By Dr. Jim Dahle, WCI FounderI may not be the world's foremost expert on Backdoor Roth IRAs, but I'd be very surprised if I wasn't in the Top 10. I've been helping people with a Backdoor Roth IRA nearly since the beginning (i.e. 2010). I think at this point I've seen every mistake, certainly 99% of them. Most of those are demonstrated somewhere in the 1,300 post comments section on my Backdoor Roth IRA tutorial. I am continually amazed at how complicated people can make something that can be so simple. I mean, the only possible way it could be made simpler is if Congress would just allow high earners to contribute directly to a Roth IRA. Today, we're going to go through the most common ways to screw up the Backdoor Roth IRA. But first, a brief instruction on how to do it “right” in 2021.
How to Do a Backdoor Roth IRA
- Step #1 Contribute $6,000 ($7,000 if 50+) to a traditional IRA account during the calendar year, investing the money into a money market fund
- Step #2 Convert to a Roth IRA the next day, investing the money into your selected investment fund
- Step #3 Follow the written IRS instructions to fill out Form 8606 properly or double-check that your tax preparer did so
More information here:
How to do a Backdoor Roth at Vanguard
How to do a Backdoor Roth at Fidelity
17 Most Common Backdoor Roth IRA Errors
#1 Trickling in Contributions to Your Backdoor Roth IRA
To be fair, this isn't technically an error. I mean, you can do the backdoor Roth IRA this way if you really want to make your financial life more complicated. I think this error occurs from people trying to automate their financial life a la The Automatic Millionaire. They divide up their $6,000 contribution into 26 biweekly periods and every time they get paid, they put a little money into the IRA. If married, they do it for their spouse too. Maybe it makes their budgeting easier, I don't know. Perhaps they learned about the benefits of periodic investing/dollar-cost averaging and want to try to do that. Some of these people even do the conversion step each time they make a contribution. But by the end of the year, they've made over 100 transactions when they could have done four (halve those numbers if you're single).
I don't know about you, but I've got better things to do with my time than do an extra 100 transactions that I didn't have to do. Even if you put the contributions on auto-pilot and only do the conversion at the end of the year, you're still overcomplicating things (not to mention creating some tax drag). Save yourself some time and don't do this. If you make enough money that you have to contribute to a Roth IRA through the backdoor, you make enough to make the contribution all in one lump sum. Do your Roth IRA in January, your spouse's in February, and then move on to the 401(k) or 529s or whatever in later months.
#2 Not Making Your Backdoor Roth IRA Contribution During the Calendar Year
Here's another one that is super common, so common there's an entire post about how to fix it. Technically, it's not an error because you are allowed to contribute to a backdoor Roth IRA up until tax day in April of the next year. But don't do it if you can avoid it. The problem is that people learn about the Backdoor Roth IRA and realize it's already past the new year and they want to do a contribution for the previous year. Or they procrastinate. Or they do the first step and then forget to finish. So the very first time they do the Backdoor Roth, they've got to do a more complicated version. It's way easier to do the 8606 when it looks the same every year!
#3 Not Doing the Conversion During the Calendar Year
Here's a third one that isn't technically an error. I mean, it's not illegal or anything because there is no deadline for a conversion. You can do the conversion step now, later in the year, next year, or in 30 years without breaking any rules. But it makes your 8606 more complicated. And the longer you wait for the conversion step, the less tax-free growth you will see.
#4 Not Knowing the Pro-Rata Rule
Now we're starting to get into where you're actually breaking the rules. Line 6 of IRS Form 8606 (the form on which the Backdoor Roth IRA is reported) requires you to list the total you have in traditional IRAs, rollover IRAs, SIMPLE IRAs, and SEP-IRAs (but not Roth IRAs, 401(k)s, or any other type of retirement account) as of December 31st of that tax year.
You want this number to be zero. Make it zero.
#5 Choosing the Wrong Way to Deal with a Tax-Deferred IRA
So how do you make it zero? You have two choices. If the account is small, it is best to just convert it and pay the taxes. Not only does that require little hassle, but it also makes your Roth IRA bigger. If the tax-deferred IRA is large, you probably don't want to pay the tax bill on that. So you should roll it over into your employer's 401(k) or 403(b) or your own individual 401(k). Don't have a 401(k)? Go do some surveys online, get yourself an Employer Identification Number (free and takes 2 minutes online), open an Individual 401(k), roll the tax-deferred IRA in there, and get on with your Backdoor Roth IRA.
There's no minimum self-employed income required to open an Individual 401(k). I don't think you actually even have to have any income, but I'd try to get yourself at least $10 of profit for your “business”. Technically you don't have to do this step before doing the contribution and conversion, you have until the end of the year as long as you don't put your contribution into this same IRA. But don't put it off. The deadline is December 31st and things get really busy at investment companies the last week of the year.
#6 Open Your Individual 401(k) at the Wrong Place
I used to have an individual 401(k) at Vanguard. It had two problems back then. They didn't allow IRA rollovers and they used the slightly more expensive Investor Class shares. They have since changed both of those. They now take IRA rollovers and they use the less expensive Admiral Class Shares. Wherever you open an i401(k), make sure it has the features you need, particularly if you need to roll a traditional or SEP-IRA into it in order to facilitate the Backdoor Roth IRA process.
#7 Not Doing an 8606 Tax Form
During the Roth IRA process some people, including both those who prepare their own taxes and those who get help, simply don't include Form 8606 on their taxes. Not only is this illegal, but it will likely end up in you paying too much in tax. The good news? You can go back and file 1040Xs for the last 3 years. Include the 8606 this time, and fix it.
#8 Using a SEP-IRA or SIMPLE IRA Instead of a 401(k)
There are lots of resources out there that talk about the merits of using a SEP-IRA or SIMPLE IRA for your side gig or even your practice. That advice was probably fine pre-2010. It's fine for non-high-earners too. But it's not fine for you, because of the pro-rata rule.
An individual 401(k) is a little more paperwork, but it's not bad. It has to be opened before the end of the calendar year, unlike a SEP-IRA, but is that too much to ask? I mean, you don't even have to make the contributions before the end of the calendar year, you just have to open it. It has higher contribution limits than the SIMPLE IRA and you can max it out on less income than a SEP-IRA. What's not to like? Nothing.
