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?
My situation: This year I had to cutback, get a new job and work part time, reducing my income to $50-70k. I have not contributed to any of my retirement accounts this year (old employment 401k, trad IRA with $0 balance, Roth IRA, and an individual taxable account with a $5200 balance). My new part-time job doesn’t have benefits and I am currently a W-2 worker with the option to switch to being a 1099 worker.
I have about $5200 in my taxable individual account in one index fund (FNCMX) that is at a total loss of $450. What would be the thing to do with this money?
A. If I stay as a W-2 worker…
Would it be legal and more tax efficient to sell all the shares in the taxable individual account ($5200) and then contribute it to the Roth IRA via a Backdoor Roth IRA? Would it be correct to NOT buy the same fund in my Roth IRA to avoid a wash sale if I do it all within 30 days? Lastly, normally I do the Backdoor Roth IRA each year because I make too much, however, this year is there any issue with just taking the money from the taxable account and contributing it directly to the Roth IRA since I had a smaller income?
B. If I switch to being a 1099 worker, is it better to open an individual 401k and put the taxable individual account money there instead of the Roth IRA?
Thank you for your attention in this matter
A. Sure. Seems a good move. Not sure you even need to do the Backdoor Roth IRA process with your income though.
B. I like the Roth IRA idea better if you’re choosing between the two. But if you can do both, why not?
Thank you for this great post! I’ve learned a lot from your site. I have a question: I made the mistakes of making two $6000 traditional IRA contributions with two subsequent backdoor Roth conversion for 2022. I attempted to recharacterize one of them for this year, 2023 but my custodian said it’s too late now. Would my best option be to withdraw the excess from the Roth IRA and then redo it for this 2023? What happens to the initial IRA contribution since it was converted?
Thank you!
Yes, I think so. I guess they would have to reverse the conversion on that excess contribution too. I’d call the IRA custodian and have them walk you through it.
Thank you for the quick response. I will get in touch with them. Appreciate it!
Hello, I know this question comes up so many times in comments section and on videos, etc. regarding the pro-rata rule. It might be best to explain it with pictures (i.e. fidelity, vanguard) or to as specific as possible. So in my situation, I did a backdoor roth for the first time this year. I opened an account at Fidelity and transferred $6,600 into a new traditional IRA. I transferred the maximum roth IRA contribution amount for year 2023 ($6,500) to a new roth IRA at Fidelity. The transaction took about 8 days. Fidelity had some sort of $100 bonus deal for opening an account and there was tax accrued on the initial $6,600 as the transfer was taking place. After the transfer, the Roth IRA had $6,500 but the traditional IRA account had $106 dollars left over. In order to adhere to the pro-rata rule the $106 has to moved so that the traditional IRA account balance is ZERO dollars by the end of the year. The $106 dollars (in my case) was transferred to the same ROTH IRA that I already had. Now my traditional IRA is $0 and my Roth is 6500+106
The language and examples given with pro-rata can be very vague in tutorials and blogs. Hope this helps.
Perfect. Well done.
If you’re unsure what your MAGI will be for the year, is there any harm in always doing a backdoor Roth IRA on Jan 1 of the calendar year? Even if you end up with a lower MAGI for the following 12 months and could’ve contributed directly to a Roth IRA without the backdoor conversation hoops. What are the downsides to doing this? Anything to be cognizant of?
No. Everyone can do a Backdoor Roth IRA. Last year residents/fellows definitely should.
I want to continue doing a backdoor Roth IRA conversions. I currently have no balances in any traditional IRA.
I would like to convert my past employer’s 401k into my own 401k with my LLC EIN number so that I continue to have no balances in traditional IRAs for my future backdoor conversions. The only way to do that 401k conversion is to first convert the company 401k into a traditional IRA and then to my own 401k.
If I do the above and I do a backdoor Roth conversion that year, will I have to pay prorata taxes for once having balances in a traditional IRA during the year or does the calculation go by balances in traditional IRAs at end of year – which will be zero (since I converted to a 410k before year end) and so no taxes will be paid on the backdoor Roth conversion?
No. The pro-rata calculation only cares what the IRA balance is on 12/31 of the year you do a conversion.
