[Editor’s Note 9/18/2018: We’ve updated and republished this popular post to include a new infographic and tutorial video to help make the steps to contributing to a Backdoor Roth IRA and filling out IRS Form 8606 even easier to understand and execute. This guide will show you how to get it done right and avoid/identify mistakes that can cost you time and money — even if the mistake was made by your financial advisor. We also cover how to handle late contributions to the backdoor Roth IRA (if you contribute in the following calendar year). If you’ve hesitated to make a Backdoor contribution on your own in the past, this post will give you the confidence to finally go ahead and get it done.]
I’m still getting frequent questions on how to do a Backdoor Roth IRA. So I thought I’d put together a basic, step by step, tutorial people can refer to when they do this. Most physicians should be using a personal and spousal Backdoor Roth IRA. Not only does this provide an additional $5,500 each ($6,500 each if you and your spouse are over 50) of tax-protected and (in most states) asset protected space, but it allows for more tax diversification in retirement. That allows you to determine your own tax rate as a retiree by deciding how much to take from tax-deferred accounts and how much from Roth accounts.
5 Steps to Making the Backdoor Roth IRA Contribution
Step 1 Contribute to Your Traditional IRA
Make a $5500 ($6500 if over 50) non-deductible traditional IRA contribution for yourself, and one for your spouse. You can use the same traditional IRA accounts every year, they just spend most of the time with $0 in it. Most fund companies, including Vanguard, don’t close the account just because there is nothing in it. I do this every January 2nd. I just place it into the Prime Money Market Fund to keep the math simple. Since it yields something like 0.04% and doesn’t go down in value, the sum when you convert will be exactly the same as when you contribute. No gains, no losses.
Step 2 Convert the Traditional IRA to a Roth IRA
Convert the non-deductible traditional IRA to a Roth IRA by transferring the money from your traditional IRA into your Roth IRA at the same fund company. If you don’t already have a Roth IRA there, you’ll need to open one. This can be done in a minute or two online at Vanguard and is essentially the same process as opening the traditional IRA. I do this the very next day after I make the contribution. It is very straightforward. When you transfer the money, the website will throw up a scary banner saying something like “THIS IS A TAXABLE EVENT.” That’s true. It is taxable. It is just that the tax bill is zero for it since you’ve already paid taxes on the $5500 and couldn’t claim it as a deduction because you make too much money. You can now invest the money as per your investing plan.
Step 3 Beware of the Pro-Rata Rule
Get rid of any SEP-IRA, SIMPLE IRA, traditional IRA, or rollover IRA money.The total sum of these accounts on December 31st of the year in which you do Step 3 must be zero to avoid a “pro-rata” calculation (see line 6 on Form 8606) that can eliminate most of the benefit of a Backdoor Roth IRA.
You can get rid of these accounts in 3 ways:
- Withdraw the money (not recommended, as the money would be subject to tax and/or penalties, not to mention DECREASING your tax-advantaged/asset-protected investment space.)
- Convert the entire sum to a Roth IRA. Only recommended if it is a relatively small amount and you can afford to pay the taxes out of current earnings or taxable investments with relatively high basis.)
- Roll the money over into a 401K, 403B, or Individual 401K. 401Ks don’t count in the aforementioned pro-rata calculation. Some physicians have even opened an Individual 401K at Fidelity or eTrade (the Vanguard Individual 401K doesn’t accept IRA rollovers) in order to facilitate a Backdoor Roth IRA.
Step 4 Fill Out IRS Form 8606 Correctly
The second part of The Backdoor Roth IRA is done 15 months later when you (or your accountant) fill out your IRS Form 8606 on your taxes. Remember that you need one form for each spouse. You need to double check this to make sure it is done right, even if you hire a pro. Advisors have told me that they have had to help clients fix dozens of these that tax preparers had done improperly. If you don’t do it right, you’ll pay taxes twice on your Backdoor Roth IRA contribution.
[Update 2018: To get this step right, I’ve put together a Form 8606 tutorial video AND a correctly filled out 2017 form. Both show in detail how Form 8606 should be completed in a typical year. Yours will look different if you did your conversion in a different year from your contribution, or if you had an additional Roth conversion this year.]
Page 1 (below) shows a “distribution” from your non-deductible IRA. Since the money was already taxed, the taxable amount on your distribution is zero. Line 1 is your non-deductible contribution. On Line 2, your basis is zero because you had no money in a traditional IRA on December 31 of last year (if you’ve been carrying a non-deductible IRA for years this may not be zero.) Line 6 is zero in a typical year. Note that Turbotax may fill this out a little differently (may leave lines 6-12 blank) but you end up with the same thing. Line 13 is the same as line 3, so tax due is zero.
On page 2 (below), you are showing the Roth conversion. I’m not really sure why you have to do this twice (since you’re just transferring the amounts from lines 8 and 11 and then subtracting them), but that’s what the form calls for. As you can see, a Roth conversion of a non-deductible traditional IRA contribution without any gains is a taxable event, it’s just that the tax bill is zero for it.
When double-checking your tax-preparer’s work, you want to concentrate on lines 2, 14, 15c, and 18, and make sure they’re a very small amount, like zero, and not a very large amount, like $5500.
Notice how there is no place on the form to put the date when you made the contribution or the date when you made the conversion. It isn’t on the form your IRA custodian sends to the IRS (1099-R) either.
Harry Sit’s blog, The Finance Buff, has a nice tutorial showing how to fill out form 8606 using Turbotax, which, believe it or not, is trickier than doing it by hand.
Step 5 Repeat Next Year
Contribute and Convert Each Year
You do not have to wait any period of time between the contribution and conversion. Each year, I make my Traditional IRA contribution on January 2, then convert to a Roth IRA the next day. That gets my investment money working as soon as possible and simplifies the record keeping. Vanguard won’t let you do it the same day, so I have to wait one day anyway.
The Step Transaction Doctrine
Late Contributions to the Backdoor Roth IRA
While it is “cleaner” to make your contribution and your conversion all in the same calendar tax year, you can make your contribution up until your tax filing date of the next year. Late Contributions to the Backdoor Roth IRA has more details about doing this but hasn’t been updated in a while, so let’s do it now. The key to filling out the 8606 correctly when you make a contribution after the calendar year is to recognize that the contribution step is reported for the tax year and the conversion step is reported for the calendar year. So imagine you did the following during the calendar year 2018:
- Made a 2017 IRA contribution (reported on 2017 8606)
- Did a Roth conversion of that contribution (reported on 2018 8606)
- Made a 2018 IRA contribution (reported on 2018 8606)
- Did a Roth conversion of that contribution (reported on 2018 8606)
Your forms would look like this:
2017 Form 8606 (only have to fill out part I)
Note that all this serves to do is report basis for the next year. No tax is due. Since no conversion step was done during calendar year 2017, you only have to fill out lines 1-3 and 14.
2018 Form 8606 (must fill out parts I and II)
Notice a couple things here. First, you’ve got to do all of Part I plus Part II for this year because you did the conversion step, unlike last year. Second, don’t get confused by the fact that this form says “2017” and line 4 asks about 2018. This is the 2017 form and you would actually be filling out the 2018 form. But since the 2018 form doesn’t exist yet, I had to use the 2017 form for this demonstration. So add one year to anything you see here. But let’s go through this line by line.
Part I
- Line 1 – That’s the money you contributed for 2018
- Line 2 – This is your basis. Since you made a contribution for 2017 but didn’t do a conversion during 2017, your basis is $5,500
- Line 3 – $5,500 + $5,500 = $11,000
- Line 4 – Remember this is asking about 2019, not 2018 and since you didn’t make the mistake of doing your contribution late again, this will be zero.
- Line 5 – $11,000 – $0 = $11,000
- Line 6 – This is the line that triggers the pro-rata issue. Even though you made a 2017 contribution, you did so AFTER December 31st, so this line would still be zero if had to fill it out for 2017, which you didn’t because you didn’t do a conversion in 2017 and got to skip lines 4-13. But this is the 2018 form and since you converted your entire traditional IRA, this will be $0.
- Line 7 – This doesn’t include conversions. Since you didn’t take any money out of your traditional IRA this year except the conversion, this is $0
- Line 8 – You converted a total of $11,000 this year to a Roth IRA, so $11,000.
- Line 9 – $0 + $0 + $11,000 = $11,000
- Line 10 – $11,000/$11,000 = 1
- Line 11 – $11,000 * 1 = $11,000
- Line 12 – $0 * 1 = $0
- Line 13 – $11,000 + $0 = $11,000
- Line 14 – $11,000 – $11,000 = $0 Note that when you do this form for 2019, line 2 will be $0. (Line 14 on 2018 form = Line 2 of 2019 form)
-
Your Roth IRA contributions will need to go through the “backdoor” many times as you build your portfolio.
Line 15a – $0 – $0 = $0
- Line 15b – You didn’t take money out of an IRA to help you survive a disaster, so $0
- Line 15c – $0 – $0 = $0
Part II
- Line 16 – Line 8 is $11,000 so $11,000
- Line 17 – Line 11 is $11,000 so $11,000
- Line 18 – $11,000 – $11,000 = $0
As simple as this all seems, there are a few ways to screw up the process. Read 17 Ways to Screw Up A Backdoor Roth IRA to see them.
What do you think? Are you doing Backdoor Roths? Why or why not? Any questions about it? Comment below!
The only accounts I’ve ever had in the past are a 401k, my wife’s 403b, and a traditional Roth IRA from when I was underneath the income threshold.
Do I start at step #2 then?
Honestly I’ve seen you write about this a lot of times, but I’ve always felt if something seemed a little sketchy or non-traditional that it probably wasn’t a good idea and would come back to bite me in some way, shape or form… so despite understanding the logic, I’ve never done it.
But I continue to warm to it.
What is a traditional Roth IRA? There is either a traditional IRA or a Roth IRA, not both.
If you have no SEP, SIMPLE, traditional, or Rollover IRA, then you do not have to get rid of one before year end, that’s correct.
I meant a regular Roth IRA that was not done backdoor style.
I have a regular Roth IRA for me and my wife.
I have zero money in a traditional IRA, no SEP, Simble, or rollover or anything.
Only 401k a couple 403b accounts (both NON-roth)
If I contributed to a traditional IRA TODAY and converted it next week would it be for the ’13 or ’14 tax year?
It could be either or both. You can make 2013 contributions from Jan 2013 to April 2014. You can make 2014 contributions from Jan 2014 to April 2015.
So I can contribute 5500/ yr? If i contribute 5500 in December 2015, then make another contribution in 1/2016, do I just indicate that I made a single contribution for my taxes in 4/2016 and put the second contribution on the tax return in 4/2017?
Yes, you can do a 2015 contribution between Jan 1 2015 and April 15 2016 and a 2016 contribution between Jan 1 2016 and April 15 2017.
Yes, that is correct. You do not have to mention anything about the 1/2016 contribution when you file taxes in 4/2016.
When you file taxes in 4/2016, you just mention that you made $5,500 contribution (that you made in Dec 2015). And then again, in 4/2017, you indicate that you made $5,500 contribution.
Do I have to get rid of inherited IRAs (ie convert to 401k’s) to avoid the pro-Rata rule to fund a Backdoor IRA?
No. They don’t count. Per the instructions, you file a separate 8606 for each inherited IRA.
I fear I have really screwed up my attempt at the backdoor Roth conversion. I contributed $5500 to a Vanguard traditional IRA in December and then shortly after converted it to a Roth. However, an old SEP IRA from a different bank was not yet 0–in process now. So…..it still had a balance on December 31. What are the awful consequences–for this year and future years? Many thanks!
You’re about to learn all about the pro-rata rule. Basically, for 2013, you’ll have to deal with the pro-rate rule and most of your backdoor Roth IRA isn’t going to work quite the way you hoped. However, during 2014, you should roll that SEP IRA into a 401K or convert it to a Roth IRA and all will be well in the end. It’s just going to make your 2013 taxes more complicated.
I have a situation. You said I should have 0 balance by Dec 31 of the year I make the roth conversion from a traditional IRA. Now I have some funds rolled over to my traditional IRA from my previous employer sponsored 401K plan, which need to be moved out (to an individual 401k plan, as per your suggestion). I am working as a locum tenen now and will receive a 1099. I do not own any business/corporation. Can I open an individual 401k with say Fidelity. Apparently, Fidelity denied to let me do so since I do not own any business. Can you please advise what to do in this situation, to reap the benefits of backdoor IRA?
Thank you.
What do you mean you don’t own a business? You absolutely do. It’s a sole proprietorship. Get an EIN from the IRS and tell Fidelity you own a business and open up that individual 401(k).
Thank you so much for your prompt reply. I believe I go to irs.gov and apply online for the EIN. Is there any fee for doing it myself? I have brokerage, IRA and roth IRA accounts with schwab. Do they allow rollover from IRA to individual 401k account.
I have another question. As an individual contractor what will be my best option for purchasing health insurance for family? My wife is joining school this fall and we may all join the student health insurance, which is not so good. In that case will 100% of the premium be tax deductible?
I don’t think there is any fee. Here is my article on individual 401(k)s but be aware that their websites often say one thing and their representatives another. I’m continually updating the data as readers tell me about it.
https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/
Regarding health insurance, I’m no expert in what your best option would be for your family’s needs and local area. See a local broker. Premiums are deductible for the self-employed on line 29 of Form 1040. Employees who pay them have to put them on Schedule A with other medical expenses, subject to a huge 7.5% floor (which means they’re probably not deductible for a typical doctor.) In general, I like High deductible plans that allow you to use an HSA (stealth IRA.)
Hi – I am an academic MD and have a W2 income. I do some disability reviews/surveys that earn me $500-6000/yr – do I have to have an EIN to open a Solo 401K? Thanks
I don’t know of an individual 401(k) provider that doesn’t require an EIN. But it isn’t a big deal. A couple of minutes online and no money.
Hi!
I have been making backdoor IRA contributions the past few years. This year I made the traditional IRA contribution very late and the fund wasn’t available to convert to a Roth IRA until today which is the first of the new year. Unfortunately I’m too late to make the conversion for 2017 tax year. What would be the best course of action at this
time? Should I hold current amount in traditional IRA then add the additional $5500 for this new year in a few months and convert everything to a Roth IRA later in the year? Thanks in advance!
Just convert it now and make sure you fill out your 8606 right.
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Was “shortly after” also in December 2013? If so, you will have to pay some taxes on your 2013 conversion, which may not be a big deal depending on what exactly you mean by “in process now” with regard to getting your SEP balance to zero. If you are converting the SEP to Roth in 2014, no big deal on your mess-up in 2013 — you pay a little more for 2013, a little less for 2014. If you are rolling the SEP over to a 401k-type qualified plan, be sure to rollover only the pre-tax money, not the after-tax money as a result of applying the pro-rata rule for 2013. If you rollover the whole SEP, you will eventually pay taxes twice on part of the money.
Alternatively, you can recharacterize your 2013 conversion and redo the conversion in 2014 (must wait 30 days) after you clear up the SEP.
Thanks, that’s very helpful. I knew I would be paying some taxes with the conversion process this year. I wanted to get rid of the SEP in order to facilitate doing tIRA–>Roth conversions in the future. The SEP is relatively small with a balance of $8000. I am transferring the assets to my Vanguard tIRA and will then do a conversion to the Roth–pre tax money only. I’ll have to check into recharacterizing the 2013 conversion–don’t know much about it.
Don’t worry about recharaterizing then if you are going to convert the SEP to Roth in 2014.
?typo on step 3. You stated, “is essentially the same process as opening the traditional Roth IRA.” I believe you meant “traditional IRA”, not “traditional Roth IRA”. It just seems a little confusing.
You can delete this post after you read it.
Thanks for pointing that out. I just corrected someone in a comment only to find I made the same mistake.
Nice and timely summation of a topic I’ve been very interested in. I have an IRA through a former (and rather nasty!) employer, who sent out paperwork as a 1099 on it – so I had to pay taxes on it already. I’d like to roll this over to a Roth, and would expect, since it’s already been taxed, it would be considered a non-qualified IRA, and as such, the conversion would be taxfree, as you outlined above.
Comments? Thanks!
I”m not sure what you mean by an IRA through a former employer. IRA stands for individual retirement arrangement, and doesn’t come through an employer. Do you have a SEP or SIMPLE? Those should be pre-tax. Something is screwy here.
I agree, if you hire an accountant, make sure they correctly fill out the 8606 form. I have always done my own taxes on TurboTax, but about 3 years ago I decided maybe I should hire a professional because I might be costing myself more in lost tax savings than if I just hired someone. I hired a very reputable local professional (not one of these H&R block outfits). This year I got an IRS notice saying I owed $10,000 on my Roth Conversion from the year he did my taxes. I noticed he never filed the 8606 form. I sent in my response with the form and everything was resolved. I’m back to doing my own taxes.
I am a graduating resident, so this is my last year to do a pure Roth, and also the first year I have had disposable income to contribute.
There is no limit to the number of Roth IRA’s that one has, right? can I have one at Scottrade (that allows option trading within the Roth) and in a year open a backdoor through Vanguard (for low ER funds)? I understand that it will take a few years until I can really start investing meaningfully in the Vanguard account anyway because of minimum requirements (3k)
The IRS considers you to only have one ROTH IRA, even if you have accounts at tem places. The term IRA stands for individual retirement arrangement, not account like most people assume.
You can have as many as you want, but can only contribute $5.5K total ($6.5K total if over 50) to all of them. I have 3 different Roth IRAs- one at Vanguard, one at Bridgeway, and one at Lending Club. Remember Vanguard has a number of funds with a minimum of $1K.
What happens if I contribute to a tIRA based on my measly resident income, deduct it and send my taxes in the next day, and then on the third day convert to a Roth…?
It’s the same as if you just contributed to the Roth in the first place.
To my understanding when I recently rolled over a SEP IRA to a Solo 401K, and now about to do a backdoor conversion is that you can have have a SEP or other retirement vehicles, you just can not contribute to them the same year you do the conversion. So if you have a SEP, you can still hold onto it, but don’t add money to it the same year you want to do the backdoor Roth conversion.
You can add money to it the same year, you just have to convert the whole thing or roll it into a Roth IRA. All that matters is the SEP IRA balance on December 31.
I see how that worked out. I can only contribute to a SEP or 401K in a single tax year. I chose to keep the SEP till the end of the year to maximize contributions for that year, and then rolled it over late Dec. Thanks for clarifying
For the past several years I have been making annual contributions of $5,500 each to non-deductible IRAs for both myself and my wife. I have no outstanding Traditional IRAs (I previously rolled them over into my 401k) so I can convert to Roth at any time. Currently, total non-deductible contributions are around 40K and the total value of the account is around 55K. As you can see, I am waiting for an opportune time to convert and I was wondering your thoughts on the matter. I will convert in either of the scenarios below…
1. The market drops considerably so my ‘cost basis’ would (hopefully) be close to zero when I convert (rather than about 15K as it is now) such that my tax liability would also be near zero.
2. I retire early and have a few years when my taxable income is zero or minimal. This would place me in a lower tax bracket and any tax liability resulting from non-deductible IRA to Roth IRA conversion would therefore be minimal.
Your thoughts on this strategy?
My wife’s situation presents more of a problem. As she has not worked for the past 8 years (since I began non-deductible IRA contributions) and has considerable investments in multiple IRAs (totaling perhaps $150K). What you advise for her? As she does not work currently, I cannot set up an individual 401K with Fidelity to accept rollovers for her deductible IRAs. I am hoping she either a) Starts up her own business earning at least $14k per year so she can open a individual 401k or b) Goes back to work as a teacher and opens a 403b that accepts rollovers. Any further ideas on how to handle my wife’s non-deductible IRA contributions since her current deductible IRAs present a conversion problem vis-a-vis the ‘pro-rata rule’?
1) You have your ‘cost basis’ backwards, but point taken.
2) That’s fine if it’s coming up shortly. If it’s still far off, by that time your $55k can become $255k.
You can rollover $15k pretax money to a 401k now and convert the remaining $40k. See the charts in my article linked in this post.
Your wife doesn’t need to earn $14k before she can open a solo 401k. $400 will do. How about tutoring?
I actually don’t have the ‘cost basis’ backwards. I have been making NON-DEDUCTIBLE IRA contributions over the past eight years totaling about 40K contributed which has grown to about 55K. Thus,my tax liability for a conversion would only be the difference (55K-40K=15K taxable at my marginal rate). The reason: I made these contributions for purposes of asset protection but was unaware, until only recently, that I could convert to a ‘backdoor’ Roth.
I will look for opportunities for my wife to earn $400 as a sole proprietor. Who knew the minimum to open a solo 401k was so small?!
Thanks,
Gary
He’s saying your basis is backwards because the $40K is the basis. You don’t pay taxes on the basis in the conversion.
You’re right that if the market drops before you convert that you’ll save taxes. The opposite, of course, could easily occur. Since the market goes up most of the time, I would convert yours sooner rather than later. In fact, I would have converted as I went along each year rather than saving it all up. Right now if you converted you’d owe about $5K. It’s quite possible in a few more years you could owe a lot more on a conversion. I wouldn’t wait for a lower bracket, since the increase in value is a far bigger factor.
I agree with Harry that if you can isolate your wife’s basis that will be the best course. I managed to do that with my TSP money a few years ago.
Is there actually a minimum amount of earnings you must have to open a Solo 401K? I’m not even sure you have to have earnings, do you? Just a viable business with an EIN as far as I know.
Thanks for clarifying. Harry Sit implies in his reply that my wife would need at least $400for a sole proprietorship to qualify for setting up a solo 401k but you seem dubious. Any idea where I might find an answer to this question?
I don’t know if he was using $400 as a specific number, or just saying you need very little income to justify a Solo 401K. I have never heard of $400 as some minimum income needed.
I appreciate this and hope I can utilize it in the future but really. How dumb are our tax rules? Why not just let everyone have a ROTH regardless of income and make it easier?
I am sure you are aware that government makes everything more complex. It ends up creating more jobs to understand and work through the complexity. Look at medicine today and how much paperwork is now required to do very simple things. In the past you can just send in your bill with a short free hand note and that was it. Now you need someone for coding and billing, claim disputes, file management.
I wish I had something like this post 5 years ago. It took me way to long to figure this out on my own.
So I have about 20K in a traditional IRA from before I qualified to contribute to my group’s 401k. I became ineligible to contribute more to the trad IRA once I qualified to the group’s 401k and have been maxing the 401 since then.
My question is, can I open another trad IRA account, put post-tax money in it, and just backdoor this new one to a Roth. Will my older trad IRA (with untaxed money in it) be any hindrance to this plan?
Yes. You must get rid of the old IRA. All IRAs are included in the pro-rata calculation. Roll it into your 401K or pay the taxes and convert the whole thing.
I am a little confused about the pro rata rule. If all IRAs are included in the pro rata calculation, and I move money into a Roth IRA, will I have to figure out where to stash it next year, so I can backdoor again? Won’t that defeat the whole idea? Or do only traditional IRAs, Sep IRAs, and Simple IRAs count toward pro rata, and not Roth IRAs? Thanks!
