I 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 Ten. 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 1300 post comments section on my Backdoor Roth IRA tutorial. I am continually amazed 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.”
- Step # 1 Contribute $5,500 to a traditional IRA 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
It really is that simple. Which makes the rest of this post rather amazing actually. But sad experience has convinced me that this post must be written. Perhaps the biggest mistake is not doing your Roth IRA through the backdoor when your income was so high that you had to. That used to be easier to fix prior to 2018. Now you can’t do recharacterizations (no more Roth conversion horseraces) anymore, so it is even more important that you do it through the backdoor if there is any doubt at all as to whether your income will be too high for a direct Roth IRA contribution.
17 Most Common Backdoor Roth IRA Errors
# 1 Trickling In Contributions
# 2 Not Making the 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 an 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
My individual 401(k) is at Vanguard. It’s perfectly fine except for two very minor points. The first is that you have to use the more expensive investor shares instead of the cheaper admiral shares. The second is they don’t accept rollovers. If you’re opening an individual 401(k) mostly or partially in order to rollover a tax-deferred IRA to allow you to do Backdoor Roth IRAs, DON’T DO IT AT VANGUARD. Do it at eTrade, Fidelity, or Schwab. If I had it all to do over again, I’d do it at eTrade and just buy Vanguard ETFs. I may even move mine over there for the cheaper expense ratios if I ever get over my inertia.
# 7 Not Doing an 8606
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 8 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, just this year 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
Nothing confusing about this. Just one way down.
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. $5,500 each ($6,500 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 $5,500. 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.) $5,500/$5,500 = 1. For some reason, a lot of people think $5,500/$5,500 = 0. Want to pay too much in tax? Put 0 on line 10.
# 16 Worrying About Pennies
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 $5,500 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 $5,500 and have to pay taxes on the amount above $5,500 or you leave the amount above $5,500 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
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 $5,500). 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 $5,500.
If you have $5,500 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.
What do you think? What other ways do people screw up their Backdoor Roth IRA? Comment below!
Can backdoor Roth with a SEP IRA? If not, should I set things up differently? I am a self-employed specialist. I started my own solo practice when I finished training in 2015. I took on more debt to do this and made some expensive mistakes learning how to run a business. Fortunately, I was able to survive by just “running faster and farther.” Since 2017, my employees have been employed through a management company and they have a retirement plan available to them through that business entity that employs them. This management company controls my practice bookkeeping, HR, billing, collections, accounts payable, etc. All money left over from the practice (all revenues less all expenses) is passed over to my S-corp to run my payroll. So if/when the entire practice is in the red, I’m the only one who gets no paycheck. I am the only employee of my S-corp. My payroll is run at 400k per year (via my S-corp). The extra profits are handled as a distribution. Aside from my payroll, the only other expenses in the S-corp are business debts payments, equipment leases, assets (equipment) purchases, etc. My accountant and I decide how to handle those funds to minimize my tax burden (capital equipment purchases, small business debt payments, etc.). My profits in 2018 were 1.4 million, my AGI ended up being ~950k. I’ll be 36 years old this year. I expect my income to rise for the next few years as my partner (currently my employee) gets busier, buys half the practice and takes over half the shared overhead. However, I do not expect (or want) to keep up my current pace/volume for my entire career. What I am getting at, is that my income tax burden will likely be at its max for next few years. I elected to max out a SEP IRA for 2018 to tax defer as much as possible. I can’t figure out how to do a back-door Roth with a SEP IRA. The low max limits on individual 401ks made it worth forgoing a Roth (if I had to) to do a SEP-IRA. Any advice would be appreciated. I’d like to tax defer as much as possible THEN max out a backdoor Roth and only THEN wipe out low interest debts vs. invest in taxable accounts. My wife does not generate any income and does not have an IRA… I don’t know if there is a way to do some tax advantaged investing (deferred and/or Roth) in her name. I’ve finally turned the corner from a negative net worth to positive net worth and I want to minimize my financial mistakes. Any advice would be much appreciated.
Who owns the management company? If you, then your employees and you are all eligible for whatever retirement plan you offer through either company.
In short, I doubt you’re even eligible to contribute to a SEP-IRA. I don’t think this is going to pass an audit.
And no, you can’t do a Backdoor Roth IRA with a SEP-IRA.
What’s the point of having two businesses instead of one in this situation anyway?
Yes, your wife can do a Backdoor Roth IRA.
Oh I missed that the management company was an entity he established, I thought the management company was completely separate from him, like it was a staffing agency or something like that.
Can’t blame you, he wasn’t entirely clear, but I think that’s what he was saying.
