By Dr. James M. Dahle, Emergency Physician, WCI Founder
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 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
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
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. $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
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.
What do you think? What other ways do people screw up their Backdoor Roth IRA? Comment below!
I am leaving fellowship and have a roth 403b and roth 401a that I plan to move to my roth IRA when I become an attending during the summer and leave the university. Will I still be eligible to do the backdoor Roth IRA given this transfer?
Sure, why not?
I’m an idiot and didn’t know about the aggregrate rule. I just did my first back door roth for both my husband and myself last year, but also have $300K in a roll over IRA. Is there a way to undo what I’ve done? Or do I just need to suck it up and take the double tax hit on the $12,000 we put it?
Thanks for your help.
No. Starting in 2018 you can no longer recharacterize Roth conversions. So you’ll be “pro-rata’d” on her 2019 Roth conversion. Technically, you’re not getting a double tax hit. You paid taxes already on ($6000/300,000)*$6,000 and you are paying taxes for the first time on ($294,000/$300,000)*600,000. But the bottom line is this is going to add something like $1500-2000 to your 2019 tax bill. It’s not the end of the world. If I were you, I’d roll that big IRA (minus the basis you now have in it) into a 401(k) and convert the basis to a Roth IRA with your 2020 Backdoor Roth IRA this year. But nothing is ever actually double taxed as long as you keep good records of your basis.
Regarding “mistake” #1: Other than the extra few minutes per year it takes to do several contributions (say monthly for example), are there any other potential issues with making multiple contributions throughout the year rather than one lump sum? For those of us who adhere to a budget, making a monthly ROTH IRA contribution makes life much simpler and probably increases the yearly time burden of making transactions by a few minutes, which I am more than willing to sacrifice.
My understanding of reading through the 8606 form is that you simply report your yearly total contribution without having to break up individual contributions by date. Also it seems even if you have a few dollars of traditional IRA earnings from one transaction or another, they all get lumped together when determining tax implications right?
Am I missing something about “mistake #1?”
No, you can do it. But I wouldn’t because you’re going from 2 transactions a year to 24. That’s a lot of additional complexity in your financial life. If you make enough to have to do your Roth IRA through the backdoor, you make enough that lump summing it all at once shouldn’t be any hardship.
Fantastic read. Quick question. I talked to my Schwab guy, and he didn’t instill confidence in his answer… so figured I’d try to confirm here: I just learned about the “backdoor” Roth IRA, and I’d like to start contributing ASAP. It’s currently January, 2020. I have a traditional IRA with approx $5,900 in it. Am I assuming correctly that it’s too late for me to convert/transfer that tIRA money into my Roth IRA for 2019, since the tIRA needed to be at $0 by 12/31/19? Also, am I allowed to make the $6,000 contribution to the tIRA for 2019 and then convert everything over ($11,900) to the Roth IRA for 2020. Basically, I want to contribute as much as I can now, and set myself up for future (more simplified) success. Thanks so much in advance for any help!!
You can convert it in 2020, just make sure it is zeroed out by 12/31/2020. I’m amazed that I answer this question 3 times a day all January long. How could I write the post better so people got that?
Yes, you can still make a 2019 contribution. And a 2020 contribution. And then convert all $17,900, paying taxes on the $5900 (I assume that’s pre-tax, but maybe it isn’t.)
Here’s how I screwed it up… I made regular ROTH IRA contributions of $6,000 each for me and my wife in 2019. We ended up earning more money than anticipated, which put us over the income limit for ROTH contributions. Just this month (Jan 2020) I recharacterized those to traditional IRA contributions, then did ROTH conversions for the $12,000 plus earnings. My understanding is when I file my 2020 taxes at this time next year I’ll have to pay ordinary income tax on the earnings portion.