Exactly. Roth IRAs don’t count. Only traditional, SEP, and SIMPLE IRAs.
“The total sum of these accounts on December 31st of the year in which you do Step 3 must be zero to avoid a “pro-rata” calculation that can eliminate most of the benefit of a Backdoor Roth IRA.”
I don’t quite understand these…can you explain?
Perhaps the best explanation is the cream in the coffee example. The non-deductible dollars in the IRA are the cream. The tax-deferred dollars in the IRA are the coffee. Once you mix them, you’re not getting the cream back out, it all comes out as a mixture.
What I do is I put the cream in an empty cup. Then I convert it. Since it is all cream, I pay no taxes. If you already have 4 ounces of coffee in the cup, then add 1 ounce of cream, it all comes out as a mixture. If you only take out 1 ounce of creamy coffee, then you pay taxes on 4/5 of it, since it is 4 parts coffee, and 1 part cream. That’s the pro-rata contribution.
In dollars, let’s take a look at this example. You have a $20,000 tax-deferred IRA. You then add $5000 of non-deductible IRA contribution. There is $25,000 in the account, with a basis of $5000. If you convert the entire account, you pay taxes on $20,000 and you get $5000 tax-free. If you convert half of the account, you pay taxes on $10,000, and $2500 comes along tax-free.
Does that help?
thanks. but I still don’t get it.
I don’t mix cream with coffee.
Keeping old tax-deferred IRA at Brokerage One; open new non-deductible IRA and just convert it at Brokerage Two.
Why I have to get rid of old IRA (rolling into 401K) before doing that?
That’s just the way the tax laws work. All IRAs are considered together, no matter where you hold them. Work through Form 8606 and you’ll see why. The IRS knows how much you have in IRAs because it is reported each year.
The person above could also transfer 20k into any 401k/403b that accepts transfers. Then he can backdoor the remaining 5k at no tax liability. At least, this is how I understand the schematic from Harry Sit.
I have 40k in a traditional IRA that was initially rolled over from a prior employers 403b. I also contributed 5.5k to traditional IRA in 2016 and 2017, both nondeductible. For 2017 I was initially thinking of doing a backdoor ira but have not rolled over my prior 40k traditional by December 31, 2017. Can I rollover my 40k into my current company’s 403b and then can I convert 15k to backdoor for 2018 (5k contributed in 2016, 2017, 2018). Or is it better to rollover all I have (including the 2016 and 2017 contributions) into current company’s 403b and just backdoor 2018. Don’t want to pay too much pro rata. Thanks!
Assuming I already hold a combination of traditional IRA’s and Roth IRA’s, could the pro-rata rule be avoided in retirement if I deplete the the traditional IRA’s before touching the Roth IRA’s ?
The pro-rata rule only matters for conversions. So if you wanted to do conversions in retirement, then yes, once your traditional IRAs are spent, you could do conversions without worrying about the pro-rata rule. That’s kind of too late for what you’re trying to do.
Please help me understand the timing of this. Do I have until tax day 2013 to do the initial contribution and backdoor conversion for 2012 or did this already pass on December 31st.
Also, can you refer me to the listing of the hierarchy of investment accounts. 1) 401k up to company match 2) hsa 3)… Etc and where this would fall along that spectrum.
The deadline for contributions is April 15th of the following year. There really is no deadline for conversions. The deadline to get rid of traditional IRAs to avoid pro-rata calculations on taxes for that year is December 31st. So the deadline for a 2012 contribution was April 15, 2013.
The hierarchy changes depending on many things. But a reasonable hierarchy for a typical attending would be:
1) 401K up to the match
2) High interest debt
3) HSA
4) Tax-deferred accounts of any type (401K, 403B, 457, DBP etc)
5) Backdoor Roth IRAs
6) Moderate interest debt
7) Everything else depending on priorities
Great post. You put contributions to a 457b ahead of a backdoor roth IRA, and this is something I just started to think about. To me, the 457 might have the advantage tax-wise as most of us attendings make more than we will withdraw in retirement and expect our current marginal tax rate to be higher than our retirement rate (though we may be wrong). On the flip side, 457 plans are subject to the credit risk of our employers, and that puts our jobs as well as our savings in the same risky basket. Things to think about…
It’s pretty tough to pass up on that tax break, even with the credit risk. Good reason to spend that money first in retirement, of course.
Hi. Great post. I have 2 questions.
1. Where do things like making a 529 account for kids come in this hierarchy ?
The hierarchy changes depending on many things. But a reasonable hierarchy for a typical attending would be:
1) 401K up to the match
2) High interest debt
3) HSA
4) Tax-deferred accounts of any type (401K, 403B, 457, DBP etc)
5) Backdoor Roth IRAs
6) Moderate interest debt
7) Everything else depending on priorities
2. And my second question is – Since my income is high and i have already paid my tax on that $5500 ( that i plan to put in trad ira), doesnt it make sense to convert it to roth ira every year ? I mean why isnt it a ‘no brainer’ ? The reason i ask this is that a lot of websites say , “this conversion might not be right for you if you are going to be in a lower tax bracket at retirement”, but i think that since I am funding this trad ira with POST tax dollars, why to leave that money in trad ira (only to be taxed again on withdrawal) . Please let me know if am thinking wrong ? Also , I have heard that I am subject to penalty if I open a roth ira if my employer is already providing a 403B ?
thanks in advance
Your list isn’t bad. However, I wouldn’t add 529s to it because they’re aimed at a completely different goal. While everything else is about improving your financial position (primarily getting you to financial independence), 529s are for college funding. So they’re above and beyond anything on that list.
Yes. The Backdoor Roth IRA IS a no-brainer because you’re comparing a tax-free Roth IRA to a taxable account or a non-deductible traditional IRA and the Roth IRA always wins that comparison. You’re confusing a standard Roth conversion with a Backdoor Roth IRA. They aren’t the same thing. One is contributing to a Roth IRA via the backdoor (always a good move) and the other is pre-paying tax on a tax-deferred account, which may or may not be a good move.
No, you aren’t subject to a penalty for opening a Roth IRA just because your employer has a 403(b). Whoever told you that is ignorant at best.
Sorry, im still a bit confused with the concept of a backdoor roth despite reading the blog and comments. Can you please help me? I get the concept that its another avenue of money to draw from if you retire “early” esp if before 59.5 and you need money to float you. Or that there are less penalties should you need to draw from it, but again what i have a hard time understanding is if you are in a high tax bracket say 30-35% and your paying this on your income and then taking 5500 out of THAT SUM and putting it into a tradition ira to roll over into a backdoor roth your still taking a pretty large tax hit right? I must be missing a concept here. Are you saying that i can put pretax money into a traditional ira and then roll it into a backdoor roth? I feel like one way or another i am going to pay tax either on my income or when i roll it? Am i missing the ball? Thanks for the help I appreciate it!
You pay the taxes on that money up front either way. Now you need to ask yourself if you would rather the money grow tax-free in the future or be taxed as it grows/kicks off dividends and capital gains. In addition, would you like it protected from your creditors and to pass to your heirs outside of probate? If the answer to those is all yes (and of course it is) then a Backdoor Roth IRA instead of investing in taxable makes sense. Remember that for a high earner with a retirement plan at work, a traditional IRA contribution is NOT deductible. So you’re not choosing between tax-deferred and tax-free. You’re choosing between taxable and tax-free.
Has anyone considered a Roth IRA that a teenager can fund? Can I have my teenagers work in my office doing filing and making copies and get them some earned income? Some day they will appreciate never having to pay taxes on the compounded earning.
Absolutely. In fact, many parents “match” their teen’s income, so all of it goes into a Roth IRA, but they still get to spend it all thanks to the Bank of Mom and Dad.
My parents helped me open an IRA when I was 10. This was pre-Roth, but by the time the Roth option came along, I still didn’t have any significant income so I was able to convert it without paying any taxes. In fact setting up a Roth IRA account for your kids is a great way to pass money down to them that will never be taxed again. And heaven forbid they actually learn how to work in the process, obviously them working is an essential component to being able to contribute to the account.
Thanks! Thats a great tip Jon.
Does that in any way help in my taxes if I open one for my son?
Just realized my son actually has to earn some money before I can put money for his Roth. For now its not a reality.
Wow, this is crazy timely. I just got a 2013 1099-R in the mail from vanguard and was crapping my pants. It says I got a distribution from my Traditional IRA of $5500 (which I did not, I just did the back door Roth) and that $5500 of it is taxable because of “early distribution, exception applies”. Did I F something up on my taxes last year (never filled out an 8606 last year, I did do a backdoor Roth for the first time in 2012), F something up in the timing of my conversion to the Roth, or is this a non issue that gets worked out with the 8606 form?
Do I need to go back and file an 8606 for 2012 taxes? I am not very tax savvy and may have gotten penalized without even knowing.
We should all get a 2013 1099-R this month. If you did a backdoor Roth in 2012, you should have done a 2012 8606 9 months ago.
So YOUR 1099 will say the same thing, that you have $5500 in taxable distributions? And we just ignore that because the 8606 cleans it up? When you fill out your taxes, you do own up to that 1099 but it gets negated by the 8606?
My 2013 1099R has the following in it:
1) 5500
2a) 5500
2b) X
4) 0
5) 0
7) 02
12) 0
14) 5500
My wife’s looks the same.
Since you put the basis ($5500) onto the 8606, then yes, that “cleans it up.”
Huge huge thanks!
A few years ago, I made the mistake of rolling over a 401k from a former employer into my nondeductible, traditional IRA. I didn’t realize until afterwards that it would complicate tax matters for backdoor roth conversions going forward.
Currently the value of the trad IRA is less than the sum of my nondeductible contributions plus 401k rollover(due to market losses). I now have the option to rollover pre-tax funds to a new employer 401k. Should I only do it for the amount in my trad IRA that is above my nondeductible basis? (rather than the original amount I rolled over from my old 401k).
So, just to make sure I understand correctly, even if I already have commingled funds, I can still rollover only the “pre tax” portion to a new 401k and keep only post-tax dollars for my Roth conversion, up to the amount of my original basis, and be able to avoid taxes at conversion?
Thanks, your website is awesome–you helped me find a solution to something that’s been bugging me for a couple of years!
If the 401K accepts transfers and only accepts pre-tax money, then roll all the pre-tax money into it, and then convert what’s left. No taxes should be owed.
my current 401K is with vanguard. I had a 403 B that was transferred to a traditional IRA years ago from my previous employer. Vanguard won’t accept these funds into my current 401 K. How or where can I eliminate this traditional IRA so I can do my backdoor ROTH,.
You can either find another 401(k) (at a job you have now, a job you can get, or an individual 401(k) opened at Fidelity or etrade) or you can convert the entire amount to a Roth IRA.
By the way, Vanguard does close accounts with 0 balance – after 18 months. We discovered it on Dec 31st when we wanted to do the contribution exactly as described above. However, the last conversion out of that account was in June 2012 (for some reason we did it mid-year then), 18 months and 12 days earlier and the traditional IRA was missing, so we had to go through the trouble of reopening. Just watch out for the 18th month mark, or do it around the same date every year for simplicity, that’s what I intend to do in future.
They closed my wife’s before 12 months went by!!! I was quite peeved. For some reason they didn’t close mine, and it was 0 for the same amount of time. I reopened my wife’s and put auto investments into each one, hopeful they won’t close an account early if it has an auto investment heading into it.
(My auto investment is $5500 on December 6 each year).
That was helpful. How about doing a similar tutorial on form 5500 for individual 401k accounts with assets over $250k?
I was just reading through this fantastic article on back door Roths and came across this comment. Completely agree given the implications of not filing your 5500 or filing it late. Maybe its on the site and I just haven’t seen it. Accountants charge $500 a return. I did 3 of mine late last year under the new Delinquent filing program and had to do the same thing this year which costs $500 for each return. I don’t plan on being late in 2018 😉
Jim – How long do you keep the money in the converted Roth in Prime money market funds? When you exchange/ convert to some other funds like Vanguard Total Stock Exchange, does it create any issues?
Thanks for the detailed info. Very helpful.
I wish you can do a similar detailed post about rebalancing portfolios at the end of the year and how to harvest tax losses.
I am a new attending an have been recommending your website to all our residents and fellows.
I put my money directly into my asset allocation when I convert to Roth. You could put it into Prime, but I don’t see any reason to. It shouldn’t create any issues to do that. Here is an article on tax loss harvesting:
https://www.whitecoatinvestor.com/tax-loss-harvesting/
Here’s one on rebalancing:
https://www.whitecoatinvestor.com/rebalancing-the-525-rule/
Thanks. I will look into them.
On a different note, if I am saving aggressively, and have maxed out by 401k, 403b, college savings, etc – what are the other options? I could put money into traditional IRA’s, but if I put a lot in to it – it will make it impossible to do the Roth conversion anymore (pro-rata), right? My wife’s a physician too and we don’t see any major options which are tax efficient and are relatively simple to implement. We are also doing the HSA and dependent saving accounts based on your posts. However, both these are employed based plans and makes it compulsory to withdraw the money in the calendar year unlike your HSA.
You are limited to $5500 total ($6500 if over 50) per person into traditional IRAs and Roth IRAs for the year.
HSAs are not employer based. You’re thinking of an FSA or something. I’m not sure what a dependent savings account is, but perhaps consider a UTMA/UGMA for money you want your kids to have.
Sounds like it might be time to move on to a taxable account. It can be very tax-efficient if you do it correctly.
https://www.whitecoatinvestor.com/retirement-accounts/the-taxable-investment-account-2/
Any way you could add a “print” button to make it easier to print out your articles in an “easy to print” format?
I try not to print much to stay green, but sometimes when you are going over stuff with your spouse it helps to have a written copy
Hmmm…..That’s a great idea. I’m not sure how to do it but I’ll look into it.
Well, that was easy. Look for the little buttons on the lower right corner of each post.
Thanks bro
I started an traditional IRA with Vanguard last year and placed $5500 in it with the thought of converting it to a Roth IRA but never did. Can I still convert the traditional IRA to a Roth at this time and have it count on last years taxes(2013) and then latter this year, contribute $5500 to my traditional IRA(I have not contributed anything yet in 2014) and convert it to into a Roth IRA a short time later all during this calender year?
You can still convert it now. There is no “counting” on the taxes. You don’t get a deduction for the contribution and don’t pay taxes on the conversion. The end result is just like contributing after-tax money into a Roth IRA. Make your 2014 contribution, then convert the whole thing.
Thanks!! Love the website!!
The minimum amount to open vanguard prime money market account is $3000. The key to not closing the account is to leave a little of money behind ($1) on that account before doing a back door conversion. For those considering using this particular fund for conversion…. Once again WCI, great post
Wouldn’t this mess with the prorata in the future? Is having the account closed such a bad thing, such as will it reflect on your credit score?
First, pay your bills and your credit score will take care of itself.
Second, investment accounts have no bearing on credit scores. It’s only closing credit accounts that affects it.
Third, the prorata calculation only has to do with dollars in IRAs, not the number of accounts.
You don’t have to leave money behind. I leave zero money behind in Prime Money Market Fund in a traditional IRA every year. $5500 spends one day in the account, then it is all gone. The account sits empty for 12 months, rinse, repeat.
If you have enough income that you need to do a backdoor Roth, you should have enough to fund it all in one fell swoop.
Ok, so when you contribute 5500 on Jan 2nd of a given year, then convert the next day is it for that given year or for the previous? For example, can I contribute 5500 on Jan 2 2017 for my 2017 contribution and then on Jan 3 convert to Roth for 2017 and that is it? Or do I have to prove I made too much money for a Roth IRA in 2017 first?
That year. I did the previous year in January of the previous year. But you could do it that way if you want. You don’t have to prove you made too much money to do a Roth IRA through the backdoor. Anyone can.
I talked to Merrill Edge about this today.. sounds pretty seamless except that they told me if I didn’t leave $50 in the traditional IRA that they would close it in 6 mo. and then I’d have to go through the hassle of setting up a new account again if I wanted to do this the next year.
Any thoughts on this… will it make things complicated tax-wise.. any workarounds?
Merrill Edge? Why would you invest there? Why not just open an account at Vanguard or Fidelity instead of dealing with Merrill? You don’t have to use an old traditional IRA when you can open a new one at Vanguard in 5 minutes.
WCI is right. If you’re reading this deeply into the blog you should have a pretty good understanding on the investment process and likely do better than the vast majority of Merrill advisors. Generally speaking, you won’t run into a whole bunch of bogleheads around the Merrill Lynch office — you’re better off opening a Schwab, Fidelity, Vanguard, etc. Just because you bank at BoA doesn’t mean you need to stick with their investment arm.
I don’t use their advisers.
Merrill Edge is their self-directed area.
And if you have enough money with them it’s the best deal in the business.
I was born at night, but it wasn’t last night
Because if you have 100K with Bank of American you get 100 trades per mo. free and so I can get any Vanguard ETF or iShares or anyone 100% free.. no trading costs, no maintenance fees, no fees of any kind ever.
No better deal in the business… bar none.
no to mention if you have the aforementioned 100K you get the keys to the best cash back credit card in the industry.. not to mention a ton of flexibility with your money.
Bank of America has really rolled out the carpet for rich guys.. their package if you keep good money with them is absolutely fantastic.
I think WellsTrade is pretty similar, lots of free trades as I recall. I know I’m not paying commissions for Vanguard funds in my HSA at TD Ameritrade as well. I’m curious to hear about the cash back card. Does it beat the Fidelity AmEx (2% on everything) plus PenFed (5% on gas)?
Maybe. 1.75 everything, 3.5 grocery, 5.25 gas.
It’s a 1 2 3 card in those categories with a 75 percent bonus if you are platinum plus privalege
That is a nice card.
I know this is an old thread but Z above is only referring to the Cash Rewards CC by BofA. The Travel Rewards CC by BofA gets you 2.625% cash back on everything with no limits if you have $100k combined between BofA checking/savings and/or ME. Pairing that with the Cash Rewards CC gets you 3.5% back on groceries/wholesale clubs and 5.25% back on gas (up to $2500 per quarter).
White Coat — I know this thread is old, I was researching another topic and saw this. I was considering moving my HSA investments to TD Ameritrade, and I specifically see you say that you, “know [you’re] not paying commissions for Vanguard funds in my HSA at TD Ameritrade”.
Can you elaborate on this? I can’t find a single Vanguard NTF fund at TD Ameritrade…there are no-commission ETF’s and no-load mutuals but I can’t find any Vanguard NTF’s…I was wanting to do what you are suggesting there, but was put-off by TDA’s $49.99 fee for No-Load funds (which most the Vanguard’s are). That would mean each transfer in/rebalance could really rack up the commission charges. What am I missing?
I buy Vanguard ETFs in my TD Ameritrade HSA account. Sorry for the confusion. I’m also put off by $49.99 transaction fees.
I was pleased to discover that Schwab leaves about three cents in my non deductible traditional Ira after I convert to my Roth account. They keep it open the whole year and it makes it super easy to re-contribute for the next year. They have figured this out in the last year or so because three years ago I had to re-create a new traditional Ira account after I converted. Hopefully Merrill will figure this out. If not, switch. Or call them and ask them to leave a few cents of accumulated interest that doesn’t get capitalized. This must be what Schwab is doing because I convert the whole account.
I don’t really see an advantage to doing this. Why would I convert $230k of tax deferred into a Roth IRA and pay taxes when I’m in the highest bracket right now? If I prefer to invest my SEP with vanguard funds I don’t want to place my money with a different firm.
I don’t see such an advantage for $5500/yr to cause me to essentially forgo my SEP when I get 51k tax advantaged space. Once I get to the point I want to save amounts above that I will set up a defined benefit plan. As a 1099 SCorp this would be most advantageous, correct?
I am assuming doing these back door Roths are mostly for W2 situations, correct?
I like to keep investing as simple as possible which every year doing a conversion doesn’t seem to be. It seems to me to be easier to just buy stocks/funds through an account like scottrade for accumulating retirement monies to be available if I want to retire early.
I edited your three comments to put them all into one.
You are correct that converting a $230K SEP-IRA into a Roth at the highest tax rate in order to make $5500/year Roth IRA contributions probably isn’t a good move. However, if you have a 401K, or can open an individual 401K, you can then roll that SEP money into the 401K without any tax bill, and then do Backdoor Roths for the rest of your career. You could also do a spousal backdoor Roth IRA either way, unless you’re either not married or your spouse has a bunch of money in a SEP or traditional IRA.
While I agree that keeping investing simple is a good thing, leaving significant money on the table is not. Only you can decide how much money is significant to you. But consider $5500 per year contributed to a Roth IRA for 30 years vs $5500 per year invested in a taxable account. If the pre-tax investment is 8%, then after 30 years, you have $672,902 in the Roth and, assuming a 23.8% LTCG/Dividend rate, $507,259, a difference of $165,643, or about $5521 per year for the hassle of 5 minutes of work, plus maybe screwing around for an hour or two doing the initial rollover of the SEP. I’m not sure how much you make per hour, but I don’t make that much, so I find the hassle quite worth it.
There are plenty of ways to get to retirement money before age 59 1/2 if that is your main concern. Frankly, if you’re in the top bracket, you’ll probably have plenty of taxable money above and beyond your retirement accounts including backdoor Roth IRAs.
You can have an individual 401K at Vanguard, although you’ll probably need to open one elsewhere to do an initial rollover of your SEP since Vanguard’s doesn’t accept them.
Good luck with your decision. I hope you at least see the advantage, whether or not you feel it is worth the hassle.
You are right JIm. I did this the first time this year and it didn’t take more than 15 mins.
Also, don’t forget 5500 for your spouse, which doubles all the figures Jim just mentioned.
As Jim mentioned before, once you have maximized your 401k and other similar accounts, this provides a great tax diversification.
I definitely see how it can be beneficial, but you are omitting the fact that it costs money to setup you’re own 401k as a corporation, followed by the ongoing accounting costs of filing returns for the 401k. At least that’s what my CPA told me today.
Do the math on a Roth growing at the same rates you showed vs putting 9-10k/yr (pretax Roth funds) into a defined benefit plan. Once I retire I will have a much lower marginal tax rate and I would have had almost double the money grow for 20+ years?
Am I wrong on these points? I’m not trying to be argumentative, but a Roth isn’t always the best strategy for high income earners. Unless of course I am completely misinformed by my CPA.
Love the blog btw!
No no, you’re thinking about all the right things. I agree that you should max out all tax-deferred accounts before funding a backdoor Roth. That includes a defined benefit plan. I suggest you use a backdoor Roth instead of a taxable account. It doesn’t cost money to set up an individual 401K. It was free. It may cost money to set up a corporation, but you don’t need one to open an Individual 401K. You just need an EIN, which is free. In my view, an individual 401K + Backdoor Roth IRAs is a whole lot less hassle than a defined benefit plan. Once your individual 401K plan his $250K, you do have to file an additional form (5500) each year. I suppose that would be an expense.
Great post. We’ve avoided the back-door ROTH because my wife and I both have substantial SEP-IRAs from an S-corp with other employees. I assumed we couldn’t hide the SEP-IRAs in a individual 401k since we have employees and I hadn’t thought of the new EIN. But then going forward the SEP-IRA still felt easier to manage than 457s, 403b, 401s, etc as it restricts eligibility to certain employees. Thoughts? What am I missing?