#9 Fearing the Step Doctrine
Lots of people and their advisors are worried about The Step Doctrine. This is an IRS doctrine that says if the sum of all the parts is illegal, the transaction is illegal even if all the individual steps are legal. People have worried the IRS could apply this doctrine to the Backdoor Roth IRA, even though they never did to any single person in the last eight years, tens or hundreds of thousands did a Backdoor Roth IRA every year, you don't report the dates of the contributions or conversions to the IRS, and the most prominent financial publications in the land have written about it. “Too risky,” the misguided advisors said. They recommended you wait months or even years between the contribution and conversion steps so you could argue to the IRS that you really didn't contribute to a non-deductible traditional IRA just to convert it to a Roth. And then somehow did the same thing the next year. Give me a break. I practically dared the IRS to audit me on this point. No dice. At any rate, in 2018 Congress clarified that I was right, so consider this my victory lap. To be clear, you do NOT have to wait any period of time between the contribution and conversion. The next day is fine.
#10 Confusing a Backdoor Roth IRA and a Roth Conversion
I know, I know. They both have the word Roth in them. They must be the same thing. The Backdoor Roth IRA even includes a conversion step, so I suppose it shouldn't be surprising that people get confused. But there is a key difference. When you do the conversion in the Backdoor Roth IRA process, there is no tax cost. With a Roth conversion, there is almost always a tax cost of some kind. A Backdoor Roth IRA is a no-brainer. Deciding whether to do a Roth conversion requires weighing a number of competing factors and often making assumptions about an unknown future. Don't confuse the two.
#11 Confusing a Backdoor Roth IRA and a Roth 401(k) Contribution
While we're on the subject of confusing stuff, here's another one. A Backdoor Roth IRA is not the same as a Roth 401(k) contribution. With a Roth 401(k) contribution, you're trying to decide which is better—tax-deferred or tax-free. That can be a difficult decision. With a Backdoor Roth IRA you're choosing between taxable and tax-free. That's not tricky. That's a no-brainer. Just do it.
#12 Forgetting the I in IRA = Individual
INDIVIDUAL Retirement Arrangement. That means one for you and one for your spouse. $6,000 each ($7,000 if 50+). That means you each fill out your own 8606 each year. That means if one of you can't do a Backdoor Roth IRA due to your employer using a SIMPLE IRA or you have some huge SEP-IRA you can't get rid of (online surveys are just too hard) your spouse can still do one. Your spouse doesn't even have to have any income, as long as you have enough income to “cover” him.
#13 Not Understanding What Basis Is
Line 2 of Form 8606 asks what your basis is.
Basis is money that has already been taxed, so if you convert it, there is no tax cost. The instructions for that line say:
Generally, if this is the first year you are required to file Form 8606, enter -0-. Otherwise, use the Total Basis Chart to find the amount to enter on line 2. However, you may need to enter an amount that is more than -0- (even if this is the first year you are required to file Form 8606) or increase or decrease the amount from the chart if your basis changed because of any of the following:
- You had a return of excess traditional IRA contributions (see Return of Excess Traditional IRA Contributions, earlier).
- You received part or all of a traditional IRA (see the next to last bulleted item under Line 7, later).
- You rolled over any nontaxable portion of your qualified retirement plan to a traditional or SEP IRA that wasn’t previously reported on Form 8606, line 2. Include the nontaxable portion on line 2.
This line confuses people more than any other on Form 8606. Here's a tip. Enter $0. That's probably right most of the time and certainly right if you're doing your Backdoor Roth IRA the way I recommend you do so (i.e. contribution and conversion steps both during the calendar year).
#14 Skipping Form 8606 Lines 4-13
See that little box there by line 3? The one that says skip most of the form (and which didn't use to be on the 8606)? That only applies to people who didn't do a Roth conversion during the calendar year. If you did your Backdoor Roth IRA the way I tell you to (contribution and conversion during the calendar year) you don't get to skip those lines. That's because you did a Roth IRA conversion during that tax year. Those lines aren't so bad. Just follow the instructions.
#15 One Divided by One Is One, Not Zero
Math time. See line 10 on Form 8606? It makes you do math. See?
Usually, line 9 is going to be $6,000. So is line 5, at least if you're doing your Backdoor Roth IRA the way I tell you to (contribution and conversion during the calendar year.) $6,000/$6,000 = 1. For some reason, a lot of people think $6,000/$6,000 = 0. Want to pay too much in tax? Put 0 on line 10.
#16 Worrying About Pennies and the Backdoor Roth IRA
Here's another thing that throws off so many people I wrote an entire post about it. These folks make their contribution, then a little while later do the conversion step. Even if they kept things really simple, doing the conversion shortly after the contribution and leaving the money in a money market fund while it was in the traditional IRA, there is likely a little more than $6,000 in the traditional IRA when it comes time to make the conversion.
So one of two things happens.
- Either you convert a little more than $6,000 and have to pay taxes on the amount above $6,000 or you leave the amount above $6,000 behind in the traditional IRA. If the amount is less than 50 cents, don't worry about it. Nobody cares. On your taxes, the IRS is perfectly fine with you rounding everything to the nearest dollar.
- If the amount is more than 50 cents, then try to include it in the initial conversion or do a second conversion if the IRA custodian will allow it. If they won't, no big deal, just fill out the 8606 right (there will be a few dollars on line 6) and convert it next year with your next Backdoor Roth IRA (and do it right this time so the amount left behind is < $0.50). Honestly though, even if it is a buck or two, if you only round to three places like line 10 tells you, it still rounds to 1.000.
#17 Not Checking Your Work on Form 8606
Whether you prepare your taxes yourself, or you pay somebody else to do it, you need to check Form 8606 before it is submitted. It is actually more complicated to fill out 8606 using Turbotax than to do it by hand (so if using Turbotax see Harry Sit's excellent tutorial). Either way, you need to check your work. So what do you check? You check lines 15c and 18. These lines should have $0 on them (not $6,000). If you're not doing your Backdoor Roth IRA the way I recommend (contribution followed rapidly by the conversion both within the calendar year), there may be something else on one of those lines, but it should be a whole lot closer to $0 than $6,000.
If you have $6,000 on either of those lines, you're going to be paying tax twice on the same money and you're throwing away a couple thousand bucks. Be sure to check your spouse's too.