Question though, does anyone know if I’ll have to file an 8606 for this (2019) year’s taxes? Will I be able to make another round of backdoor ROTH IRA contributions for 2020 (during calendar year 2020) and file these on the same 8606 forms with my 2020 taxes? Or will I now have to miss out on a year of ROTH IRA contributions because I did my recharacterization/conversion for my 2019 contributions during the 2020 calendar year? Thanks to anyone who might be able to help with this
Yes, you’ll have to/want to file them.
Yes, you’ll be able to do a 2020 BD Roth. One 8606 per person for each tax year.
No, not missing out on anything.
Being a high earner is a blessing and comes with responsibility. Here’s my concerns in my field we are only allowed to be a W2 wage earner all income is W2 no Corp. I contribute the max to the 401k and an additional 10% to deferred compensation plan.
Tax time is always a stress I am tax so heavily both fed and state (Calif). I like the back door ROTH plan however I am still paying heavily in taxes. Unfortunately I too have an ill feeling for financial planners. (Too long of a story). I own 4 properties (1 is primary) and have no debt except the real estate properties which I am paying as quickly as possible. What do you recommend for someone in my earnings for a tax benefit or break?
I recommend you get a financial plan.
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
It wouldn’t surprise me if that plan involved selling some properties and maybe even moving. The biggest tax break available to you is likely leaving California if that’s an option.
So #10 is still confusing.
When I tried to “convert” my traditional IRA money to Roth IRA with Merrill Lynch, they made me fill out a form: “IRA/IRRA® to Roth IRA Conversion Form”.
This has an item: “withholding election” on there.
Here it says: “Federal Withholding:
Please note that if you do not make a withholding election, federal income tax will be automatically withheld from your distribution at a rate of 10%.”
Now is this a Backdoor Roth conversion or a Roth conversion?
And how am I supposed to tell??
Same thing. Set it at 0%.
I am having a hard time figuring out how to fill out my taxes. Last calendar year (2019), I contributed to a traditional IRA, first 5500 and then 6000, to use for 2018 and 2019 backdoor roth $$. I changed both amounts to a Roth IRA for both 2018 and 2019. I use the word “changed” because your post says it is not a “conversion” but the software says what I did is a “conversion”. I am using H&R block online. The problem is, when I’m filling it out, there is no direct information about when I’m entering information that would go into form 8606. Should I use different software? Or should I be using paper to fill out my taxes? It almost seems like writing it out on paper forms would be easier than using a software program, but I have never done taxes on paper before.
The terminology is just so confusing to me. It also wants me to check “I converted a traditional IRA” and/or “I contributed to a Roth IRA”. If I in fact “converted” the traditional $$ to the IRA, did I also contribute? Or does a conversion not count as a contribution?
I think I should have someone else do my taxes because I really don’t understand the language, but all of the posts about tax preparers messing these things up make me nervous. Should I just fill out my own taxes on paper? Your posts make it seem so simple, but the language you use doesn’t seem to align with what the tax preparation software uses.
I think this will fix your issues:
https://thefinancebuff.com/how-to-backdoor-roth-hr-block-software.html
And yes, it is a conversion. It just doesn’t cost you anything because you already paid taxes on that money.
Ok great, thank you! I will use that website.
I’d like to do the Backdoor ROTH but I’m in the predicament of having the deductible and non-deductible funds in my IRA. I have multiple 401Ks from previous employers that don’t take the IRA rollover. I also just lost my job this year. While I’m in my job search, I’m thinking I should just get EIN number and open Solo-401K that accepts IRA rollovers and get the Backdoor ROTH done that way. Incidentally, I’m thinking of rolling all my previous employer 401Ks into this Solo-401K. During that time I guess I can do some small things like online surveys under the EIN.
– What happens if get a full time job and don’t make any money under the EIN this year or even years going forward? What happens to the Solo 401K? Will the IRS get mad?
– Is it a good idea to roll over all the previous 401Ks into the Solo-401k? Are there any bad implications to do this? Is there more costs/paperwork (maybe above certain balances?). Is it bad to have it all in one 401K? My main attraction is the simplicity, control/availability of investments, and lowering costs.