WCI: “In short, I doubt you’re even eligible to contribute to a SEP-IRA. I don’t think this is going to pass an audit.” I am unsure, but it should be an easy call to a CPA (Can a self employed with no employees start a SEP-IRA ?). If not, surely the wife can become an employee in some legal & lawful capacity, no? That way he can fund his SEP and his wife the same percentage?
My point is he has employees because the two companies are basically looked at as one.
Thanks for all the great information. I don’t believe this exact scenario has been mentioned.
I contributed 5500 to a Roth account in 2018. In February 2019 I realized my income was too high to have contributed to the Roth, so through Fidelity I recharacterized the 5500 into my existing Fidelity IRA and then converted that 5500 back into the Roth. I believe this would have turned out well except the IRA it went into had 85,000 of Tax deferred rollover money from a previous employer’s 401k. As a result I suppose I will be taxed at my top rate on most of that 5500 conversion.
My intention is to simplify now that I have commingling of pre and post tax money in the same IRA which defeats the backdoor advantages. I believe my options are:
1. Convert it all and take a large tax bill (not preferred)
2. Keep track of the basis for contributions and withdrawals forever (not preferred)
3. Hoping to walk it back and unconvert the 5500 and then move the pre tax Ira money to my current employer’s 401k but I believe you can’t walk back a conversion making this option unusable.
4. I’m currently seeing if my employer 401k will accept the pretax money if I can show it separated out, but they seem resistant to believing it can be separated out correctly and a basis formed for transfer into the 401k. This is ideal if they will let me do it as I can then take the remaining 5500 and backdoor to Roth and the Ira would be empty every year for rinse and repeat.
5. Last option I’m not sure if this is allowed but based on reading other posts, open a solo 401k at Fidelity and see if they will allow me to separate out the Ira pre and post tax money and move the pretax money into it. I do have an EIN for rental properties I manage as well as some rehab flip real estate I do as a side job. Would this be allowed to have two 401ks (one I max at my employer) and another opened for the purpose of side business money but really being used to move that pretax comingled IRA money into (assuming Fidelity would allow it)?
Thanks in advance for any thoughts and advice.
Can’t do # 3 any more. You can’t recharacterize Roth conversions starting in 2018. So if you can’t separate out the basis somehow, you’re stuck with # 1 or # 2. Here’s how I separated out the basis of my TSP:
https://www.whitecoatinvestor.com/how-to-get-your-tax-exempt-tsp-money-in-to-a-roth-ira/
Your # 5 would work if Fidelity allows it. Basically, you just roll an amount equal to the total minus the basis into the 401(k), then convert the basis. If the 401(k) only accepts pre-tax rollovers (like most) then of course the basis is left behind when you do the rollover.
Question about step 5 (zero’ing out tax-deferred IRA’s). I plan to roll over my tax-deferred IRA to my employer sponsored 401(k) so as to comply with step 5 and not have to deal with the pro rata rule. But the 401(k) plan administrator’s rollover form says they only accept rollovers from the following type of IRA: “an IRA with no after-tax contributions.” My IRA was funded with after tax money in the sense that I funded it using my already-taxed earnings, but I (properly) took a deduction for the full amount of the IRA contribution on my taxes. Does that count as an “after-tax contributions”? Or is it considered all “pre-tax” because I fully deducted the contribution? I imagine this issue comes up quite frequently because many 401(k) plan administrators have similar restrictions on incoming rollovers.
Apologies if this has already been asked/answered in other comments.
No. That is pre-tax money since you took a deduction for all of the contributions. It’s actually a helpful 401(k) limitation to some docs because it helps them isolate basis to do tax-free Roth conversions of after-tax money in their 401(k)s.
Hi WCI, You are amazing. Thank you for all that you do. I have been reading like mad, and this process is still giving me a bit of an ulcer. I have a real fear of the tax man. Would you mind taking a look at my situation below and sharing any thoughts?
For year 2018, I contributed $5500 to my Roth when I wasn’t eligible due to high MAGI. I recharacterized this contribution to a traditional IRA (done after 12/31/2018). For pro-rata consideration, I do not have another traditional IRA, SEP-IRA, or Simple IRA. I do have an employer 401K, a 401(a), and a 457(b) account.
In year 2019, I also contributed $1000 to my Roth in error and withdrew this amount to a personal, non-tax advantaged brokerage account. I then contributed $6000 to my traditional IRA (non-deductable). I now plan on converting (i.e. backdoor) my traditional IRA (total ~$11500, 2018+2019) to my Roth account, and in the process, zeroing it out (including a few dollars in earnings, about $5).
On my 2018 taxes, I reported my excess Roth contribution of $5500 and filed my 8606 reporting my recharacterization to a non-deductable IRA (using Turbo-tax). My year 2018, 8606 form looks like this:
Line 1: $5500
Line 2: blank
Line 3: $5500
Line 14 (basis): $5500
So, given all of this, for my 2019 taxes, I plan on filing another 8606 and reporting 1) my excess $1000 Roth contribution and withdrawal of excess (to avoid penalty) 2) my $6,000 traditional IRA contribution and 3) my Traditional to Roth conversion of $11,500. If done correctly, I shouldn’t have tax liability correct (except on the $5 or so in interest gained when the money was in my traditional account)?
