into?

    • BenRod

      Mayojayo, same with me. My Vanguard screens did not look like PoF’s posted here. I don’t remember it being like that in previous years, but looks like they are making me transfer it to my Roth in the same settlement fund. I suppose I’ll later have to move it into the funds I want in my pre-existing Roth.

      • mayojayo

        thanks for letting me know I’m not the only one!

        • Larry Ragman

          Same for me, but I attributed it to the difference between the old mutual fund structure and the new brokerage platform.

          Yes, you can exchange to another fund in the Roth once the conversion is complete (I just did this).

        • mayojayo

          thank you Larry,

          just completed the conversion now. lots more steps involved this year. hopefully Vanguard improves the process for next year!

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  • AD2018

    Hello,

    I have a SEP IRA for which I contributed to for 2017, now I am about to contribute to my Roth IRA for the 2018 year by using the backdoor method. Would I be able to do this? I don’t plan on contributing to my SEP for 2018. Or is having a SEP in general kind of preventing me from using the backdoor method.

    Thank you!

    • Read up on the pro rata rule (links above). You’ll owe tax on a prorated basis based on the balance of any IRA (includinga a SEP IRA) if you attempt the backdoor Roth.

      If the $6,000 non-deductible contribution represents 10% of the total (let’s say you have $54,000 in the SEP IRA), 90% of the conversion would be taxable.

      Consider the option I mention of earning some 1099 income via surveys or another method and opening a olo 401(k) to roll the SEP money into.

      Cheers!
      -PoF

  • azphx1972

    Thanks for this excellent tutorial! I’ve referred to it each year for the past several years to make sure I don’t make a mistake when making my annual contributions.

    FYI, I think there’s a slight error in the following paragraph:

    Note: if you’ve never done the Backdoor Roth, and you’re financially able, now is a great time to make one contribution for 2018 and another for 2019. If you’ve got an eligible spouse (and by eligible I’m referring to backdoor Roth eligibility), the two of you can sneak $22,000 into Roth accounts this year as long as you complete the 2018 contribution by mid-April, 2019.

    I believe the total is actually $23,000 since the 2019 contribution limit is $6,000 (a $500 increase over 2018). (6000+5500)x2 = 23000.

  • Jennifer

    Hello,
    I just deposited $6000 into my Vanguard Federal Money Market Fund (Settlement Fund) within my Traditional IRA account. Can I just transfer the funds from this account into my Roth IRA or do I need to first invest the funds in my Traditional IRA before transferring?

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  • Sijisoju

    I got my 1099-R on Vanguard. Last year I rolled over my trad IRA to my employer 401k, then did the back door.
    On my 1099-R all the boxes have two row; the rollover and backdoor. There’s no way on turbo tax to add an additional row. Even if I add both rows to get the gross, other boxes that have “x” mark are different in each row as the well as distribution codes. Any advice?

  • CJHU

    Love your step by step- I used it last year but it did not help me as well this year (2019) as the screen appearance and links have changed somewhat.

    • Did you transition from a mutual fund account to a brokerage account, by any chance?

      The screenshots in this post are from January of 2019. I still have a mutual fund account, which they are no longer offering to new customers (and will probably eliminate for all of us, eventually).

      Best,
      -PoF

  • YL

    POF, thank you for all your insights.
    I just made non-deductible $5500 contribution to my traditional IRA, and within two days converted the entire amount to Roth IRA. I designated the contribution is to 2018 although I did this just now (Feb/2019). I assume I will receive 5498 form in May but not 1099-R before filing the tax. So How do I do for 2018 tax filing? Should I only file for contribution to traditional IRA but not conversion to Roth IRA?

  • Adam Hutchins

    Sorry if this is a dumb question, but if we are doing this for the first time do we have to open a Roth IRA account first before doing the conversion. This is the first time I am doing it and when I select the convert to Convert to Roth IRA, it is prompting me to open a Roth IRA account first. Any help would be appreciated.

    • Yes, that’s what you need to do. It should be pretty straightforward. I’d walk you through it, but it’s been ages since I did it myself. Vanguard should be able to help if it’s not self-explanatory.

      Best,
      -PoF

      • Adam Hutchins

        Thanks a ton, PAF!! I just finished my first conversion and all the information that you included here was super helpful!!

      • Adam Hutchins

        Thanks a ton, PoF!! I just finished my first conversion and all the information that you included here was super helpful!!

  • Financial Free 123

    Well Vanguard sucks! I regret opening my solo 401 account at Vanguard which does not allow me to roll my SEP-IRA into the 401 K.

    If you are thinking of opening up an solo 401K account, don’t do it at Vanguard.

    I’ve had all of my investments in Vanguard for the last 20 years. Now I need to transfer my solo K to another institution then move all my SEP-IRA to them before I can even start my back door roth process.

    If I am mistaken, please let me know before I start this laborious process.