Appreciate any advice!
You have to have a business to open an i401k, preferably one that makes at least some money. But once you have that, it could certainly help you clean things up. Alternatively, you could just convert the whole thing and just pay the taxes on the tax deferred dollars.
1. Technically, a business only has to make money in 2 of its first 5 years, but an obvious sham may not hold up in an audit.
2. If you qualify for the solo 401k, sure, why not?
Hello,
I feel a little embarrassed to tell my story and ask the questions here, but at the same time I feel like I have to ask them anyway for my help and others’. I rolled 2 old 401K money plus 1 old 457B from previous jobs into a new IRA (about $500K) created with help of a financial advisor at the beginning of 2019. On my request, at the end of 2019, we opened 2 Backdoor Roth IRAs, one for me and one for my wife. However, after reading this article, I think he did not do it correctly, and I will be hit by the pro rata rule. For my backdoor Roth IRA, he “rolled” $6000 from my $500K rollover IRA (which is where I think I will be pro rata’d, defeating the whole purpose of the conversion). For my wife’s, he rolled 6000 out of 6,700, available in a new IRA opened few months earlier, into her new backdoor Roth IRA, leaving behind the 700 in the IRA.
1- Are my fears justified about not doing the conversion right and being hit by the pro-rata rule for 2019?
2- Was it even a mistake to take the 6000 out of my rollover IRA instead of creating a new non deductible IRA and then into my backdoor Roth IRA for 2019?
3- Is there a problem of having the left over $700 on my wife’s IRA? Can we use those 700 and complete 6000 in order to fund her 2020 backdoor Roth IRA?
Your mistake was rolling those 401(k)s into an IRA. Sounds like malpractice by the advisor to me. Those IRAs need to be rolled into a 401(k), THEN do your contribution THEN do your conversion. Frankly it would have been easier to leave the 401(k)s alone or roll them all into one 401(k) or your current 401(k).
1) Yes. You’ll definitely be pro-rata’d.
2) Yes.
3) Can’t quite tell what’s going on here. There’s no “problem” there other than the problem you started with that you have tax-deferred money in IRAs instead of 401(k)s. The limits are on contributions, not conversions.
Thank you, Jim, for your quick answer. I will definitely transfer the monies in my “rollover IRA” to my 403b at work this year, which will likely end up terminating my business relation with my advisor (we have become “kind of friends” during the time he’s been my advisor, although I already told him I plan to do the transfer).
1) I’m curious about what is the part so bad that sounded “like malpractice by the advisor” to you.
2) Also, in a separate issue, do you think it is appropriate to make the transfer of the money during the current volatile market, or wait until it gets stabilized (even though we don’t know when that will be)? The money is invested roughly 2/3 in mutual funds and 1/3 individual stocks, and my advisor is telling me that “down markets” are not good times to do the transfer. I don’t know now if his advise is trustworthy (for obvious reasons).
1. The part about rolling money into IRAs (he likely gets paid on the IRA money but not the 401(k) money) in someone who wants to start doing Backdoor Roth IRAs.
2. I know it’s a pain in volatile markets, but it could go either way. Maybe your money is out of the market while the market drops. But the opposite could obviously happen too.
Thanks so much for the detailed breakdown of the Backdoor Roth! Before reading all this, I acted too quickly and made a few mistakes and was hoping for some guidance.
So, a few months ago, I put in $6000 into my wife’s Vanguard Roth only for my CPA to tell me that we don’t qualify for Roths anymore because my fellowship + attending salary for 2019 (became a new attending in August 2019) brings us above the minimum AGI. Without realizing that I could have just withdrawn my Roth contribution, I set out to do a backdoor Roth so I transferred the funds into a Vanguard traditional IRA. BUT then I learned of the pro rata rule and she has about $7500 in a Fidelity traditional IRA. On top of all this, I realized after January 1, 2020 that I should have opened an individual 401k for her to roll the Fidelity IRA over into to avoid the pro rata rule (SO many mistakes, I know).