Did I get all of this correct?
Moving forward I plan to make a much simpler backdoor contribution as you outline.
This process has been very confusing. I appreciate your help/re-assurance.
P.S. I am a PhD, not an MD. That counts as white coat right?! : )
That’s right, there should be no liability.
Jim, a sincere thank you for your time and the education you provide.
Also very grateful. One piece of information I haven’t seen on these incorrect Roth contributions and required recharacterizations, how does it fall out for penalties and 5498 reporting? This came up because I just received my 5498 thinking I should now have my final backdoor Roth conversion considered only to learn from the brokerage that anything done in 2019 would be on the following 5498 (received in 2020). I did an incorrect Roth contribution (AGI too high) in 2018, recharacterized it back to traditional in Jan 2019 at the suggestion of my CPA, then converted to my Roth IRA right away thinking all was ok. Then the 5498 comes still showing a Roth contribution in 2018. I am guessing it doesn’t matter as long as the 8606 for 2018 is filled out correctly (I have an extension for 2018)? Is there no penalty for crossing tax years between an incorrect Roth contribution and the recharacterization/conversion to get the back door Roth? I took it from the opening dialog to this article that it is “fixable” just harder since tax laws changed on recharacterization. Not sure if I’m hosed or ok as long as the 8606 is done correctly.
The only change is you can’t recharacterize a conversion, which you didn’t do.
Not sure why your 5498 shows a Roth contribution in 2018. It seems to me you did a traditional contribution for 2018 as far as the IRS is concerned.
I was told by Schwab that if a Roth contribution is made in 2018 and not converted in calendar year 2018 then it stays on record as a Roth, hence the indication on the 5498. Hoping the CPA will clarify, my thinking is that the 8606 sorts it out when the 2018 tax return is accomplished, and the indication of “roth contribution” on the 5498 is not necessarily a tax collection related event that the IRS cares about. After all, normal Roth contributions are not taxable and not reported on the tax return since after-tax funds are used. However, if they are checking to see if you had too much income to make a Roth contribution, then I would think they care. It almost has to go back to the 8606 being the final say if you are indeed allowed to convert to traditional and back to Roth the following tax year. This brings up another question, if the conversion of a 2018 contribution is done in 2019 is it documented on the 2019 or 2018 8606? I’m thinking it must be the 2018 8606 to make the contribution “back-door” and allowed, otherwise would be disallowed in 2018 due to AGI being too high.
You told me it was recharacterized and thus treated as a traditional contribution. I don’t fill out 5498s. They’re filled out by the IRA custodian. My custodian doesn’t even send it to me, they presumably just send it to the IRS.
Yes, it was recharacterized to traditional and moved back into the Roth IRA account (I was using word “converted” for both transfers), but all was done in Jan/Feb 2019 for an April 2018 contribution. I’ve since heard from the CPA and gone over the brokerage statements, it should “come out in the wash” when the 2018 return is completed. Schwab lists conversions and recharacterizations under the Contribution and Distribution Summary sections of the monthly statements for each account — its all in the English. Funds leaving the traditional account are listed as a Roth conversion but with no year label. So, the original Roth 2018 contribution remains as a 2018 Roth contribution in the records, but is technically a converted back door Roth IRA (2019 conversion), but with some earnings, so no disallowance or penalty should result. I always have received 5498s mid-year and even have a corrected one, but they are not used to prepare tax returns, maybe they would support an audit.
Thank you so much for this tread, I have been an avid follower since I started residency, but unfortunately I have fallen under mistake #1 – trickling in contributions as well as another mistake that is not listed above. I started my Roth IRA during residency and maxed out my yearly contributions by doing automatic monthly contributions.
I am now an attending (as of July last year) and unfortunately, I forgot to discontinue my monthly contributions to my Roth IRA.
For the year thus far I have already inadvertently contributed $2000 to my Roth IRA.
I have already discontinued my automatic contributions to the Roth, but I am wondering what I should do now.
Recharacterize the contributions, then convert them.You’ll owe taxes on the earnings.
Thank you for this website! It has changed my life!
Sorry if my question is a repeat question. I tried to do a backdoor ROTH for 2019. I contributed $6000 from my bank account to a Traditional Vanguard IRA. After a few days, I rolled over $6000 from IRA to a Roth-IRA at Vanguard. Unfortunately, I now have $5 in the IRA account (from interest) from awaiting for bank to clear. I successfully rolled over $6000 into the Roth-IRA prime money market fund.
