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.
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What do you think? What other ways do people screw up their Backdoor Roth IRA?
If I make contribution to Roth 401K, does it impact the amount that I can do backdoor Roth IRA conversion?
No. Totally separate limits.
I am planning on doing my 2020 backdoor in Feb of 2021. Is it ok to do both 2020 and 2021 backdoor as one transaction – meaning $12k into an IRA and $12 converted to a Roth, or do they need to be done as separate transactions $6k at a time?
Yes. The 2020 contribution will be reported on your 2020 8606 and the 2021 contribution and the entire conversion will be reported on your 2021 8606. More details here:
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Awesome! Thanks.
Already have many investments at TrowePrice and trying to setup the backdoor Roth process from scratch. I was assuming I could open a Roth with $0, then open a tIRA with $6000, then make the conversion. However, it appears there is a minimum of $1000 when opening the Roth. I’d like to keep everything at Trowe, any suggestions?
Why not open it as you do the conversion? When they ask how you’re funding it, say from a Roth conversion. So maybe you open the traditional IRA today and the Roth IRA tomorrow.
Yeah, I’ll have to try that via phone. Doesn’t seem to be an option online. It wants me to fund the Roth only from a bank account.
Try calling them. I’m sure it’s possible. It just may have to be done manually.
Help! I was dumb and waited until the 21st of Dec to try to open up a spousal tIRA and Roth IRA at Vanguard to do her first backdoor Roth IRA. Unfortunately, my high interest savings account that I was transferring the$6000 from to her tIRA rejected the transfer for some reason, so Vanguard still has it as no contribution was made. Weirdly though, it has $0.01 left over in her tIRA now. I called Vanguard and they informed me that the bank rejected the transfer but that still doesn’t explain how the transaction history shows $6000 was transferred from my bank account and then $5,999.99 was “swept out.”
Regardless, now I am stuck with $0.01 in her tIRA and it’s too late to try to do the contribution to her tIRA again and then do the conversion due to Vanguard’s one week delay with brokerage accounts. I know the tIRA account should be $0 on Dec. 31 so what should I do with the $0.01 in there now? Can I convert it to her empty Roth IRA? If so, can I still contribute $6000 to her tIRA in January and then convert it to Roth IRA for 2020 and then do another for 2021? Or should I leave it in there and then just make the contribution and conversion after Jan 1?
No big deal. You have until next tax day to do the contribution.
You can ignore 0.01 on your taxes. You round everything down anyway.
Yes, you can do it all in January. You just fill out the 8606 slightly differently.
I have an IRA which has some tax deferred contributions from residency time and most post tax contributions since we have 401 in my practice. Do I open a new IRA to be able to do back door Roth conversion as per your advice? I follow your blogs regularly and they are really easy to follow and at the same time very descriptive!
I would just convert that entire IRA to a Roth IRA, pay taxes on the tax deferred money, and keep using that for my backdoor Roth IRA contribution each year.
I am saver but not finanically savvy. I am confused by the definition of traditional IRA and conversion to back door Roth IRA.
Do I have to convert ALL my retirement accounts to safely convert to back door Roth IRA to avoid the pro-rata rule?
Do I have to convert a prevous 403b rollover IRA also?
Over the past 20 years, I have accumulated multiple retiremnt accounts: 1) Current emloyer 403b, 457, Pension cash plan 2) Personal non-tax deferred contributory IRA 3) Consulting self employed profit sharing Keogh, and 4) Previous 403b Roller IRA.
I plan to retire in 15 years. Currenlty, I am at the highest tax bracket. Is it still a good idea to convert to Roth IRA.
If you have an IRA, SEP-IRA, or SIMPLE IRA, it must be EITHER converted to a Roth IRA OR rolled into a 401(k) or 403(b) in order to avoid your Roth conversion being pro-rated. You can still legally do the conversion, it just isn’t going to accomplish what you are hoping to do with it. Yes, that includes a rollover IRA that came from a 403(b). Why not roll the old IRA into your current 403b or Keogh?
A Backdoor Roth IRA is still a good idea in the highest tax bracket, but a Roth conversion where you would owe taxes often is not when you are in your peak earnings years.
I have read through your common mistakes, but still am not sure what I should do about this error I made. I opened a traditional IRA in Dec 2020 and deposited money into it. I was not able to convert it before end of the calendar year and therefore had a balance in the traditional IRA as of Dec 31, 2020. So now what is the best next move?