Her Vanguard traditional IRA has grown to about $6400 now over the last few months (yay, I guess). This leads to a couple questions:
1. Is there any way I can perform a backdoor Roth IRA for the year 2019 for my wife completely tax-free?
2. Let’s say I can’t do it for 2019 but want to convert for 2020 once I roll the Fidelity IRA money over into an individual 401k. Are there any penalties/disadvantages for leaving the remaining $400 in the tIRA for the rest of the year?
Any recommendations would be super helpful! Suffice to say that I’ve learned my lesson and will hopefully not be in a predicament like this again!
1) Hard to tell what’s going on exactly. But the only deadlines are on contributions. You and do a conversion at any time. If the money is pre-tax or earnings, then you’ll pay taxes on the conversion. If 100% post-tax money, not tax due.
2) The pro-rata rule only applies to tax years in which a conversion is done.
Thanks for the response!
So I read that you should keep the tIRA balance $0 as much as you can by the end of the year that you perform the conversion. What happens if there’s money left over in the traditional IRA at the end of 2020 after I transfer $6000 to the Roth to perform a backdoor Roth? The money in her tIRA is all POST-tax money.
If it’s post-tax nothing. But if it’s pre-tax, you get pro-rata’d. Work your way through Form 8606 and you’ll see what happens.
I have a Calpers pension I put tax-defered contributions into monthly. I also max out my Roth 457b. I am married and our total income is around 240,000. Can I do the backdoor Roth? (Just making sure my tax-defered contributions don’t trigger anything)
yes
Thank you for the response!
I am opening an E Trade IRA account soon. I want to contribute 6,000 for last year (2019), and later in the year contribute another 6,000. I understand my 2019 return 8606 will only show the 6k contribution, while my 2020 return will reflect a 6k contribution AND 12k total in conversions. I see you recommend E*Trade for the backdoor Roth IRA. ****What election should I initially select to put my 6k contribution into while waiting the day to convert to a Roth IRA to avoid gains AND transaction fees?***
I don’t recall recommending E*Trade for a Backdoor Roth IRA over Vanguard (which I use) or Fidelity or Schwab or anywhere else.
Put it in a money market fund or other cash account.
Regarding #5: Is there a limit on the amount of a traditional IRA I can convert to a Roth IRA in order to “make it zero”? The way I understand it, converting from a traditional to a roth IRA is different than the $6,000 per year back door roth conversion limit because theoretically the traditional IRA contributions have all been within legal limits in years past and now you just have to pay the appropriate taxes on it. Am I correct in that line of thinking?
No limit on conversions.
Hello
I zeroed out my SEP-IRA last week – i.e. rolled over to my employer 401K at Prudential. Am I able to do a BackDoor Roth IRA contribution for 2019 before April 15 of 2020? As per the late contributions addendum you posted it appears that I could do it because I would stop at line #3 and go directly to line #14 on form 8606 and not have to enter any value for line #6? Is my thinking correct.
Much appreciate your response.
Thanks
IMohd
There is no such thing as a “Backdoor Roth IRA contribution.” There is an IRA contribution and there is a Roth conversion. The entire process is a Backdoor Roth IRA.
Yes, you can do a 2019 contribution.
Yes, you can do a Roth conversion in 2020 without getting pro-rated now.
Remember the contribution goes on your 2019 8606 and the conversion goes on your 2020 8606.
Understood – I really meant Backdoor Roth IRA…
Thanks for the confirmation.
Hi WCI:
Sorry for the additional question on this topic:
I followed your instructions to complete form 8606 using Turbo Tax for a late 2019 contribution (which was made in 2020) and Part I of the form looks exactly like your written example you provided on your website. However, Part II of the form i.e. questions 16-18 are blank (no zeroes printed on those lines). Is that Ok for me to go ahead and file the returns electronically?
