By Dr. Jim Dahle, 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
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.
What do you think? What other ways do people screw up their Backdoor Roth IRA? Comment below!
With regards to the Pro Rata Rule, is a 401(k) with a former employer that is still in that 401(k) account excluded from the pro-rata rule? Since it was never converted into a Traditional IRA account? Debating whether to just leave with the former employer or if I have to/need to roll it into my current employer 401(k) account.
Yes, all 401(k)s are excluded.
Have been doing Backdoor roth for 5 years now. Have done few mistakes like violating pro rata rule, converting the year next from contribution year . Have tried fixing it but not sure if right or not. What does Cost basis on line 14 in form 8606 exactly mean? What should it ideally be? lets say if one has been doing it for several years – Is it the sum of all contribution done by backdoor method , or close to 6000- the annual limit, each year or 0?.
What are we trying to show to IRS on form 8606 exactly, lets say 10 years from now? ( provided the bill to stop it for high earners does not go through)
Thanks for all the guidance
Ideally? $0. It’s the money in the IRA that has already been taxed. Yes, the sum of all non-deductible contributions.
The point of Form 8606 is to not pay taxes twice on thge same money.
Thanks so much for this wonderfully-detailed article. I was hoping to get some clarification so that I approach this correctly without making a mistake/incurring tax penalties. I currently have about $15k in my Vanguard traditional IRA. I also contribute to a TransAmerica 401k through my employer. The majority (if not all; I’m not 100% sure) should be post-tax dollars. I currently have a Roth IRA with Vanguard that I don’t contribute to because I am past the income limits for a Roth IRA. From what I understand, I have 2 options:
1. Rollover my traditional IRA funds into my 401k. This will prevent any tax implications currently. I’m not sure if my 401k allows for this. I’m trying to find out from TransAmerica.
2. Convert/backdoor Roth (still a little confused about the difference) my traditional IRA funds to my Roth IRA. This may cause me to incur taxes via the pro-rata rule, but it may be minimal since very little funds (if any at all) in my traditional IRA are pre-tax dollars. However, there probably is some capital gains in there, so I’m assuming I’ll have to pay taxes on that if I go this route.
Assuming I’m unable to do option 1, is option 2 my only alternative? If so, could someone please clarify the Roth Conversion vs Backdoor Roth?
You can convert it all to Roth. You’ll owe taxes on any pre-tax dollars in there. No such thing as capital gains there.
Your other option is not do the Backdoor Roth IRA process.
I just last week funded my first ever IRA for 2021 and yesterday added another 7K for 2022. The employee on the phone at Schwab told me that I can convert that cash into a Backdoor Roth without first investing it in a money market fund (or any other fund for that matter). I have not yet tried to (waiting for the cash to clear) but does this sound right? It is obviously preferable to do it with cash and avoid the paperwork involved with any earnings before the conversion, but if this is the case, why doesn’t everyone just convert the cash in the IRA into a Roth and then invest the money?
Yes. Money market fund. Settlement fund. Cash fund. Cash account. Whatever. But don’t put it in stocks or bonds until it’s in the Roth IRA.
Got it, just a terminology thing. Still new to it. Thank You for your dedication! You are truly appreciated.
Question regarding tax filing & 8606. I opened my first traditional IRA on 1/1 of this year, funded it, and then did backdoor roth conversion a few days later. This is the first IRA/backdoor Roth I have had.
This is considered a 2021 transaction, meaning when I do my taxes in a couple weeks, I should fill out 8606, correct? Also, since this is the first time I have done this, should I not be completing lines 3-13?
Thanks for the useful info and help with this.
The contribution gets reported on the 2021 tax return. The conversion gets reported on the 2022 tax return. 1-3 and 14 should have something for 2021. Next year’s will be more complicated as discussed here: https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
I did my first backdoor roth last year using schwab, $6k post-tax dollars into tIRA then to roth. When I submitted my 1040 this year the software I used deducted my tIRA contribution because apparently I qualified. I’m assuming I’ll need to file an amended return (as well as the 8606) as this should be a non-deductible contribution correct?
