Sometimes I wonder if I write too often about the Backdoor Roth IRA. Then I see the results of my recent poll where I asked how many of my readers were actually doing a Backdoor Roth IRA. The results were very encouraging, but there is still room for improvement among physicians in general, especially when you realize these are the numbers for those who are really tuned in to personal finance and investing (i.e. those who read this blog.) The poll simply asked, “Are you doing a backdoor Roth IRA?”
Over 500 people responded, and 48% of them said yes. Another 19% said they weren’t yet, but planned to soon. So far, so good, we’re up to 2/3 of readers. 10% said they couldn’t due to pro-rata issues. That means they had a large SEP-IRA or a large traditional IRA and didn’t have a 401(k) they could roll it into. That’s unfortunate, but I understand. Another 12% simply doesn’t need the backdoor Roth IRA since they can make direct Roth IRA contributions. Finally 5% said they were scared of the IRS (presumably the Step Doctrine), 4% admitted to being too lazy, and 2% felt they couldn’t afford it. That isn’t necessarily bad, as docs in their peak earning years should generally be maxing out tax-deferred options before doing a Backdoor Roth IRA.
My most recent presentation on QuantiaMD was # 4 in the series. This is really a fun format if you haven’t seen any of the others. They are 8-15 minutes long, contains slides, polls (usually with much different results than the ones I do of regular site readers), and audio (I’m told I sound like an old fart.) If you haven’t seen the first three, you can find them here:
#1 Live Like A Resident (804 comments)
#2 Student Loan Management (398 comments)
#3 Your Largest Tax Break (705 comments)
Number four in the series is all about The Backdoor Roth IRA, which I was unable to adequately explain while covering all the other types of retirement accounts in # 3 and had hundreds of questions about in the comments.
Future presentations include The Safe Withdrawal Rate (runs in December), How Much Do You Really Need to Retire, The Basics of Estate Planning, and The Basics of Asset Protection. I haven’t yet made the final three, but hope to finish the series by February or so. I’ll be responding to comments made on the presentation all this week. You should be able to watch these presentations without signing up for QuantiaMD, but I think if you qualify to be a member (healthcare workers) you ought to sign up as there is lots of good stuff on there, and like this blog, it’s all free to you. I discovered I even get some “Q Points” (redeemable for Amazon bucks and paying for this year’s Christmas presents) if you mention me when you sign up, so thanks to all who did so. Click the link below to view the presentation.
# 4 The Backdoor Roth IRA Presentation on QuantiaMD
At any rate, check this presentation out and then come back and let me know what you think in the comments section. It often takes a few tries for docs to really “get” the Backdoor Roth IRA? Why is that? Have you found a particularly effective way to explain the concept? Comment below!
thanks for the updates as always jim. getting ready to make my contribution for this year. the online tutorial is always helpful and the link for turbotax help is fantastic!
Yes, I wish I’d done that post. Harry obviously put a lot of work into it.
Is it possible to contribute to a traditional IRA between January 1 and April 15, 2015, for the 2014 tax year and still convert it to Roth with no penalty? I will be very close to the Roth limits for the year and wanted to wait and see if I would be able to contribute directly to a Roth IRA rather than going through the backdoor conversion.
Yes, you can convert for the prior year in the dates you mentioned.
Good luck,
Yes. But it does make the paperwork a little more complicated. It’s still very doable. The approach I took the year that was an issue is I just did it the backdoor way even though I didn’t have to. It turned out I didn’t have to, but it’s not like a low earner can’t do a backdoor Roth IRA. He just doesn’t have to.
I have a question, sort of off topic, so I apologize in advance.
I’m finishing my residency and have ~15K in a 401(k) through my residency program.
Is it possible to roll that into a ROTH IRA (I’m assuming I’d have to pay taxes on that added $15K) while my income tax bracket is still next to nothing?
I’m making ~50K as a resident, but have 3 kids which are keeping my tax bracket down. My next fiscal year will be over quadruple that so this is the perfect time for me to roll it over…if I even can.
Would that be something that sounds like a reasonable thing to do or am I just over-complicating my life?