I agree it gets tricky with employees, and sometimes a Backdoor Roth IRA isn’t worth what you may have to do to get it.
WCI, you said above: “Once your individual 401K plan his $250K, you do have to file an additional form (5500) each year. I suppose that would be an expense.” I have almost $550,000 in my Traditional IRA. I wanted to do a backdoor Roth, but your blog and several others who are your fans, stopped me because of the pro- rata rule. My tax accountant felt it was OK to go ahead and do it – she does not understand the pro rata rule (which I have read extensively about this week!) and says “you wont’ owe taxes on the $5,500 you roll over”, which I know! I want to open a Solo 401 K, but have some reservations as I quoted you here, because I have double the amount in my TIRA.
SO my questions are : 1. Were I to open a solo 401 K, can I start with this high amount? 2. What are the expenses 3. Since there is hardly any time left in 2017, and Vanguard/Fidelity have high call volumes, I want to do this in quiet time in 2018 after making sure I have all my information. So will I be able to do a backdoor ROth in the same year as I open the Solo 401K, i.e in 2018, or will I have to wait to 2019?
1. Yes. You just have to do a 5500EZ each year. It’s no big deal. I started doing them last year.
2. Vanguard has no additional fees, but doesn’t let you use the cheaper admiral funds. Be aware Vanguard doesn’t take rollovers though, so you will probably have to go with Fidelity or etrade. Fees are low there too.
3. You could do it all in 2018.
Thanks. Yes, I learnt the hard way! No wonder I was confused when I moved my assets from Fidelity to Vanguard to consolidate them as every one raves about Vanguard. Vangurad put my Rollover money into a TIRA and I was clueless what the difference was and Vanguard did not tell me either when accepting my $$. So your #2 makes sense now. Just an hour ago, I called Fidelity and they will take the Vanguard TIRA back into my ex-Rollover account – will initiate the move after this long weekend is over.
So I have missed out on the 2017 backdoor IRA, but I will do it for 2018 (your #3) early enough in 2018 to take the advantage of the entire year.
Just want to make sure, that once the TIRA gets recharachterised as Rollover at Fidelity, I can do backdoor in 2018 thru the then empty Vanguard TIRA without pro-rata consequences?
You can do the 2017 contribution until April 15.
And no, you need to get rid of all traditional, SEP, and SIMPLE IRAs in order to avoid the pro-rata issue. Best to do it before 12/31 because that is when it is reported. You can’t just move the IRA to another institution.
Thanks so much for this timely post. I have been reading the blog as well as boggleheads for the past year; the first that I’ve earned an attending’s salary. I have been in the process of moving my rollover IRA into my 401K so I could do the backdoor this year. I also made my husband transfer his tIRA to his TSP 401K so we could do backdoors for both. I was working on the April 15th deadline to have all this done. I am just now learning that we needed to have our balances to $0 by year end. We haven’t pulled the trigger so you just saved us a tax headache. I guess we will do it for 2014 instead. Now to poll my colleagues on the safety of our 457b….
Fantastic post – thanks for the step by step. My question is, I have an existing Roth in my name, and so I can easily do a backdoor Roth for myself. However, my wife (the physician) does not have a Roth and is now an attending so our income is already above the limit to open one for her. Can the act of conversion via the backdoor be used as a means to effectively open a new Roth? Or must the Roth have been previously established back when the individual’s qualified? From your step by step it sounds more like a “transfer” or funds between already extant accounts, rather than a true “conversion.” Thanks!
You don’t need an old Roth. If you guys do taxes married filing jointly, you probably have to do your Roth via the backdoor too. I transfer funds between accounts because I have them, but they’re easy to open.
My wife has a SEP IRA and i don’t have any of the IRAs. I am considering the backdoor IRA. Can still successfully complete the backdoor Roth for myself even if we will be filling joint taxes for the first time this year? Or will her having an active SEPP IRA affect this process if filling jointly?
You can do it easily, but she can’t unless she does something (convert or rollover) to that SEP-IRA. You fill out two 8606s on your taxes as IRAs are individual.
Do you recommend to do all the 5500 deposit in the IRA at once and then transfer to roth IRA? Or can you do the ira deposits and then transfer to roth every momth (for instance 480 dollars every month)?
You can do it either way, but I do it all at once to minimize hassle and paperwork.
As I understand, Backdoor IRA is a “conversion” not characterization. Am I right?
I also think this is mostly beneficial to those who have ALREADY tax deferred accounts with their employer. As I understand, if you don’t have 401k through work, there is no income limit on creating tax-deferred traditional IRA. This means you can deduct 5500 from your taxable income to open an IRA no matter how much money you make. So you can have a traditional tax-deferred IRA without the hassle of backdoor conversion. Of course, there is always some debate on paying taxes now vs paying them when you are retired. And should you switch jobs where there is a 401 option, there will be problems doing this conversion (unless the traditional IRA is transferred to this new 401K).
That’s correct, a Backdoor Roth IRA is a contribution to a non-deductible traditional IRA which is subsequently converted to a Roth IRA. It is not recharacterized. A recharacterization is like a direct Roth IRA contribution, which most docs can’t do due to income limitations.
You’re correct that this is best for those with a retirement account through their employer or their own business. A physician without a work retirement plan has bigger problems to worry about than whether he’s making traditional or Roth IRA contributions.
You may like this post on Roth vs Traditional 401K contributions:
http://www.bogleheads.org/forum/viewtopic.php?t=13917
FYI that link doesn’t lead to a Roth vs Traditional debate, which I’ve been reading about deeply for the past few weeks…
I’m not sure what link you’re talking about (I can’t actually find your comment in the other 200 comments on this page so I can see what you’re replying to, I can just see it on my dashboard page) but try this one:
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
My accountant did screw up the 8606 form because his fancy software had similar problem like the turbotax above in your example. While the 5000 were not shown as “taxable”, the Roth conversion was neither shown nor reported. Essentially it was like I opened a nondeductible IRA. I wonder if I can somehow correct this myself or need to find another accountant (not going to go to the same guy). What makes it even trickier is that I did the conversion for 2012 in early 2013.
I also got the 1099 from Vanguard like above. They report 5500 as a taxable distribution, despite the fact that they check the box that the amount is not determined. This really screws turbotax and it calculates federal taxes on this. I think this is where 8606 comes in but I wonder if just overriding the import of 1099R marking 0 in box 2a would be enough.
Like I said, it’s a little trickier in Turbotax than by hand! If you didn’t do the conversion in 2012, I’m not sure your accountant screwed up. The 8606 that matters will be the one that goes with your 2013 taxes.
My wife and I only have traditional IRAs, all post tax dollars. We also have 401k and 403b. Could I contribute $5500 to a new traditional IRA account and convert to a Roth IRA the next day while keeping my other traditional IRA accounts intact and still miss the pro-rata rule.
You only have non-deductible traditional IRAs? Why not convert them all + $5500? You still have to count them in your pro-rata rule, but it’s just like one big backdoor Roth IRA.
Mu husband and I are both physicians and your blog has been extremely helpful though I would love to see more about tax planning for those that are higher income earners. You did a series on annuities, insurance etc, but would love to see one on tax strategies. I was just hoping you could clarify are Roth conversion allowed is MARRIED FILING SINGLE? Very confusing when I tried to research this. Not sure yet if we will do MFS, but given both incomes similar and high and all the phase outs of tax credits, are toying with this idea. Ran across some information saying no to conversion is MFS
You can do Roths married filing single or married filing joint. They’re individually done anyway as you both have to do an 8606. The MFJ vs MFS decision is easy with tax software. Just run it both ways. MFJ usually, but not always (especially for residents making IBR payments), works out better.
I did a series for high income doctors, which is a very small subset of higher income earners, of which most doctors are.
https://www.whitecoatinvestor.com/financial-advice-for-high-income-doctors/
How is a 457b considered? Is it considered in the same category as a 401k or is it considered an IRA.
Thanks for answering my newbie question.
For the pro-rata calculation, it’s not an IRA.
Thanks for all the help,
I fear I have made a big mistake. Hopefully you can offer some insight:
I contribute 5500 to a Roth IRA. I then realize I cannot contribute to Roth (married filing separately). I recharacterized the Roth to a traditional. The next day, I transferred the funds back into the Roth. I then read on the IRS page (http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Recharacterization-of-Roth-Rollovers-and-Conversions) that there is a minimum 30 day waiting period to reconvert these funds to Roth.
Any suggestions of what the best plan would be now? Totally at a loss…
Should I re-recharacterize my Roth to a traditional?
Is a letter to the IRS necessary after every recharacterization?
Thanks
Hmmm…..I think you better recharacterize and wait 30 days. If the IRS gives you a hard time, just show your documentation and plead for mercy. There shouldn’t be a penalty as far as I can tell.
The website you recommend has this question in the forum. He states that the 30 day waiting period is only for previous conversions and not direct contributions; there is no wait limit for contributions.
Is it too late to start the backdoor process for tax year 2013? Let’s say tomorrow my wife and I both contribute 5500 to tIRA and rollover to roth soon after. I know we have until April to contribute to the tIRA, but does the backdoor rollover count towards 2013 or 2014 taxes? If the rollover can be counted in 2013, when would we be able to restart the process again for 2014? Thanks!
You can do the conversion for a 2013 contribution in 2013, 2014, 2015, 2016 etc. However, you can only make the contribution between Jan 1 2013 and April 15 2014. So you can still make your 2013 contributions and of course can convert that money at your leisure. You want to avoid having any money in a traditional IRA on December 31st, but even that isn’t a huge deal. Basically, the sooner you make the contribution and the sooner you do the conversion, the more benefit there is to you. There is no benefit to delay of either part, except concern for the step doctrine, in which case you might want to wait a few months between contribution and conversion. I don’t worry much about that.
WCI, I was thinking of using my tax return for 2013 to make a back door roth contribution for 2013 before the deadline…but then it would be done after I had submitted my taxes. Would I then have to amend my taxes? Mail in the form 8606? Forget about it because our tax system is too complicated?
BTW, considering any posts on auto/homeowner’s insurance decisions or the new myRA?
I just wrote about myRA in the recent newsletter. It contains content not found on the blog. It isn’t going to do much for docs unfortunately.
I suggest you make your backdoor roth contribution for 2013 before filing your taxes. Can you borrow a few bucks from your emergency fund for a couple of weeks until you get your refund back in order to do so?
Thanks for the response to my question earlier. The comment threads on this site are as helpful as the posts! Before I pull the trigger here and shove $22,000 of our savings into Roths through the backdoor ($5,500 each for 2013 and 2014) I was wondering, if I need to access those funds before retirements, are backdoor conversions treated just like regular Roth contributions – in that they can always be withdrawn tax and penalty free (not the subsequent earnings…just the original contributions since they were already taxed.) Besides the future tax benefit, I like Roth’s for this reason – the original amounts are still available as an emergency fund so there is no reason not to get started investing in them right away even if you don’t have an emergency fund yet.
Nope, conversions are treated differently than direct Roth IRA contributions. But people who make so much they have to do backdoor contributions and can dump $22K at a time into these things don’t generally need to have their Roth IRA double as their E Fund. That’s one downside of the Backdoor Roth IRA. But it isn’t a reason I think you should pass up on it for.
Ha, fair enough. It is a sizable chunk of our cash reserves, but yeah I think we will be glad we maxed out the Roths when we retire and have the tax free source of income. Thanks again for keeping up with all the comments here.
I am (relatively) new to the website, and very new to learning even basics of investing, saving for retirement, etc., and am grateful for the information provided herein.
I am 3+ years into a 5 year residency, and, potentially regrettable, have as of yet made $0 Roth contribution; instead maxing contribution to my 403b matched by institution (10% contribution/14% match).
I will be entering a 1 year fellowship after residency, at a different institution.
One scenario I have been contemplating is the following:
1) Rolling over 403(b) to traditional IRA upon termination of residency employment (from what I understand of 403b, termination is necessary to rollover)
2) Roth conversion on this traditional IRA
Current holdings ~ $30,000; 80/20 indexed equity/bond allocation.
If I can plan accordingly, keep my marginal tax rate in 25-28% (after accounting for roth conversion), am I able to convert the entire value of the traditional IRA into a Roth?
Would this not then potentially allow residents a path by which to effectively EXCEED the $5500 yearly contribution? (via higher annual contribution limits to 403b, which are subsequently rolled to traditional IRA, and then Roth).
While difficult (and maybe impossible), one may be able to convert the tax-deferred fund to a Roth at the advantageous marginal tax rate between his residency and fellowship (allowing the rollover of the 403b). Naturally, this would assume the (potentially unreasonable) ability to pay the tax owed from current savings.
Forgive me if this or similar scenarios have been discussed elsewhere, or if in my yet limited understanding I have overlooked important limitations in the back door option.
Thanks in advance!
You’re thinking pretty clearly on this. Roth conversions in low income years are often a good idea. You might also see if there is a Roth 403B option that will let you do in-service conversions, so you don’t have to wait until separation.
Thanks for the quick reply!
I checked today, and verified that my institution does unfortunately not offer Roth 403b.
Another source of my confusion relates to what exactly is taxed at time of conversion. Will I be taxed only on portion of the fund that is the sum of my(and employer matched) tax-deferred contributions? Or on the final cumulative value of the fund?
Obviously, if any growth achieved in the fund is also taxed, I assume this becomes a much less attractive option.
Yes, the growth is also taxed when it is converted.
if you max out a solo 401k at 51k for 2013, can you still contribute to the backdoor roth? thanks
Yes, the limits are separate.
So I have a potentially interesting situation I could use advice on. It centers around maxing out my wife’s self-employed retirement options.
I’m just transitioning from paying off my high interest student debt and trying to max out our retirement accounts. I’m trying to max out what we can still do for 2013. I fill my work 401k and don’t have other options there. My spouse stays at home and makes a relatively low income doing freelance work < $15,000/ yr and has a Roth IRA only.
To start, neither of us had pre-existing traditional IRA assets, so three weeks ago we did backdoor IRAs and plan to repeat that for 2014 in the next couple of months.
For my wife, we want to start a retirement account for her. A solo-401k seems best long term so we can put away more of her earned income relative to a sep-IRA. We can't however open one for tax year 2013 like we can for a sep-IRA still. My question centers around this situation.
My tentative plan is to open a sep-IRA to fill for last year, and then to prevent problems with future backdoor roth-IRA's, to convert that money either into her newly opened 2014 solo-401k immediately or roll that sep-IRA into my wife's Roth and take the small tax hit.
Anyone see any problems with this? Particularly regarding rolling over into a Roth multiple times in one year? My wife will have done it twice each from traditional IRAs, then my wife potentially a third time from her sep-IRA.
Thanks for any advice. And great blog by the way. I'm an ER doc myself and sent the blog links to my cousin and brother in residency now. It's great having a resource you feel you can trust.
Nope, both great options. I’d convert the SEP to Roth for simplicity’s sake, then open an individual 401K for this year. You can do multiple conversions in a year without an issue.
hmmmm. if you make a contribution for 2013 in 2014 and thus roll it over in 2014 then it really jacks things up… lesson learned
Ok.. so I made my contribution for 2013 last week.
I converted it to a Roth IRA a couple days later
So the conversion happened in 2014..
Now, if I were to put my 2014 contribution in next week… am i going to have to wait until 2015 to convert it?
No. Convert it now (or wait a few months if you’re worried about the step doctrine). No biggie. Certainly no reason to wait for 2015.
If you are worried about the step doctrine and wait, what do you do about the increased balance due to returns. For example, I waited for my first statement for my initial traditional IRA deposit. I now have a balance of $5503.48.
Can I convert the entire balance to a Roth IRA or should I only convert $5500?
After scrolling these posts for 20 minutes I came across the answer immediately after making this post.
Yup, convert it all and pay a few bucks in taxes on the earnings.
First off, I apologize if this question has been answered elsewhere. I searched high/low this site as well Bogleheads forum and did not find a situation that quite fit mine.
I am married and a pgy4 of 5 resident. My wife is a teacher and taught 4 years during medical school contributing to a 401k. When we moved for residency I rolled the 401k over into a rollover IRA where it basically sat in a MMF for 3 yrs before I had any kind of financial knowledge. It has now been in a Vanguard Target Retirement fund for 13 months and has increased in value from around 8k to 10k. We have 23k in total education loans at 6.8%. I will likely soon sign a contract that will eliminate my education loans in the form of a signing bonus and receive a stipend that is equivalent to another resident salary. We have no consumer debt and rent. Neither of us have a Roth IRA or 401ks at our current jobs for various reasons (her: small employer with no match and me: but we do have an HSA with roughly 2k in it (opened in 2014). Another important note is that my wife plans on retiring to be a stay at home mom in June. My question is about how I should handle the rollover IRA. Should I….
1. Convert the rollover IRA to a roth IRA and use the added income to pay taxes on the conversion allowing for future backdoor IRA contributions.
2. Convert the rollover IRA to a solo 401k while she is still working in order to allow for future backdoor IRA contributions.
3. Leave the rollover IRA where it is and contribute to roth IRAs this year knowing that I would need to convert the rollover to a roth IRA in the future while at a higher tax bracket.
I’m sure I left something off and will be happy to answer any questions that makes answering my question easier. Thanks in advance.
Your wife doesn’t own a business, so she can’t open a Solo 401K. Doesn’t mean she can’t start one, but you need a Federal EIN to open one. It sounds like her only income right now is employee income.
If I were you, I’d convert that $10K to a Roth. The taxes won’t be that bad. Probably should have done it before the first of the year. Oh well, water under the bridge now.
Did I read correctly that to backdoor a roth you have to have both the traditional and roth at the same company? So i cant backdoor from a vanguard traditional to a merrill lynch roth?
You could probably do that, but it does introduce an additional hassle. If I were you, I’d do the conversion at Vanguard, then transfer the Roth. Actually, I wouldn’t transfer the Roth. Why would you want any account at a place like Merrill Lynch?
agreed that I should roll my merril lynch roth into a vanguard roth. as long as i create and contribute to a traditional ira by april 14 (for my 2013 contribution), does it matter when i do the backdoor into the traditional ira? Thanks.
It doesn’t matter when you do the conversion, so long as you do it before December 31. Contribution by April 15, conversion by December 31. The sooner the better if the investment goes up, the later the better if it goes down.
Why is sooner better if investment goes up? I left a traditional contribution for one month. Now it has accumulated 200 dollars.
Now you get to pay taxes on $200 more than you otherwise would if you’d converted a month ago.
I have a rollover traditional IRA. When I take RMD at age 70.5yrs. Can I pay taxes on withdrawl and the fund a new Roth (which I can open now with a small rollover) with the balance?
You have to have earned income to put into a Roth. You can do Roth conversions, but not with your RMD. Lots of people do conversions in their 60s before taking SS to lower their RMDs.
That means conversion stops once rmd starts? JRB
You can still do conversions, but not with the RMD.
Does conversion mean entire amt of trad IRA? Or can it be converted over a period of years?
It needs to be gone by December 31st. Either converted or transferred into a 401K.
WCI – Thank you so much for the blog and posts! I just learned about this backdoor Roth IRA the other day and have been reading everything I could find online about this. My question is on timing – I still have a Rollover IRA (funded with pre-tax dollars) that I plan to roll into my current 401K this coming week to get out of the pro-rata issue. I know I am too late to contribute to 2013, but if I roll my Rollover IRA to my 401K tomorrow, when can I make a contribution to my TIRA for the 2014 tax year?
You’re not too late for 2013 (unless you’ve done your 2013 taxes), then you might have to do a 1040X. But you could do both 2013 and 2014 contributions tomorrow, and the conversion the day after that. You just need to do the rollover/transfer by December 31st, unless you’re contributing to that same IRA. Then you just need to do the rollover/transfer before your new contributions.
So if I read that right, one can still do a full $5500 contribution for 2013 and 2014 now (March 2014), even though a rollover IRA with funds was in existence as of Dec.31, 2013, and the pro-rata rule will NOT come into play so long as the rollover IRA is rolled over or transferred by Dec.31, 2014?
I’ve received conflicting information on this topic. When I filled out a few mock Form 8606s (to extrapolate the next few years), this is how it appeared to me too…
Nevermind- you appear to have already confirmed this on a reply to KRB below!
Thanks so much for this website, lots of great info.
That’s right. You need to make sure the balance of the traditional IRA is zero at the end of the year you do the conversions.
Hi, thank you for a great post. I’m hoping you can shed light on my situation. I don’t have any traditional IRAs, only a Roth, so I was planning to do the backdoor Roth since I won’t have to pay taxes. But then I realized my spouse has traditional IRAs (not sure the exact amount). Assuming the assets stay in those traditional IRAs, will her IRA assets be factored into my Roth conversion therefore subjecting me/us to taxes via the pro-rata rules? Or are her assets taken into account only if she wants to do a backdoor Roth? Thanks for your thoughts on this.
I have the same question, if anyone has any advice…and if it matters whether you do married file jointly or filing separately…
Sorry Louise that it took me so long to see this comment. I must have missed it. As you can imagine, it’s getting tougher and tougher to keep up on the comments on the site given that there are over 500 pages now. At any rate, the backdoor Roth IRA is all individual. So you can do the backdoor no problem. But your spouse cannot unless she does something about the traditional IRAs.
SJ- it doesn’t matter if you file jointly or separately since you EACH have to do an 8606.
Do I need to amend my tax return for 2013 if I open up nondeductible traditional IRA and convert to Roth IRA now for 2013? Can both my husband (also a physician) and I each contribute $5500 each year in addition to 401K limit?
Yes, if you’ve already filed 2013 taxes and now want to make 2013 contributions, you need to do a 1040X. No big deal, I’ve done em before. Yes, it’s in addition to the 401K limits, that’s the point.
Yes, I believe you do need to amend your taxes. Don’t let that scare you, a 1040X isn’t that big a deal. I’ve had to do it once or twice.
Thanks for your reply. We have employer sponsored 401 K with Fidelity.Do we need to open the IRA account under the same financial institution (Fidelity) or could it be another financial institution? Is there any advantage to convert 401K to Roth 401 K? t Is that going to affect Roth IRA limit? Thanks.
No, you can use another institution. The advantage of 401K to Roth 401K is simply a pay taxes now vs later issue; it has no effect on the Roth IRA limits.
Trying to make sure I have filled out 8606 correctly. I made a 5,500 traditional contribution Jan 2014 for 2013 and converted it the same month (at the same amount).
This means Line 1,3,4 will be 5,500 but as the conversion was in 2014 line 14 will be 5,500. Will this screw it up or will that basis be wiped out next year when I file the conversion. Thanks.
If you convert a 2013 contribution in 2014, it’ll all work out okay. But you’re right that the contribution will be on 2013 taxes and the conversion on 2014. If your contributions aren’t deductible anyway, no big deal.
I am new to investing. Which fund do you recommend putting the money after converting traditional IRA to Roth IRA?