It’s really all the same whether you get the deduction and pay taxes on the conversion or don’t get the deduction and don’t pay taxes on the conversion. Just make sure you don’t both not get the deduction and pay taxes on the conversion.
Dear WCI,
I made my 7000 IRA contribution and conversion to Roth in Feb of 2021. I am now completing my 2021 form 8606 using Turbo Tax. Lines 1, 3, 14 has 7000 each. Lines 2, 15b, 15c each has Zero. Did I enter the data correctly?
Many thanks
Sounds right to me. Making sure 15c and 18 are zero is really the key.
Thanks for all you do
I filled out form 8606 and sent to my accountant. This is my third year following your instructions to do a backdoor roth ira. I copied your example exactly for form 8606 and sections 14,15c and 18 are 0 . I sent this to my accountant and he filled out section 3 for some reason(complete this part only if you have taken a distribution from a roth ira in 2021) . He put 6,000 for line 22, 0 for line 23 and 18,000 for line 24 leaving the rest blank. I asked if he should redo this and he said it does not have to be resubmitted because it will not have any tax implications. My 1040 form has 6000 on 4a and 0 on 4b. Do you suggest resubmitting for 8606 and leaving section 3 blank? Any implications either way?
No, probably doesn’t matter. I really don’t care what any lines besides 15c and 18 say to be honest and I doubt the IRS does either.
Dear WCI,
Thank you for teaching me and many other white coat wearers to use backdoor Roth IRA. I have been doing this for three years and the first two years I did it correctly, but last year I managed to screw it up in a way that is not one of your 17 mentioned ways! I contributed directly to Roth IRA and skipped the traditional IRA part completely. I realized that just today when I was trying to find my 1099-R and found out that I do not have any (I filed for tax extension, my CPA’s fault). I talked with Vanguard, they recharacterized it aka moved it back to my traditional IRA and told me that after one day I can convert it back to Roth-IRA. They also told me that I do not need to report it in my 2021 tax forms. So my understanding is that I will report it next year just like I contributed to my Roth-IRA after Dec. 31st 2021. Is that correct? Thanks a lot for the help!
You need to report the IRA contribution as though it were made to a traditional IRA in the first place. If it was a 2021 contribution, it goes on your 2021 8606 and you need to refile your 2021 taxes if you already filed them without an 8606. If 2022, then it goes on your 2022 8606.
This post should help:
https://www.whitecoatinvestor.com/ira-recharacterizations/
Thanks for the quick response! Yes, it was my 2021 contribution. I don’t have a 1099-R for this contribution. Do I need it for this tax submission?
No. The 1099 just tells you what to do. If you already know what to do, you don’t need the 1099. You need to report a non-deductible IRA contribution. That’s done on Form 8606.
Could clarify a couple of details regarding completing Form 8086 with a split IRA contribution with back door Roth conversion. Here is what occurred.
5000 IRA contribution and Roth conversion in 2021
2000 IRA contribution (for 2021) and Roth conversion in March 2022.
What is the correct entry for Line 8? 5000?
For line 14 would there now be a 2000 basis? (subtracting line 13 from line 3)
Sorry I couldn’t find any examples of dual contribution and conversions for single Tax year which occurred in 2 different calendar years. Thank you in advance.
Line 8 of what year? 2021? $5K
Yes, $2K basis for 2014
Stop making your life hard and do it all at once.
Question about avoiding pro-rata rule:
Last year I set up a Vanguard Solo 401K for my wife’s private practice and rolled over her previous employer’s 401k into it and also contributed max amount.
This year we did a backdoor Roth conversion for her already but due to changes in her practice we now have employees. As I understand we can NO longer contribute to solo 401k given we have a W2 employee making over $650. I am now looking to set up a SEP IRA instead however I am reading that we will be subject to pro-rata rule given backdoor Roth IRA conversion done earlier this year. So some questions:
1. based on my research best option would be to contribute to SEP IRA then ROLL it over to solo 401K to clean the IRA slate (except for 2022 backdoor Roth contribution) before the end of the year to avoid pro-rata rule. Is that correct?