Thanks in advance – I wasn’t sure where this would fit in a discussion board, but I love the idea of a backdoor ROTH and plan on using it as soon as I exceed the income thresholds
You usually can’t roll it out until you separate from service, meaning leave residency. But doing it in the Fall after residency graduation is a great way to do it. Yes, your income is higher than the year before, but it’s still much less than the year after. Also check if your 401(k) allows in-service rollovers/transfers or if you have a Roth 401(k).
OK so you reminded me to do it again this year 🙂 Just transferred the money to my Traditional IRA for this purpose today. Will convert it to my Roth tomorrow once it will let me. Ought to make you feel good, plus I am now thinking of starting to do this at the start of the year instead of the end to capture maximum growth.
As someone who has explained this process to Physicians many times this still remains one of my favorite things to teach my clients. I am a financial advisor and my wife is a Physician and we have done this process since 2010 when the conversion income limit went away. One thing I do differently is to do the contribution every two years. For instance, in January 2015 I will make my 2014 and 2015 contribution to the Traditional and then the very next day I will convert it to the Roth. Who does it help to do it this way? The CPA. 😉 Doing it every two years means you dont have to do the tax paperwork every year.
That’s a good point and one I had never thought of. However, the downside is that you lose a year of benefit of having the money in a Roth every other year. That isn’t insignificant, and the hassle pales in comparison to that benefit in my view.
My wife’s t-IRA consists of a rollover from an old 401k and about 3 years of post-tax contributions. She will have a 401k at her new job that accepts rollovers.
Can I rollover funds from tIRA to her new 401k, keep the post-tax contributions from the past 3 years in tIRA and then convert those 3 years’ worth to Roth and avoid the pro-rata?
If so, do these steps sound right:
1. Exchange past 3 years of post tax contributions in Vanguard tIRA (16k) to money market.
2. Rollover the remaining amount to her new 401k.
3. Convert the funds in tIRA money market account to Roth at her/our asset allocation.
Sound right?
Yes, that sounds right, ASSUMING YOUR WIFE’S 401(K) ALLOWS ROLLOVERS BUT ONLY ROLLOVERS OF TAX-DEFERRED MONEY. If it doesn’t take rollovers, or accepts after-tax money as rollovers, then your plan won’t work.
I completed that same conversion in tax year 2013 for my wife and do not anticipate a tax problem. My wife had a 401k at her previous employer. She converted some years ago to a traditional individual IRA. All this was pretax so no complications. Going forward, because of income thresholds being exceeded she no longer qualified to deduct her tIRA yearly contribution. Despite this, she and I decided to put money into her tIRA and understand that she would not get a deduction, filling out the 8606 tax form at tax time. After completing this nondeductible contribution for a number of years and filling out the 8606 forms each year we decided to make the conversion to a Roth IRA.
Firstly, commingled pre and after tax money existed in her tIRA and had to be separated out. Money contributed via 8606 after tax over the years was added up and subtracted from the total tIRA to leave only money that was as yet untaxed (her old 401k+gains from 8606 IRA).
Secondly, the untaxed money was transferred to her current employer’s 401k, leaving her with a tIRA containing only 8606 taxed IRA contributions. Her “basis” if you will. At this point the conversion from tIRA to Roth IRA was a non taxable event. This last conversion was accomplished within Vanguard.
Lastly, yes, employers have to be willing to accept tIRA money into their 401k programs and yes, we realize all that money will be taxed in the future at withdrawal. The main reason for the conversion was for tax diversification, however that is another topic that while related,is not included in my comment.
I just did my first backdoor Roth IRA contribution. It was sooooooo easy at Vanguard.
My steps were as follows:
I already have a Vanguard account
I logged in and created a traditional IRA on Sunday and had an ACH transfer from my bank for $5,500 into a money market account.
The account posted on Monday after business hours.
On Monday evening I set up a transfer from the traditional IRA into the Roth IRA buying total stock market index fund. I assume it will transfer and post between tonight (Tuesday) and Thursday.
All I have left is to do the proper tax form this season and done. For those that are scared, don’t be. it was a piece of cake.
Absolutely. That’s exactly what I do, except I don’t even have to open the accounts since I always have them from the prior years. It’s literally a 30 second exercise.