Unfortunately, you’re trying to skip straight to step 3 without doing steps 1 and 2 first. Step 3 is very easy if you have already done steps 1 and 2, but very hard if you have not. That said, if you absolutely insist on skipping Steps 1 and 2, I like Vanguard’s Life Strategy Moderate Fund as a great “know-nothing” portfolio.
Step 1: Set your goals
Step 2: Develop a written investing plan or asset allocation for each goal
Step 3: Choose the specific investments that will give you your desired asset allocation.
I’m all for more “know nothing” wisdom. Can you go into what should we put into the after-tax Roth and what should we put into the before-tax 401k?
It doesn’t matter if you tax-adjust the accounts. If you don’t, then if you put something that you expect higher returns on in the Roth then you really have a more aggressive asset allocation than if you put them in the before-tax 401(k). If you tax adjust based on marginal tax rate at time of contribution, then you probably want the higher expected return asset in the traditional IRA to capture the bonus from the tax rate arbitrage (but again, this is simply taking on a more aggressive asset allocation on an after-tax basis.) If you tax adjust based on your effective tax rate at withdrawal, then it truly doesn’t matter.
Hope that helps. Sorry, this one doesn’t lend itself well to a “know nothing” approach. It is actually a very complicated question with a lot that goes into any reasonable answer.
Great blog and most helpful. I have read and absorbed as much as I can on this topic – as well as the linked posts on the “Finance Buff” site. But I’m still confused on one paperwork detail. Here’s the scenario:
1) I did a non-deductible contribution to traditional IRA in Jan 2014 for tax year 2013
2) Converted to Roth IRA shortly thereafter (thus no earnings in traditional IRA), for 2013 tax year
But I am still confused on the Form 8606. There seems to be an implication that this is not needed “until 15 months later”. So, when filing my 2013 taxes – which of the following is correct?
1) 8606 part 1 needed for the non-deductible contribution to traditional IRA for 2013, or
2) 8606 part 1 and part 2 are needed due to conversion to Roth (I am pretty sure this is not the case, since the conversion occurred in 2014, even though it is for a 2013 Roth), or
3) No 8606 is required to be filed with 2013 taxes.
Thanks for helping to clear this up. Future years should be easier because I will do the contribution and conversion in the current tax year.
1 is correct. Line 1 5500. Line 2 0. Line 4 5500. Line 5 0. Line 6 5500. Line 8 0. Lines 10-13 0. Line 14 5500. Line 15 0. On 2014 taxes, your line 2 will be 5500.
Hope that helps.
white coat investor. Great blog Just learned about the backdoor roth, plan on doing it from now on
So I am in the same situation and wanted to make sure I am doing this correctly on turbotax, I contributed for 2013 in Feb 2014 (5500)and converted the next day , Do I not file form 1099r for 2013 for this? So essentially only 8606 part 1 only only to prove basis for next year.
2nd question related to this is: If I I do another non-deductible contribution to traditional IRA now for 2014 and convert will I have 11K (5500 in Feb + 5500) now for 2014, will that leave me with a tax liability?
Thanks and wish I knew about this sooner.
You don’t file 1099R anyway. Vanguard (or whoever holds your IRA) sends you that form. IRA contributions are noted on your 1040, line 32. But since your deduction (if you’re like most docs) is zero, you’ll have a zero on that line.
No, there is no ADDITIONAL tax liability. You already paid taxes on this money when you earned it. You didn’t get a deduction when you put it into the traditional IRA. So there’s no tax due when you convert it to a Roth IRA (assuming you’ve eliminated any other SEP, SIMPLE, or traditional IRA money.) You could do your 2013 and 2014 contributions today for you and your spouse, convert them tomorrow, and voila, an extra $22K in Roth IRAs that would have otherwise been in a taxable account. Good stuff, isn’t it?
WCI, I think for the scenario where you contribute between Jan to April of the following year (assuming first time doing backdoor and no prior TIRAs, etc), you only have to fill out the following on 8606:
Line 1: 5500
Line 2: 0
Line 3: 5500
Line 14: 5500
Between item 3 and 4 is a question asking if you took any distribution OR made a Roth conversion for the year, which if first time would be “no.” If the answer is “no,” then you skip the rest of Part 1 and just transfer the amount on line 3 to line 14. I think that’s all you have to fill out, right?
As long as the numbers at the bottom are right, I don’t know that it matters much. That’s what Turbotax does for example.
More details here: https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
How come line 6 is 5500 for the 2013 taxes and not 0? if he contributed for 2013 after 12/31/2013, and this is the first time he has ever contributed to a tIRA, wouldn’t the value of “all your traditional, SEP, and SIMPLE IRAs as of December 31, 2013” be 0?
You’re going to have to give more details. I have no idea what you’re talking about. Who is “he”? If you didn’t do a Roth conversion in the prior year, you never get to line 6.
Sorry. I tried to reply to a comment and it just popped my reply way below where I meant it to be.
I am referring to comment number 53 above: Michael| March 15, 2014 at 1:27 pm MST
In your reply to him: “1 is correct. Line 1 5500. Line 2 0. Line 4 5500. Line 5 0. Line 6 5500. Line 8 0. Lines 10-13 0. Line 14 5500. Line 15 0. On 2014 taxes, your line 2 will be 5500.” you mentioned that line 6 should be 5500, even though he converted to roth after 12/31/13. Is that a typo? I’m on the same situation and am not sure what to fill in on line 6.
BTW, great blog and super fast replies. both are greatly appreciated.
Sounds like it. That question after # 3 hasn’t always been on the form either. It used to be that you had to fill the whole thing out but that changed one year, I think about the time this post was written, so keep that in mind. Just follow the instructions for the current form and you’ll be fine.
sorry about the long reply but a want to clarify.
form 1099r is part II of form 8606 Lines 16-18 (At least on turbo tax). Just want to confirm If I made a non-deductible contribution to traditional IRA in feb 2014 for tax year 2013, and converted to roth in Feb 2014. I do not need to fill out form part 2 since conversion was done in Feb 2014 and only need to fill out form 8606 part I. Its confusing because you can make contributions until April 15th but have to convert before Dec 31st.
I guess what I am not understanding is if for 2014 I make another 5500 and convert 5500 before December. Then in the eyes of IRS did I not convert 11K (5500 in Feb and March) but only contributed 5500 in 2014. would I not owe taxes or is that where total basis comes from? Is total basis similar to thinking credit for prior year non-deductible contributions. am I over thinking this. Please clarify, thanks.
No, you’re right on target. Your basis will be $5500+$5500. So if you convert $11K, then you owe no taxes since the value = the basis.
While you may enter the information from the 1099R you received from Vanguard into Turbotax, it isn’t a form that you send to the IRS.
http://www.irs.gov/pub/irs-pdf/f1099r.pdf
Opened a traditional IRA in 09, and was able to deduct $3100 from my 2009 taxes. Continued to place money each year into this account but income limits prevented me from deducting from my taxes in 2010 to present. Found out about the backdoor Roth in August of 2013 and converted all that I had in this account which was around $15,500. Overall, I added $11k and it grew $4.5k. Now looking at my taxes this year, should I only be paying tax on the growth plus the $3100 that I deducted in 2009? And if so, what do I need in terms of forms/statements to accomplish this? Can this be done through turbotax? I’, confused.
Yes, it can be done through Turbotax. It’s all about using form 8606. See TFB’s tutorial on 8606 through Turbotax at the end of the post. You’re correct that taxes will be due on earnings plus $3100, assuming you filled out 8606 correctly for the last half decade.
Vanguard asked me a new question today when I was converting my 2014 traditional IRA to Roth.
They asked if I wanted to withhold state/federal taxes. What does this mean exactly? Is this related to 8606? Do most people say yes to withhold?
No, absolutely don’t have them withhold. They’ll just screw stuff up. You’re not going to owe taxes anyway on a Backdoor Roth, why would you need/want taxes withheld on something that isn’t going to cost you taxes?
I think I understand mostly how this works, but there’s one thing I’m missing: When doing the conversion from non-deductible traditional IRA to Roth, are you creating a new account every time?
I have a Roth IRA I opened with ETrade a year or so ago. When I open a traditional IRA, contribute my post-tax dollars to the traditional and I’m ready to convert, are the funds going into my existing Roth or am I creating another Roth account?
You can use an existing Roth. I only have a single traditional and a single Roth at Vanguard despite doing this 5 times.
Thank you very much for this post. It was very helpful. I just want to make sure I am crystal clear on the timing of getting rid of my existing traditional IRA and doing the backdoor Roth IRA to avoid pro-rata.
I have a large rollover IRA, that contains a rollover from my previous 401k. My current 401k allows for roll-ins so I can roll the rollover IRA into it in now (2014). Can I do the backdoor roth IRA (fund new IRA and convert to roth IRA immediately after) in 2014 or do I need to wait until 2015? Do I just need to wait for my current IRA to rollover to my 401k before I do the backdoor roth IRA, doing both in 2014? Thanks!
You need to complete the rollover to 401(k) by December 31, 2014.
You must do the traditional IRA contribution for 2013 before April 15, 2014. You should do the traditional IRA contribution for 2014 by December 2014. You should do the conversions before December 31, 2014.
There must be something I’m missing. I have a non-deductible Traditional IRA with 44k in contributions and $5500 in gains. I have a Roth IRA with a little under 10k in it, opened when I was making less income. If I do future backdoor conversions to the Roth, I’m still going to have pay taxes on the gains to the account which are taxable, correct? BTW, both accounts are with Vanguard.
Convert the whole thing, pay the taxes on the gains ASAP. It’ll be like $2K or so. Then every year put another $5500 into it and convert it.
Unfortunately, I believe Vanguard will close an account with $0 in it. I think you need at least 3k for investor shares and 10l for Admiral shares, which is going to defeat the purpose, since I’ll always have to pay taxes on the gains in the Traditional IRA, even though its non-deductible. Is that correct?
I’m not sure I understand what you’re asking or where your mistaken assumptions are. First, Vanguard doesn’t close IRA accounts with $0 in them I assure you, at least not in any period of time less than 13 months. Second, you do need $3K for most investor shares, but just $1K for some funds. Admiral shares are mostly $10K, but some are as much as $50K. Third, the investor/admiral minimums have nothing to do with paying gains on IRAs that I can tell. Fourth, gains are taxable, non-deductible contributions are not. I hope that somewhere in there I answered your question.
Considering the fact that I plan on retiring in 13 yrs. and will more than likely be in a lower tax bracket than we are currently in. We are currently very underfunded but plan on heavy contributions for our remaining working years. I basically would like to know if you’d recommend converting the entire balance in each of our(my wife and I) Traditional IRA’s to our Roth’s, or just using the “backdoor” conversions on all future annual contributions while leaving the current balances alone? And if we converted all of it, what what the approximate tax hit be? The current balance in my Traditional IRA is $49,356 of which $5505 has been gained. My wife’s Traditional IRA has a balance of $31,321 of which $5524 was gained. All told, we only have a little over 305k saved, between the trad. and Roth IRA, a separate Vanguard taxable account and my 401k through work.
The way to figure out the tax hit is to subtract the basis from the value, and multiply it by your marginal tax rate.
So if your basis is $44K (meaning all your contributions were non-deductible) the tax hit would be about $2K for most docs. If your basis is $0 (meaning all the contributions were deductible) then your tax hit on that $49K conversion is going to be more like $20K.
Thanks for all the great advice! I decided to open a nondeductible traditional IRA, funded it with 5500 and converted it fully to a Roth (all transactions occurred in march this year within a few days, I don’t have any prior IRAs, Roth IRAs, SEP or simple IRAs). I wanted to take advantage of still being able to contribute for 2013 thus the contribution to the traditional IRA was made for the previous year (2013). If I am not mistaken I will have to file 8606 for 2013 reporting the contribution but not yet the conversion since that will have to be reported in 2014’s tax return, please correct me if I am wrong. Now my question is I already filed my tax return for 2013 last february, do I have to amend the return? I don’t think I have to since these are nondeductible funds but just wanted to make sure. Can I file 8606 by itself without 1040 attached to it? thanks
No, you can’t file an 8606 without a 1040X. No big deal. 1040X is easy.
Actually, that’s probably not true. I just looked at my 8606 and it says at the top: “Fill in your address only if you are filing this form by itself and not with your tax return.” So I guess you can just send in the 8606 by itself. Your 1040X would look the same anyway I suppose.
I made $4000 contribution to Roth in 2012. At the beginning of 2013 I realized I needed to recharacterize my Roth as I exceeded the income limit in 2012.
Before April 15, 2012 tax deadline I recharacterized my Roth to nondeductible IRA. The amount was $4500. A few days later, I converted $4515 (there were minor gains) from nondeductible IRA back to my Roth.
The way I understand this is – my Roth recharacterization had to be reported in my 2012 tax return while my nondeductible IRA to Roth conversion has to be reported in my 2013 tax return. Is this correct?
I filled out part I of 8606 form in my tax return for 2012, with a small mistake: I entered $4000, instead of $4500, thus omitting the interest on the $4000 in my Roth. So, first thing, I have to amend my 8606 for 2012.
Then I have to report my nondeductible IRA to my Roth IRA conversion for tax year 2013. Do I fill out both Part I and Part II of 8606? I’d appreciate any instructions on how to fill out 8606.
What a mess! I think your understanding is right of what you have to do. The Finance Buff had a nice article on this subject recently that may help:
http://thefinancebuff.com/backdoor-roth-tax-return-made-easy.html
As far as your 8606, did you make a 2013 contribution to a non-deductible IRA? I think that’s what determines whether you need to do part 1 or not (read the 3 conditions on the form under which you must file it and see if any apply to you.) You’ll definitely have to do part 2.
For the “catch-up” additional contribution, do you know if you have to be 50 in the tax year, or in the calendar year?
My wife turns 50 this year – so which scenario is correct for a non-deductible IRA, assuming we will make the contribution by April 15, 2014:
A) $5500 for TY 2013 + $6500 for TY 2014 = $12,000 max
B) $6500 for both years = $13,000 max (since she will be 50 in the year the contributions are made)?
I just recently learned of the back door option as well but thought it was off the table this year since we had roll-over and SEP IRA balances on 12/31/2013 … Have learned from your awesome blog this is not necessarily an obstacle (as long as we roll over those trad IRA’s by end of this calendar year)!! Would require a 1040X since we’ve already filed, and the 8606, but could be worth it….especially since I could add $13,000 of my own
Why would the tax year be different from the calendar year? A is correct.
Does it matter if you make contributions in pieces or all at once? What I mean is that can I fund a nonded IRA with 3000, convert it tomorrow, and then do the same thing with 2500 later in the year?
Also just wanted to confirm that 401k does not affect ability to do backdoor roth. My wife and I both have Roth IRAs and she has a 401k. We will be above the income limit this year to fund Roth IRAs any further so we can just use the backdoor now? Thanks!
No, it doesn’t matter if you do it in pieces or all at once, but I’d still try to do it all at once for simplicity’s sake.
The 401(k) does not affect the ability to do a backdoor Roth IRA.
I’m 28 years old, single. I have 5500 in a Roth IRA already for this year (no other IRA, I think I have some strange savings plan at my hospital, not a 401k). Am I still able to put money into a traditional IRA and convert to RothIRA? Or rather, should do this, or should I be doing something else with the money?
No, the $5500 annual contribution limit applies to the sum total of all traditional and Roth IRAs.
I have about $5000 in rollover IRA from residency contributions to a 403b. My current position has a 403b. Can I transfer the rollover IRA to my 403b and in the same year do a backdoor roth with a different IRA account to avoid taxes on the $5000?
Yes.
I’m about to start my first year of residency and plan on opening up a Vanguard Roth IRA. My question is should I use my resident salary toward it or sale some walmart stock I have? I currently have around 15-20k in stocks and I’m trying to figure out what I should do with them. Should I hold them or sale them and invest it in a Vanguard fund in addition to the Roth?
Thanks
I would sell the stock and diversify, especially now while you’re in a low tax bracket. You can probably do it tax-free. Save as much as you reasonably can. If you can’t max out Roth IRAs without using the taxable investment money, then use that (or technically, if the IRS asks, live on the taxable investments and contribute earnings to the Roth IRA.)
Is there any way to separate pre-tax & after-tax money that is mixed together in the same traditional IRA? I would like to move the pre-tax portion to a 401(k), then convert the after-tax money to Roth, and then do the backdoor Roth yearly going forward.
However, I am hopelessly confused about how to sort out how much money to port to the 401(k) and how much to leave and convert.
Existing traditional IRA had pre-tax funds. One year I contributed to a Roth before discovering I was above the income limit. I then re-characterized and (stupid me) put the money (and earnings) into the same pre-tax traditional IRA, thereby mixing pre-tax & after-tax money. So $5K of post-tax money and $300 or so of associated earnings on that money went in. Does this mean I should keep only the $5K? Keep the 5K plus the $300? Or keep that plus earnings accrued since then?
Thanks again for the helpful article!
The IRA provider should be keeping track of how much is pre-tax and how much is non-deductible. Most 401(k)s won’t accept non-deductible money in transfer. So if you transfer all you can, all the nondeductible money will be left in the IRA, which can then be automatically converted. This is a great way to “isolate the basis” to allow for a conversion and then future backdoor Roth IRAs. The earnings, since they are pre-tax, should also be able to go into the 401(k).
Hello (or should I say, “Help”). I read every single post above yet my PhD is of little or no use (it’s obviously NOT in finance nor tax code, LOL) – despite all I’ve tried to understand from the conversations above, I still remain quite confused! So apologies in advance if you’ve already answered my question by proxy above and I’ve just been too dense to grasp it.
Here is my situation:
– I’m 63 years old and work as a self-employed consultant, so I can put up to 25% of my income into a SEP).
– I’ve had both an E-Trade SEP-IRA and a Roth for more than five years.
– In 2010 I took advantage of the one-time Obama admin deal and did a partial conversion of ~95% of my SEP value into my Roth – in securities (not cash) and paid the tax due over two years (tax years 2011 and 2012). My reason for the conversion was that any dividends earned and appreciation of my long-term securities would NOT be taxed at capital gains rates, but eventually as regular income and I wanted to avoid that. I did not convert 100% of the SEP, because I was told that Etrade would close any empty accounts and I wanted to keep it open for any future conversions (e.g., 2014). I do not really know whether the value was “deductible” or “non-deductible” or a mix, and frankly still don’t fully understand the difference. At the time there seemed to be some indication that I should NOT have left any value in the SEP, but perhaps was supposed to have cleaned it out, have it closed, and later start a new one (which I did NOT do, obviously, and have worried about potential audit consequences ever since). The remainder in the SEP then was about $1200, now with appreciation and contribs, it’s worth ~$10K, while the Roth is now worth ~$200K.
– Because I am self-employed, I am allowed to fund my SEP up to 25% of my AGI. This year I expect my AGI to be ~$100,000 so I’d like to deposit up to ~$25K into my SEP before December 2014 *for* TY 2014 and then convert the same amount into my Roth.
– My questions are – is it kosher for me to just plunk in $25K into my SEP and immediately convert (back-door) it into my Roth (and just pay the tax in April)? Do I need to call the SEP contribution “deductible” or “non-deductible” (is there a choice?) and do I do this at the time of the conversion in the conversion paperwork, or only on IRS forms after the fact? How does one “prove” the contrib was “deductible” or “non-deductible” – do they just take your word for it? Do I need to complete a 8606-S? Is there any danger of getting taxed twice? How does the 12/31/13 value of my SEP figure in all of this?
Thanks very much in advance!
Scott
1) Yes. You can put $25K into a SEP-IRA and then convert it to a Roth, as long as you convert that $10k along with it. That’ll cost you about $2500 in taxes. The deduction for the SEP contribution and the cost of the conversion of the SEP contribution will be a wash. What you save with the contribution will be lost as a deduction. Be sure you look very carefully at the SEP contribution rules. It usually works out to be less than 25%, in my experience 18-19%, of your gross that you can contribute. If you want tax-deferred savings in the future, consider a Solo 401(k) to allow you to do backdoor Roth IRAs each year. You can do one of those for yourself and your spouse for 2014 as well if you like. Just make sure you do all the contributing and converting by December 31, 2014 to keep it all straightforward, although you can do 2014 SEP and backdoor Roth IRA contributions for 2014 until April 2015. Just try to do both the contribution and the conversion in the same year.
2) You don’t call the SEP contribution anything. You just claim it on your taxes.
3) SEP contributions are always deductible. Traditional IRAs can be non-deductible.
4) Yes, you’ll need an 8606 on your 2014 taxes. If you fill out the tax forms wrong, and the IRS doesn’t catch it, you could get taxed twice.
5) The basis on the SEP will also be entered on 8606.
Hope that helps. If you don’t want to do backdoor Roth IRAs (and you probably don’t have to with your income), you don’t have to convert that $10K you have in the SEP now. You could just leave it tax-deferred. Heck, you could make your entire SEP tax-deferred. This post was written with a reader with a much higher income than yours in mind. You’re really talking about Roth conversions rather than backdoor Roth IRA scheme that higher earners have to use. You can just contribute to a Roth IRA for yourself and your spouse.
Thanks very much, that certainly clears up some fog and misconceptions I had. I did not know that SEP contribs were always deductible – interesting!
So you are saying that I definitely CANNOT convert a portion of my SEP value into the Roth? It has to be all or nothing? (so I wonder why I “got away” with it three years ago)…
BTW, my gross will be ~$180K, only about $135K of which will be employment income. I estimated my MAGI at ~$100K after deep deductions & business write-offs, etc.
However, not sure I was completely clear – my main goal here is NOT to defer current taxes per se, but to maximize my leveraging power of my Roth to (one hopes) take advantage of the tax-free future stock appreciation(s) and dividend earnings inside the Roth. If I just fund my SEP with 25% and buy stocks inside it, not only will the returns NOT be tax-free, they will be taxed as regular income, i.e., I won’t even get the benefit of capital gains (15%) tax rate I enjoy in my regular brokerage account – it would be closer to 30% !! A definite must-avoid! I am unmarried, so as I understand it I can only contribute $6500 to my Roth directly – what I was hoping I could do a conversion of the 25% by itself…well, perhaps I could just convert the whole thing (i.e., add in the SEP’s current $10K) and be done with it.
Thanks,
Scott
No, you can convert a portion if you like. This whole article is about a backdoor Roth IRA. You’re just talking about converting a SEP IRA. Far simpler. You don’t have to deal with the pro-rata rule because you don’t have any non-deductible contributions in any IRAs anywhere and you’re not going to make any, right?
The real question you should be asking yourself is whether you should be making tax-deferred contributions or Roth contributions at this point in your life. The answer is probably tax-deferred! But if you want more Roth, converting your SEP money (and making direct Roth IRA contributions- but watch that phaseout as you’re close) is a great way to do it. If you’re above the phaseout range, then you’re in the same boat as all the docs- Backdoor Roth only.
I think you’re forgetting the value of an upfront tax deduction if you think paying at a capital gains rate is somehow better than using a tax-deferred account. Sure, you pay at your marginal rate when you pull the money out, but you didn’t pay anything at all when you put the money in!
Thank you so very much for your unselfish and yeoman public service here.