If you didn’t do a Roth conversion in 2020, it’s no big deal. The contribution will be reported on your 2020 taxes and your conversion done this month will be reported on your 2021 Form 8606.
I’m confused. Since I still had a balance in the traditional IRA as of Dec 31, 2020, won’t I be subject to the pro-rata rule? and if I am subject to that, does that make it worth it to do the conversion?
The pro-rata rule only applies to years in which you did a conversion. Did you do a conversion in 2020?
I did not do a conversion in 2020. I only opened the traditional IRA in Dec 2020 and funded it. So as I understand it from you, I can now convert it into a Roth IRA this week and the contribution will be reported on my 2020 taxes 8606 form. The conversion I will report then on the 2021 8606 form – correct?
Another couple questions:
– I made an error in my contribution process put in $6200 rather than the allowed $6000. How should I address this error?
– can I still make a contribution this year, 2021, of $6000, to a traditional IRA and then convert it into a Roth in 2021? If so, when should I do this?
Thank you!
No problem then. Yes, that’s correct.
You’ll need to pull $200 out. You’ll owe taxes on the gains. Do it sooner rather than later.
Yes, you can do that tomorrow. In fact, if you call up your IRA custodian, you can probably have them call that $200 a 2021 contribution and then put in another $5800.
The pro-rata rule only applies to years in which you did a conversion. Did you do a conversion in 2020?
I converted my rollover IRA to my Roth IRA yesterday, about 17000 ( I am kicking myself that I didn’t do it earlier in the year when it was just 7K ) I decided to just eat the taxes this year so I can let it grow tax-free. My question is now that I converted this amount into my Roth can I still make the 6K contribution?
Sure. The only limitation is how much you can contribute to an IRA each year. Conversions are unlimited and don’t count toward that contribution limit.
Hi, another couple questions:
– Can you do a backdoor Roth if you have a self-directed IRA?
– Can you open a backdoor Roth for a domestic partner (like you do for a legal spouse)? And can you open the backdoor Roth for them if they have an IRA already?
Thanks so much!
Yes, but you’ll be pro-rated. Maybe you can convert the self-directed IRA to a self-directed Roth IRA if the tax hit isn’t too much. Otherwise pretty much a no-go for you.
No. Have to be a spouse. But if they have earnings they can contribute from those.
Hello, some questions I had:
– In order to do a backdoor Roth all IRAs must be zero by Dec 31 – does that also include self-directed IRAs?
– Is it possible to do the spousal backdoor Roth for a domestic partner?
– If so, if that domestic partner already has other IRAs, can you still do it? Will you be subject to the pro-rata rule?
Thank you!
1. Yes
2. No. Spouse only.
3. N/A
Dear White Coat Investor,
I might be on track for the record of accumulated mistakes for a first timer. I wish I had been more careful it seemed too easy and I overlooked the process. I also wish I found your pages a year ago. But everything below is my own fault. Here is a timeline of the events:
1. February 2020: file my taxes for 2019. Have not contributed to a traditional IRA.
2. Early April 2020: realize that because of the lockdown I’m sitting on a pile of money. After searching online, I find that I while I can’t directly contribute to a Roth IRA, I can do a backdoor one. Looks easy enough, create a traditional IRA account, contribute on Vanguard for 2020 and convert it shortly after. I’ll fill out the 8606 when I file in 2020. Mistake #1 did the contribution directly to my Roth IRA (from when I was not making enough) but noticed it right away so I was able to re-characterize to Trad IRA quickly.
3. Mid May 2020: pile of cash keeps growing. Apparently I can still contribute to the 2019 IRA because tax day is in July. Yay! Contribute another $6k but not convert it. I fill out the 2019 8606 form (no part II since no conversion) and amend my 2019 return… At this point I think all I have to do is do the conversion in 2021 and correctly fill out the 2020 8606 when filing my taxes for 2020
4. Fast forward to mid January 2021: Time to get ready for tax season and prepare the 2021 contribution/conversion.
Mistake #2: My “2019” contribution was done on VTSAX, not MMF and grew from 6k to 8k… I’ll probably have to pay more than a few pennies on the $
Mistake #3: Your website is very clear, my IRA should have been 0 at the end of the calendar year. Except I forgot about my rollover IRA ($38k) from my previous job & 401k…
I’m trying to figure out how the heck:
1. I’m going to amend (again) my 2019 return with a new 8606 that includes my rollover IRA. Is 38k (or whatever it was on 12/31/2019) my basis (box 2)?