Thanks in advance for your response
Zero and blank are essentially the same thing, so I wouldn’t worry too much about that.
But I don’t think you did a conversion in 2019 anyway did you? Isn’t your conversion getting reported next year? That’s what 16-18 are for.
Correct, I am doing both 2019 and 2020 conversions in 2020. So I would expect my 2020 form to look like your written ‘column 2’ example on the web site (accounting for the amount I contributed which is the max for both years)…
Thanks for you response
I don’t have “column 2” in front of me, but you report any conversions done in 2020 on your 2020 8606, yes.
If I roll over a pre-tax traditional IRA into my 401k today, would I still be able to do this backdoor Roth free of taxes? Or would the fact that I had money in a separate traditional IRA as of Jan 1, 2020 not allow that?
Yes. It’s all about clearing it out by 12/31 of the year you do the conversion step.
So even if I contributed $6k for 2019 I can still do the backdoor Roth and 8606 form for 2019 tax-free?
Yes. Because the conversion step is reported on your 2020 8606, not your 2019 8606. The contribution is recorded there.
I have a bit of a unique situation.
I had $7k in a traditional IRA on 12/31/19 but I also contributed $6k into a separate traditional IRA in 2019 in order to do a Backdoor Roth. Long story short, I missed the boat and now am stuck with the pro-rata. I’ve made my peace with it and just want to convert and fill out paperwork correctly.
I converted the $6k (Contributed in 2019) to my Roth in 2020. I also eventually want to transfer my other traditional IRA $7k to my Roth, eat the taxes, and make my basis 0.
My main question is: How should I fill out my 2019 8606 form? Per the instructions, if it’s my first time using an 8606, my basis is general 0. Is that still true here?
Why are you being pro-rata’d if you didn’t do a conversion in 2019? As long as you clean it out by Dec 31st, 2020, you won’t get pro-rata’d.
Basically, you report your $6K contribution on your 2019 8606 (super easy) and then report the conversion (presumably along with a 2020 contribution and a second conversion) on your 2020 8606.
Good point, you made my day!
So as long as I clear out my other IRA to avoid pro-rata by 12/31/2020, I don’t need to mention it on the 8606 form right?
Exactly. Not on your 2020 8606. And on your 2019 8606 it doesn’t matter because you didn’t do a conversion.
I realized that grace has a similar situation like me. I am assuming that she has to fill out 7K in line 6 – (Enter the value of all your IRAs as of dec 2019). Will there be an additional taxable income on the 6K backdoor roth since she already has 7K in a traditional IRA?
You’ll get pro-rata’d because you didn’t clear out your traditional (rollover) IRA by Dec 31st. If you can convert the whole thing this year, that’ll clear it all up. If it’s too much money to do that, then you can look into isolating your basis by rolling the pre-tax money into a 401(k) and then convert the basis.
As far as your 2019 8606, you’re going to owe some taxes on that conversion. Just work your way through the questions and it’ll calculate it out just fine. Line 2 is zero and line 6 is going to have the value of that rollover IRA.
Thank you all your posts. I have made a mistake with my backdoor roth. To be specific, #4 mistake. I did not realize that a roll over IRA falls under the same category as any other IRA under the pro-rate rule. I have about 18K in my roll over IRA and i have already made a roth IRA conversion for 2019. When doing the form 8606 how do i report. Any help will be much appreciated.
First, thank you for writing this. I think I have already broken several of these rules. It has been somewhat of a nightmare trying to figure this all out on my own.
I recently left my previous financial firm & my longtime accountant and moved to Vanguard. As you know, this means it’s all on me and my confusion continues. I transferred my Roth and non-deductible Traditional IRAs to Vanguard at the beginning of 2020 (before COVID). After both Vanguard accounts officially funded, I completed the final back-door Roth converting all of what was left in my traditional IRA to a Roth. 2019 taxes have been filed and for 2020 I am no longer contributing on a paycheck by paycheck basis into my traditional IRA. (I’m still putting the money away for a future lump sum payment though)
My questions:
I currently have approx 25K in my Roth IRA with about $530 of that in cash. I would like to invest that $530, but almost every fund that is available via Vanguard has a minimum of $1000-$3000 to purchase. My previous financial institution literally put every bit of my IRA money into one fund.