Thank you. On another note, if one wanted to max out on a contribution directly to a Roth 401k, would it make more sense to contribute to a pre tax 401k instead and convert it to Roth afterwards that same year? That way the employer will not take social security and medicare taxes off the contribution and AGI will not be affected for Medicare surtax (not sure about NII). And in many states a retirement distribution is not taxed by the state but the contribution is deductible.
The employer will withhold payroll taxes including PPACA taxes no matter how you contribute.
I’d be interested in seeing a list of states that let you deduct contributions but don’t tax withdrawals. I suspect it isn’t “many” long.
Hi there. I hope you may be available to field this question. I have contributed to a backdoor ROTH IRA the past two years. Our CPA was unaware of this as a concept. He uses Pro Series software from Intuit. Last year he was able to make it work by “overriding” something but this year the government is not accepting our return.
As background, I do not have any other IRA. I contributed $6000 to a traditional IRA via Wealthfront and converted it to a Roth using their software as soon as the money became available (within 2 days). We are filling out a Form 8606 with all of the blanks filled out as you have outlined. He has made it “work” with a $150 tax liability, which just indicates to me that something is being done incorrectly.
I am curious if this is related somehow to the software he is using. I have also read that it may have to do with the order things are entered into the tax return.
Any insights or thoughts you might have would be so appreciated.
Thank you!
Diane
I’m sorry your CPA does not know how to use their own software. I’m not an expert in the tax code and I’m certainly not an expert in all of the different tax preparation software out there. Maybe you need a tax preparer that knows how to do form 8606 using their software. I assure you that most (but no where near all) do. This post might help your CPA:
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
If you need a new person, try these folks. If they don’t know how to do a Backdoor Roth IRA I want to hear about it:
https://www.whitecoatinvestor.com/tax-strategists/
Do retired individual or couples have to have “earned income” (wages or self-employed service income) to quality for a Backdoor Roth IRA contribution or rollover. We are both retired and only have income from pensions, SS and individual investments. We do already have two small Roth IRAs if they help us in qualifying. Thanks.
Yes, only earned income can be contributed to retirement accounts.
I think we’re in this boat of getting pro-rata’d. Backdoor Roth IRA’d in Jan 2024 (7k and 8k for spouse) and then our company was bought out and our 401k plan was terminated. We had to roll into TIRA’s/Roth IRA’s. We didn’t expect to sell or the sale to go through so quickly. I retired and now I have 240k in the TIRA which I could roll (but we have 375k from the biz sale, spousal income of about 90k, my income of about 15k (10k went to pretax 401k), a 57k LTCG and rental income of 45k. Spouse has 600k in her TIRA as well. She’s retiring soon but I don’t think the new company’s 401k allows for plan in rolls. We have 3m in taxable with another 1.2m from a loan repayment on the sale so I could bite the bullet and pay the tax. My real question is if we don’t contribute to IRA/RIRA’s in 2025 but we do a roth conversion does pro-rata hit the conversion if there’s still money in the TIRA? I think effective rate hits around 24 percent if I convert all of mine in 2024 so that seems doable. Thanks WCI for this post.
Sounds like your conversion is going to be pro-rated if you can’t roll those IRAs into 401()s by the end of the year. It’s not the end of the world to get pro-rated. I don’t think I’d do a million dollars in Roth conversions just to avoid that pro-ration.
I think that makes sense. If I understand the calculation right we’re looking at about 14,700 out of the 15k to be ordinary income which at the end of the day isn’t destructive (if we don’t do anything else). We have a donor advised fund as well so I’m thinking I can offset some of that income with an appreciated holdings donation. I just don’t want to make more of a nightmare for our CPA’ going forward with 8606’s. Thanks again.
First started doing Backdoor Roth’s in 2021 for myself and souse. Did everything using Vanguard to set up traditional IRA’s and Roth IRA accounts. Our CPA filled out Form 8606 correctly as the examples on white coat investor website are done .
In May this year get a notice from the IRS that we owe taxes and penalties on this $12,000 amounting to a little over 10K. Paid my CPA to send an IRS response letter and supporting documentation from Vanguard (5498 Forms) showing the contribution to traditional IRA was appropriately transferred to a Roth IRA.