2. Unfortunately I am also reading that Vanguard does NOT allow SEP IRA roll over into solo 401K. Is this still the case?
3. If Vanguard does NOT allow this should I then open up another solo 401k and SEP IRA with another company (Merrill lynch or Charles Swab) to be able to do this rollover?
4. Other options? just let pro-rata rule apply after max contribution or should I just skip SEP IRA all together this year ? which makes most financial sense?
5. For future years does it make sense NOT to perform backdoor Roth conversion and just max out SEP IRA instead given employees are here to stay?
All the best and thank you
If you can’t do a solo 401k for her you can’t do a SEP-IRA for her. You need to do a study to determine the right plan for the company. It might be a 401(k), it might be a SIMPLE IRA, it might be a SEP-IRA, and it might be nothing at all. If it is a SEP-IRA, yes, you’ll need to convert it all each year if you want to keep doing the complete Backdoor Roth IRA process each year. These folks can help you determine the right plan for your company:
https://www.whitecoatinvestor.com/retirementaccounts/
1. Maybe
2. No
3. N/A
4. Depends on the results of the study. But I’d probably stop doing the Backdoor Roth IRA before passing up on a huge SEP-IRA contribution.
5. Possibly.
Thanks for the reply.
Only reason that I CAN’T do solo 401k this year is that she now has an employee this year (making more than $650, employed last 3/5 years rules apply). Not sure what you meant by “If you can’t do a solo 401k for her you can’t do a SEP-IRA for her” if something else I am missing there.
Re: whether Vanguard allows SEP IRA rollover into solo 401k. just to clarify they are ALLOWING this option now? (i did just find a YouTube video from Dr. Dahle 6/26/21 mentioning Vanguard NOW allows this). I plan to confirm with Vanguard myself before opening any account. If true it would make our lives easier since we already have solo 401K with Vanguard.
I wonder if best strategy would be :
Max contribution to SEP IRA every year –> rolling it over to solo 401–> backdoor Roth IRA
this way i can max out both 401k and Roth IRA
thanks again
You can’t have a business with employees that provides a retirement account just for the owners and not the employees. Doesn’t matter if the retirement plan is a SEP-IRA or a 401(k).
Not sure why you would make that assumption we wouldn’t provide SEP IRA for our employees based on what I had asked.
We certainly plan to follow all the rules that comes with establishing a SEP IRA.
Oh, then yes of course you can do that. But are you sure that a SEP-IRA is the right plan for the business and not a 401K?
I invested the maximum amount of $6,000 at the beginning of the year 2021. When I filed my taxes for 2021, I calculated my MAGI adding back self-employment taxes when I determined income limits for Roth contributions. Based on this, I believed I had exceeded the allowable contribution based on my incorrect MAGI. When I filed my taxes. I completed Form 5329, section 4, # 23-25 indicating that I had excess contribution in the amount of $2,120 with $127 additional taxes due. However, I have just completed IRS “Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes” and discovered that self-employment taxes are not listed for this specific MAGI calculation. Based on this, I actually didn’t have excess contributions, despite what I indicated on my taxes. To complicate matters, I never actually withdrew the excess contribution from Betterment. I forgot. So now the IRS thinks I made an excess contribution and I paid 6% taxes on the excess. Do I need to file another amended tax return to rectify the mistake. Do I need to follow through with withdrawing $2120 from Betterment? Do I eat the loss of $127 dollars and do better next year? Any Advice would be wonderful.