1. I’ve already completed a back-door roth in Feb 2020. It happened immediately after the account funded at vanguard and included approx $500 in 2020 IRA contributions. Am I allowed to do another back-door in the same year? Example: If I put $2,500 into my traditional IRA now and do another immediate back-door. Then I use the $2500 plus the $530 in cash to purchase into a vanguard fund. This would not exceed the $6,000 per year contribution limit. I’m not sure if it’s better to wait and save up the $6000 so that at the beginning of 2021 I can max out my 2021 contributions and backdoor immediately or is it better to contribute something (since I can’t max out yet and preferably early this year) to take advantage of the market being down. Or if I’m even allowed to do two back door conversions in the same year?
2. Option B is to sell enough of the funds I have to then purchase into a vanguard fund eating up the cash that is just sitting in the account without the ability for me to do anything with it. The downside I see is the fund I have is down, but the upside is I’m putting it back into the market for 2020 when everything is low. Sell “x” shares to get enough to meet the minimum and use the $530 that is just sitting there.
Your thoughts are much appreciated.
Alisha
1. You need to be more precise in your language. A backdoor roth IRA is a process made up of discrete steps (a contribution to an IRA plus a Roth conversion). I’m not sure which ones you are taking and when and that makes it hard to answer your questions.
2. Can’t you just add it to a fund you already have?
Thank you for your reply.
1. I apologize, let me try again. I had two accounts, a nondeductible traditional IRA and a Roth IRA. I moved them from one financial institution to Vanguard in early 2020. I subsequently converted all of the monies that were in my non-deductible traditional IRA to my Roth using the exact same steps you have posted in your “back-door conversion video”, the only difference being I know I will have a basis and that I will have to pay taxes on the gains that I converted. I did this so I can zero out my nondeductible traditional IRA and begin doing one time yearly conversions as you have suggested, rather than contributing monthly to my traditional and doing the conversion every few years. Your right, it makes the paperwork much more complicated doing it the way I was previously advised.
My question was if I did this conversion once 2020 can I do it again as long as I don’t exceed the $6,000 yearly limit on IRA contributions. I realize I will have to pay taxes on the gains for 2020, I just don’t know if I can do more than one conversion per calendar year. If that still doesn’t make sense, I’m at a loss on how else to explain it.
2. I can’t buy into the same fund b/c it’s not available with Vanguard, I tried even though I don’t like that fund. I could buy a Vanguard ETF, but with only $530 it wouldn’t be very many shares of anything, although it might be better than nothing.
Thank you.
1. There is no limit on conversions, only a $6,000 annual limit on contributions to IRAs. You can do as many as you want and they can be as large as you want. Did that answer your question?
2. Sure, just buy a Vanguard ETF. Good solution to only having $530 but wanting to invest at Vanguard.
In the #5 mistake:
What is meant by ” 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.”
If you want to open an individual 401(k) there is no minimum required business income to do so, just that there be a business.
I opened a SEP IRA with Fidelity in October 2019 ($10K), when I was self-employed in 2019. I am now W2 and want to open a Backdoor Roth IRA at Fidelity.
My employer will allow me to open a 401k with them in October 2020.
What do I need to do exactly with my SEP IRA before opening the traditional IRA now and employer 401k in October? Any tax consequences?
Thank you!
Nothing. But you need to roll the SEP-IRA into the 401(k) before Dec 31st 2020.
The tax consequences occur when you do a Roth conversion and DON’T roll that SEP-IRA into the 401(k) by year end. Your conversion gets pro-rated.
And what if my employer does not offer a 401k? What do you do with the SEP IRA before December 31?