I am really impressed with your knowledge and have to say it gives me renewed faith in my fellow citizenry. You really not only understand these issues fully, you are expertly able to cut right to the answers.
best,
Scott
That’s very kind of you to say.
Sorry, I did not understand the meaning of “phase-out range”. Are you talking about my age (63), or income coming close to an upper limit – or s/t else? Whatever it is, what should I be doing/not doing about it?
Also, – forgot to ask earlier – can I keep contributing to my Roth right up until I start taking distributions? Or is there a waiting/fallow period?
BTW, on the pay-tax-now-and-stick-the-$$-in-the-Roth vs. IRA pay marginal tax rates later – I am essentially making a bet that I can do better in my inside-Roth investments than saving a couple of thousand in tax today. Yes, it’s true that I could be investing that couple of Ks immediately, but it, too will be subject to taxation.
thx
As long as you have earned income, you can contribute to a Roth. The phase-out range is an income limitation to making direct Roth IRA contributions. For singles like you, it’s between a MAGI of $114K and $129K in 2014. If you’re above $114K (and remember a MAGI is slightly different than an AGI) then you can only make Roth IRA contributions via the backdoor, which complicates your SEP question (you basically need to get rid of the SEP.) If you can stay below that, you have more options with the SEP.
I don’t think you’re understanding the Roth vs tax-deferred issue. It can take a while to wrap your head around it, but basically if you can withdraw the money later at a lower effective tax rate (using it to fill up the 0%, 10%, and 15% brackets) and can get a tax deduction at 28% now, then you’re getting some benefit from the tax-deferred account that you wouldn’t get from the Roth account. If you expect to be pulling that money out at 28% in retirement because you have tons of other retirement income like a rental property, SS, and big IRA withdrawals, well, then might as well do as much Roth as you can for now.
Just reread Harry Sit’s backdoor missive – OK I get it now – I understand “phase-out” – means that I most likely won’t need to do all of that if my MAGI comes underneath $114K – which it probably will.
I intent on rolling out my 401k contributions from my previous employer, which is currently sitting in my traditional IRA account that I intend on using as a route for back door Roth, into an individual 401 k, by December 31, 2014. Now, I intend on moving funds out of that individual 401 k into the Roth in phases. Will this mess up the back door Roth IRA mechanism? Do I have to open another Roth individual 401 k account (since individual 401k can be either the traditional one or Roth one) for this purpose?
Thanks.
I doubt it, but check with the Roth 401(k) provider.
I haven’t filed my taxes for 2013 as yet because I think I messed up when I did my
Form 8606 for 2012, I used Turbo Tax. Lines 1,2 and 14 has $5000, all the other lines are blank. I’m not sure what I should do at this point. Do I need to file an amended 8606? Please help.
It’s not that big of a deal to do a 1040X with another 8606. Don’t stress too much about it. It sounds like you filled it out wrong unless you did contributions and conversions in different years.
Thank you for responding, here is what happened:
On 3/15/13 I opened a Vanguard account and deposited $10,500 into a traditional IRA, $5000 for 2012 and $5500 for 2013. On 3/18/13 I did a conversion to a Roth IRA for both years. I did not get a 1099 for tax year 2012, however for 2013 the 1099-R that I received had the following information
Box 1 $10,500
Box 2a $10,500
Box 2b X
Box 4 $0
Box 7 02
IRA/SEP/simple X
All other fields were left blank, so based off this information do you think I need to redo my 8606 for 2012, or did I get it right the first time?
Caveat: I am not licensed to give tax advice in your state or mine. This is a very specific tax question with a very specific answer. I’m not sure I have all the information I need to give you a correct answer. You mentioned your previous 8606 but didn’t say if that was for 2012 or for 2013. Nor have you mentioned if either of the two contributions were deductible. In general, if you make a contribution for 2012 in 2013, that contribution should show up on your 2012 taxes. If you do a conversion in 2013, that goes on your 2013 taxes.
It was a non deductible IRA and the 8606 was for 2012. Thank you so much for all your help! I think I’m going to consult a CPA for a second look to put my mind at ease. From now on I’ll do my contribution and conversion in the same year to make things easier.
So your 8606 for 2012 should only reflect the contribution and that it was non-deductible.
So that means that on your 2012 8606
Line 1=$5500
Line 2= $0
Line 3= $5500
Line 14= $5500
Everything else should be blank. This means you didn’t get a deduction for the contribution, but also that you have already paid taxes on it. Your 2013 8606 will be a little more complex.
P.S. I’ve heard of a few CPAs missing this so be sure to double check his work!
Jim,
Thanks for your website, book, and podcast. I truly appreciate all the knowledge you have taken the time to share. I have run into a hiccup while doing my 8606 for 2016. I didnt realize this until now while I am filing my 2017 return. I found out my 2016 return had the exact same numbers you mentioned in the post #75 above:
2016 Form 8606:
Line 1=$5500
Line 2= $0
Line 3= $5500
Line 14= $5500
Everything else is blank.
I am probably confused but on your tutorial above it says things very different than what is in post #75 above (which is exactly what I did on my 8606 in 2016). I followed TFB website on how to complete the 8606 on turbotax and the numbers above are what I got.
Based on my 8606 from 2016, my current year (2017) looks like this now:
Line 1=$5500
Line 2= $5500
Line 3= $11000
Line 14= $11000
Everything else is blank.
These numbers will continue to go up over time. Is this correct or do I have to amend my 2016 return and from here on out manually fix my 2017 turbotax return as the instructions from TFB website is not filling out the form correctly?
Thanks a million!
The most common place to make a mistake is line 2. Why is your line 2 $5,500? Did you not do a conversion? I can’t help with the 8606 because I don’t know what you did. First describe what you did. When you did each contribution, when you did each conversion.
Sorry for not giving all the info! For my 2016 IRA contribution I did the contribution and conversion in 2016. For my 2017 contribution I did both the contribution and conversion in 2017. I followed TFB turbotax guide and the above 8606 results came out.
I think my 2017 8606 line 2 has 5500 because my 2016 8606 incorrectly has 5500 in line 14? I think that my 2016 8606 was completed incorrectly.
If it was done incorrectly am I correct in that I have to complete a 1040X and a 8606 for 2016 to fix the issue?
Also I am not entirely convinced the TFB guide of getting the 8606 completed correctly on turbotax works. I tried it again for 2017 and got the same result!
Jim
Ok sorry I just realized this all was my error and TFB is not incorrect. I apparently got confused and contributed my 5500 for 2016 in 2016. Invested in a total market index and then converted to a roth in 2017. There were some gains while invested in the traditional roth. And this is why everything has been thrown off!
Glad you got it sorted out.
Hi WCI,
I know this topic has been beaten to death, but I need just a little more clarity. I just started nurse anesthesia school and stopped working in May. I rolled $20k from a 403b account into a Traditional IRA at Vanguard. I also have a Roth IRA at Vanguard. What’s the best way to handle the rollover? Just roll it all over at once? Or can I do increments? Will this simply be a process of transferring from one account to another? Since I worked part of the year, should I wait to do it all in 2015 when I will have $0 income?
Hello,
Will any 401k work? For example, my wife stopped working a while ago but never did convert her 401k to an IRA. While she is no longer employed with the company that sponsored the 401k, does that 401k still “count” as a place that is shielded from the pro-rata calculation? Is there a risk that the plan sponsor may forcibly boot her into an IRA?
Yes. It counts. Read the plan document, but in general no (except with very small accounts or plans that close.)
I have done my backdoor Roth IRA for the year, but I have a question regarding my wife. She has about $12,000 in a traditional IRA from a previous job’s 401k rollover. I just found out that her new job’s 401k will not accept a reverse rollover from an IRA. So now there is some debate as to whether it is worth it to convert it to a Roth IRA and pay the 33% tax on it to facilitate backdoor Roth IRAs for the future, or to just leave it and invest that $5,500 each year in traditional investments. My feeling is that it would be cost effective to avoid capital gains taxes from the traditional investments but I could use some more definitive numbers.
Also I’m wondering if the whole $12,000 can be converted in one lump sum, or does it have to be done in increments to keep it under the $5,500 limit.
Thanks for the help
You can convert it all in one year, and I think it’s probably worth it to be able to do $5500 a year for the next 10-30 years, no?
I recently finished fellowship and hence switched jobs. I rolled over my pre-tax 401K contributions from my prior job to a traditional IRA (created solely for the rollover) and then converted them into my Roth (making this a taxable event). My question is, can I still do a backdoor Roth with for my wife and I this year, or do I have to wait until 2015? My tradition IRA balance is $0 after the conversion.
Yes. Rollover money doesn’t count toward your $5500 IRA contribution limit for the year. Don’t forget a spousal one either.
I just finished school a year ago and currently have a Roth IRA. At the moment I still qualify though hopefully I won’t qualify for the Roth much longer. I did start my own business so I am eligible for a solo 401k or SEP IRA. I read on your site that the solo 401k is likely the best option, and you also mention that some companies will let me use this ‘backdoor roth’ if I use them for my 401k.
This article above mostly talks about traditional IRA’s and how they are what should be used for a backdoor roth. Could you clear this up for me please, how important is it for me to have a solo 401k with a company that will let me use a backdoor roth if all I need to do moving forward is open a traditional IRA to backdoor the Roth.
Maybe I am missing something. Any help would be appreciated.
Thanks
You are missing something. You don’t need a company’s permission to do a backdoor Roth. I don’t know of a company that doesn’t allow it. You certainly don’t need a 401(k) with them to do it. Open an IRA. Open a Roth IRA. Put $5500 in the IRA. Transfer it to the Roth IRA. No 401(k) needed unless you have a pre-tax IRA or SEP-IRA somewhere you need to get rid of.
Hi, still new to investing/retirement planning. Trying to learn as much as possible from your website, Bogleheads, and the WCI book. Med students should get a copy of that at their white coat ceremony instead of the other poem/narrative books on doctoring.
Anyway, I’m interested in the backdoor roth option, but am not sure if that’s the route I should go at this point.
I’m 28, single, in 3rd of 4 year residency. Already have emergency fund. Loans at 100K at 4 to mostly 6.8% interest. Maxed out Roth IRA at Vanguard x 2 years. Created a traditional 401K with Vanguard small cap fund through employer (no match), because Roth IRA was maxed out. Currently have $500 in it, but stopped contributions to pay down loans. There is a Roth 401K option available.
Question:
– Should I continue contributions to traditional 401K or make contributions to a non-deductible traditional IRA after January 1 so that I can roll it into a backdoor Roth via Vanguard later?
– Any benefit in opening up a Roth 401K or having funds from my traditional one roll over into the Roth 401K?
Sorry if I am not understanding something.
Willing to learn and get some feedback.
Thanks!
You’re definitely NOT understanding something. You should max out your Roth IRA (no need for a backdoor Roth as a resident as you don’t run into the income limit for contributions- the whole point of doing it by the backdoor.) If possible, you should also max out your Roth 401(k), but even if you can’t max it out (and I wouldn’t expect any resident to be able to do so) all 401(k) contributions should be Roth as a resident. Those 6.8% loans are also a great investment assuming you won’t be going for any forgiveness.
You could also open up a Roth Solo 401(k) for any moonlighting income, but again, it would be very unusual for even a moonlighting resident to max out a Roth IRA and a Roth 401(k), much less all that plus a Roth Solo 401(k).
Hi,
This is a very helpful post, and I’ve read through the comments, which have been very educational as well. However, I was hoping to find someone in a similar situation to me, but since I did not, I am posting these questions. (I am planning to run this by my financial advisor, but I was hoping to learn from the readers of this blog, in case there is anything that I have not considered previously.)
I am interested in doing the backdoor Roth this year (2014).
Present situation:
Income = 6 figure W2 income (above limit for any regular Roth), and 15-21k per year (varies) of 1099 income.
Investment accounts = SEP IRA 15k (put in 3-4k yearly) with my 1099 income, SIMPLE IRA 70k (put in 12k year with 6k employer match) with my W2 income – front loaded funds have been purchased (at 2-3 percent)
The question is whether this plan is reasonable, or if there are any suggestions on how things can be done better:
1) Open solo Roth 401k this year, and rollover SEP and SIMPLE into it (into the pretax or employer portion of it), prior to 12-31-2014. Does the rollover need to be initiated before 12-31-14 or does it need to be completed by that date to avoid pro-rata taxes? I plan to rollover the SEP and close that account. However, with SIMPLE I want to take as much out of it as I can, but keep it. I’ve had the SIMPLE for over 2 years (I believe that one needs to have had it for minimum of 2 years to be allowed to roll out), and the employer contributions are fully vested at the time they are made.
2) I’ve already contributed into SEP this year, and will continue to do so for the remainder of 2014 with my 2014 income from 1099. However, other than the rollover, I won’t contribute into the solo 401k, as I understand that both (SEP and solo 401k) are allowed to exist in the same tax year, but not to be contributed into within same tax year. Please correct me if this is not true, or not allowed.
3) Open the Traditional IRA and convert into Roth.
There are some more questions that I also have: I want to continue with my SIMPLE IRA at work in the future (2015 and after), but only up to the 6k matching by employer. Then I want to contribute (in 2015) 17.5 – 6 = 11.5 into the solo Roth 401k. Am I allowed to contribute into both SIMPLE from employer with W2 income and solo Roth 401k with 1099 income in the same calendar year? Then I would also like to contribute the “employer” part into the solo Roth 401k from the 1099 income up to the 19% maximum (or whatever that percent is). My understanding is that I am limited to 17.5k employee contribution into 401k and SIMPLE IRA combined. Please correct me if I am wrong, and if it is 12k into SIMPLE IRA and additionally 17.5k into 401k. Does the 5.5k into after-tax traditional IRA (then to be converted to Roth) affect the 17.5 (as in, reducing it to 12k) – making my allocation 6k SIMPLE IRA, 5.5k traditional-Roth conversion, and 6k solo 401K?
I want to continue doing rollovers out of the SIMPLE at the end of each tax year to minimize if not eliminate money remaining in it by December 31st (to decrease pro-rata taxes). Are there some limitations on doing this? I don’t want to close the SIMPLE and stop the contributions, due to the 6k employer match. I will, however, look into investment options that are not front-loaded.
I would very much appreciate any advice on this. I apologize for this post being very long and specific, but I am hoping there were people in similar situations or with knowledge of this, who would be willing to share.
Your employer uses a SIMPLE IRA, a terrible choice, not only due to low limits but also because it will screw up any backdoor Roth you want to do. But not participating seems foolish given the match. I’d lobby the employer to change to a 401(k) if at all possible. While you’re at it, try to get your employer to drop the loaded funds. No reason for those.
Remember there is a 2 year waiting period for SIMPLE rollovers (yet another reason they suck.)
http://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Rollovers
https://www.whitecoatinvestor.com/simple-iras/
You also need to do something with a SEP IRA if you want to do backdoor Roth IRAs.
You may be one of those few, that due to your employment situation, simply shouldn’t do backdoor Roth IRAs. You can, of course, do a spousal one. You can also “store up” those IRA contributions in a non-deductible IRA and convert them at a later date when your situation changes. It won’t be as beneficial as converting right away, but the sooner you convert, the sooner you can get some benefit from it.
Hope that answers your questions. In short, I don’t think your plan is workable due to the SIMPLE rollover/transfer restrictions and their effect on the pro-rata calculation of the backdoor Roth IRA.
I do not currently have any non-deductible assets in my IRA.
As long as I do not contribute non-deductible assets to the IRA, If I want to convert IRA assets into ROTH (and pay tax on the conversions), can I simply make partial conversions every year directly from the IRA without having to deal with the pro-rata calculation of deductible/non-deductible amounts in the IRA?
Thanks,
Yes, you can do partial conversions. Since there are no non-deductible amounts in the IRA, there is no pro-rata issue. Of course, this has nothing do with the purpose of this post, the backdoor Roth IRA, which involves making non-deductible contributions each year and converting them each year.
This is a great website; you’re passion for both finance and teaching come through. I had 42,000 in nondeductible IRA (confirmed my tax basis from last year’s tax return) money mixed in with pretax SEP-IRA money (cream in the coffee). Following your guidance, I separated the pre-tax SEP money and any non-tax gain from the non-deductible money and moved it first into a conduit IRA, then the 401k of my current company (I have no other IRAs beside the one that currently holds the 42,000, now 47,500). I’ve made a contribution of $5500 dollars (no doubt non-deductible) for 2014 to the current $42,000 non-deductible money in the traditional IRA. My question comes with how to account for the $42,000 in the 8606. When I convert the total 47,500 non-deductible money in the traditional IRA to a Roth, how exactly do I fill out the 8606 form? My tax basis in prior years appears to have gone into line 2, but you mentioned in the article that it should be low or 0. I want to make sure I do this correctly and it may benefit others who are converting more than just this year’s nondeductible IRA. One other quick question, by the time I convert to the Roth, there may be a dollar or two of interest. Obviously, it would be taxable. Is that a big issue and where would I place the 2$ of non-taxed income to claim it on the 8606? You’re providing a real service and I have mentioned your site to colleagues. Thanks.
The “conduit IRA” seems a little fishy. I think you’d have been better off leaving it all in one IRA, and ensuring your 401(k) doesn’t accept post-tax money before moving the pre-tax money in there. Probably won’t matter, but might get interesting in an audit.
As far as the 8606, it shouldn’t be that big of a deal to handle your situation, but it won’t be as simple as the classic Backdoor Roth IRA 8606. Follow the instructions step by step and it should work out okay. If it’s spitting out a huge tax bill, you’ve done it wrong since only a buck or two should be taxed.
Fidelity actually uses the term ‘Conduit IRA(rollover IRA)’ on the 401K contribution application. The Fidelity 401k advisor said that you can’t transfer directly into the 401k from a Vanguard IRA, but that there has to be an intermediate step of moving into a conduit rollover IRA, then into the 401k. They also said that the 401k would not accept after-tax contributions. I was under the impression that I could convert the prior years’ non-deductible portion to a Roth, but I’m not sure where on the 8606 I put that prior years money. I cant’ combine the 42,000 with the 5,500 from this year on line 1 as I made the those non-deductible contributions in earlier years before the 2014 period, so I’m unsure where to place them on the form. If you could show an example of conversion of non-deductible money from years prior in addition to the current year contribution, it would be appreciated.
All right, all right. I’ve waded back in to the 8606 form and instructions. If you had $42K non-deductible from previous years and $5.5K non-deductible from this year, your 8606 should look like this:
1. $5500
2. $42,000
3. $47,500
4. 0
5. 0
6. 0
7. 0
8. $47,500
9. $47,500
10. 1
11. $47,500
12. 0
13. $47,500
14. 0
15. 0
16. $47,500
17. $47,500
18. 0
Does that help? I suspect line 2 was screwing you up. Read the Line 2 instructions completely and carefully.
I have 8k in pre-tax/deductible contributions in a traditional IRA with no option to roll over into a 401k. My husband is the physician and we want to do backdoor Roths for both of us, so we will probably just have to pay the tax on this when we do the conversion. My question is, because the 8k is pre-tax and NOT non-deductible, do we fill out Form 8606 exactly as described above? Does it make a difference if the previous contributions are pre-tax or not with regard to the Form 8606?
Yes, it’s filled out a little differently, but should be pretty straightforward as you read the instructions. Obviously, that conversion will cost you $3K or so, but it’ll probably be worth it.
WCI, thanks for your help. I went through the 8606 for 2014 and a mock 8606 for 2015 – making the max $5500 contribution for 2014 in 2015, making the max $5500 contribution for this year and converting my pre-tax 8K this year – I went through it all with my husband and mathematically everything seems to check out and that majority of tax owed will be on what was pre-tax anyway; I think the total basis for 2015 was about $7 or so.
Now I have some questions about my next step. My current IRA is at Edward Jones (a very old one I got from my very first job ages ago, which was converted from a Simple to Traditional IRA once I quit). Husband and I both intend to open our Roth IRAs at Vanguard. Should I make my 2014 and 2015 contributions to my Edward Jones account and convert it to the new Vanguard Roth and open a traditional Vanguard account in 2016 for future conversions? Or do you recommend opening up a Traditional IRA at Vanguard, making both contributions there, then converting both the Edward Jones and Vanguard tIRA to the Vanguard Roth?
I would do the second, but make sure to do it all in the next month.
Can I roll my IRA funds into a Keogh plan–it seems as if it shouldn’t count toward the pro rata rule. Thanks!
Yes. 401(k)s, profit-sharing plans, 403(B)s, Keoghs etc don’t count.
Quick question. I have a $15167 in a traditional IRA to date with Vanguard. On my 2013 taxes, I started earning more in 2013 which put me over the deductible limit. I did invest $5200 from 05/01/2013-08/01/2013. I did receive a dividend plus long a short term gains totaling 202.77 in December of 2013.
My 401K is through Fidelity currently. I talked to Fidelity about rolling my deductible portion from Vanguard into my 401K. They said they are not sure if they would let me do it but to ask Vanguard. When I talked to Vanguard, the person I spoke with seemed more interested in keeping the money with Vanguard than helping me set up a new Roth IRA to use as the backdoor.
My questions are:
1) is what is my deductible contribution? Is it $15167-5500-202.77?
2) Anyone have problems rolling over Vanguard traditional IRA to a Fidelity 401K?
1) It doesn’t sound like you made a deductible contribution at all this year. I have no idea if you made any in past years, but I assume that all your other contributions other than this $5200 were deductible. So your deductible portion should be in the range of $15167-$5200 – ((($15167-5200)/15167)*202.77) = $9834.
2) It depends on the plan document for the 401(k). Ideally, it will say that you can’t roll in non-deductible money. Then you roll in $9834, leaving the rest in a non-deductible traditional IRA, which you can then convert to a Roth IRA tax free, then do backdoor Roth IRAs going forward.
Don’t expect a lot of help from Vanguard or Fidelity on the phone with this issue. Keep your questions to them very basic, like “Does my 401(k) allow incoming IRA rollovers of non-deductible contributions?”
Thank you so much! Bought your book and really appreciate your insight.
I successfully rolled over my pretax dollars from my traditional IRA (Vanguard) into my employer 401K (Fidelity.) I know have about $5800 nondeductible contributions in my traditional IRA. However, I will have $300 left over in my IRA after performing the backdoor roth. If I’m understanding things correctly, this $300 would be subject to the pro-rata rule. What do you think is the best way to proceed?
Convert it all. There is no $5500 limit on conversions, only contributions. I suspect you don’t have $5800 non-deductible in the IRA. I suspect you have $5500 non-deductible and $300 tax-deferred (earnings on the non-deductible.) If that’s true, the conversion will cost you $75 (about 25% of the $300.)
Thanks for the extensive information provided on this page. After combing the internet for Backdoor Roth in 2011 and not gaining any sufficient knowledge to execute it- I feel this single page has the entire details about the whole process. I read through all the comments but wasn’t able to find the answer to my question so thought of asking.