2. File my tax return and 8606 for 2020 while taking into account the 38k (or whatever it was on 12/31/2020) and the growth from 6 to 8k. For box 6, is it $38K + $6K + $8K?
3. How/if I should contribute/convert in 2021, how to take into account the 38k and the growth from 6 to 8k.. and not mess up even more.
The good news today is that I was able to start the process to rollover the 38k from Vanguard into my current 401k
Here’s a crude spreadsheet version of the 8606 calculation for ’19/’20/’21: https://imgur.com/a/diG9gtZ … Do I owe 40-50% of $10k in tax?
I’m worried about messing up all these 8606 and under/over paying taxes and the IRS coming after me. I don’t know any CPA or tax-preparer (yet) but also afraid they could mess it up if they’re not used to it and it’s too complicated. How bad is it doctor? What would you recommend I do?
Thank you for reading all the way through.
This doesn’t sound too bad. So basically, you put in $6K for 2019 in 2020, you put in $6K for 2020 in 2020, and you put in $6K for 2021 in 2021. You have an outstanding pre-tax IRA money of $38K either in the same IRA or a different one. You haven’t done any conversions at all.
1. Pre-tax money is not basis. After-tax money is basis. Why are you redoing your 2019 8606? Because you didn’t put the $38K in there on question 6?
2. That sounds right.
3. This is the hardest part for you. If they’re in separate IRAs, you might consider rolling the $38K pre-tax IRA into your 401(k) and converting the other IRA, paying tax on that $2K, but the other $18K converts tax-free. If you’ve co-mingled everything, you can either convert the entire thing and pay tax on $40K OR you can try to isolate the basis. Basically, you roll $40K into your 401(k) (which probably only accepts pre-tax money) and that which is left is all post-tax money and converts tax-free to a Roth IRA. I don’t see why you would owe 40-50% tax on $10K though. Something is messed up. Either you didn’t tell me about a conversion you did in 2020 (did you do a 2020 conversion) or you’ve mistakenly put a conversion on your 2020 8606. Which is it? If the latter, no big deal. Fix the form. If the former, you’ve made a somewhat bigger mess and maybe the best option is to just convert the whole shebang and pay some taxes since you’ve already started doing that. Sure, it may end up costing you $15-20K in taxes, but you also now have $60K in a Roth IRA never to be taxed again and a clean slate to go forward with.
1. Correct, I would redo my 2019 8606 because I didn’t enter $38k in box 6 but since the taxable amount remains $0, is it ok not correct?
2. Actually, isn’t box 6 $38k and box 9 is box 6+7+8
3. It’s the former, eeeek. I did do a $6k conversion in 2020. I haven’t done anything for 2021 yet. So with that in mind, are my forms correct?
The outstanding $38k is in a rollover IRA, not my traditional one. It’s getting rolled over to my current 401(k) (reverse roll) but it’s been way more than 60 days so I’m going to get taxed on that.
Should I reach out to a CPA to help me get that clean slate?
Well that explains why you owe $10K this year. Personally, if you can afford it, I’d convert the rest of that $38K and all of your after-tax money to a Roth IRA in 2021. You’ll be pro-rated on your 2020 taxes, but your 2021 taxes will essentially correct it.
I may have made a stupid mistake with my backdoor roth. I have mine through fidelity and didn’t get around to funding my traditional ira until 12/27/2020 for tax year 2020. I put $6000 in, but could not move it to my roth account until a week later due to fidelity taking a week for those funds to be available to transfer. So I moved them over on 1/3/2021. The problem is that now my tax forms from fidelity show a $6000 end of year balance in my traditional IRA, violating one of the rules in this post. It seems silly since you can do all of this until 4/15 of the following year and if i had waited until january 2021 to do all of this it would have been fine. I’m just hung up on having this tax document (form 5498) showing a $6000 end of year balance in my traditional and what this might mean if i get audited.