If you qualify to use a SEP-IRA you should qualify to open a solo 401(k) and you can roll it in there. Alternatively, you can do a Roth conversion on it and pay the axes due.
I qualified since I was 1099 previously, but no longer am. Now I am W2.
How is one able to open a solo 401k?
Thanks!
You need 1099 income. If you’ll have a 401(k) soon, then just do the Backdoor Roth contribution step and hold off on the conversion step until you can roll your SEP into the new 401(k).
I wanted to ask a clarification regarding your comment on how you’d “start over” by having etrade Roth accounts and Vanguard ETF’s. Did you mean you would have a traditional IRA at etrade, convert it to a Roth IRA at etrade, roll it over to a 401K at etrade, and Vanguard ETF’s? I originally wanted to have both IRA accounts at Vanguard, but I’m not sure if you need to have both of them at the same place in order for the rollover to work. Now I’m thinking of doing it at Etrade since Vanguard doesn’t allow the rollover into the 401K. I’ve been reading over the backdoor IRA process for a while now, I find it interesting and want some clarification on how to start it off right (I’m a 4th year dental student that’s started getting into the basics of investing).
Thanks!
Ashton
It’s been years since I wrote this, but the only thing I think eTrade does better than Vanguard is i401(k)s.
Great pointers! I’m just now starting to understand basis. If you utilize a backdoor roth every year for many years, will your basis always be $0?
Yes.
I contributed $6000 to my traditional IRA (which had a little bit of $ still in it after doing the Roth conversion in 2010) in April 2020 (to count for 2019) and then moved (converted?) it to Roth IRA the next day. Now I want to contribute $6000 to traditional IRA (to count for 2020) and move everything to Roth IRA so that balance in traditional IRA is zero. Can I do this now in May 2020 or do I need to wait until next year? I read something about being able to do only 1 rollover every 365 days.
Yes, go ahead and do it now. The 1 rollover/365 days rule does not apply in this situation, and in fact only applies when you take possession of the money yourself, not to a direct transfer anyway.
I have a FT job, match full 401k through it. Also have self-employed job (1099), for the past year and a half I’ve been contributing for SEP IRA. I also have been doing backdoor conversion to Roth IRA for the past 3 years. From what I understood reading the article, I can’t continue doing that, right?
Can I convert my SEP to 401K, although the 401K is already maxed out? If I convert SEP to 401K, would I lose the ability to deduct SEP contributions at the end of the year?
Thank.
Oops. Did your tax preparer not notice this on Form 8606?
Yes, you can TRANSFER (not convert) your SEP-IRA to your 401(k). Transfers don’t count toward contribution limits. You can also CONVERT the SEP-IRA to your Roth IRA, but it will cost you some taxes.
You would NOT lose the ability to deduct SEP contributions, but you would be bette served to just switch to an Individual 401(k) for your 1099 work.
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
https://www.whitecoatinvestor.com/rollovers-transfers-conversions-oh-my-learning-the-vocabulary/
Can someone comment/clarify the statement, “With a Backdoor Roth IRA you’re choosing between taxable and tax-free.” I don’t understand the benefit of putting your money into a Roth 401K as opposed to a Roth IRA or Backdoor Roth IRA? Is this to say that a Roth IRA is a good place to invest your retirement money, as opposed to a traditional IRA if you have a high income now, and will have a low income when you retire and withdraw funds?
Since a higher earner cannot deduct a traditional IRA contribution, their options are:
Non-deductible IRA contribution (all earnings fully taxable at ordinary income tax rates)
Taxable contribution (taxable)
Backdoor Roth IRA (tax-free)
When you look at it that way, the Backdoor Roth IRA is the obvious choice. The tax-deductible traditional IRA is not an option because you earn too much and probably have or will soon have a plan at work.
There’s noting special about a Roth 401(k) over a Roth IRA aside from some slight asset protection benefits in some states and the ability to tap it at 55 instead of 59 1/2 without jumping through hoops. Higher contribution limit too I suppose.