Prior to this year I was a resident and only contributed directly to a Roth IRA. I just recharacterized a Roth contribution of $2k I made earlier in the year due to not realizing I am now over the income limit this year. I was able to complete that with Vanguard (~$1600 got transferred to a new traditional IRA) and contributed an additional $4k into the new traditional IRA in December 2022 (for a total of $6k 2022 contribution), but will not be able to do the conversion step until January 2023 due to the 7-day hold. This is my first year doing a Backdoor Roth – prior to this I only funded my Roth IRA directly and did not have any other IRA. How will this affect the 8606 form as I do have ~$5600 in my traditional IRA currently that will not be converted until after the new year. Will this be pro-Rata’d, or no because no conversion occurred in 2022? I plan on doing the backdoor conversion this first week of January and then doing a 2023 Backdoor Roth contribution and conversion after that. Appreciate insight into how to accurately represent this on the 8606 form.
You’re okay as long as you didn’t do any Roth conversions this year. Only conversions can be pro-rated, so if you didn’t do one in 2022, no big deal. Just finish the process in 2023 and move on with life. Just make sure you fill out the 8606 right.
Wow, this made me realize I spectacularly messed up this year, the first time I’m doing backdoor Roth. Aside from time and headache, and having a very complicated 8606, am I going to end up with a tax bomb? Should I roll it into my employer’s 403b?
1. Contributed about $1000 into a Roth IRA and then realized I would be over the income limit due to moonlighting -> recharacterized Roth contribution to traditional contribution. Thought I was safe. But then…
2. Contributed the remainder over the course of the year, in 4 installments, including one final contribution in January 2023. Not only that, contributed it into a fund and not a money market! Gah! Broke rule #1, #2, #3, and #16.
Recharacterize it all, then reconvert.
https://www.whitecoatinvestor.com/ira-recharacterizations/
Hey WCI, just had a question regarding tax form reporting.
This was my first year doing a backdoor Roth IRA, and I unfortunately didn’t realize I needed to do one until after I had made a $1000 contribution directly into my Roth IRA in Jan 2022. I’ve since recharacterized that (at the time, the value of the contribution was down to $550-ish). I then made a $5000 non-deductible contribution to my tIRA, and then converted the whole $5500 tIRA into my existing Roth IRA. I did the recharacterization and the conversion all in the 2022 calendar year. I don’t have any other tIRA’s open, so I don’t believe I’ll be subject to the pro Rata rule.
My question is regarding filling out the 8606 form. Would I put the contribution for 2022 as $5500 on line 1? Do I need to do anything with the ~$450 of lost value of my contribution? Seeing as I contributed $6000 total in 2022, but only converted $5500 due to the lost value between contribution and recharacterization/conversion?
No, the contribution is $6K.
It just gets carried forward indefinitely on Form 8606s. So at some point in the future you can have $450 of gain in the IRA between contribution and conversion and not hav e to pay tax on it.
Wanted to share my experience and a mistake I made. I did my first backdoor IRA conversion last year,: I opened a traditional IRA and funded with $6000, then immediately converted into my existing Roth IRA. This year (2023), I went to fund my traditional IRA again and repeat the process. However, because the tIRA had a zero balance for most of the year, it had apparently been closed (Merrill Lynch). Apparently when there is a zero balance, the account can be closed and there is a closing fee (something like $95). Needless to say I was upset by this! So now I have opened another traditional IRA and will fund and convert all but $0.05 so that it won’t auto-close and I won’t get hit with a fee. FYI in case you didn’t read the fine print.
Sounds like yet another good reason not to invest at Merrill Lynch. I know that neither Vanguard nor Fidelity close accounts with zero dollars in then within one year. Of course, they also don’t charge fees to close accounts. Sounds like Merrill just wanted to charge you a fee. Why are you investing there anyway? Better be a good reason.
Dr. Dahle, my wife and I have been contributing to back door roth for a few years. Not this year yet for 2023. We Just found out from her parents that she has a sep ira from when she was 16 yrs old with 170 dollars open at northwest. So we’re afraid we’ve been violating the pro rata rule this whole time. What do we do?
1) ask fidelity to move the sep to our traditional ira and then convert to her roth that has all the backdoor roth money in it ?