Is this an issue? Can I fund the traditional IRA for tax year 2021 ( I won’t wait till the end of the year again to
Just read through other posts and realized this question has been answered. Sounds like no issues since this was the only conversion i did for 2020. Thanks!
That’s right. The IRA balance only matters on 12/31 of the year you do the conversion step. That’s when the pro-ration calculation is made.
Question-
I have already converted back door Roth conversion. Bc of income and waiting on others, we now have found out we have self employed income, so I believe there is an opportunity for sep ira (solo 401k too late due to dec 31 deadline) this would be a new contribution to a new sep ira. We already did the back door so will prodata rule be involved if we did this. First time making the big bucks so appreciate guidance.
As a review have maxed out clinic(primary work) 401k, hospital paid for this year and gave 1099-misc (100k est made), did backdoor Roth IRA. How much total could we contribute? Is this a good idea or will the pro rata rule be in effect?
Yes, it could be involved. The work around is to open a SEP-IRA for your 2020 contribution, then open a solo 401k for 2021, and roll the SEP in there before the end of 2021
You could probably put around $20K into the SEP.
I have not opened or funded the Traditional IRA yet for the Backdoor Roth IRA. Would I be wise to just wait until after tax day April 15, 2021 to do open and fund a tIRA and convert to a bdrrIRA? If I did it now for 2020, could I do it again after April 2021 for 2021?
Same answer as on the other thread:
No reason to wait. You can do 2020 and 2021 tomorrow.
Hello,
First off, thanks fir continuing to update the site and provide feedback to people like me trying to navigate back door Roth’s for the first time.
Here’s my situation:
I opened a tIRA with Vanguard in 12/29/20 and deposited 6000 into my MMF. For whatever reason, I could not figure out to convert the money into my newly opened Roth IRA on 12/30/20, so I decided to buy $6000 of VFIAX on my tIRA account. In reality, I probably had to wait until my funds actually landed in the MMF and then convert, but I wanted to complete the process before 2021 and I naively thought by purchasing VFIAX I could do that. Finally, according to my transaction history it shows that I converted those shares into my Roth IRA, $6001.75.
So first question is does it matter that the converted money was in the form of shares?
Second, if everything checks out then I just fill out my taxes this year using your post, “Not Making Your Backdoor Roth IRA Contribution During the Calendar Year“? For example my tIRA contribution in 2020 was 6000 and I made my Roth IRA contribution of 6001.75 in 2021 but for the 2020 tax year?
Third, what’s the best thing to do about the $1.75 in terms of reporting it or paying taxes, if it rounds down to 1.00 what do I do?
And lastly, if I do another back door Roth conversion now, say 6000 dollars for 2021, do I have to report it on the taxes I’m filling out for this April or does it go on my taxes next year?
Hope this all makes sense and thank you in advance!
I don’t understand why people try to do this the last week of the year. Procrastination I guess.
No, it doesn’t matter. You’ll just owe taxes on $2.
You did not make a “Roth IRA contribution for 2020”. You made a Roth conversion in 2021. So that gets reported on your 2021 taxes. The traditional IRA contribution for 2020 gets reported on your 2020 taxes. Discussed here:
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Make your life easier from now on. Just do your Backdoor Roth IRA each year in January, leave it in a MMF/settlement account/cash in the traditional IRA, and do the conversion step as soon as possible afterward.
I think I have one more way to mess up the Backdoor Roth! I have a $160k Traditional IRA as a premarital asset. I’ve been told to avoid commingling this money to protect it in the unlikely event of a divorce. My husband and I want to start Backdoor Roth’s, but if I convert my Traditional IRA, we will owe taxes and I will have theoretically co-mingled and lose it as an individual asset. Could you provide any guidance?
Co-mingled with what? Money you made after getting married? Must be since you can’t commingle it with your spouse’s money. IRAs/401(k)s are always yours, not joint. I guess if commingling/asset protection is your big concern, then you probably can’t do a Backdoor Roth IRA unless you roll it into a non-commingled 401(k) somehow. So that decision will increase your asset protection against your spouse at the cost of paying more in taxes and decreasing the asset protection on your new money from other creditors since you’ll be investing it in taxable.
Good luck with your decision.
Looking for help on my backdoor Roth and form 8606 with Turbotax.