I’m doing Back door Roth’s since past year after reading your blog and did it this year as well.I changed employer in July 2014. My new employer have an option of Roth 403b(After Tax) or Traditional 403b(Pre-Tax). I started contributing to Traditonal 403b as I think I won’t be able to do Back door Roth if I contribute to Employer Sponsored Roth 403b account. Am I correct in my thinking? Or can I do both contributions- Employer Roth 403b and Back door Roth? Thanks
No, you can do both. But in general, during peak earnings years, pre-tax contributions are better than Roth contributions. You may be an exception to the general rule, of course.
Graduated from residency this year. I made $25,000 from residency and $150,000 from moonlighting as an independent contractor. Also currently have a job as an employee, but won’t be able to have a 401k until January.
My question is this. Am I able to contribute to a SEP-IRA as well as doing a backdoor roth? My thinking, was I could do the backdoor roth before December 31st and open a SEP-IRA in January (for the year 2014) and roll this over into my employee sponsored 401k next year. Would this work? Is there any flaw in my thinking?
Thanks!
Yes, you could do that. You could also just open an individual 401(k) for the moonlighting. You could also just do a “Mega Backdoor Roth” by making the SEP-IRA contribution, then converting it to a Roth (do the conversion this year, not next, due to probable lower tax bracket, although you did so much moonlighting that might not be true for you.)
I thought about opening up a solo-401k and the tax break would be around $4,000 total, while I could invest $18,000 more than my SEP-IRA. Not sure if it is worth it for the hassle (so I have heard). Any experience with setting up the individual 401k through Vanguard?
Yes, it was very easy. I did have to get an EIN though and I make the contributions on a different Vanguard site than the main one. It’s more hassle than a SEP-IRA, but well worth $4K.
Thanks for the the great book/blog. I managed to screw up one of the three simple steps in setting up my first backdoor Roth with Vanguard. Regarding Step 2, I accidentally chose a Target Fund as my initial investment instead of the Prime Money Market Fund. Vanguard plans to draw the money from my savings account in 3 days and says they can’t change my selection. I could, I suppose, tell my savings account not to release the funds to Vanguard and start over again. Should I? How much of a tax hassle will it be when the IRA slightly changes value up or down? If it goes up, do I put the entire amount in the Roth?
Not much hassle at all. A little extra work when you fill out the 8606.
Hello again,
Still trying to get an answer to this question: I rolled $20k from a 403b account (previous employer) into a roll-over Traditional IRA at Vanguard. I also have a Roth IRA at Vanguard. I am back in school full time and not working. Should I rollover all the money from my rollover TIRA into my Roth by Dec. 31 of this year, or wait until 2015 when I will have $0 income? OR would it be better to move $5500 a year for the next few years? Thanks.
A year with no income is a great time to do a Roth conversion.
I’m sure this was addressed above but I likely missed it. I have 2 questions. I have an American funds IRA rolled over from prior 401K. I am still able to roll over the pretax dollars into a 401k even though I have already maxed out through my employer?
Secondly, what if the remaining earnings in my IRA exceed $5500. What do I do with the remainder of the money after I roll the $5500 into a Roth?
1) Yes
2) Rollovers don’t count toward the annual contribution limit.
Question!
I am trying to figure out how to do this backdoor with my new employment situation.I just finished residency and am starting to think about how to plan my investments.
I have an old 403B from residency.
My new position is employed at a hospital who does not offer a 401K/403B for their physicians. Only option is a non-qualified plan.
I’m planning to open an IRA for myself and spouse (who plans to stay at home in 2015). But to avoid taxes we need a 403B/401K account to roll over this money into to keep the balance at zero? Correct? I wonder if I should keep this 403B to use as a rollover account instead of transferring the money into a IRA like I was going to. But I don’t love it’s investment options.
OR – Could my husband open an Individual 401K plan since he was an independent contractor this year and we could both be on the account?
thanks for the help-this site is much appreciated by newbies like myself!
Yes, you should probably keep the old 403B until you get a new one at some point in the future.
You might also be able to use a deductible IRA if you have no retirement plan at work. I’m not sure what your non-qualified plan is and whether that counts as one. Do you have more details on it?
You can’t share a 401(k) account with a spouse, although if you work for him, you can also be an employee in the plan and thus use the same 401(k) (but different accounts.)
Hope that helps.
Thanks for the quick reply! The non qualified plan is weird, it probably is considered a retirement plan b/c there is a matching component by the employer. I will plan on keeping the 403B. We will be able to open Roth IRAs this year and will take advantage of that since my income is lower. Next year we will reassess but in the meantime-will keep the 403B. Thanks!
WCI-
Quick question on the conversion process. Forgive me if you’ve already addressed this. once you convert a non deductible ira into a roth, what happens to the nondeductible account? Are you able to use the same nondeductible account/roth account every year? Seems like fees could get expensive if you had to open a new account every year to do the conversion. Thanks and love the website!
No fees to open a traditional IRA at Vanguard. But they leave it open for a while so you can just use the same one every year. I have one traditional IRA and one Roth IRA at Vanguard for me, and one of each for my wife. I only have money in the traditional IRAs for one day a year.
Can you keep that money in the Roth IRA there year after year as you convert the $5500 from your traditional IRA into it before Dec 31st of every year?
Am i correct in saying that every year after your first Backdoor Roth IRA conversion, do you have to empty out the Roth IRA as well?
Thank you
Yes. All the money I’ve ever contributed to a Roth IRA, either directly or via the backdoor, is still in there with its earnings.
just answered my own question by calling vanguard. completely fee free (not even an annual fee) if you sign up for electronic delivery of account information and can use the same account. Easy enough!
Hi,
So I’m a relatively new attending and earning well above the limit for a Roth IRA, and have no existing investments other than about 10k in a 401 from my employer. I have about 30-40k in locums (1099) income, and wondered if it’d be doable for me to start a backdoor Roth. Also, I’m in my late 30’s (38) – would this alter my planning? What sort of returns can I expect from a Roth IRA? Thanks for any advice and great site.
Hello,
I worked for a few years had a company (3%) matched 403b which I maxed every year. I have about $70k in it. I haven’t worked for a year and had no idea what to do with it. Now I just started a new job in October that offers a 401k without match, should I transfer my balance there? I still don’t understand the back door Roth. I am an anesthesiologist/pain physician. What do you recommend? From what I am understanding, I can open a traditional IRA and put $5,500 in it then a week later put it in a ROTH IRA before dec. 31 then file an 8606 for the April tax season?
That’s correct. You can either leave your $70K in your old 403B or bring it to your new 401(k). But you can’t put it in a traditional IRA and still do the backdoor Roth.
Thanks for the great blog. I had a question about the backdoor IRA. I currently have $5500 in a traditional IRA that I opened this year. I am married and our combined income this year will be ~$170k. My thought with opening the traditional IRA is that I can then deduct the $5500 for takxes. However next year our income will be ~$400k. I will no longer be able to deduct traditional IRA moving forward. I plan on using the backdoor conversion going forward for IRA.
My question is should I convert my traditioanl IRA to a Roth IRA before the year is out? Or should I hold it, get the tax deduction and roll it over into an individual 401k next year? Or should I hold it get the tax deduction this year and roll it over to a Roth IRA next year? Any guidance would be appreciated.
Thanks,
Kevin
I think you’ve got the options down. Personally, if I were in a relatively low tax bracket compared to my peak career earnings, I’d go Roth this year by doing my conversion before December 31.
PMJI, but regarding the last option you mention:
“…Or should I hold it get the tax deduction this year and roll it over to a Roth IRA next year? ”
If I understand you correctly, are you suggesting you would take the tax credit in a year you were making $170K, and then convert to Roth (you can’t “roll over” traditional IRA to a Roth) in a year you’re making $400K?? Unless I’m missing something, I don’t see how that makes sense… You pay the most in that scenario.
From tax perspective, you should think of your retirement $$$ in buckets of Tax-Free (Roth), Tax-Deferred (traditional) and taxable investments – I wish I had had the opportunity to use Tax-Free options earlier in my career, now the tax impact is just too significant for me to use Roth accounts (other than the backdoor), so I’ll be more limited in my withdrawal strategies since most of the nest egg is tax-deferred. Unless you’ve already got a big Roth account and REALLY need the tax break this year, go with Roth. Good luck, Rich
I’m a little behind on this post obviously, but came across this researching the topic of back door roth. I may have missed this, but please clarify for me one point. If we have a rollover IRA from previous 401K, etc money we need to roll this to my husbands existing 401K prior to Dec 31, 2014. After that time, (January 2015) we can then open a traditional IRA for each of us and convert to Roth IRA’s in the 2015 tax year to make it clean. Is this correct? And of course making sure the Form 8606 is filed for each of these conversions.
And also what is the impact of rolling a large rollover IRA back into a 401K? Our current balance is about $280K.
Thanks!
What do you mean the impact? The IRA is smaller and the 401(k) is bigger and you can then do backdoor Roths? You then have to invest the money in what the 401(k) offers? There’s no tax impact.
So if I’m reading that right both the rollover IRA and 401K accounts are tax deferred so there is no tax assessed on the transaction?
To keep things clean, I’d try to get the rollover/transfer done this year. But I don’t think I’d skip out on a 2014 IRA contribution (can be done until April 2015) in an effort to keep things really clean. The cleanest paperwork would probably be doing the transfer this month. Do the IRA contribution in December, then converting it the next day, all before the end of the year. In January, do it again for 2015. If you can’t pull it all off, you can always do it next year. Run yourself through Form 8606 and you’ll see that you could do it all in January next year too and it would work out okay, even if a little more complicated. What I wouldn’t do, however, is do the IRA contribution/conversion this year, and then do the transfer next year. That’ll bring the whole pro-rata thing in.
So I have the 600K combined rollovers with husband, I can put 480 into my employers 401K with a 0.1% admin fee and some Vanguard options, still stuck with his 130K Rollover IRA and he has no employer at this time.
– Would it be smart to rollover my $$ and pay this admin fee
– even though we are still stuck with husbands 130K Rollover and no where to roll it
Maybe we should wait until he gets a job and an option to roll over also.
Part B- I make 10K maybe yearly consulting on the side, what I are the options with this money if I already have a 401K and a 403B at work? only a SEP?
You could do your rollover and start doing backdoor Roths for you. You could also start doing the first step (contribution) for your husband each year and do the conversion in the future after he rolls over his IRA.
You could do an individual 401(k).
Also, I have an existing Roth IRA from my prior employment earnings that I had rolled here. It is currently being held/managed by an insurance agent who of course has tried to sell us many insurance vehicles for investing…… Do I have to use this Roth IRA or can i open another. We also have a large amount of investments we are managing on our own through Vanguard. I’d like to open the traditional IRA and do the conversion with Vanguard if possible.
Since I’m not part of another pension plan, at the moment & my income is above the ROTH limits. Can I make a Contribution to an IRA that is considered Deductible and convert to a ROTH, thereby, making my original contribution to an IRA non-deductible?
I only hear about making non-deductible IRA contributions prior to conversion to a ROTH…
It’s basically the same. If you get the deduction, and then do a conversion, the tax due is exactly the same as if you didn’t get the deduction and then did a conversion.
What If I’m from a relatively low income. And thus could benefit from the Saver’s Credit. Is it possible to count the T-IRA as a deduction. Rollover. And then reduce the income tax penalty from the rollover via Saver’s credit?
NVM, I did some of the math and decided it doesn’t make a difference. Before, I had this idea that I could increase the total amount of taxes I could owe by doing the conversion. And then use the Saver’s credit to make it so that I don’t owe those additional taxes. But after doing it on paper, the amount of total taxes owed doesn’t change when doing the conversion.
Yes. And you mean conversion, not rollover.
I am opening new Vanguard IRA accounts to do the backdoor Roth-IRA. would like to contribute the max for me and my wife. what’s the proper way to do that? open two different sets of accounts (one traditional and one Roth for each of us, contribute and convert)? is there a way to have joint IRA accounts?
No, all retirement accounts are individual. You’ll need 4 total accounts to do backdoor Roths for each of you. Sorry the government has made this so complicated.
sounds good. I just opened all 4 accounts for us with Vanguard. Do you have any suggestions regarding investment strategies, which funds to pick, etc? I just setup these IRAs and a solo-401K so wanted to started learning about the different options for these accounts.
Thank you!
First set your goals, then your asset allocation, then choose funds to match your allocation. Don’t try to jump to step 3. If you insist, choose a well-rounded, simple solution like Life Strategy Moderate Fund until you figure out what you want to do for the long run.
Thank you for your website- it’s been a tremendous help. Can you clear up my questions?
In September 2014, I had a $10800 defined benefit plan payout, and will owe taxes on it. I had it sent directly to a rollover IRA at Fidelity. I then opened a Roth converted the rollover IRA to a Roth, also at Fidelity. (My income is above the limit to open a Roth, but understand there is no income limit on conversions.) There is now a zero balance in the rollover IRA. I understand I’ll still pay taxes on the $10,800 this year.
Now, in December 2014, I’d like to open a traditional IRA and fund it with $5500 after tax dollars, and then immediately convert that to a Roth IRA. Given a recent cash event, I’d then like to do the same thing in January 2015 to get $11,000 into a Roth. I would like to do it for my husband, too (who doesn’t have the complicating rollover IRA).
Questions: Is is problematic to do a traditional back door Roth in the same year as I did the rollover conversion given that the first conversion was of pre-tax dollars, and the second would be of post-tax dollars? Am I better off waiting until 1/2015 to begin the normal backdoor process for me? Does it matter when I do it for my husband? (We file jointly.)
And either way, when I do this, I understand I need to open another IRA as the first one was a rollover IRA, and this one is not a rollover. When I open that, can I then convert it to another (second) Roth account, or do I convert it into the existing Roth IRA (the one I did in September 2014)? I’d prefer to have it all in one Roth account, but worried that the paperwork would be more difficult if I co-mingle the source dollars.
I very much appreciate your help. Many thanks.
First, you won’t owe taxes on the “payout” because it wasn’t a payout, it was a transfer to a rollover IRA. No taxes due.
Second, you will owe taxes on the conversion, those will be due on your 2014 taxes.
Third, there should be no issue doing a backdoor Roth for 2014 or 2015 (and you can do it in either year if you can’t manage it by year end) in the same year as this transfer. The key is to have a traditional/rollover/SEP/SIMPLE IRA balance on December 31, 2014 of $0. Your husband’s backdoor Roth is completely separate as you must fill out an 8606 for each of you.
Fourth, you probably need a second traditional IRA account (check with the company though, you may not.) You shouldn’t need a second Roth IRA. Just transfer the money into the existing one.
This question may have already asked and I apologize in advance if it repetitive.
The husband has a SEP with a large amount and the wife has a small traditional IRA. The wife wants take advantage of the backdoor conversion. She has a six figure salary from her employment. Is the husband’s SEP required to be considered part of the total traditional SEP and IRA for previous untaxed accounts. Just want clarification if we can only pay taxes on the wife’s small traditional IRA only and do the backdoor conversion to the wife’s Roth IRA.
Thanks!
No, IRAs are separate. My tax forms include two 8606s, one for me and one for my wife. Yours will be the same. So if you don’t want to convert the SEP and have nowhere to roll it, you can still do a spousal backdoor Roth IRA.
Thank you very much!
After reading your book on the S corp and the cash distributions to the individual, you stated that the cash distribution would be treated as a dividend. Did you mean ordinary dividend or qualified dividend? What I gathered from your book is that you were referring to an ordinary dividend. Could you please tell my why it would not be a qualified dividend? Turbo Tax implies that it could be called a qualified dividend. I have not been able to find anything to dispute that implication. Qualified dividends are taxed at a much lower rate than ordinary dividends. Thank you very much for your time and attention.
It is an ordinary dividend. Not my rules. It’s not qualified because the IRS says it isn’t qualified. We can speculate as to why, but that’s the rule. Sorry. If TurboTax says that, it’s wrong.
Actually, if you want to get really technical, it’s a distribution and not a dividend at all. Read here for details:
http://www.scorporationsexplained.com/how-are-s-corporation-dividends-taxed.htm
But bottom line is it is passed through to your individual return and taxed at your ordinary rates, not the lower qualified dividend rate. All you save on S corp dividends/distributions is the payroll taxes.
If my spouse has a rollover IRA will that have a tax impact on a backdoor Roth contribution under my name? I assume it would only impact a backdoor Roth contribution in her name?
No, it won’t affect you. Two separate 8606s.
Via email:
I’m new to the IRA game but plan on contributing and converting from now on. My question with Roth IRAs is if someone at vanguard (or the like) is actively managing accounts or do I have to move things around with the market changes? Are there fees being withdrawn within the accounts to pay people to manage?
Next question: I had a financial advisor recommend a private company to manage my 401k through my government job. They charge 2% per year to manage which comes out of my pocket since they can’t touch the TSP money. I have no stock market knowledge so his idea was for me to pay someone who does. But it’s getting costly for me at 2% as it grows so I’m asking if this private company is even necessary to manage my TSP or is it reasonable To place the account or cruise control with a life fund that automatically adjusts based on the retirement track I put it on?
Any help with this would be appreciated. Love this site!
1) A Roth IRA is a type of investment account. After funding the Roth, you must also select an investment. Mutual funds are managed by a professional. Passively managed mutual funds are managed to match an index of some type and match the market. Actively managed funds try (with little long term success) to beat the market. If you pick your own individual securities within the Roth IRA, you are essentially your own manager. Mutual funds do have “fees” called expense ratios. At Vanguard, those are very low and automatically taken out of the investment, which is in the Roth IRA. It might be literally $10 a year for a $10,000 investment.
2) That’s a ridiculously high fee. Especially when it’s to monkey around market timing the TSP funds. Not only is it not necessary, it’s a bad idea. Put the account on autopilot, either with the lifecycle funds or a combination of the funds you design yourself.
If you need an advisor, you can get one for as little as 0.3-0.8% a year, or as little as $1000 per year as a flat fee.
Good Day WCI,
Let me first start by saying what a blessing discovering this blog has become.
My wife and I are both 3rd year residents. I was hoping to get some advice about our currently very humble but ambitious retirement accounts. We were both clients of GL Advisor since med school graduation in 2012. We blindly maxed out all retirement accounts possible since the start of residency and have followed all of their recommendations without question. I recently received a letter from TD Ameritrade telling me that GL was no longer one of their partners and I should contact them immediately as our money was currently in Limbo. I contacted them to try and get our traditional and Roth IRAs transferred to Vanguard but was informed that 20k of my money had gone into a traditional IRA (which I blindly signed off on without fully realizing what I was doing) and I had 1k in a Roth. 15k out of the 20 k in the Traditional was Post-tax money that was initially in a Roth but converted to a Traditional for an unknown reason by my GL adviser. I was eventually able to get a hold of my adviser and he informed me that the CEO of GL Advisor is currently going to jail for fraud charges and one of their GL funds was actually a Ponzi scheme that was funneling money to the CEO. He informed me that he and most of his colleagues were no longer working with GL and that I should immediately close all my accounts with them. Sorry for that long story, but I know many residents/fellows are clients of GL Advisor and would like to know of the recent developments as GL is apparently not trying to reach out to clients about this. My question is, how do I go about getting all of my money at TD Ameritrade into a Roth in one account so I can transfer to Vanguard and start “fresh”. My wife’s 11k is already only in a Roth so this will be easy on her part. We have also been maxing out our 403b at the hospital so we will eventually have to transfer that in as well after residency. I would hate to pay taxes on money that was already taxed before and I am hoping that there is a backdoor option to get the money back in. I also would like to get this done this year before our tax brackets increase as my wife is graduating in June and our income will quickly rise above 250k with my moonlighting and her attending job.
Thanks again for any help and recommendations and thanks again for the information on this blog!
I’d start filling out the paperwork at Vanguard. They’ll transfer everything over. Once it’s over, you can convert your traditional to a Roth. I’m unsure of how much this will cost you in taxes, but that’s really the question and you didn’t provide enough info to answer it.
https://personal.vanguard.com/us/openaccount
Transferring IRAs is no big deal.Sorry to hear about the situation with GL advisor. I believe that was an issue with their fund and not necessarily anything else you might have been invested in. Were you invested in that fund?
Sorry for not providing enough info. My wife and I have no kids and make about 110k between us. We were only able to get 6k each into the 403b at our hospital for 2014 (we started the 403b at the end of 2014 and they won’t let us write a check to max it out for the calendar year) and otherwise put the $5500 each into Roths for 2014. My wife’s 5500 is still in a Roth at TD but mine was converted to the traditional. I don’t believe any of our money was invested in the specific fund that got GL in trouble. I probably just need to find a CPA to discuss what the exact tax ramifications would be for 2014 to convert the entire 20k from the traditional to a Roth for 2014. I can then just start doing the Backdoor for us every year according to your instructions. Are there any CPAs that you can recommend? Thanks for your advice.
I don’t have a list of recommended CPAs, sorry. You’re the second person to ask today though. Maybe I’ll start working on it. Your tax ramifications are probably $20K*25%+ your state tax rate, or a little over $5K to do the conversion.
apologies if this was explained, or too simple.
for the 8606 for 2013 – you made a 5500 nondeductible traditional IRA contribution in 1/2014 for 2013; then you converted to a Roth a few days later, in 1/2014. Then why is line 4 0 and not 5500? what am I missing?
It should be $5500 as near as I can tell. Did I say it wasn’t somewhere?
Thanks for your reply – the 8606 form that you filled out and scanned looks like line 4 is $0. I don’t understand why, I thought it would be $5500 (since you made the contribution for 2013 in January of 2014, which is included on line 1).
I assume that I am missing something obvious.
thanks
Yes. I made the 2013 contribution in January 2013, not 14.
ok, thanks. we did it differently, made it more complicated/confusing – the 2013 contribution was made in 2014, then converted. the 8606 numbers are a little different (since we made the 2014 contribution in 2015), but the end result (line 15 and line 18) is the same, unless I am still missing something.
you have a good book and website – i suggest it to the med students and residents with whom i interact.
You’re right, it’s just a little more complex the way you do it, but the end result is the same.
If you made the contributions in Feb 2015 for 2014 , then Line 1 and Line 4 should each be $5500. Line 5 should be zero. How do you figure the math for Line 10 – Divide Line 5 by Line 9? 0/5500? And the lines onward from Line 10?
Just to confirm – The Form 8606 is being done in the next tax year?
I have been staring at Turbo Tax too long so my question may not be clear or my math incorrect.
Any word on a rule change for 2015 that requires you to hold the $5500 in the non deductible ira for a year before being allowed to convert to a Roth? A financial planner mentioned this to me but I haven’t been able to find any information to verify that and I hope it’s not true. Thanks!
While that might be a good idea to avoid any issues with the Step Doctrine, it certainly isn’t a rule. I converted mine the next day again this year, as I have for the last 5.
I am confused about the first step about moving money out of iras.
I just started my first attending job but don’t qualify for the groups 403b until after a year. Luckily I still am per diem at my fellowship hospital and they allow me to contribute to my 403b still. i have a fidelity account that has my old 403b from residency (can’t contirbute) in it as one account, an old roth ira account which i can’t contribute to anymore because I make too much, and i just opened a traditional ira and put 5500 in today for 2014.
Can I make the traditional IRA into a backdoor roth still if I contributed today and not in 2014? Also I’m confused about step one. Would I have to move my two other accounts the roth ira and the 403b from fidelty to my active 403b in transamerica before I could convert the traditional to roth?