The IRS sent us a Statutory Notice of Deficiency after we sent a response, and the IRS has still not reviewed our supporting documentation and our Tax Court petition date is very soon.
Has anyone else experienced this type of harassment?
I have done Backdoor Roth IRA’s for 2022 and 2023, but am seriously considering whether I should do again in 2024. Any input is appreciated.
No. You’re the first. But I’m very interested to hear what happens in Tax Court. I can’t imagine you’ll lose but there are serious consequences if you do. Let me know if there’s anything I can do to help. I suspect either your CPA didn’t explain it well or someone at the IRS end is ignorant.
My wife and I already have money in traditional IRA’s since 2021 that is currently invested. I’m looking to start converting to a backdoor Roth this year or next. What do I need to do with my current IRA account prior to doing the backdoor roth? Should i just open another traditional IRA and start the backdoor roth conversion on a clean slate?
Roll it into a 401k or convert it all. Opening a new IRA doesn’t help.
Ok. So my accountant & finance buddy said to open another IRA and use that one to do the backdoor roth conversion because it makes the taxes or potential future documentation easier. Do you agree with this?
It might make it easier, but both are considered the same IRA when it comes to the pro-rata calculation. Certainly you CAN open another one, but that technique doesn’t get you out of the pro-rata.
So then i should just backdoor everything in my traditional IRA and be done with it?
If you can afford the taxes, converting the entire IRA is certainly a reasonable way to avoid pro-rata calculations on the conversion of that year’s Backdoor Roth IRA contribution.
Do I need to pull all my money out of my investments, and leave it in cash before I do the conversion?
I don’t know that it’s necessary required, but in general yes, conversions are done mostly easily with only cash.
This is my first year doing a backdoor Roth IRA, and I made a mistake in Step 1. Here’s the situation:
Step #1: Contribute $7,000 to a Traditional IRA and invest in a money market fund.
Instead of keeping the contribution in a money market fund, I ended up investing it in two ETFs. As a result, my Traditional IRA balance has grown to $8,100.
When I tried to convert the IRA to a Roth as per your steps, I couldn’t find the $7,000 for conversion. The reason is that my money market fund doesn’t show any balance since I already invested the entire amount in ETFs, and I couldn’t locate the funds for the conversion.
I contacted Vanguard customer support to ask if I should sell the ETFs and move the money into a money market fund before proceeding with the Roth conversion. However, the representative suggested the following approach instead:
Use the “Convert to Roth IRA” option under the holdings section: This way, I can move the entire amount, including the ETFs, directly to the Roth IRA without needing to sell the ETFs and convert them into money market funds. This would skip the step of reinvesting the funds into a different index fund.
Tax Implications: The representative mentioned that the $1,100 profit (from $7,000 to $8,100) would be taxable as part of my income, while the original $7,000 would be treated as a regular backdoor Roth contribution. This is a bit confusing to me.
Clarification Needed: If I proceed with this, am I still eligible for a backdoor Roth IRA, or could I face any tax complications due to this mistake?
I’d appreciate any feedback or advice on how to proceed and avoid any tax issues.
Thank you in advance!
You got good advice.
The only tax implications are you’re going to owe taxes on the extra $1,100. But you should still convert it all to the Roth IRA. Hurry before the year ends.
New to the financial literacy game, but trying my best to take advantage of the backdoor roth. I am not entirely sure if I understand the pro rata.
I just made a contribution to a traditional IRA to begin the backdoor process through Fidelty. They are now holding the money and will not allow me to transfer to the Roth until Jan 9th of 2025. So I will have my $7000 still sitting in the traditional IRA on Dec 31st of 2024.
What’s my best plan. Pull the money back out and just start again after Jan 1, 2025? What does leaving it in and doing the concersion as soon as the money clears (next year) look like in terms of taxes or penalties?
Any advice from the collective wisdom would be greatly appreciated.
Why do people do this the last 10 days of the year? It’s the worst possible time to contribute. Might not matter this year though if you didn’t do a conversion in 2024 or if you can pull off the conversion before the end of the year. The hold period seems especially long with Fidelity.