What can I do with the $5 of interest that remains in the Traditional IRA since we have to zero it by 12/31/2019? Can I roll that small amount into my 403b, 457, or DCP plan to zero out my IRA?
If I cannot do the above, would you prefer leaving in the IRA or converting what’s left over $5 into the Roth IRA (and essentially overcontribute by 5 bucks)?
Thank you!
Convert it.
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
Thank you WCI for all your wisdom. I just recently learned about your site and realized I made a few of these mistakes and was hoping for some advice. I contributed $5,500 into my Traditional IRA on April 12th 2019 for the 2018 tax year. I then mistakenly recharacterized it to my Roth IRA on April 16th 2019 (day after tax day). I was following a different website that used the wrong verbiage thus leading to my misunderstanding. I have just recently realized my mistake and have recharacterized the money back into my traditional IRA. I now have $5,550 in my traditional IRA. I was hoping you could help me understand a few things: Can I still convert the money, should I rollover the additional funds into my employer 401k before converting the $5,500, what year/ forms will I be completing (2018 v. 2019 and 8606 v. 1040x), and finally is this something I should try to do myself on TurboTax or hire a CPA (my taxes are otherwise uncomplicated). Thank you for your time in reading this. I definitely won’t be making these same mistakes now that I’ve come across your website.
Yes.
Uh oh. You contributed/recharacterized non-deductible money into the same IRA as tax-deferred money? You’ve just mixed the cream with the coffee and made things more complicated. You might be able to separate out the basis and convert it by rolling the tax-deferred money into a 401(k). Alternatively, convert it all and pay the taxes on the tax-deferred bit.
Contributions are reported on the taxes for the year for which the contribution is made. Conversions are reported on the taxes for the year in which the conversion is actually done.
I would feel very comfortable reporting all that on Turbotax but you would be in the majority of docs if you hired an accountant to assist.
I have a solo 401k. 19k goes to Roth portion this year. I was thinking of moving the employers contribution, (the remainder 37k going into trad solo 401k) , to a traditional ira and then converting this to Roth IRA Combined with using backdoor personal ira to Roth, leaving Roth IRA flush and the traditional ira zero every year. I already have a lot in trad 401k so eventually doing this would be pretty even between Roth’s and traditional. What do you think?
No need to stop in a traditional IRA. Just go straight from the solo 401k to a Roth IRA if you want to do that. Kind of classic for a Mega Backdoor Roth IRA. It’ll cost you a lot of taxes of course, but if you think it makes sense in your situation, you may be right. Bear in mind the rule of thumb is to max out tax-deferred options during peak earnings years. Going all Roth goes against that. So if by “a lot in traditional 401(k)” you mean $5M, then it’s probably a good idea. If by “a lot” you mean $500K, it probably isn’t.
Thank you for your quick reply. I just signed up for your email service and have loved your blog so far. I have 1m so far so no where near the 5m. I may need to rethink. What I was considering is including my itemizations and reduction of business tax burden using a reinsurance product my overall personal bracket is low, near 24% last few years sometimes lower. . I’m afraid when I stop all the complexities during retirement and change to withdrawals only I may be in higher tax bracket. I suppose I can only guess. My goal is to have about 5-8m in next 20yrs between contributions and growth. Perhaps I should do balanced now between solo and Roth 401k. My lean toward Roth is because we are at such low tax rates right now it’s hard for me to imagine any lower. I need to read more about your video workshops as I’m sure I’d learn more. Thanks.
You may be right. If you’re in 24% now and expect to have $8M in 20 years then all Roth may very well be right for you.
I have spent last several days educating myself from your amazing site and just bought your book off of amazon also. According to your criteria a mega backdoor Roth is worth me considering. As a physician, I am so glad you are doing this with your life and educating all of us.
Your previous comment to me on the Mega Backdoor Roth conversion led me to your article about doing those. I could fall into Variation #1, except my current broker doesn’t allow after tax 401k donations. I could ,of course, change brokers, however, To me, this doesn’t seem like totally necessary, but is where I need your help.
My question is:
Wouldn’t I just be able to donate the $37k (as the employer in my solo 401k) which gives me the corporate tax deduction (Im LLC filing as S corp), then turn around and do an inservice distribution from the 401k to a Roth IRA which my plan does allow?
This last step will generate a tax consequence and 1099 of course to me personally, but I think it would wash out between the employer tax deduction from the 401k donation and personal 1099 from the conversion if I did them within a short period of time since S corp taxed as pass through. Thanks for your time.
Yes, if the plan allows it, you could do that. The business would get a deduction for the contribution and you would have a tax bill for the conversion. But in effect it would be the same as a mega backdoor Roth except as regards the 199A deduction, if that’s a factor for you (that’s why I’m doing a MBD Roth.)