That post ended up being longer than I expected, but I hope it is useful to those of you who are still becoming familiar with the Backdoor Roth IRA process. Don't worry, if you do it right all you have to do next year is copy the previous year's form. If you've made one of these errors, here's how to fix the mistake.
How does the Backdoor Roth IRA fit into your investment plan? If you don't have a plan, you need to get one in place. Invest in Fire Your Financial Advisor: A Step by Step Guide to Creating Your Own Financial Plan! Try it risk-free today!
What do you think? What other ways do people screw up their Backdoor Roth IRA?
Thanks for all the info on this site. Lots to learn on my end, and appreciate your knowledge WCI. Going to catch up and stop doing prior year contributions for clean 8606’s.
In January 2018, made 2017 contribution to my tIRA for a backdoor ROTH and then called my brokerage. Stupidly told them it was a recharacterization to the ROTH rather than a conversion.
Got my 2018 1099-R with the “R” code on it and noticed my mistake as we are married filing separately and are beyond the $10k ROTH contribution limit.
1) Any way to reverse or change this from a recharacterization to a conversion or is it too late?
2) if changing to a conversion is not possible, what’s the best way to handle this now? Pay a fee, take the money out with early withdrawal penalty? Or will the IRS have pity and hear my pleas for my vocabulary blunder?
Regardless, learned my lesson. Hoping it’s not too expensive of one.
1. You need to recharacterize it back. Then reconvert it. I think you can still do that. Call them.
2. See # 1. I would not just leave it and hope it flies.
Lee,
Like you, I made the same mistake. Thus, I received a 1099-R. I called Vanguard and they told I’ll have to complete the Form 4852 and they don’t send these forms out until May. Is that true? Have you called them? Was your issue resolved? WCI, I think you should do a blog to let your readers know when calling Vanguard for the Backdoor IRA make sure they stressed the word CONVERSION not recharacterization. When I spoke to the representative he kept on saying recharacterization and I thought it was the same as conversion. Hopefully this issue is resolved.
Thanks for the tip. Agreed that conversion and recharacterization are two very different things.
First of all, thanks for putting this together. I’m trying to follow your instructions but something is not adding up. Line 14 is coming up as a negative number, Subtract line 13 from line 3 (line 13 will generally be a bigger number than line 3 right since you have to multiply line 7 by 10 per line 12?). For me line 7 would be 0 since it states DO NOT include conversations to a Roth IRA or recharacterizations of traditional IRA contributions. I’m extrapolating my numbers from Form 1099-R to complete the 8606 but I feel like I’m doing something wrong as I’m not getting the values that you speak of. Perhaps I can send it to you to see what i’m doing wrong?
Line 14 definitely should not be negative. Line 13 generally should not be more than line 3.
I don’t know what you are doing wrong because I don’t know what you did. If you can tell me what you did, I might be able to help you report it correctly. For example, what were your IRA contributions, when did you make them, what year were they for? What were your conversion amounts and when were they made?
I made the maximum contribution in 2018 ($5,500), but as you mention in mistake #1 I did the trickling contributions, $500 per month (didn’t know any better and hadn’t read that part of your blog until the end of last year). I called Vanguard the end of December to convert the traditional IRA to the Roth IRA and recharacterize it.
Okay so you contributed $5,500 in 2018 as a 2018 contribution and you converted ? ~$5,500 in 2018. Simple 8606. You just need to follow the directions. Somewhere you screwed them up. Let’s go line by line and see where that is.
1. $5500
2. 0
3. 5500
4. 0
5. 5500
6. 0
7. 0
8. ~5500
9. ~5500
10. ~ 1
11. ~5500
12. 0
13. ~5500
14. 0
15. 0
16. ~5500
17. ~5500
18. 0
That’s what it should look like. Where is your error?
Commenter just emailed 8606. There was a math error on line 11. It was $55,000 not 5500.
Omg, I feel so silly! I misread the instruction for line 11. Instead of multiplying line 8 by LINE 10 I multiplied line 8 BY 10! I guess that’s what happen when you’re trying to do your taxes after a long shift. Thanks Jim, you’re a lifesaver.
Endless thanks for your website and Fire Your Financial Advisor course, from myself and my physician husband (OGATL).
Situation:
I was contributing to Roth IRA during residency, graduated in 2017.
In 2018 as an attending I made too much to keep contributing to the Roth IRA but did not realize, and at end of 2018 thanks to WCI guidance, I recharacterized into tIRA before doing backdoor Roth conversion.
However, foolishly did not remember to stop automatic biweekly transfers to Roth IRA, so one last contribution was made.
This required a separate recharacterization, and the subsequent conversion was not completed until 1/2/19 so the balance in the tIRA was $209.36 on 12/31/19.
What are the ramifications of this? Can it be corrected? Any other things to consider if we file married jointly versus separately? My husband also (correctly) did his backdoor Roth conversion.
You’ll have an ugly 8606 for 2018 and 2019, that’s it. Just convert it this year and it’ll all be fine.
Hi!
I became an attending August 2018 and so for 2018 will have made too much money to contribute to a roth IRA. I did not realize this and so Feb 1st 2019 transferred money into my roth IRA as a 2018 contribution for my fidelity account. I am trying to figure out the best way to rectify this situation without paying too much in taxes/penalties but also not breaking the law. The money is just in the fidelity roth IRA account and has not actually been invested in anything yet so has not made any money. I’ve come up with a couple of solutions but unsure if actually the right thing to do.
1. Move the money from the roth out of the account and into a traditional IRA and then a couple of days later move it back to the Roth as the “backdoor roth IRA”
2. leave the money where it is at and invest it with the other roth and then pay the fees at the end of the year
3. Move the money out and back to savings account and then skip 2018 contribution and try for the 2019 backdoor IRA
Any advice on what to do in this situation?
Thank you for any help!
You don’t need to leave comments on multiple posts for me to see them. I’ll see all of them. If you’re hoping others will see them, you’re better off posting them on the forum.
You’ll need to recharacterize the contribution to a traditional IRA, then reconvert it. There is a waiting period between the two, don’t violate it.
https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions
sorry for the multiple comments, first time posting and didn’t realize the first one had gone through. Thank you for the information!