In 2020 I made a 2019 traditional contribution of $6K and converted it the next day to a Roth
In 2020 I made a 2020 traditional contribution of $6K and concerted it the next day to a Roth
I received one 1099R from my traditional IRA for $12,000.12
Using Turbotax my form 8606 shows I have $140 of taxable income. Why???
Line 1: $6k
Line 2: $6k
Line 3: $12,000
Line 4: blank
Line 5: $12,000
Line 6, 7, 8, 9: Blank
Line 10: x
Line 11 & 12: Blank
Line 13: $12,000
Line 14: 0
Line 15a: 2
Line 15b: Blank
Line 15c: 2
Line 16: $12,000
Line 17: $11,860
Line 18: $140!!!!!
Why do I have $140 of taxable conversation???
Thanks!
Bizarre. No idea. Line 17 is clearly wrong though. Is it using that table in Pub 590B? Turbotax does that a lot. If you are using the desktop version you can go to Forms mode and see what’s going on and correct it manually. Hard to do that with the online version. Somewhere in there you’ve put in that the basis is $11860. Change that to 12000.
Thanks for the response. I am using the online version of Turbotax. I copied the info from the worksheets and posted them below. Form 8606 is the only place in my return where I see the amount $11,860. I can’t for the life of me figure out where that amount comes from. I guess I will have to call Turbotax unless anyone has an idea where it is coming from. Thanks!
20200 Transactions – Contributions
Regular Roth IRA contributions: BLANK
Rollover from Roth 401(k) and Roth 403(b): BLANK
Conversion contributions taxable at conversion: $140
Conversion contributions not taxable at conversion$11,860
Repayments of qualified Roth reservist distributions
Balance c/over to 2021 (Basis – After 2020 Transactions)
Conversion contributions taxable at conversion: $140
Conversion contributions not taxable at conversion$11,860
Did you get a $140 deduction for the IRA contribution? Maybe what you gain in one place on the return you’re giving up in another place.
I don’t see that amount anywhere on my return for 2020 or 2019. When I entered my traditional contribution Turbotax said I was over the income limit for a deduction, so I don’t think that is it. To answer your earlier question, Form 8606 has an asterisk next to line 18 that says, “from taxable IRA distribution worksheet (per pub. 590-b)
The taxable amount on a $140 isn’t significant, but it’s bugging me!
Thanks so much.
Try running your numbers through worksheet 1-1 in Publication 590B. Maybe that will explain what happened.
WCI, thanks for the advice. I am embarrassed to admit what I overlooked but will share it in case it helps someone else down the road. Following the advice of WCI, I did the 8606 on my own and, I had $140 of taxable income, as Turbotax concluded. I forgot that I had $142.00 in a SEP IRA that I cashed out before 12/31. That $142 resulted in line 10 being .988 (,988 x 142 =140). Turbotax doesn’t display anything on lines 6-12 or I would have understood the numbers better.
Thank you!
Nice, you found it.
Wow, so glad I found this website!
This is my first year as a high earner, and never knew about income limits for roth contributions! I just learned about this while doing my taxes this month, and heard about the backdoor IRA.
Current situation
401K – Current employer
401k – Previous employer
Traditional IRA <$10k (This was a rollover from a previous 401k, so pre-tax)
Roth IRA <$10k
I just opened a Roth and Traditional IRA ($0 balances) with Vanguard as the first steps, but now I'm stuck as I don't want to mess this up. My understanding is I need to get the above IRAs to $0 balance to avoid the pro-rata rule.
I want to contribute for the 2020 tax year. What should I do? Just keep it simple for the 2020 tax year and contribute to the traditional IRA? Then zero the IRA balances, moving it to a traditional, then immediately to a roth for the 2021 tax year? This 2020 year contribution would be post tax, and the current traditional IRA that I have is pre-tax, does this create a problem?
I appreciate any help!!
You just need to get the traditional IRA to $0. Roll it into the 401(k) or just pay the taxes and move it into the Roth IRA.
Go ahead and make your 2020 contribution to the new traditional IRA and convert it, you have until the end of the year to empty out the old IRA to avoid pro-ration.
Thank you for all you do. You have put me on the path to financial success I never thought I would obtain.
I think I have messed up my first ever roth conversion.