Can she still do backdoor roth for 2023?
2) any addendum for previous taxes? How?
Thank you
Well, you can refile taxes for the last 3 years and reflect the pro-ration in the new taxes. Alternatively, you can ignore it all and hope nobody notices/cares.
1) Moving forward, I would convert that SEP right now into her Roth IRA. It doesn’t need to stop in a traditional IRA first. Then go ahead and proceed as usual with your Backdoor Roth IRAs.
2) If you choose to amend past returns, that is done on Form 1040X. So you’d send in a new 8606 and a 1040X and pay a little bit of tax for each of the last 3 years. But you still have the years before that if they were wrong too that you’ll just be leaving as “wrong.”
https://www.whitecoatinvestor.com/household-employees-and-the-1040x-kids-corner/
In 2021, 2022, and 2023 at the start of each year, I funded a Roth IRA with $7000 only to find out when using TurboTax that I had exceeded the maximum allowed contribution.
I have both a traditional and Roth IRA that are the same investment fund. I am using Janus.
Last year (2022) at this time, I recharacterized my 2021 Roth contribution and moved the money from Roth to traditional IRA and filed an 8606 for that.
This year (2023), TurboTax says that I again exceeded the maximum amount for 2022.
And there is a chance that the money I already put into the account for 2023 may be in the same situation for my 2024 taxes.
It sounds like I should also recharacterize and move the 2022 contribution to a traditional IRA (and maybe the 2023 contribution now too?)
And then convert 2021+2022+2023 money from the traditional IRA back to the Roth IRA?
Does this mean I’d need to resubmit my 2021 taxes? It sounds like my 8606 form will be messy.
It’s not clear to me exactly what is going on. Why don’t we start with you age. Were you 50+ in 2021? Otherwise, why are you putting in $7K? Is the problem that you contributed directly to a Roth IRA when you should have done it through the Backdoor?
I didn’t know anything about backdoor conversion when I did that.
Yes. I am now 66. I thought that since my income for those years disqualified me for Roth IRA after I had already funded it for the year meant that my only option was to characterize the contribution as a traditional IRA. So, yes, It sounds like I shouldn’t have directly contributed to the Roth IRA, but I didn’t know until the time of working on taxes that I didn’t qualify.
My income has been right on the edge of what is allowed for making a standard Roth IRA contribution.
Always best to do it backdoor if you’re even close to the income limit. I didn’t actually have to do my first BD Roth in 2010.
I didn’t know anything about backdoor conversion when I did that.
Yes. I am now 66. I thought that since my income for those years disqualified me for Roth IRA after I had already funded it for the year meant that my only option was to characterize the contribution as a traditional IRA. So, yes, It sounds like I shouldn’t have directly contributed to the Roth IRA, but I didn’t know until the time of working on taxes that I didn’t qualify.
My income has been right on the edge of what is allowed for making a standard Roth IRA contribution.
The fix is to recharacterize and then convert. The solution for the future is to only contribute indirectly via the Backdoor Roth IRA process.
I’m 66 now. My income is borderline for the cutoff of normal Roth IRA contributions.
At the start of 2021, 2022 and 2023 I’ve thought that in January that I would qualify and then found out with TurboTax the following year that my income exceeded the cutoff. Turbotax advised withdrawing the Roth funds, so I moved the funds from Roth IRA to traditional for 2021 taxes.
I’m in the same situation now for 2022 taxes — and I also made a direct Roth contribution for 2023 too.
There’s a difference between withdrawing the contribution and recharacterizing it. You should recharacterize the contribution in these situations.
https://www.whitecoatinvestor.com/ira-recharacterizations/
Stop making direct Roth IRA contributions. Anyone can go through the backdoor, even if they don’t have to go through the backdoor.
Doctor,
I can’t wrap my head around this concept. Please explain and take it easy on my poor soul will ya?
8606 form:
Let’s say I contribute 6k in feb 2023 for year 2022.