WCI,
First time poster, long time follower. Thank you for all your help over the years.
A few years ago, an accountant advised me to put some money into a traditional IRA. Since then, I have done my own taxes instead and maxed out my and my wife’s Roth IRAs. I became an attending in July 2018, and this year would have been my first time doing the backdoor Roth. In anticipation, I tried to get rid of all my tax-deferred accounts, namely the traditional IRA, at the end of 2018 by transferring the funds from a traditional IRA at Vanguard to my 403b at TIAA. However, due to delays from both Vanguard and TIAA, it wasn’t completed until end of Jan 2019. Since I technically still had money in the traditional IRA on Dec 31 2018, then I think I am subject to the pro-rata rule.
1. Am I still able to do a backdoor Roth IRA without incurring the pro-rate rule in any way or is it a no-go for 2018 now? Any other alternatives for 2018?
2. Is there anything I need to keep in mind for backdoor Roth in 2019? Perhaps I should just call it for 2018 and just do the backdoor Roths for 2019 now instead?
Thank you for your help.
1. Just do the conversion in 2019 and empty out the traditional IRA by Dec 31 2019. No big deal, just a little uglier 8606s for 2018 and 2019. The tax consequences are the same.
2. Do 2019 too.
WCI,
Similar situation to Eric. An old traditional IRA balance as of 31 Dec 2018 will roll into a 401K this month, Mar 2019. Not realizing the income jump in 2018, I had directly contributed to my Roth IRA for 2018 and 2019. I’ve had Vanguard re-characterize to T-IRA this month, Mar 2019. At this point, I don’t have a Backdoor Roth and the 8606 for 201 8 just reflects the T-IRA basis and a statement addressing the re-characterization.
If I convert the re-characterized T-IRA balances to my Roth IRA after the old tax-deferred amounts are moved to my 401K, will I be able to reflect this on the 8606 somehow to avoid the Pro-rata for 2018? Otherwise, if there isn’t a way to accurately reflect this on the 8606 for 2018 should I just wait to convert until 2020 as the only balance in the T-IRA at 31 Dec 2019 will then be the basis and earnings/losses for 2018/2019 non-deductible contributions.
Thanks for your guidance.
Who cares if there is a balance on 12/31/2018 if you don’t do the conversion until 2019? That’s when the pro-rata calculation is done.
Re: #5 – I max out both 403 and 457 accounts with my employer. My wife is home with kids. We file jointly. Three questions here:
1. Am I still eligible to roll over traditional IRA money into an individual 401K?
2. As a stay-at-home mom, my wife has no way to put money away for retirement… or so I thought. Can she get an EIN, open her “business” and contribute to an individual 401K that way?
3. If the above holds true, can I roll over any traditional IRA money into my wife’s individual 401K or does it have to be under my own name?
Thanks. Appreciate your website and advice.
Yes if you have self employment income. But the easiest thing is to just roll it into the 403b.
If she has a legitimate business. Not “business.” Business. Otherwise she’s limited to a spousal Backdoor Roth IRA.
Retirement accounts are always individual. You can’t roll one of yours into one of hers.
401k / 403b accounts are “individual” as well in that each has its own set of rules as to when and if you can roll money into it.
Check with your provider.
Yes, but most allow rollovers into the plan because that increases the AUM.
Just to clarify, I don’t have any self-employment income and I already max out my 403b (and 457). I suppose I’m not familiar with rollover rules, but am I still allowed to roll my traditional IRA money into 403b, even if the latter is maxed out? Does the $6,000 limit between traditional and Roth accounts apply here?
I was also confused about having legitimate business. WCI, in the original article you said one could get an EIN and not even have any minimum income/profit in order to be able to contribute to an individual 401K and used the word “business” in quotes. Thanks.
Yes.
No.
Not true. You need a real business with at least some income in order to contribute and roll money into an individual 401(k). You don’t need a lot of income, but you need some. That business can be doing physician surveys for which you are paid 1099 income or something relatively easy to start like that. But it does have to be a real business with a real EIN and a real individual 401(k). You can’t just pretend you have one. But in your case, just use the 403b. For most docs, the side business is just moonlighting in their specialty for a 1099.
Understood. Thank you.
One last question related to pro-rata topic – I can roll my traditional/pre-tax IRA balances to my current 402(k) in order to get most of the year end balance to -0-, how do I treat an inherited (non-spouse) pre-tax IRA? Is it excluded or included in the total IRA balance? I haven’t been able to find anything through the irs.gov site, but maybe I’m not looking at the right spot. Thanks for such a thorough discussion via this post and comments!
Inherited IRA doesn’t count.
Big fan of WCI here, can’t thank you enough.
I’m following the steps and converting the IRA to a ROTH IRA, but I am being asked to withhold 4.5% for state income tax (Michigan). Is that typical? Should I be paying 4.5%?
No. Don’t have anything withheld.
Hi – Thank you so much for all of your great posts and explanations on the backdoor Roth.
I tried to read through pages of comments and don’t see the answer to this question…..
Last year I put $5500 in the Traditional IRA, and forgot to move the money before December 31st (had a baby on the end of the year and didn’t realize I should have done it all in January anyways!). I have a total of about $7000 in the T-IRA at this time. I’m not a physician (a nurse and professor!) and don’t think I’m eligible for an individual 401K.
-What is my option to move the money from my T-IRA so that I won’t be subject to pro-rata? I’d like to be able to fund a backdoor Roth this year.
Thank you so much!
Was the contribution deductible for you? If so, you’ll owe taxes on it when you convert it. If not, you’ll only owe taxes on the $1500. But either way, if you want to start doing Backdoor Roth IRAs, just convert the whole thing to a Roth IRA, pay the taxes due and then move forward doing it again for 2019. No big deal, you just have to fill out your 8606s right. (Contribution goes on 2018 8606, conversion on 2019).
No, the contribution was not deductible.
I already filed my taxes for 2018 so do I need to do an amended return with the updated 8606 after I do the conversion? Thank you!
Yes.