What is the fidelity account with the old 403b. Is it a 403B or an IRA? If it’s an IRA, you’ve got to do something with it. Yes, you can convert a traditional IRA at any time. Step one is contribute to an IRA. You already did that, no? No, 403(b)s and Roths don’t count against you in the pro-rata calculation. Take a look at the 8606.
In my fidelity account i have both roth IRA and a 403b in fidelity both which I was contributing to when I was in residency. Should I move that 403b into the roth IRA as well? Now as an attending I opened a traditional IRA (which I’m going to changeto back door) and have an active 403b which I continue to contribute to. My understanding is that both roth and 403b don’t count toward the pro-rata so I can go ahead and roll over the traditional now.
That’s right. Whether or not you want to convert the 403B is a totally separate question. I think it’s a good idea to do it in the year you finish residency, but I suspect you missed that deadline, no?
I appreciate you taking time to educate and answer questions. I contributed $11,000 to IRA in March 2014 and converted to Roth IRA for 2013 and 2014. Do I need to amend my Tax return for Roth IRA conversion for 2013 before filing for 2014? What do I need to do to amend? Thanks!
The IRA contribution for 2013 goes on the 2013 taxes. The IRA contribution for 2014 goes on the 2014 taxes. The conversion goes on 2014 taxes. If that isn’t what you did, you need to amend something, probably your 2013 taxes.
What if I have several inherited IRAs? Can I still get money into a Roth IRA? I am required to take RMDs from these accounts each year. I will not be able to roll these into any 401K or anything like that.
Inherited IRAs don’t count against you on the 8606.
Turns out, I have an old IRA from 16 or so years ago that I haven’t touched in the same amount of time. It has a balance of about $300. Do I need to roll this over to a 401K before I can open a new IRA, fund it, then convert it for 2014? I presume it’s already too late since the balance was there at the end of 2014. What do you suggest I do this year and for subsequent years?
It’s not too late since you didn’t do the conversion last year. Just contribute your $5500 for 2014 before April, convert it and convert the entire old IRA. Voila-no issue with the pro-rata calculation.
Looks like the 2016 budget proposes to close the back door:
http://www.marketwatch.com/story/president-obamas-2016-budget-targets-retirement-accounts-2015-02-05?page=1
I’m not sure why people worry about a budget proposed by a president whose party controls neither house of Congress, especially when said Congress hasn’t passed a budget in years. I’d worry if it was Putin proposing it, but not Obama. Remember last year’s budget proposal? Nope, didn’t think so. But it generated just as much worrying as this year’s I assure you.
Thanks WCI!
I have yet to do my 2014 taxes.
As of Jan 31 2014, I have:
1) a Vanguard Roth for me (I’m an NP)
2) a Vanguard Roth for my husband (MD)
3) his 401K
4) a Vanguard traditional IRA with very little money (which I rolled my previous 401K of $2,000 into and added $1,000)***
Am I too late to do the backdoor rollover into Roth for 2014? If I roll it over, can I roll it over into our existing Roth IRAs?
– If I’m not too late, I would:
A) Open a traditional IRA for hubby
B) Contribute another few K into my traditional IRA ($4,500?)
C) Roll each over to our respective Roths
The deadline for 2014 IRA contributions is April 15. There is no deadline for conversions. Rollovers are different from contributions. You each get $5500 per year toward IRAs.
If I were you, I’d contribute another $4500 for 2014 plus $5500 for 2015 into your traditional IRA. Then I’d convert the whole thing (transfer it from the traditional IRA to his Roth IRA.) It’ll cost you something like $800 in taxes. I’d then open a traditional IRA for your husband, contribute $5500 for 2014 and $5500 for 2015, and then transfer is all to his Roth. If you’re concerned about the Step Doctrine, wait a few months after the contributions to do the conversions.
Thank you. The thing that I’m not clear about is how to handle the $2000+ money that I rolled over from my 401K into the traditional IRA (in addition to the $1000 that I directly contributed in opening that account.)… any ideas?
I’d convert it to the Roth. I’d move the tax-deferred money over with the after-tax money and pay the taxes on it.
Hi again. Sorry I’m not so tax literate.
A) Do I need to roll the tax deferred $2,000ish out of the traditional IRA first or am I too late and subject to Pro Rata anyways?
B) Because I didn’t do step 1 by December 31, 2014 and am subject to pro-rata, does that mean that I should only do the Roth conversion for myself for the $3,000ish total in my account to wipe it clean and call it a year, or can I go ahead and do a full 5,500 for myself and my husband even though I’m subject to pro rata on that $2,000ish? (AKA, is this tax year screwed due to pro rata implication and should I just try again next year after clearing out my traditional?)
C) OR even though I’m late, should I roll the $2,000ish pre-tax 401K portion of my traditional IRA into hubby’s 401K before I submit my taxes for 2014? (Am I too late for step 1?)
D) Will this extra $2,000ish be really difficult to report on turbotax?
You can still make IRA contributions for 2014 until April 15, 2015.
You can either convert the pre-tax $2K, or roll it into a 401(k) if you have one that will take a rollover. You can’t roll your IRA into your husband’s 401(k) though.
It’s not that big a deal to do it on Turbotax. See Harry Sit’s link in the main article.
how will 2014 8606 look like if you convert in 2015? thanks
how will 2014 8606 look like if you convert in 2015? I made regular roth contributions in 2014 and now I see I am not qualified. I need to defund 2014 Roth then open regular ira, move money from regular to roth and then file 8606, correct? I am having problems with 8606 though because I am converting in 2015
What problem specifically are you having with 8606? Have you worked through the form following the instructions and now have a question about what to put on a specific line?
well, I have 5500 is 1 and 0 in 2 and consequently 5500 in 3. then it asks if in 2014 I made a roth conversion. my answer is no as I am doing a roth conversion in 2015. If the answer is no, then it says my amount from 3 (5500) becomes my amount in 14 which becomes 5500 while you are saying it should be 0. I am confused…
Also, I called Vanguard and opened regular non deductible IRA. They are moving 5500 out of roth along with the earnings into traditional. They said I could call on Tuesday and move the $$ back to Roth and they said I will have to pay taxes on earnings a year from now. They said I have to file a recategorization now. Is it also 8606?
I am afraid I am much more confused now.
Ultimately, I do fund roth in the beginning of the year not knowing whether I would qualify or not. It’s a coin toss in my case. I just need to figure out the process of how to defund it if needed and what exact tax steps I should take.
I will much appreciate any advice. Thank you!
If you made your 2014 contribution in 2015, it should look like this:
1 5500
2 0
3 5500
4 5500
5 0
6 0
7 0
8 0
9 0
10 1
11 0
12 0
13 0
14 5500
15 0
Does that help?
If you’re not sure if you’ll be able to do your Roth contributions directly or not, better to do them through the backdoor. That avoids having to do a recharacterization. Learn more about recharacterizations here: http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Recharacterization-of-Roth-Rollovers-and-Conversions
I made my contributions in early 2014 which makes copying and pasting your original example of 8606 impossible because it was all done in different years. Thank you for the “revised” form. This is exactly what I have! But it makes my next year total basis 11000 (5500 from line 14 now and 5500 from line two in next year form), right. The end result or the same form for next year should look the same with zero overall except 5500 will be replaced with 1100, no?
Thank you very much for the reference. I will read it right away. I think what you are saying is that in my situation I should not be playing a guessing game but rather do a backdoor each year, correct? The problem for now is that I already made my 2015 contribution for roth. Should I sell and do a back door?
At this point you can just wait and see, then recharacterize if it looks like a good income year.
You shouldn’t have a basis of $11K next year because you converted the first $5500. It’s no longer “basis in a traditional or SEP IRA.”
Jim, you may have answered this previously but I reread all your Backdoor Roth posts and couldn’t find it. I made IRA contributions for 2012 and 2013 of $5,000 and $5,500 for my wife but forgot to convert them through the Backdoor before 12/31/13 (I did convert mine in time), I did it in January 2014. So for our 2014 Form 8606 mine is just like your example, but her’s is different, I think? On 12/31/14 her total in traditional IRAs was zero, but the amount converted is $16,000 (including her 2014 contribution).
I think that makes the whole form complicated? Can I tell my accountant to go back and amend the two prior years for the conversions and keep this year simple? Sorry if these are pretty dumb questions. As always, thanks for what you do.
No, if you did the conversion in 2014, you have to report it on 2014 taxes. Work through the 8606 instructions and you’ll probably figure it out. If you have a question about a specific line, let me know.
Just wanted to say thanks so much for the very detailed information regarding setting up the accounts initially and then the links to find step by step filing guides for turbo tax and h&R Block. Saved me a mistake/headache! I was able to follow each step and get everything set up and converted and then get my taxes prepared without an issue!
You’re welcome.
The 8606 instructions state that part 1 should not be completed for recharacterizations. Is there a reason you still do?
Finally, what happens if the value drops after conversion, e.g. from $5500 to 5499. Do you report the negative value or zero?
1) I’m not sure what you’re talking about. I don’t do recharacterizations. That isn’t part of the usual backdoor Roth IRA process. That’s for when you accidentally put money in a Roth directly and need to recharacterize it to a traditional because you make too much.
2) After conversion, you shouldn’t have to report anything on the 8606. You mean before conversion?
This is a truly awesome site. The topic of backdoor Roth conversions slightly confuses me as to the mechanics of this so here is my situation and hopefully you can advise. I am 44, and have a Roth IRA which I have been unable to fund for years because of too high income: the current value is $6,900. I also have a traditional IRA which is worth $13,950 and in addition have 2 other rollover IRAs which are collectively worth $850,000. My wife is not working and has no earned income but does have a traditional IRA worth approximately $6,000 as well and I have not recently attempted to fund the Roth because of the idea that my income was too high to qualify for the “front door” traditional method. Please forgive my obtuseness if it may seem that way but is there any sense in my attempting to use the backdoor method to make Roth contributions? Because of the prorata issue, would I have to convert just the $13,950 traditional IRA to a Roth and pay taxes on this alone or would I have to convert the other rollover IRAs? Any information you can give me would be appreciated and thank you very much in advance.
You’d have to convert it all. That’s almost surely not an option with an $850K IRA. You might be able to use an existing 401(k) or open an Individual 401(k) and roll it over though. If not, it’s pretty hard to recommend doing it.
Thank you very much for your prompt response. On perhaps a related note, can you advise me how to find an advisor who might help me evaluate my overall financial retirement situation for a reasonable rate? My accountant seems unsure about the validity of these retirement strategies and it seems like hiring a tax lawyer would be unnecessarily complicated and expensive. I live in NJ.
Your accountant is “unsure” about the backdoor Roth IRA? I can understand someone being cautious about the Step Doctrine (so wait a few months or a year between contribution and conversion), but to not do it at all? Bizarre. And you certainly don’t need a tax lawyer to do it. I’ve written before about choosing advisers here:
https://www.whitecoatinvestor.com/investing/what-you-need-to-know-about-financial-advisers-2/
I also keep a list of recommended advisors here, most are paid advertisers on the blog: https://www.whitecoatinvestor.com/financial-advisors/
Dear Sir, I just want to make sure I’m completing the 8606 form correctly. In 2014, I contributed $5,500 to a traditional IRA for 2013 and converted it to a Roth IRA rightaway. In 2014, I also contributed another $5,500 to a traditional IRA for 2014 and converted it to a Roth. I followed the easy way in 2014 and plan to stick with it. But,Here’s what the 8606 should look for the year 2013 and 2014: Can you kindly verify if it looks right? I didn’t report in 2013 and plan to file it along with my 2014 taxes.
2013 Part I:
—————–
Line 1: $5,500
Line 2: $0
Line 3: $5,500
Line 4: $5,500
Line 5: $0
Line 6: 0
Line 7: 0
Line 8: $0
Line 9: $0
Line 10: 0.000
Line 11: $0
Line 12: $0
Line 13: $0
Line 14: $5,500
Line 15: $0
No Part II for 2013.
————————————————————–
2014 Part I:
Line 1: $5,500
Line 2: $5,500
Line 3: $11,500
Line 4: $0
Line 5: $11,000
Line 6: 0
Line 7: 0
Line 8: $11,000
Line 9: $11,000
Line 10: 1.000
Line 11: $11,000
Line 12: $0
Line 13: $11,000
Line 14: $0
Line 15: $0
Part II:
Line 16: $11,000
Line 17: $11,000
Line 18: 0
Does this look okay for both the years?
There’s a post coming up soon on this subject. I’m honestly a little hesitant to confirm to you that you did your taxes correctly. The most important thing to check is to make sure the tax owed is $0. If that came out right, chances are you did the rest right.
Thank you for the quick response. I haven’t done the taxes yet and so, there is opportunity to fix things if needed. Since, The 2013 non-deductible contribution wasn’t reported for the year 2013, I plan to send it along with my 2014 returns. Additionally, I just made sure the basis got forwarded to the 2014 – 8606. So, the 2013- 8606 would just report the contribution (no Part II). The 2014-8606 would report the 2014 contribution and the total (2013 and 2014) conversion and the Part II, line 18 would show $0 with no tax owed.
Does it seem logical?
Yes.
Dear WCI,
Thank you for the awesome blog and great information on ROTH-IRA. I may have jumped the gun on the backdoor by missing on a key point and can use your help in understanding a few things.
I missed the point that 401K can reduce MAGI, I added our 401K accounts back to AGI and miscalculated the ROTH-IRA MAGI limits. But we may be in the ROTH-IRA MAGI limit situation in 2015 as our work 401K might phase us out of 401K based on high compensation situation. So I think I was a year or two ahead in using the backdoor strategy.
My Wife contributed 5500 to a Merrill Edge T-IRA account and then converted to a ROTH-IRA.We used Merrill Edge due to our other account relationships.
The Traditional IRA was funded with after-tax money but Merrill Edge did not let us take out the whole amount so we left $50 in the T-IRA and moved 5450 to ROTH-IRA. Does this balance of $50 in a T-IRA pose any issues?
I did not contribute to the T-IRA to backdoor to ROTH as I have some rollover IRA that I need to move into my 401K, but 2014 year’s AGI might let me contribute to ROTH-IRA directly. Am I correct in assuming that as long as the Roll-over IRA balance is zero on Dec, 31 2015 I can do a backdoor Roth contribution for 2015? ( this assumes my 401K situation at work changes and puts me over the ROTH MAGI limits)
Thanks again for your time and a great blog!
-Damon
First, I can think of no reason to keep any money at Merrill Lynch. At all. Is there something you really like about the way they do business?
Second, that $50 is going to be a hassle for you. I’d convert it with the rest of the IRA. If Merrill won’t let you do it, well, seems like as good a reason as any to leave Merrill to me.
Yes, you need to get your traditional IRA balances to zero on December 31 to do the Backdoor Roth IRA effectively.
Thanks for the quick reply. I will get the $50 out of the T-IRA or close the account.
The only positive thing I can say about Merrill Edge is that I get free trades on the accounts 🙂
Hi WCI.
I am trying to do the back door Roth IRA and I am not sure whether I messed up or not along the way but I have a feeling I did. I had no prior IRAs to get rid of. I went to the Vanguard website a week ago to open an account, which I did, but when I got to the part to set up the fund transfer, they gave me the option to contribute to both 2014 and 2015 so I maxed out both at $5500. After the fund transfer, it occurred to me that a contribution to 2014 might amount to having had a past IRA (ie,-like an IRA i should have gotten rid of). Is this a problem at all, and if so, how can I fix it? I have already opened the Roth in preparation to do the backdoor, but I wanted your advice before rolling anything over. If it is a problem, can I roll the 2014 contribution over into an individual 401K? I did have moonlighting income last year but have never set up a i401K and not sure whether I am past the deadline to do so. Please help.Your website has been a godsend! I am in my mid 40s, bought your book and passed it on to my other physician mid 40s friends who are not yet at financial peace.Looking forward to your response. Thanks.
There’s no issue. You’re fine. You just need to fill out the 2014 and 2015 8606 correctly. There’s a post coming up on it. Go ahead and do the conversion step at your leisure (but sometime during 2015.) And no, you probably can’t roll a non-deductible IRA contribution into a 401(k). You are past the deadline for opening an i401(k) for 2014, but if you’re going to continue moonlighting, certainly open one up for 2015. One thing you can do is make SEP-IRA contributions for 2014, then convert those to Roths or roll them into your i401(k) also. I did that one year.
Should I roll over the 2014 IRA contribution of $5500 to my newly opened Roth and file a form 8606 this tax season, leaving the 2015 IRA contribution of $5500 in the IRA to roll over later this year for next tax season? Or should I roll over the entire $11000 (5500×2) after/before April 15th 2015, or it makes no difference. I do not want to complicate my form 8606 so I do not mind doing two separate roll overs,one for this year and one for next year.Thanks again
It is important to be precise with your words when discussing this. The worst offender is the word “rollover.” Rollovers are actually incredibly rare. What most people do is “transfer” or “convert.” You’re using the word rollover when you mean to use the word convert/conversion.
To answer your question, at least the one I think you’ve asked, you can just convert all $11K at once. The conversion will show up on your 2015 8606 along with the 2015 contribution. The 2014 contribution will be on the 2014 8606.
Appreciate the correction. This is like a whole new language for me…with a steep learning curve!
I did a backdoor Roth IRA conversion through Vanguard 2 years ago, but even though I converted the next day, there was still a small amount of money left over that has continued to grow in the traditional IRA, so now I have both. If I want to do another roth conversion this year, do I have to take that small amount of the traditional IRA and roll it into a 401K before I do another $5500 contribution/conversion? And if I do another Roth conversion is it done to the same account or do I open a separate account each year I do it?
Why is there a small amount of money left over? When you do it this year just convert the whole thing. I use the same accounts every year at Vanguard and never leave a dime behind. Not sure why you did.
I think it’s because I picked a REIT fund for both the traditional and Roth IRA’s and I guess it went up in value in one day…I will change it to the money market fund. So when I do this year’s conversion, can I make it into my previous Roth IRA or do I open a new one with each yearly conversion?
I use the same traditional IRA and Roth IRA every year. I also put it in the money market fund for the day it sits in the traditional IRA, so no gains or losses. But even if you used a REIT fund, you can still convert 100% of the amount in the traditional IRA.
I know this reply is over a year old, but what would you recommend to do if there is money left over due to growth or weeks/months between contribution to the IRA and conversion? Would that money be taxed in the traditional IRA? It hasn’t happened to me, but if it were to happen I’d like to have a plan B.
Roll it in to the Roth and pay the taxes on the gains. I leave mine in a MMF for a day before converting to avoid that issue.
Thanks, wouldn’t that go over the 5500 allotted in the Roth for the year?
Thanks, wouldn’t that put me over the $5500 Roth limit?
Thanks, wouldn’t that put it at more than 5500 for the Roth for the year?
OK, I screwed up. In my haste, I assumed that TurboTax had filed out the 8606 correctly for backdoor Roth conversion; but alas, after reading your post on the matter it seems that I did not. I have already filed my taxes and received a return.
What is my best course of action? I realize this would be a better question for a CPA, but since I did my own taxes, I don’t have one!
For the record, I did fill out a 1040X on TurboTax and the error is neutral from a tax perspective (ie, I get no more refund but I owe nothing additional). But since form 8606 does not clearly show that the non-deductible traditional IRA was converted to a Roth I am concerned about its future.
I guess really I have 2 questions: (1) is there any harm in just sending in the 1040X and amending the return? Will this increase my audit risk? Is it even necessary? (2)Fundamentally, is a retirement account a “roth” or “traditional” based on what the investment firm calls it? Or is it based on how it’s reflected in my tax documents?
I wouldn’t expect it to increase audit risk. The retirement account documents, both from the IRA provider and from you, should match.
I converted $11,000 in early 2014 to Roth(for 2013 and 2014) . Had no IRA’s at the time. Later in year rolled over $47,000 from old 401K. This was done after Roth conversion but in same year. Since 8606 asks for 12/31/14 value of IRA’s the rollover values are included, making most of Roth IRA conversion taxable. Is this correct? Since at time of conversion, no other IRA;s were held, assumption was that none of it would be taxable.
Yes. You messed that up. If you wish to convert the rest of the $47K, it could still work out okay though. It’s not about the date of the conversion, it’s about what’s in an IRA on December 31st. Sorry! Should have waited until January 1st to do the rollover, but you’d still face the same issue for the 2015 Backdoor Roth.
I wanted to ensure that none of my random accounts were going to be counted as part of step 1) you listed above—” Get rid of any SEP-IRA, SIMPLE IRA, traditional IRA, or rollover IRA money”
random accounts:
1) 403b from my prior employer (no contributions since June 2014)
2) PSP from my wife’s prior nonprofit employer (no contribuitons since 2006)
3) new HSA for me 2014
thanks
No, none of those count. It’s only YOUR accounts, not your wive’s, and neither 403(b)s, PSPs, or HSAs count. Just SEP, SIMPLE, and traditional IRA.
Both my wife and I have trad IRA money. I can roll my back to former employer 403B (tiaa-cref) but my wife currently has no income. Is her only option to convert her IRA money to Roth and pay the taxes to be eligible for future back door contributions? Can I contribute for her each year even if she has no income?
thanks
Yes and yes.
Another question after we are going through the 8606 form. I found out my wife has about $8000 in an old work IRA. I have $300 from way back when. We want to contribute the max to each for 2014 and then roll them both over to Roth IRAs. Then we will have $0 in our IRAs for 2015 and can do it again later this year. Can we do that? Is there a problem with my wife’s or my IRA tax-wise or penalty-wise if we do what I described? Should we just convert her IRA and not contribute for 2014? It’s all very confusing especially because we didn’t do it all in 2014. Thank you in advance.
Yes, you can do that. As long as you have no traditional, SIMPLE, or SEP IRA money on December 31st, it all works fine. Your 2014 8606 and 2015 8606 will be a little complicated, but it’s no big deal.
I’d make your 2014 contributions, make your 2015 contributions, then convert everything.
Thank you.
I’m confused when you say as long as there’s no money in the IRA on 12/31. But as of 12/31/2014 my wife had $8000 and I had $300 in our respective IRAs.
We are also confused on the 8606 when it asks about the net rollover for 2014 or where it asks about values for 2014 but does not specifically say to include contributions made up to 4/15/2015. Do we include the contribution we are making now for 2014?
Thank you again.
There will be a post out soon that deals with how to do your 8606 when you make your contributions in Jan-April of the next year. Let me know if you’re still confused after seeing it.
12/31/2015, not 2014. There is a line on the 8606 where you include contributions made for the previous year in Jan-Apr of the current year.
Now you see why I recommend people do the contribution and conversion all in the current tax year! Nearly every question I get on this post these days involves someone who did their contributions in the next year for the previous year. There is a post coming up on that subject shortly which will hopefully clarify things.