Line 1 is 6k
Line 2 is 0
Line 3 is 6k
Line 4 ( should be 6k since that’s the amount i contributed during jan-april 2023)
But the math after that doesn’t work…no one likes division with zeros.
Thankfully, your extensive comments and numerous pages on the backdoor roth topic have helped me understand the process perfectly, except line 4 🥺
Nothing goes on line 4 in your case. Read the instructions for line 3 more carefully.
In 2022, did you take a distribution
from traditional, SEP, or SIMPLE IRAs,
or make a Roth IRA conversion?
No Enter the amount from line 3 on line 14.
Do not complete the rest of Part I.
Yes Go to line 4.
You fill out lines 1-3, 14, and 15a,c
1 6K
2 0
3 6k
14 6k
15a 0
15c 0
You’re done! Next year’s will be more complicated obviously.
I made the mistake of transferring a 403b to my traditional IRA years ago and have also contributed a small amount of post tax money over the last few years. The IRA is now too large to convert to a Roth and I am unable to rollover the IRA to my employer’s 401K. Since it seems I will never be able to put 0 in my total IRA box (line 6), is it even worth continuing to contribute post tax funds to this IRA since I will never be able to do a back door conversion? I converted my wife’s IRA to Roth this year, since it’s much smaller, but I don’t seem to have a lot of options on mine.
You could try to isolate the basis. Have you checked if your employer 401(k) accepts rollovers? They probably don’t accept post-tax rollovers. So figure out how much is pre-tax and roll that into the 401(k), leaving the after-tax money in the IRA to be converted to Roth at no tax cost and allowing you to do Backdoor Roth IRAs moving forward.
That’s exactly what I attempted to do. Unfortunately, both Vanguard and Fidelity seem to require a letter or confirmation that the distribution is qualified and all pretax contributions and when I ask Vanguard for that they say they do not keep track of this and can’t send such a letter to the employer 401K company (which is Fidelity). It seems that at least for my 401K plans that this is not a viable option. Fortunately I can continue to contribute to my wife’s IRA and do backdoor on hers every year. Is it even worth continuing to contribute after tax dollars to my traditional IRA in the knowledge that I will likely never be able to do a backdoor conversion?
They’re not going to hold your hand through this process because it’s so unusual and there is no benefit to them to do it. Will they take a letter from you or your accountant? Might try that.
It’s not always possible, but I was able to do it with the Federal TSP.
If you can’t pull it off you can do non deductible contributions and try to fix it later or just invest in taxable. Neither is wrong. I might just stick with taxable and save the hassle.
The best article I read about backdoor Roth IRA conversion. Wish I would read it earlier. My problem is my wife and I just purchase annuity using our money in 401k through insurance. The financial adviser told us the money is now in an IRA account. So I assume it is a traditional IRA holding annuity. My question is now do I need to include the money in that account in line 6 of form 8606. I did research online. Some says IRS does have guideline on this, and people are handling this in different approaches. Some include it in line 6. some does not. In your opinion, should it be included?
https://www.whitecoatinvestor.com/individual-retirement-annuity-the-solution-to-the-spia-rmd-dilemma/
Great question. I’m not sure you can exclude it just because it has been put in an annuity. I suspect you cannot but I confess that I don’t know for sure.
Thank you for the thorough post! I have a few questions:
1. I made the mistake of investing in a few funds within my traditional IRA account last year, and this year I want to do the backdoor IRA. Should I still transfer/convert the full balance and pay taxes on the dividends received in prior periods?
2. My spouse and I both have traditional IRAs that we have not done backdoor IRA, should we convert all in the same year?
Thank you!
1. Probably. Not enough info to know for sure.
2. Probably if they’re little and you can afford the tax bill.
Hi, so I did a Roth Conversion and backdoor Roth. After one month, there is $1.30 on my traditional IRA.
What should I do with $1.30?
Thanks,
Convert it into the Roth IRA by doing a second conversion of $1.30.