I’ve followed you for awhile but this is my first time posting! I’m pretty sure I royally screwed up my desire for a Backdoor Roth by doing a conversion instead. I only have been working three years. My second year out 2016 my income exceeded what was permissible for a Roth IRA and I already had contributed so I recharacterized a little over $2200 to a traditional IRA from my Roth IRA. Then in 2017 contributed $5029 to my traditional IRA. For some reason I thought this year I would just convert everything in my traditional IRA to my Roth IRA so I used the convert to Roth IRA button on vanguards website and contributed all my holdings in my traditional Ira ($8110) to a Roth IRA in November (all from contributions from 2016 and 17). I still contributed $5500 to my traditional Ira for 2018 as well. Does the conversion just mean I pay taxes on the $8110 I converted at this years tax rate? I definitely did not keep it simple on this one and am hoping to learn to avoid future mistakes. The money in my traditional Ira was also sitting in a target date retirement funds so will I need to calculate earnings? My accountant asked to reach out to my financial advisor to talk about the conversion but I don’t have one so I’ll have to do some explaining with him.
Not sure you really botched anything. Was your traditional IRA for 2016 deductible? Probably not. So most of that conversion isn’t going to be taxable. You’ll owe taxes on earnings and anything you got a deduction for.
Speaking of non-deductible tIRAs, if you contribute your post-tax money there and then roll it over to your employer-based 401k, which is pre-tax, how do you avoid paying taxes on the portion you rolled over when you retire? It’s mixing apples and oranges to me and I can’t quite figure out how you do it. Thanks.
Don’t roll non-deductible money into a 401(k). Convert it to a Roth IRA.
Reason I asked is I wanted to set aside additional money for retirement in a separate non-employer-based IRA account. I was going to do that with a traditional IRA, but realized that I would need to zero it out every year in order to convert $6K to Roth. Is there a way to do that or do I just put any extra retirement money into a regular brokerage account?
No IRAs are employer based. They’re INDIVIDUAL retirement accounts. Of course you zero out the traditional IRA each year. That’s the point of the Backdoor Roth IRA process- you move the money from the traditional IRA to the Roth IRA.
Sorry, I may not have been clear. After maxing IRAs offered by my employer, I would like to set aside more than an additional $6K a year for retirement. If I put all of that extra money into a traditional IRA, then when I do the backdoor Roth on just the $6K, I would be subject to the pro-rata rule. I was wondering if there was a way to set additional money aside for retirement AND still do the backdoor Roth without invoking the pro-rata rule. Thanks!
You can only contribute $6K a year into an IRA. That’s it. Additional savings must go elsewhere like a taxable account.
Thanks, WCI. That cleared it up.
Thanks for your response! Got it sorted out with my accountant and looks like I will just pay taxes on the earnings. I’ll try to follow your step by step for next year.
Working on 2018 taxes…I’m using Vanguard for our back door Roth’s. In ~February 2018, I made 2017 contributions of $5500 for myself and my wife. My 2017 form 8606 was filled out by my accountant and it was consistent with the WCI post that refers to 8606’s when I make the contribution in the next year. I then also made 2018 contributions in ~May 2018 for my wife and I. Shortly thereafter I converted $11,025.59 for me and $11,020.64 from our traditional IRA accounts to our Roth IRA accounts.
I received a 1099-R for each of us from Vanguard and the ‘Taxable amount’ in box 2a is $11,025.59 and $11,020.65. I was expecting to have to pay taxes on the gains but it doesn’t seem right that the total amount I converted to my Roth IRA should be taxable right? Did I make an error somewhere or did Vanguard get this wrong?
Was the “taxable amount not determined” (2b) box checked? If not, you can request Vanguard send you a new one with that checked.
There is an ‘X’ in both areas of Box 2B ‘Taxable amount not determined’ and ‘Total distribution’. Does that mean I’m good? First time seeing this form…I appreciate the help!
Yes, you’re good. Just fill out the 8606 right.
I am new to this as far as me trying to be proactive rather than leave the retirement stuff to my financial planner. I thought I knew enough but now I realize I am just dangerous but your post, emails, etc are helping me get through the weeds. I currently contribute 60K though our profit sharing plan and last year I was in the 35% marginal tax bracket. In a different account, I have about 170K in a traditional IRA that I haven’t contributed in for the last 20 years or so. Can I convert or rollover some of that into a Roth IRA (backdoor) or mega? And if so, am I taxed on that rollover at 35%? Thanks.
Yes, you could convert it all to a Roth IRA, but the tax bill will be quite large, $170,000 * 35% = $59,500. Sure you want to do that? If you just want to do a Backdoor Roth IRA, why not roll it into your 401(k)/PSP instead of converting it?
Also, be aware the contribution limit for a 401(k)/PSP for 2019 is $56K, not $60K.
Hi WCI! Thanks for your posts, I’ve been reading all of them. Wanting to clarify timing:
I’m a 2nd year attg trying to get all my ducks in a row.
I have pre-tax non-deductible 7k in a Vanguard traditional IRA that I want to get rid of before starting backdoor Roth IRA contributions. I want to convert it to a Roth IRA now, and I called Vanguard and they said it’s too late for 1099Rs to come out for TY2018 so I will pay taxes on it for TY 2019. Can I make a backdoor Roth IRA contribution as detailed in your tutorial for TY 2019, or do I have to wait until TY 2020? Thanks so much!
It’s not about 1099Rs, it’s the fact that it is 2019. It’s been too late since you got that kiss on New Year’s Eve.
You can still do a 2018 contribution until tax day, but any conversion you do this year will be reported on your 2019 8606. No big deal. People do that all the time.
Thanks for your quick reply!
Gotcha. But if I make a 2018 contribution of $5500 after I convert the 7k out (since there was 7k in my traditional IRA on 12/31/2018) I’ll be subject to the pro rata rule on the 2018 8606 right?
Unless what you mean is both conversions will show up on my 2019 8606 –
1. 7k pre tax traditional IRA to Roth IRA – Pay income tax for TY 2019
2.. 5500 backdoor after tax traditional IRA to Roth IRA – no income tax
And I would just do #2 between 1/1/2019 and 4/2019?
Thank you so much…
Yes, that’s what I mean. All conversions done in calendar year 2019 will go on the 2019 8606.
Contributions done for tax year 2018 in calendar year 2019 go on the 2018 8606.
Pro-rata rule never applies until you do a conversion. Since you didn’t do a 2018 conversion, it won’t apply on your 2018 taxes.