So I opened a traditional IRA ($5500) at VG in Oct 2013 for my wife and myself. I made too much money for it to be deductible, but never did the conversion to roth. Each account is currently worth ~$6500. I was getting ready to make our 2014 contribution of our traditional IRA, but since learning about the backdoor would like to do the conversion this year (and every year thereafter). Do I need to convert last years money first, and then complete the steps for the 2014 contribution? Do I make this years contribution to the t-IRA and then convert the whole sum? I figure I owe tax on the gain, but do I pay tax on the original $5500 since I was never able to deduct it? I have no other IRAs or pro-rata issues.
Just a little confused…or maybe more than a little 🙂
Stay Gold, WCI
Either way. You should only pay taxes on gains if there was never a deduction.
I am in the process of completing my first backdoor IRA. We are amending our 401K to allow for IRAs to be rolled in. I have converted my wife’s IRA to a roth and will pay the tax this year since it is small. My question is if I do not roll my IRA into the 401K by the end of the year will I be able to complete the backdoor IRA for my wife? Thanks
Yes, they’re completely separate.
I did the backdoor Roth for my wife and I this year (first time) with Vangaurd and it was quite easy. However I lost my job last August (hospital filed bankruptcy). I’m starting a new job on 12/01/14. I was planning to roll over my 401K from my previous employer to my new employer’s 403b plan (they accept roll overs) so I don’t have to worry about the backdoor Roths we already did. However I just received a letter from the bankruptcy trustee of my former employer stating that I have until 11/30/14 to make an election to roll over my former 401K to an IRA or another employer’s plan, otherwise they will just issue me a check for the money. But I do not start work with my new employer until 12/01/14 so can’t sign up for the 403b plan yet. This puts me in a difficult situation on how to handle this, so I don’t have to deal with the pro-rata rule. What would you do.
Technically, a rollover allows you 60 days to hold on to your money before giving it to the new custodian. Unfortunately, you might not be eligible for your new 401(k) for a while. But as long as you can do a rollover within 60 days of getting the money, no biggie. If so, it’s going to definitely screw up your 2014 backdoor Roth and basically force a partial conversion of your current 401(k) soon to be IRA.
Have to thank you , for doing the spousal backdoor roth. Asked you a while back re spousal backdoor roth ira,to confirm that was possible. Been doing backdoor roth for both of us since.
For those with a 403b and 457 account, do both count towards the after-tax contribution limit of (now) $53k, or only the 403b? In other words, is the max after-tax contribution $53k-18k or $53k-18k-18k?
No, only the 403B. Remember that the $52/53K limit is per employer. Two unrelated employers = two separate $53K limits.
I just started my first job out of residency and maxed out both mine and my wife’s 403B (17.5K each) for the year. Can I still do a backdoor IRA to Roth conversion?
Yes you can. The 403 (b) contributions do not affect your eligibility to do a backdoor Roth
So is there any backdoor Roth option available for someone with 175k in SEP- IRA and in the 35% tax bracket?
not without some significant prorata tax implications. If possible, you should open a solo 401k at a place that will let you roll that sep-ira in and start doing the backdoor roth once that sep is out of your prorata equation.
Do you need to open a traditional IRA account to convert it to a backdoor Roth IRA or can you use an existing rollover IRA to make maximum contribution and transfer it to a Roth IRA ?
If you can make contributions to the rollover IRA, then you can use it. Most of the time that will work fine. If your particular custodian balks, open a new contributory traditional IRA.
Dear WCI,
I have some old 403b and 457 accounts that have not been rolled over yet. I am also planning to open a solo-401K with Etrade in the next week. Does it matter which company I use to open the non-deductible traditional IRA (for backdoor Roth) since I plan to roll the 403b and 457 accounts into my solo-401K anyway? Husband and I are both physicians so if he does a personal and spousal backdoor Roth, so does that preclude me from opening up my own personal and spousal backdoor Roth?
A few misconceptions here:
Open your non-deductible traditional IRA at the same place as you want your Roth IRA. Mine’s at Vanguard. So there is one traditional IRA and one Roth IRA there for me, and one for my spouse. You don’t get both a personal IRA and a spousal IRA. You get one IRA each. If your spouse isn’t working, then it’s a spousal IRA. If your spouse is working, it’s just their own IRA.
Make sure your 457 can actually be rolled into a 401(k) and make sure you open your 401(k) somewhere that accepts rollovers. (I think eTrade does as I recall.)