If you didn’t do a conversion in 2024, there’s nothing to prorate, so just wait and do the conversion in January. If you did, then you’re going to get pro-rated. It might clean up next year anyway with no big deal.
You can work through how a pro-ration works using Form 8606.
Pulling the money out seems like a lot of hassle that probably isn’t necessary but I guess could be in certain situations. Again, did you do a conversion in 2024?
No conversion in 2024. This is my first go at a backdoor Roth IRA. Just learned about it and I really didn’t think that Fidelity would require a 16 business day hold before transferring between accounts. I guess I learned a valuable lesson and I will know better for 2025. Thanks for your advice. It sounds like I will be okay since I did not make a conversion in 2024, so the pro rata will not apply. Thanks so much for your advice.
No big deal then. You’ll have a balance on line 6 of your 2024 8606 but you won’t get pro-rated.
I am reaching out to inquire about the possibility of seeking consulting regarding pro-rata tax issues related to a recent backdoor Roth IRA contribution. On Dec 31, 2024, I contributed 7k into a traditional IRA with non-deductible, after-tax funds and subsequently converted this amount to a Roth IRA through Fidelity.
Unfortunately, I recently realized that I may have inadvertently triggered the pro-rata rule. I had overlooked the requirement that all traditional IRA balances should ideally be zero (or emptied) before initiating a Roth conversion. I currently hold a substantial rollover traditional IRA (approx 600k coincidently the same example in the 8:53 video), recently transferred from my previous employer’s plan, in a separate account. I understand the IRS considers all traditional IRA funds collectively, regardless of where they are held, for the pro-rata calculation and that the pre-tax and after-tax status of these funds is not tracked across different platforms.
Despite some preliminary research, I have several questions regarding potential mitigation strategies. I am particularly interested in exploring options to address this situation before the 2024 tax filing deadline. Specifically, I am considering the possibility of transferring my rollover (tax-deferred) IRA back into my current employer’s 401(k) plan due to the IRA balances not being zero before conversion. Understand this is the first step to separate my basis of 7k away from the 600k IRA and what I struggle to comprehend is the note to ‘converting the basis left behind in the IRA’.
Post this mess, do I still need to complete Form 8606 for the 2024 tax filing season?
Appreciate your time in reading this long post
What year did you do the conversion step in? 2025? Then you have until Dec 31, 2025 to take care of that rollover IRA before you get pro-rated. If you did it in 2024, then that conversion will be prorated. Too late now to fix that really. You can either convert the whole thing (probably not awesome) or figure out a way to isolate basis.
And yes, you’ll need an 8606.
Hi all,
So I tried to do set up for a backdoor Roth correctly at the end of last year by moving my SEP-IRA (at Schwab) assets into my individual 401k at Fidelity, but Schwab and Fidelity both drove me crazy. By the end of the year I was able to get everything moved over, but the last interest and dividends in my SEP-IRA ($150) paid out into 2025 and are still in the SEP-IRA. So I’m going to be subject to the pro-rata rule on a small amount. I’ve set up an empty traditional IRA which I’m about to fund and then rollover to a Roth IRA. Here are my questions:
1) should I roll over the last of my SEP-IRA (at Schwab) into the new Traditional IRA (at Schwab), so after I contribute it would have $7,150 and then do the backdoor rollover and pay taxes on just the $150 (in essence negating the prorata rule)? Or is there some better way to do this (and no way am I going to try to get Schwab and Fidelity to talk to each other again over $150!)?
2) I have an existing Roth IRA (at Schwab) – can I just roll over into that one or should I do a separate one to keep all of this cleaner?
Many thanks in advance for the advice!
– D
1. Either that or just do a direct Roth conversion of it into the Roth IRA (which is what I’d probably do).
2. Yes.
Thank you! And on the second question I realized I asked it in a confusing way so when you said yes – did you mean yes to:
1) Just roll it into the existing Roth? or
2) Do a separate one to keep it cleaner?
Thanks again for a great blog!
– D
I only have one Roth IRA. I see no reason to have multiple.