During 2020 this year I scheduled contributions to my IRA that did not add up to the 6000 because I was paying of some high interest debt. This also I would not forget staring in 2021. As the end of this tax season approached, I have been fortunate enough in my new attending ship to pay off all my consumer debts and still have enough to max out my IRA for a conversion via a late contribution. I unfortunately forgot to stop the scheduled 2021 contribution to the traditional IRA thus as I try to convert there is 6300.09 in my traditional IRA account (300 extra from scheduled deposit and 0.09 in interest from 2020).
What do I do about this miscalculation? Do I convert all 6300.09 or do I only convert 6000.09 for the 2020 year and fill out the 8066 accordingly with 300.09 left in the IRA? I plan to do the 2020 conversion within the next two weeks before tax day and the 2021 conversion soon after tax day when I have saved money for the 6000 as a new attending.
Thank you again for the help.
I don’t see a problem. Put in the rest of your 2021 contribution and convert the whole thing. You can put in $6K for 2020 and $6K for 2021. All conversions done in 2021 are 2021 conversions. It’s only the contributions that are assigned a year.
Thank you for the update. Just to clarify, I would contribute an additional $5700 and convert $12000 before tax day this year. (following the guide you posted with filling out 2020’s 8606 as a late contributor). Then I would report 6000 for my 8606 in 2020 and an additional 6000 on next years 8606.
You have until year end to do the conversion and it all reports the same. But I’d do it as soon as you can. Then yes, you use the “late contributor” example. The 2020 8606 reports the 2020 contribution. The 2021 8606 reports the 2021 contribution and the $12K conversion.
Hello WCI! Thank you for your dedication. This site is a fantastic resource. I have a question regarding TurboTax and my Form 8606. I received a 1099-R from TD Ameritrade for 2020. The gross distribution amount in Line 1 is $1,250 and the taxable amount in Line 2a is $1,250. Line 2b (taxable amount not determined) is checked off. Line 7 (distribution codes) is marked with a “2” and IRA/SEP/SIMPLE is checked off. All other lines on the 1099-R are blank. This $1,250 figure is the nondeductible amount i contributed to my Traditional IRA and then converted to a Roth IRA in December 2020 (it sat in cash, no gains between the 2 accounts). Should I be taxed on that $1,250 figure? Turbo Tax seems to think so. I have only an employer-sponsored 401k and no additional IRAs. My 8606 reads as follows:
Line 1: 1,250
Line 2: 0
Line 3: 1,250
Line 4: 0
Line 5: 1,250
Line 6: 0
Line 7: 0
Line 8: 1,250
Line 9: 1,250
Line 10: 1.00
Line 11: 1,250
Line 12: 0
Line 13: 1,250
Line 14: 0
Line 15a: 0
Line 15b: 0
Line 15c: 0
Line 16: 1,250
Line 17: 1,250
Line 18: 0
Thanks in advance!
No. You shouldn’t. I don’t see any tax due on that 8606. It looks fine to me. Why is Turbotax mad if that is the 8606 it is spitting out?
https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html
I’ve returned to this post several times since it’s been written, so thank you WHITE COAT INVESTOR.
My CPA files Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and other Tax-Favored Accounts.
Under Part IV he puts the amount that I contributed and transferred to the ROTH. It appears that I’m paying taxes on that amount per line 25.
Is this correct?
Thank you!
Karen
Why in the world is your CPA filing Form 5329? Did you do something wrong like put too much into a 401(k), IRA, HSA, 529 etc? That’s the only reason to file that form. Read the header for each part of that form where it says “Only fill out this part if you…..” With a typical, well done backdoor Roth IRA process, you didn’t do any of those things. If you go to the instructions, the first page has a section called “who must file”. Read through that section and make sure you didn’t do any of those things.
You only fill out that form when you’re taking money out of accounts inappropriately, when you put too much into your accounts, or when you forget to take your RMDs. Part IV says:
Did you do either of those things? If not, tell your account that he or she better become competent fast or you’ll be finding a new one.
thank you WCI!
I followed your directions, step by step, it was all easily done at Schwab.
I contributed $7000.00 (I’m over 59 1/2) to the IRA, then moved it to the Roth.
My new question is should I contact Schwab and ask them to change the code in Box 7 of Form 1099 from “7” to a “2”?
BIG MAHALO!
I wouldn’t think that the fact that you’re over 59 1/2 would change anything, but maybe that’s why they put a 7, dunno. But yes, I would contact Schwab and try to get that form changed.