I get it now. Thank you so much. So as long as I convert that pre tax traditional IRA to Roth IRA before 12/31/2019 then I will avoid pro-rata rule for TY 2019 conversions and I can put 0 on line 6 for my 2019 8606. Got it!
You are so great! Thank you!
That’s right. You’re welcome.
I am pre-filling out my 2019 8606, which will report both 2018 and 2019 backdoor Roth IRA contributions of 5500 and 6000 respectively, in addition to the 7000k pre-tax traditional IRA to roth IRA conversion. It is a little ugly but I think I did it right, what do you think?:
1. 6000
2. 5500
3. 11500
4. 0
5. 11500
6. 0
7. 0
8. 18500
9. 18500
10. 0.622
11. 11500
12. 0
13. 11500
14. 0
15a. 0
15b. 0
15c. 0
16. 18500
17. 11500
19. 7000
My question is, will the 1099R from Vanguard report out the 1040 4a (total IRA = 18500) and 4b (taxable amount = 7000), or do I put line 19 in on 4b? I’ve looked for 1099R form examples and I’m not certain how mine will show both the pre-tax and non-deductable IRA conversions.
Thank you WCI :). You’ve inspired me to force my husband to contribute to a Roth IRA before he graduates from his 7 year residency.
Why would you prefill a 2019 8606? That’s not due for a year. Bear in mind the 2018 8606 reports the 2018 contribution. The 2019 8606 reports the 2019 contribution and the conversions.
As far as your 8606, there should be a tax bill on that $7K conversion so your 15c should be $7K or so (maybe $7K + $30). So there must be an error. Let’s see if we can find it.
Why is line 6 $0 instead of $7000?
I don’t know what the Vanguard 1099R is going to look like, but you’ll need to keep working on this until the taxable amount is $7,030.
Line 6 is 0 because I will have already converted the tIRA by 12/31/2019 so that there will be 0 in that account.
My line 18 shows a taxable amount of about 7k (7030, as you say), I mistakenly wrote line 19 in my previous post. Are you saying that line 15c also has to show 7030? I’ve triple checked the math and the only way I can get 15c to show 7030 is if my line 7 is 7030, which would just not be true (I did not take any distributions from an IRA).
You’re right. I got confused for a second there thinking it was a 2018 8606.
No, I think you’re right. You’ll pay tax on $7030.
Last year I used urbotax for first year after years of using an accountant. I did not carefully check the 8606 and realized I did not include the 2016 basis in the calculations (it was not obvious in turbotax where to enter this) which I discovered when doing my taxes this year. I also was subject to pro rata penalty as my backdoor conversions were setup by my advisor and done on Jan 2018 for the 2017 year and then in January of this year for 2018.
On the upside, I do not think I would have learned that this is the wrong way to do things without going through the exercise of doing my own taxes and finding my way to your site. I have now corrected this so it won’t happen again in 2019, but I have a balance on line 6 on both 2017 and 2018 taxes.
Using corrected numbers, my AGI was falsely elevated and I overpaid last year and because I did not report the basis from 2016 (I had previously converted a SEP IRA to roth so I had a basis that carried over), now the basis on the 2018 taxes is erroneously low and the taxable amount on line 18 is erroneously high (as it was last year) so I will overpay again, and it will be erroneous on next year’s as well if I don’t correct the numbers before filing.
Do I give up and file and extension and try to fix the 2017 return and file a late but correct 2018 return? Do I use the corrected basis I calculated from 2017 on my 2018 8606 and just move on? Is there a way to just pay tax on the excess 700 (total in the account of 6200) that was left in the traditional IRA on Dec 31st, since I did the 2017 conversion in 2018 and the 2016 conversion in 2017, or do I just have to pay the “dumb tax” on the whole thing for not doing my research?
I am going to back to using an accountant next year- but at least I know how to review the forms. Painful lesson.
Why do you need to file an extension? You can’t file a 1040X for 2017 and your 2018 taxes by April 15th?
I haven’t been able to find an accountant to help me and I am not sure how to approach this problem. It doesn’t seem right to have to pay tax on the 5500 but sinceI has 6200 in the traditional ira on dec 31 I don’t know how to make the math work to avoid it. Do I just put 700 in that box and leave out the 5500 even thought the end of year statement says 6200? Since that is the only part I should really be paying taxes on?
I agree it isn’t right to pay taxes twice on that $5500, so I don’t think you should do it. If you already did, file a 1040X with a corrected 8606. If you got pro-rata’d for a year or two, no big deal, just clean it all out this year by converting it all to Roth. Just make sure you fill out the 8606s right and it’ll all work out in the end.
I can’t tell you how to fill out your 8606 because you’re not giving me all the details. Why not write down exactly what you did (when you made contributions, how much, when you made conversions, how much etc) and then start at the top of the first 8606 you need to correct (2016?) and work down from there through the 2016 8606, the 2017 8606, and the 2018 8606. Then compare to what was actually done, and if it was done wrong, send in a 1040X with a corrected 8606.
I use betterment for all my retirement savings. Does anyone know how to do the backdoor roth on betterment?
Btw… for those of you who did not know… if your filing status is MFS and you make more than 10k per year… you cannot make ANY roth IRA contributions. I had to learn this the hard way. I have to withdraw my 2016 and 2017 contributions and amend my tax returns. I recharacterized my 2018 contributions as Traditional IRA, and now I have to do the backdoor to get it back into a roth IRA.
As I recall they have a Backdoor Roth IRA button on Betterment. Just hit that.
Thanks. Just spoke to Betterment. They call it a conversion and it’s pretty easy to do online like you mentioned.
Confused me because your article says conversion is not the same as a backdoor.
A Backdoor Roth IRA is an indirect Roth IRA contribution. It has two steps- a non-deductible contribution and a tax-free conversion.
There are some Roth conversions that are not Backdoor Roth IRAs and are in fact taxable.
Hope that helps.
I’m confused about the pro-rata penalty. What is the penalty if your traditional IRA balance is not 0 on December 31st?
Can someone tell me how it will affect me. I recharacterized my $5500 2018 Roth IRA contributions as Traditional IRA in Feb 2019. And then I will be converting it into Roth in March 2019. Everything is nondeductible (post-tax money). How does the pro-rate penalty apply here?
Just work through 8606 and you’ll see what your penalty is. It’s going to be a non-issue tax-wise for you, just a little extra paperwork.