Just wondering where is best brokerage to open a new Roth IRA and Traditional IRA for back door conversions? Vanguard, Etrade, TradeKing, TDAmeritrade, ScottTrade? Any thoughts on expenses, options for investor or admiral shares, or trade commissions and ETFs that would push someone in a particular direction?
I do mine at Vanguard as I’ve never seen a particularly good reason to do it anywhere else. But any of those you list are reasonable options.
Question regarding if I am maxing out my annual contribution limit.
I split my job between the VA (so have a TSP account) and a University (so have a 403b account).
My financial advisor, at a large full service brokerage firm <– just learned how big of a mistake this is, is endorsing the idea that my annual limit between the two plans is 18k total.
Is this true? Or is the annual limit 18k-18k? Or does the TSP have no annual limit and the 403b = 18k?
If I am not maxing out these, then I have work to do before doing a backdoor Roth.
Thank you!
I should also say that With the above endorsement, I was talked into a LIRP/VUL for retirement contributions… i seem to learn about one piece of bad advice weekly since reading your book and joining a physician financial interest group.
More on investing for retirement in a VUL here: https://www.whitecoatinvestor.com/variable-universal-life-insurance-as-a-retirement-account/
I’m amazed how easily doctors are talked out of just using a taxable account. It’s really a fine account to use to save for retirement and other goals.
https://www.whitecoatinvestor.com/retirement-accounts/the-taxable-investment-account-2/
Each 401(k)/403(b)/TSP at an unrelated employer has a $54K total contribution for employee + employer contributions.
However, you only get one $18K employee contribution no matter how many 401(k)s you have. So if you put an $18K employee contribution into the TSP and then did it again for the 403(b), you have overcontributed.
What you should probably do is put in the minimum to get the full match from the 403(b), and put the rest of your $18K into the TSP.
More details here: https://www.whitecoatinvestor.com/multiple-401k-rules/
Thank you!
I am now an employed physician with a 457 (employer paid) and a 401(k) that allows me to make Roth contributions. My previous retirement monies from private practice have been “rolled over” into a solo 401K. Am I still eligible for a “back door” roth?
Yes. Read through form 8606 and you’ll see it doesn’t ask anything about 457s or 401(k)s. Only traditional, SEP, and SIMPLE IRAs.
Dear WCI,
I’m recently out of residency and appreciate all the information on your website about financial planning. You actually played a big role in helping me dodge a whole life insurance policy not too long ago!
My question about the back door Roth conversion has to do with taxes. In the next 2-3 years, my wife and I will be in the highest income tax bracket combined with our earnings. We also suspect (hopefully correctly) that once retired, our tax rate will be lower. This means that we expect any money we withdraw from 401K will be taxed at less than 40% and capital gains tax is already far lower than that.
Given this, would it make sense to contribute to a back-door Roth IRA with after tax dollars (taxed at 40%) right now thinking that our rate would be lower in retirement? Would it make more sense to use this money to invest in a taxable account? Or is there something that I am missing?
(My 401K is at max and my wife’s will be soon. We do not have any other IRA therefore pro-rata doesn’t apply to us yet).
Thanks for your help,
Vik
Yea, you’re missing something big. Roth always beats taxable. You’re not comparing a tax-deferred account to a Roth account. You’re comparing a taxable account to a Roth account. And Roth wins, every time. You’re not eligible to deduct a traditional IRA contribution, so you might as well convert it to a Roth. The money that goes into both a Roth and a taxable account is after tax, so you might as well choose the one that is never taxed again.
WCI,
My mother passed away in 2025 leaving me two traditional IRAs and a Roth IRA of large sums. What would be the repercussions of converting these to a Roth so then I could then do an annual backdoor Roth?
In regards to the traditional IRAs, is there no penalty if they were post tax money?
I don’t think inherited IRAs count on your 8606.
https://www.nerdwallet.com/ask/question/can-i-still-completed-a-backdoor-roth-conversion-if-i-have-a-large-inherited-ira-4052
https://www.irahelp.com/forum-post/17744-inherited-iratraditional-ira-and-backdoor-roth-conversion
Dear WCI, I am new to your site and appreciate all the good advice. This is similar to VIK’s comment above. I am learning about the backdoor roth and have not indulged in it due to a schwab calculator that told me a few months ago that it was a bad idea in my case. The parameters that I used, I believe, are accurate. Is there a scenario where a backdoor roth does not make sense?