    • Vanguard as a company most definitely does not suck, but their individual 401(k) leaves a lot to be desired. You are correct in that it does not accept rollovers, and you’ll have to find a different provider for that. I chose E*trade due to its flexibility and access to great funds including many Vanguard and Schwab funds. I believe Fidelity’s solo 401(k) also accepts rollovers.

      Sorry you had to learn the hard way.

      Best,
      -PoF

      • Financial Free 123

        Yeah, Vanguard is good. It’s made me hundreds of thousands of dollar over the years. Was a bit frustrated after finding out that I cannot do the roll over.

        Another question though. If I do the Roth conversation of $6000 in addition to maxing out my solo 401K of $55000, does that mean I can put $61,000 total a year into tax free growth?

        Or does the $6000 in Roth limit my max of $55,000 in solo K. So I end up converting $6000 into Roth, and $49,000 left in solo K?

        If it is the former, than is a no brainer.

        • Those limits are completely different, so using the backdoor Roth option has no effect on your 401(k) contribution limit.

          The 2019 limit for the 401(k) is actually $56,000, but if you’re still making contributions for tax year 2018, $56,000 is the correct number to use.

          Cheers!
          -PoF

  • I found a new way to screw up the Backdoor IRA:

    I followed the Turbotax instructions provided in the blog post sometime in January.

    Two days ago I imported all of my tax forms from Vanguard to Turbotax (1099-DIV, etc). Turbotax imports at once all of your forms from Vanguard, regardless of the section you were currently working on (i.e, it imports IRA forms even if you were working on dividend income).

    Because of the above, the IRA information got duplicated and I was being taxed on the 5,500 Roth distribution.

    At the end of the Turbotax Roth IRA tutorial, they showed how to check the actual 1040, which is how I found the mistake.

  • Adhi

    I am planning on doing the back door roth for the first time. I never had a traditional IRA account, so it will be straight forward for me, but my spouse is unemployed and has a traditional IRA with $5500 that we contributed 3-4 years ago. I am not sure if my spouse can open solo 401(K). Please advise on the simplest way to do back door Roth for my spouse.Thank you

    • The simplest way, assuming that $5,500 in the traditional IRA is tax-deferred money, is to convert it to Roth and pay the taxes owed. If you don’t want to do that, she’ll need to have some kind of business in order to legitimately open a solo 401(k). Surveys or watching animals on Rover are a couple of easy business ideas.

      Best,
      -PoF

  • anthony b

    Amazing information. I’ve been a Vanguard client since 1998 with an existing Roth IRA.
    Starting this year I may be ineligible due to income. If I follow this process, would I have to open a new Roth, or would the conversion from the non-deductable IRA be merged into my existing fund. Hope this makes sense 🙂

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  • David

    If I have a traditional IRA with commingled deductible (taxable) and non deductible (non taxable) contributions and my basis in non deductible contributions is 73k and my balance is 198k, will I pay taxes on all of the earnings (appreciates value) as if they were all taxable? Is the non taxable distribution per pro rata rules only the 73/198 (~37%)?

    And if eligible for rollover to 401k at work so that I could backdoor roth, what would I need to do?

    Really appreciate your answer in advance!!

  • Matt

    Thank you for the great write up.

    My wife has pre-tax 401(k)s from a couple previous employers that we are yet to roll into her 401(k) with her current employer. Are they considered traditional IRAs at this point and subject to the pro rata rule?

    This probably seems like an odd question, but is there any way to check whether we have any IRAs we don’t know about?

    • A 401(k) is not an IRA so those are a non-issue.

      Check for an old IRA? I would hope you’re getting some sort of statement in paper or electronic form if you do. You can’t have an IRA through an employer. It has to be something you opened, so it would seem strange to have something like that just floating around that you don’t know about. It’s not like an IRA slips between the couch cushions. 🙂

      But hey, I hope you find some hidden money!

      Best,
      -PoF

      • Matt

        Cool, thanks for the info. You never know…I can be pretty careless, and many addresses over the past 20 years can be as concealing as couch cushions. My wife didn’t know about one of those 401(k)s until I asked her to look. If we can keep up this rate of discovery, we won’t need to make new backdoor Roth contributions.

        Thanks,
        Matt

  • Cristal

    Thanks so much for the tutorial! The screenshots are especially helpful! Just a quick question about the pro rata rule that someone may be able to help me with… I did not do a backdoor roth last year and so would like to contribute for both 2018 and 2019 now. I have an old SEP IRA that I am working on rolling over to a solo 401K. The pro rata rule says my SEP IRA balance has to be down to zero by 12/31/2019 to avoid taxes on the conversion. Will I be subject to the pro rata rule on the 2018 funds if I actually do that contribution and conversion now (in 2019) and if my SEP balance is zero (rolled into the solo 401K) by 12/31/19? Does it matter that the SEP balance was not zero on 12/31/2018 if the contribution and conversion were done in 2019 even if applied for 2018?

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