Thanks!
This is such a great post! Right now, my wife and I are still allowed to contribute to a roth IRA, but in a couple of years, we’ll go the backdoor roth option. Our 403b and 457 does not accept rollovers and we have about $50,000 in our Vanguard tIRA in VTSAX. Please tell me if this is the correct step to do in a few years to get my tIRA balance to zero.
1) Fill out some online surveys and get compensated. (Do you have any recommendations?)
2) Apply for a EIN from the IRS.
3) Open an Individual 401K at Fidelity and not Vanguard. (Any difference between Individual and a Solo 401k?)
4) Rollover the $50,000 in my tIRA to the newly opened Individual 401K.
5) Now with a $0 balance in my Vanguard tIRA, contribute $6,000 to their Federal Money Market Fund and not VTSAX.
6) Next day, convert the $6,000 to my Vanguard roth IRA.
Maybe reverse 1 and 2.
3. No difference.
The rest looks fine.
wow that was a fast response! Thank you!
Just a follow up. I started doing surveys from 2 websites (Amazon mturk and prolific). I hear they don’t give out 1099s even if I make more than $600. Is that going to be a problem when I do my taxes?
I forgot that you mentioned to create the EIN first and then do surveys second. Is it okay if I apply for an EIN now? Is it one EIN per survey site or one EIN across multiple survey sites, dog walking, uber, etc?
Would my wife need to create her own solo 401k if she wants to do a backdoor roth in the future ?
Lastly, would you choose Fidelity and their 0% fee index funds or Vanguard ETFs at eTrade? I already invest in VTSAX for my Vanguard IRA.
Thanks!!!
No. Just claim the income on Schedule C.
One EIN is fine.
I don’t know. Does she need to rollover a big IRA and not have a job or something? That’s the point of an i401(k) as it relates to the Backdoor Roth IRA. Most people just use their employer’s 401(k) to roll IRAs into.
I prefer Vanguard, but only barely. https://www.whitecoatinvestor.com/expense-ratios/ I own the Fidelity funds in my Fidelity accounts and the Vanguard funds elsewhere.
I’ve recently come across the website and have absorbed so much already. Thank you! My wife and I are residents but I have extremely high debt and she has no debt (due to MD/PhD). We will be filing MFS so I can switch into a PAYE plan to minimize my payments since I plan on doing PSLF (out of REPAYE). Since MFS makes us ineligible for roth IRA, we plan to use the backdoor roth. Is there any easy way to adhere to rule #1 as residents who in prior years contributed monthly to the roth via frontdoor? I was thinking contribute to a savings account all year then lump sum contribute at the beginning of the calendar year into the tIRA with immediate roth conversion but that also seems like unnecessary time lost in the market to follow rule #1.
Good point that it’s tough to do it in one fell swoop as a resident. You could just save it all up and do it all at once, invest it in the IRA bit by bit and then convert it all at once or do a dozen Backdoor Roths. Your call.
Thanks for the quick response. And looking through the 8606 tutorial, the number of transactions has no bearing on how I fill out the form, correct? It’s not like I have to report each transaction, just the total $ of contributions+conversions for the year.
That’s correct.
My wife is a physician with the VA and we’re just discovering the FI community within the last couple of months. We want to leverage as much savings as possible. She’s currently contributing the max to TSP 401k. I’m a stay-at-home dad with $0 income for 2018. We want to do backdoor Roths for her and myself (spousal) for both 2018 before the April 15 deadline and 2019 asap. However, I have money in a Vanguard Rollover IRA where I merged 6 of my old 401k’s into from prior employers ($190k). As I understand it, I CANNOT successfully create a backdoor for myself for 2018 as I had no earned income in 2018 and thus cannot move my IRA money into an i401K. Wanted to confirm this with the community if anyone has any background.
Assuming this is the case my current strategy would be to 1. create Backdoor only for my wife for 2018, 2. generate some business income for 2019, create EIN and then create i401k for myself and transfer IRA to i401k. Thus opening the door for a 2019 Backdoor for myself as well.
You need income in 2019, not 2018 to open an i401(k) and roll the IRA in there before Dec 31 2019.
Right, but just to clarify, my wife can still squeeze in a 2018 Backdoor (before April 15), but because of my existing IRA and $0 of income in 2018, she will not be able to do a Spousal 2018 Backdoor for myself, right? Thanks for all you do for us in the community!!!
Yes she can still squeeze one in.
Yes, you can still squeeze a 2018 one in if you have 2019 income.
The pro-rata rule only applies in the year you do the conversion (2019) not the year you do a contribution for (2018).
Thanks VERY much WCI for all you do. Just to summarize here’s my game plan:
1. Setup 2018 and 2019 Backdoor Roth for Physician wife at Vanguard per your steps above.
2. Create EIN for myself at IRS,
3. Create i401K for myself at eTrade and move my existing IRA at Vanguard to eTrade i401K per your recommendation against Vanguard’s i401K. I’m presuming that my Rollover IRA account at Vanguard needs to be $0 before I can then contribute more to it and convert it to Roth. And, I need to have this completed by April 15, 2019 to get my Spousal Backdoor complete for 2018 tax year.
4. Fund Backdoor Spousal Roth for 2018 and 2019 at Vanguard by April 15, 2019.
5. Listen to your Audiobook!
More or less.
If you use a separate IRA instead of the same IRA, you have all year to do the rollover. The only real deadline you’re facing is making a 2018 traditional IRA contribution by April 15th. You don’t have to do the rollover, open the i401(k), or do the conversions before then. You have all year.
Thanks so much WCI. Just to further granularly clarify, you said “Separate IRA instead of the same IRA”. Does that mean separate IRA account at a separate institution, or could it be a new IRA account at the same institution? My current rollover traditional IRA is with Vanguard. I’ll be moving those funds to eTrade as soon as I can get the i401K set up but it’s taking a little time. Application is submitted, just waiting on eTrade to complete their process. I suppose I could just skip the potential wait if there needs to be a larger separation of funds and just create my soon-to-be backdoor at Schwab or Fidelity . But Vanguard did tell me I could have multiple IRA accounts with them.
I think you can do it at the same institution. If you’re going to eTrade anyway, maybe open it there.