I am 46 y/o with 1mil in 401k/profit sharing and 2 mil in taxable accounts. my gross income is between 5-600k/yr which, of course, puts me in the 39.6 tax bracket. Per the schwab calculator, I am better off not converting the max amount (or anything for that matter) each yr going forward as i believe my tax bracket at age 60 (year i plan to retire) will be the 25 or 28% bracket. Am I missing something? Is schwab FOS? thanks for all the good work on your site
What kind of a calculator would tell you a Backdoor Roth IRA is a bad idea? You must have some sort of misunderstanding about how it works.
I guess if your plan at work is a SIMPLE IRA or a SEP-IRA you can’t change it could be a bad idea.
Are you mistaking a backdoor Roth IRA for a Roth conversion? They’re not the same thing. It may very well NOT make sense for you to convert pre-tax dollars, but that isn’t what a Backdoor Roth IRA is. It’s converting post-tax dollars to Roth dollars.
Just wanted to clarify how to set this up for non-working spouse. We are married filing taxes jointly. I setup one traditional IRA and one Roth IRA for myself (I’m the one working). I setup a spousal traditional and Roth for my wife (both are in her name). We then deposit $5500 into each of our traditional IRA and then convert to the Roth. Thanks!
That’s right. Two separate accounts.
So I maxed out my 403b/457 for 2017. This year I joined the Air Force Reserves and they have a TSP traditional IRA and ROTH IRA. I understand the max I can still contribute for 2018 is $37,000 in any of the combination stated above. I want to know what is the best scenario to approach my contributions? Max 403b and max TSP ROTH? Or continue to max 403b/457 thru my primary employer?
And do I start a separate backdoor ROTH IRA if I am contributing to the TSP ROTH IRA?
There is no such thing as a TSP traditional IRA.
Personally, I’d put whatever it took to get the maximum match in the 403b (if any) then put the rest of my employee contribution into the TSP, max out the 457, and open a Backdoor Roth IRA for my spouse and myself.
$18.5K total into the TSP and 403b + any matches
$18.5K total into the 457
$5.5K into a personal backdoor Roth IRA
$5.5K into a spousal backdoor Roth IRA
Whether you do the TSP/403b as a tax-deferred or a Roth contribution is a separate question.
I tried taking a snapshot of my TSP account showing what options I have for contributions (traditional TSP & ROTH TSP), but didn’t have an option to paste it here. Hopefully this link clears it up a little bit:
https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/TaxTreatment/comparisonMatrix.html
I was told I can ONLY max out 2 of the 3 accounts. So I am looking at maxing out my 403b and ROTH TSP at this time. Which leaves me not being able to max out my 457 at work.
If I understand correctly you are suggesting I put in
TSP($9250) and 403b($9250) + any matches
$18.5K total into the 457
$5.5K into a personal backdoor Roth IRA
I’m quite familiar with the TSP investment options, so no worries there.
But you have a misunderstanding of how the rules work. If under 50, you can put a grand total of $18,500 into the TSP and the 403(b) in any combination as an employee contribution. You can’t put $18,500 into each. Then, you can put another $18,500 into your 457.
Get any match you can in the 403(b). Once you’ve put in enough to get that, put the rest of that $18.5K into the TSP since it’s a better plan assuming you make enough to do so. Then put $18.5K into the 457 (assuming it’s a good 457) and $5.5K into the Roth IRA.
Hi I’ve maxed out my 401(k) contributions. And now I am looking into putting extra savings away. I put 5500 into a traditional IRA for the past two years. 2017 and 2018, realizing that these cortina would not be deductible bc of my income. Reading your columns on the back door Roth IRA was very intriguing. Thanks for your advice. Would you recommend simply just converting this $11,000 Straight over to Roth IRA right now? Do you think there would be a tax bill?
Hi I’ve maxed out my 401(k) contributions. And now I am looking into putting extra savings away. I put 5500 into a traditional IRA for the past two years. 2017 and 2018, realizing that these contrib would not be deductible bc of my income. Reading your columns on the back door Roth IRA was very intriguing. Thanks for your advice. Would you recommend simply just converting this $11,000 Straight over to Roth IRA right now? Do you think there would be a tax bill?
Yes.
Only for the earnings (if any.)