WCI,
Well, just when we thought we were in the clear: My wife and I nailed out $5500 each before 4/15 into IRA’s at Vanguard and eTrade, then converted them both. A few weeks later we got 2019’s $6000 each done as well. HOWEVER, now the CPA steps in. When we were filing our taxes for 2018 she stated we could, because of our income limits, still contribute $240 each to a Roth… which we did not do. Although, as it turns out, she reported that we did in our 2018 return. I’m sure we need to file 1040X’s anyway for the conversion process, right? She was suggesting somehow withdraw $240 from our 2018 contribution, but I don’t understand where we’d put it. Perhaps the amended return needs to state that we contributed $0 to Roth directly, and $5500 each by conversion. Right?
Even if you are eligible to contribute directly to a Roth IRA, you can still do it through the backdoor. The only problem I’m seeing is that the CPA said you were doing something you didn’t actually do. I guess the CPA will have to file a 1040X for doing that!
I’m stuck on the 8606.
Quick summary. I was not allowed to make any roth IRA contributions due to income restrictions. I recharacterized my $5500 Roth IRA into a traditional IRA in 2019, and then converted back into roth IRA.
On turbotax, do I report the $5500 as a traditional IRA contribution, or as a roth IRA contribution that was then recharacterized into a traditional IRA.
If I do the latter, it does not ask me if I converted traditional IRA amount into roth IRA. In the section on turbotax where it asks if you made any traditional IRA contributions, it clearly states there “do not include roth IRA contributions that was later recharacterized into traditional IRA” (or something along those lines).
I’m not sure how to do it on Turbotax, I’d call their support line if I couldn’t figure it out. But a frequent work-around for Turbotax is to switch to Forms mode (might be only available on desktop) and do overrides of the numbers the program enters into the forms automatically.
The IRS says treat it as a traditional IRA contribution when you fill out the 8606.
Okay so I redid the section by treating it as a traditional IRA contribution. But turbotax never asked me if I converted some of it to Roth IRA. Is this because I entered the contribution was made in 2019?
When I change it to forms, I see that line 18 asks for the “net amount converted from Traditional to Roth IRA in 2018. “
Have you checked out Harry Sit’s excellent Turbotax Backdoor Roth IRA tutorial?
https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html
I’d do one too but how could I make it any better?
Okay. So I forgot that since the conversion for 2018 was done in 2019, I won’t be entering the conversion until next year.
On betterment, both my 2018 and 2019 traditional IRA contributions are in one traditional IRA account. If I convert it into a roth IRA, the entire account gets converted. How will I know the individual 2018 or 2019 amounts that were converted to roth IRA? Do I need to know? Do people usually have one backdoor roth IRA account, or multiple roth IRA accounts for each time they convert a traditional IRA account?
Is there any section on the 8606 that keeps track of your total backdoor roth IRA balances?
Doesn’t matter. You just report the total amount converted in any given year.
Just one account of each is fine.
No.
Perfect. I have a question not specifically about Backdoor.
I am not allowed to make any direct roth IRA contributions. But by mistake I had contributed for 2016 and 2017. And when I look back at my tax returns, I never mentioned these contributions.
Last month I withdrew both my 2016 and 2017 Roth IRA contributions (along with associated gains). This means I’ll be getting my1099-R next year. My question is… what is the next step?
Do I amend my 2016 and 2017 returns after I receive my 1099-R next year? Or do I amend them now? Will it change my penalty if I do it this year vs next year? I was told that if I remove my excess contributions by the 2018 tax deadline, I don’t have to pay penalty for the 2018 tax year. The penalty is 6% per year that the excess is not withdrawn, plus 10% on earnings?
What part of the 2016/2017 mess do I mention in my 2018 return? Do I just not mention anything and wait till next year to deal with it?
Actually I’m not sure if I even have to amend previous returns. Can I just pay the 2016/2017 penalty when I do my 2019 return?
I’m curious what will happen in your situation. I think I’d expect at least a limited audit when the IRS puts two and two together. But maybe they won’t notice.
I suppose maybe you can just get it all fixed on your 2019 taxes (assuming you’re paying the penalties and taxes due). The meter has stopped running on the penalties, so I guess I’d just do it next year.
What’s confusing is everyone says something different. The turbotax CPA says I can just pay the penalty when I do my 2019 return, and I don’t have to do any 2016/2017 amends. The local CPA I spoke to recommending doing the 2016/2017 amends. But he is charging $170 per amended return. So idk who to trust.
I don’t feel sure enough to make a definitive recommendation, but there’s obviously some gray if two CPAs disagree.
This question is in regards to back taxes. I filed my 2017 taxes on time, at the end of last year (2018) I received a letter from my state stating that they did not receive my 2017 tax return and if I did and have a copy of it to send it to them. I did filed the state return and submitted electronically (maybe they had a glitch in their system?), had a copy of it, I sent it to them. I guess didn’t pay attention to the state return then. It turned out that I was supposed to receive a small return from the state, which they sent to me this year. My question is if you owe back taxes, do the IRS charge you interest if it was not paid then. If so, if they owe you back taxes are they supposed to pay it back to you with interest?
Yes. They usually do. But state tax commissions are much more of a fly by night operation.
We have been doing backdoor Roth’s for 4 years now, plus the contribution already made for 2019.
My wife was notified by her old financial person that he discovered a balance that was not moved when we closed accounts with him and transferred everything into Vanguard. After looking into it, the account has contact info from about 3 addresses ago and there is a ~$1000 balance in an old Simple IRA.
How in the world do I untangle this?
What a mess. I’d convert it ASAP to a Roth IRA. If the IRS asks, I’d explain what happened. If they demand it, I’d refile 1040Xs with 8606s for the last three years.
Any reason to convert to Roth IRA and pay taxes vs rolling back into an employer 401K?
It’s only $1000. The Roth conversion is quick and easy and my usual go to for small amounts like that.
New to backdoor roth ira and filing 2018 taxes. I opened a traditional IRA with Vanguard (as per tutorial) with $5,500 and then converted same day to Roth IRA, did exactly the same for my wife. Our 1099R shows a distribution of $5502, is this what we are each reporting in form 8606?? Thanks!!
You don’t need to post your questions in multiple places for me to see them. Just once is fine. I answered on the other post that you’ll owe taxes on $2.