Hi,
I’ve been reading through some of the comments and I’m sure this may have been addressed somewhere, but I have several questions regarding filing a tax return with the backdoor roth IRA. My husband and I are both residents, but file separately due to student loan payments and therefore make too much money to directly contribute to a Roth IRA. Last year I contributed $3000 to a roth before I knew that I could not contribute based on income, so then I converted it to a traditional and added $1000 to the traditional for a total contribution of $4000, which I later converted back to the roth. I’m afraid this may have messed up my taxes because i have two lines on my 1099-R (one with 3,000 for the Roth and the other with 4,000 for the traditional).
My other situation is that last year is the first year we contributed. So we put $4,000 each into traditional IRA and then converted them. We did not take the tax deduction on our contribution to the traditional IRA. We made this contribution in 2014, before April 15th, for the 2013 tax season. I did not fill out an 8606 last year, should I have? And should we have taken the traditional IRA tax deduction? When I go to fill out the 8606 this year it is not the same as your example because our contribution was between Jan 1-April 15th, which when you subtract line 4 from line 3 it makes the total on line 5 $0, where yours is $5500.
I’d really appreciate some help as I don’t want to end up paying taxes on our roth contribution twice.
Thank you.
Take a deep breath. This is all going to work out fine. We’re talking about 3 separate tax years and tax returns though, and it’s not clear to me exactly what you’ve done. If you’re not sure either, it may be worth hiring a tax professional to help you sort it out. You’re also not being very careful with your terms, which complicates matters as these terms have specific meanings.
As I understand your situation, you made a 2013 Roth IRA contribution in Jan-Apr of 2014 of $3000. You then recharacterized that to a traditional IRA. You then contributed another $1000 to a traditional IRA. At some point later in the year, you did a Roth conversion of $4000.
I am not certain if you are able to deduct your traditional IRA contribution as I don’t have enough information. I am also not clear why you have a 2014 1099R for a contribution that should be documented on your 2013 taxes. Perhaps it is showing the recharacterization?
The bottom line is that you just want to make sure you’re not paying taxes twice. So when you do your 8606, make sure there is no tax bill unless it is for money you have previously taken a tax deduction.
I went back and looked through our 8606 for this year and last year. Last year’s 8606 was as following:
1 – 4000
3- 4000
14- 4000
All other lines were $0.
We converted the $4k to a roth IRA in 2014, and then contributed another $5500 to traditional so will put that on this years return, but it is reporting the $4k conversion as taxable income. Lines are as following:
1- 5500
2 – 0
3 – 5500
4- 5500
5 – 0
6 – 0
7 – 0
8 – 4000
9 – 4000
10 – 0
11 – 0
12- 0
13 -0
14 – 5500
15 – 0
Part II
16 – 4000
17 – 0
18 – 4000 (saying this is taxable)
Any idea where we went wrong?
Thank you again for your help!
Why is line 17 zero? Shouldn’t it be $4000?
I’m assuming because line 11 is 0, due to the fact that line 5 (0) divided by line 9 (4000) is 0. I’m not sure how to make that not be 0, due to the fact we have contributed in 2015 for 2014.
Megan-
I should start a business- 8606s R Us.
Okay, let’s start at the beginning and we’ll try to go step by step.
2013
Line 1: Did you do the recharacterization prior to filing your 2013 taxes? If so, I’d put $4000 down here. If not, then I’d only put $1000 there and disregard anything below.
Line 2: Should be $0 prior to the 2013 tax year, right?
Line 3: Should be $4000.
4-13 skipped
14: 4000
15: 0
Part 2 not filled out
Part 3 not filled out
I agree you did the 2013 form right.
Okay, now for 2014.
Line 1: 5500
Line 2: 4000 (why is yours zero? I think this is your error.)
Line 3: $9500
Line 4: $5500 (Right?)
Line 5: $4000
Line 6: $4000 if you did your conversion in 2015, $0 if you did it in 2014.
Line 7: 0
Line 8: Did you convert your 2013 contribution in 2014 or 2015? If 2014, $4000. If 2015, $0.
Line 9: $4000 either way.
Line 10: 1
Line 11: $4000 or $0
Line 12: $0
Line 13: $4000 or $0
Line 14: $5500 or $9500
Line 15: $0
Line 16: $4000
Line 17: $4000 or $0
Line 18: $4000 or $0, hopefully $0, but I don’t have enough info to say.
Does that help?
Yes, you really should start a business, you have by far been more helpful than two of the tax consultants I talked to. I guess my only question regarding the example above is if my basis (line 2) would be considered $4000, since I had converted it to the roth IRA prior to December 31, 2014. So at the end of the year this year there was $0 sitting in my traditional IRA.
Thank you again, you have been immensely helpful!
This is the difficulty in helping you. I don’t have all the details, they’re coming out one thing at a time. You see how the exact timing of each step matters and why it is SOOOOOOOO much easier to just do the contribution and conversion all in the same year. Let’s start over and see if we can figure out the exact timing of everything.
1) When did you contribute $3K to a Roth IRA and for what year?
2) When did you contribute $1K to a traditional IRA and for what year?
3) When did you recharacterize the $3K to a traditional IRA and what was it worth at the time?
4) When did you convert the $4K to a Roth IRA and what was it worth?
5) When did you contribute the $5500 to a traditional IRA and for what year?
6) When did you convert the $5500 to a Roth IRA and what was it worth?
1. Contributed $3000 to Roth on 3/17/14, for the 2013 tax season.
2. Recharacterized the $3000 to a Traditional IRA on 3/17/14.
3. Contributed an additional $1000 to the Traditional IRA on 3/21/14 for the 2013 tax season.
4. Converted the total $4000 to Roth IRA on 5/15/14; it was worth $4000.06 at that time.
5. Contributed $5500 to the Traditional IRA on 2/9/15, for the 2014 tax season.
6. Converted the $5500 to Roth on 2/23, it was worth $5500.02.
On my taxes for 2013 I documented it as $4000 contribution to a traditional IRA. I didn’t include the roth recharacterization.
Was that $4000 contribution deductible or non-deductible or partially deductible?
We did not deduct the $4000.
Then it should be basis. I’ll try to take another look at this tomorrow.
Okay, sorry it has taken me a while to get back to this. I haven’t forgotten you. I hope you saw the recent post on the subject and hope that helped. Perhaps you’ve also gotten help elsewhere in the meantime. At any rate, let’s try this again.
2013 8606
1) 4000
2) 0
3) 4000
Skip 4-13
14) 4000
Skip 15
Skip parts II and III. Easy peasy.
2014 8606
1) 5500
2) 4000
3) 9500
4) 5500
5) 4000
6) 0
7) 0
8) 4000
9) 4000
10) 1
11) 4000
12) 0
13) 4000
14) 5500
15) 0
16) 4000
17) 4000
18) 0
Skip part III.
The recent guest post should help with your 2015 8606. Please do your 2015 contribution and conversion in 2015 to make it easy on yourself!
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
we established IRA accounts at Vanguard a few months ago (Traditional and Roth IRA for me and my wife). Made the 2014 contributions last year and rolled that over to the Roth IRAs right away. I was doing the TurboTax forms earlier today per the tutorial you posted and it turns out that the $11,000 are fully deductible (despite being way above the income limit), per Turbotax due to the fact that we don’t have retirement accounts at work. I only have the IRAs and a solo-401K at Fidelity. No employer-sponsored 401k. I checked the IRS web site and it seems to confirm this.
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-if-You-are-NOT-Covered-by-a-Retirement-Plan-at-Work
Turbotax still gives me the option of making the deductions non-deductible. but our tax bracket this year is pretty high (I got about 45% of the $11k back per the turbotax calculator 35% federal and 10% in state taxes). so it makes more sense to take the deduction now. unfortunately this amount has been converted already to the Roth IRAs! I did the same already for 2015. does this mean I should just keep the money in the traditional IRA starting next year to keep the deduction. I’m assuming it’s too late to take the deduction for the 2014 & 2015 contributions since they are already in the Roth accounts now?
Can you please comment on this? what should be my course of action here. I might have just cost myself about $10k in taxes by making this silly mistake.
You can still recharacterize those contributions and refile the taxes if you like. More important in the long term (as opposed to the traditional vs Roth issue on $11K)is the fact that you don’t have any other retirement accounts. Why not? If you’re self-employed, go get an individual 401(k). If you’re not self-employed, look into your employer’s plans. If they don’t offer anything, consider lobbying them to add something, making you an independent contractor or changing jobs.
Thanks for the reply. I do actually have a solo-401K as an independent contractor which I maxed out for 2014, will max it out this year as well. I also have an HSA account, maxed out. I am employed but also make additional income as an independent contractor. I picked the solo-401k over my employer’s 401k because I didn’t like their offerings, they also don’t match so I can put significantly more in the solo-401k.
Would you please elaborate more on how to recharacterize the IRA contributions. I have my IRA accounts at Vanguard. The Roth IRAs have grown since the conversion to about $11,400 each (2014 and 2015 contributions). I also haven’t filed my taxes yet so there seems to be time to do this then file my taxes?
so it does make sense to keep the deduction for this year vs. pay the taxes now? it makes sense to me given my high tax bracket but wanted to know your opinion. also is it true that not having an employer-sponsered 401k makes all traditional IRA contributions deductible, regardless of income? I just want to make sure I understood this part correctly from Turbotax/IRS web sites.
If you have a solo 401(k) (it’s an employer provided retirement account- you’re the employer) you can’t deduct a traditional IRA contribution. Just take the backdoor Roth IRA and count your blessings. You should seriously consider using both 401(k)s though as written here:
https://www.whitecoatinvestor.com/multiple-401k-rules/
oh ok. now I got it. I didn’t realize that my sol-401k is technically considered employer-sponsored.
Regarding the issue of having 2 401k accounts, I did read your post a few months ago. it seems that having the employer’s 401k as well will allow me to contribute another $3600 to the solo-401k ($18000 x 20%) since I will be making that $18000 contribution in the employer’s plan and subsequently it won’t count towards my “business expenses” in the solo-401k math. any other advantages to having both? the only reason I’m still reluctant is the lower quality investment options and higher fees.
The main benefit of your employer’s 401(k) would be if using it allows you to 1) get a match and 2) have higher total 401(k) contributions. If you can max out an individual 401(k) solely off of “employer” contributions, then you can put the employee contribution plus any match into the other 401(k).
The employer doesn’t offer a match at this point. They said my be in the future but not for now.
I reviewed their 401K offerings again. There only a couple funds I would consider;
– Vanguard target retirement, expense ratio 0.43
– Vanguard REIT index, expense ratio 0.35
As you can see their expense ratios are high. the other options are even more expensive (some above 1.0!), and it’s a mix of funds by Morgan Stanley, PIMCO, Goldman Sachs, SSgA, etc.
But I guess it might still make sense to use the employer’s 401k for my $18k employee contribution, split it between the Vanguard’s REIT and target retirement funds, as it allows me to contribute more in the solo-401k (about $3600 per year) which would offset the higher expenses. makes sense?
Obviously, when the 401(k) is less than ideal, use the individual 401(k) as much as possible. The employer 401(k) seems like an okay place for your REIT allocation!
Your priorities ought to be:
1) Maximize total contributions
2) When there is a choice, prefer the individual 401(k) over the employer 401(k).
I need to do a backdoor Roth this year via Vanguard where I have a Roth IRA account. However, I have an old traditional IRA with Ameritrade – opened in 2004 for about $ 2004 that is now only worth about $100. I inquired before about rolling it over to Vanguard and Ameritrade said they would charge me $ 75 to do that so not worth it. Instead, I will be 59 1/2 on April 3, 2015 and can then cash out the Ameritrade IRA. My plan is to do that and AFTERWARDS open the new traditional IRA with Vanguard and roll it over the next day into my Roth. Is there any IRS rule that I would violate by following that plan? Is it a problem that the Ameritrade IRA still existed had about $ 100 in it as of Dec. 31, 2014? Will I need to file two 8606 forms for 2015 – one for the Ameritrade and one for the Vanguard? Since the forms do not show the dates of the IRAS, it won’t show that I closed the Ameritrade IRA on April 4, 2015 and thus had no active traditional IRA on the day I open the Vanguard traditional IRA. Will this create IRS problems for me and, if so, how do I avoid that? fyi -even though I will show some income in 2015 from the Ameritrade IRA, I will actually realize a loss since the value dropped over the years. Please let me know my best options if the plan I described above is not allowed by the IRS — and what the IRS consequences would be if I impermissably follow this plan. Thanks!
I hope you mean $200 not $2004. Still pretty crappy for an 11 year investment. Your 8606 will be interesting because you will have to reflect that $100. 8606 is not about the dates you do stuff….it’s about what you have on December 31. It’s all allowed. It’s just messy.
After reading your article I had questions about my Roth IRA conversion in 2012/13. Could you please help me with my situation? In 2012 I had a SEP IRA(my only IRA) account and in Feb 2013 I rolled it over to a solo401K. After that in March 2013 I contributed $5000 as non-deductible IRA, for Year 2012. Then converted this to Roth IRA before April 2013. Would this be okay since before I made the non-deductible IRA contribution the SEP IRA was already rolled over to 401K(even if it was after Dec 31, 2012)? I’d truly appreciate your advice.
Should be fine. On Dec 31 2012 you had a non-deductible IRA and a SEP IRA. On Dec 31 2013 you had a Roth IRA and a solo 401(k). Your 8606s just needed to reflect that. What’s your question?
Thank you so much for your quick reply! The situation is that I converted the 2012 $5000 non-deductible IRA to Roth without doing the “pro-rata” calculation. The reason was that I rolled over the SEP IRA to solo401K first in Feb 2013. Then (in March 2013) contributed non-deductible IRA for 2012. The order of the events were:
2012: had SEP IRA
2013 Feb: Rolled SEP IRA to solo401K
2013 Mar: Contributed non-deductible IRA $5000 for Year 2012 (at this time I didn’t have any other IRAs)
So in this case should I go through the “pro-rata” calculation for the $5000 conversion to Roth? If so, should I amend the 8606 form to correct this? Again I appreciate your advice.
The pro-rata calculation isn’t done if you didn’t do a conversion. No conversion in 2012, so no calculation. At the end of 2013, you had nothing in traditional or SEP-IRAs. So again, no pro-rata calculation.
Thank you very much for your explanation, which is truly insightful. Since I did 2012 and 2013 contribution and conversion in 2013, in my 8606 form I have the amount converted to Roth IRA(#8) and the Nontaxable portion of amount I converted to Roth IRA(#11) as $10500 for both. Due to the special situation for this year(contributed to the previous year as well) the amount was different than the forms I had in other years but I think this should be okay. Thank you again for your time. I do appreciate it.
You said that 401K’s don’t fall under the pro rata rule. What if you retire from your employer and take a full distribution from your 401K in December of Year 1, but don’t convert to a Traditional IRA until January of Year 2? Can you set up the back door Roth before the end of Year 1 without running afoul of the back door rule? In other words, is an “outstanding rollover” of a 401K distribution also exempt from the rule?
Wow! You guys come up with so many situations I’ve never thought of before. I think you’re okay because the money wasn’t in a traditional IRA on December 31. That’s what the form asks for.
Thanks! That’s how I interpreted it as well. Good to have a second opinion.
Still a bit confused here.
My wife has a 401k, but I still have a traditional IRA and 401k. I won’t be able to roll over my traditional IRA into my 401k for a couple more months.
Should I still put $5500 into an traditional IRA and then convert it to a roth? I’ve already maxed out my other tax deferred accounts. I think I understand that that the $5500 will be subject to taxes, but at least it will grow tax free. (35% tax bracket)
A couple of months? No big deal. As long as you can get the tax-deferred money out of there by year end I’d do a 2014 and a 2015 contribution anticipating a backdoor Roth.
Financial novice. First time poster. Thank you for an amazing site & blog.
Background:
-Me: New employed doc, 3 accounts: current 401K for new job, 414h from training that I haven’t yelled rolled over or converted
-Wife: Unemployed, several accounts (mostly small from previous jobs) including: 2 rollover tIRA’s and 1 rollover rIRA (all with no contributions since r/o), a 403b not r/o’d yet, 1 each of independently started tIRA and rIRA with no recent contributions
Questions
-Are our abilities to do a backdoor Roth considered separately? I believe this was covered above, but just wanted to confirm. In other words, if I roll my 414h into my current 401K (if possible, they’re looking into it as this is an unusual plan type), can I make backdoor Roth contributions/conversions regardless of what we do with my wife’s accounts without pro-rate implications? What do you think I should do with this account if I am unable to roll this 414h into my current 401K?
-What do you see as my options with my wife’s many accounts regarding backdoor Roth options or in general?
Thank you very much.
I learned something new today- a 414h. More details here: http://retire.ameritas.com/Plans/039284 but it sounds like a 401(a).
Yes, they’re considered separately. So yes, you can do conversions separately.
If you can’t roll the 414(h) directly into your 401(k) you can put it in an IRA and then roll it into a 401(k). Surely they accept those direct transfers, no?
Two options- transfer the money into her 403(b0 or, especially if they’re all pretty small, just convert them all.
I think I screwed up.
I came across your wonderful site, and ended up buying your book. But I think I screwed up the backdoor Roth.
Last year in 2014, I started the backdoor Roth, one for 2013, and another for 2014. I put in $11,000 in traditional IRA, and rolled it over to Roth, before April 15th.
The problem was that there was this 0.02$ in the traditional IRA that was interest earned in the money market for those few days it was stitting in the Traditional IRA.
Screw ups:
1. Being the novice that I am, the two cents stayed in the traditional IRA account all year and beginning this year…
2. I didn’t do the 8086 form yet for last year tax return (2013 tax return filed in 2014). Can I do it for 2013, 2014, and 2015 for this tax season? Which year do I need to file? I’m so confused about this..
3. I think I did direct $5,500 deposit to my Roth instead of to traditional IRA then roll. I’m hopeless. Now what should I do you think?
Thank you for any advice. I’m not sure if I’ve lost on any benefit of backdoor Roth by above screw-ups.
OK, so I just fixed the 3rd screw up. I just re-characterized the 2015 Roth to traditional IRA. Once that posts in a couple of days, I’ll do the proper conversion. I just have to report that characterization for next year taxes (2015).
But I still have to deal with issue 1 and 2.
Wait more than a couple of days. I’d have to go reread the rules, but I think you have to wait 30-60 days before reconverting.
1. No big deal. Just round down. Who puts cents on their tax return?
2. What’s an 8086? You mean an 8606? Sounds like you need to do a 1040X and include an 8606 in it for 2013. You don’t do 2015 taxes until next year and you still have time to fix 2014.
3. You need to do a recharacterization STAT. Then wait a couple of months and reconvert.
Did you read the recent thread on Bogleheads on form 8606? Looks like a lot of the tax software programs are using an IRA Distribution worksheet (590-B). As a result, lines 6-12 are blank on the 8606 form. That’s how mine turned out doing a clean backdoor roth conversion for 2014.
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=162853&newpost=2446586
I don’t think it matters in the end, but worth noting.
Thank you for the link. I have to re-read it again to understand it. I’ll also ask my tax guy.
Am I too late to do the 8086 for 2013 contribution? Since I started backdoor Roth last year, I was told I can do 2013 and 2014. But I didn’t do any 8086 last year for 2013. The tax person at the time said I didn’t need too…
Regardless, I appreciate any advice
Sounds like you need a new tax guy to me. You also probably should do a 1040X and include a 2013 8606.
True!! I’m going with a different tax guy this year.
Thank you re 1040X and 2013 8606, will do.
Will having those few cents in my tradition IRA mess us with having the backdoor Roth? I was under the impression that I should have a zero balance on traditional IRA…
Best regards.
You should have a zero balance. 2 cents is the same as a zero balance since you report it as $0.
Fantastic! Thanks again
Great website. Love your book.
I did the backdoor roth for 2014, putting in the money and converting it in 2014. I followed the form 8606 that you filled out.
Now my husband on the other hand, did not put the money into his IRA and converted it to a roth until Jan 2015 for the 2014 year. So on his 8606 form, I filled out line 1 as $5,500, but since no conversion was done in 2014 year, I did not fill out the rest of the forms.
We plan on doing backdoor roth again for 2015.
I am confused about how his 8606 form will look like this year (2015) if you can walk me through that. As it will look like he put in $11,000 and converted $11,000 in same year. Or do we need to fill out 2 8086 forms (one for 2014 again and a new one for 2015).
Thanks!
Van
Funny you should ask….
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
U are amazing! Thank you! I have searched everywhere and have not found my answer until now. Thanks!!
Good Evening!
This year my wife and I will exceed the thresholds for Roth IRA contributions (first time ever hitting this). My question is in regards to having funds in a SEP IRA.
I have roughly $2,100 in a SEP IRA at E*Trade. Am I understanding correctly that in order to do the Backdoor Roth IRA, I would need to clear these funds out? If so, what is the best way to do it?
It should be noted that I originally contributed $1,346 to this account in 2011. The balance today has increased due to gains and dividends.
I also do not plan on contributing to my SEP this year or in the future.
If it’s only $2100 just convert it all to a Roth. Unless you are planning to open an individual 401(k) anyway or want to roll it into your employer’s 401(k)
Awesome. Do you know how to convert a SEP IRA to a ROTH IRA at E*Trade and bring it over to Vanguard? My SEP IRA is at E*Trade right now. I have already moved my Roth IRA from E*Trade to Vanguard (account is still open at E*trade and any dividend payments that are received are being funneled to Vangaurd). I would like to have the SEP funds at E*Trade come over to my Roth at Vanguard – just unsure of how to do that.
First open a Roth IRA at Etrade. Then transfer the assets in the SEP-IRA into the Roth IRA. Don’t have them withhold anything. Fill out a Vanguard form there for the transfer. Then Vanguard will take care of it. I don’t think it would be very easy to go directly from a SEP at one company to a Roth IRA at another.
Does it matter if you do the conversion multiple times until you reach $5,500? I have about $4,500 in there right now and was going to convert it to a ROTH but wasn’t sure if doing this more than once a year (not exceeding $5,500 but bringing it to the total of $5,500) would impact anything.
No, you can do it multiple times a year.
I have been contemplating this move for awhile now, but am just not 100% sure how to do it. Currently I have a traditional IRA at Vanguard worth about $14K and a Roth IRA there as well. My wife also has a traditional IRA at Vanguard worth about $16.5K. If I am reading this correctly, I should rollover the entire sum of both my and my wife’s traditional IRA accounts to a personal Fidelity 401k for example. At this point we would both have the traditional IRAs at Vanguard with a $0 balance. On Jan 2nd of each subsequent year, I could transfer $5500 from each of our Fidelity 401k accounts to the traditional IRAs at Vangaurd. The following day these funds could then be transferred into the Roth IRAs (I’d have to set one up for my wife) via the backdoor. If this scenario is correct, then it would take 4 calendar years, but I could convert all the traditional IRA money into our Roth accounts?
The other question I have is what to put the money into while in the personal 401k at Fidelity? Thanks for the help.
I don’t think you’re quite getting it.
I assume both of your traditional IRAs are tax-deferred, i.e. no non-deductible money in there. So in order to do backdoor Roth IRAs, you need to get rid of that. You can either transfer/roll it into your employer 401(k)s, transfer/roll it into your self-employed/solo/individual 401(k)s, or convert it all to a Roth IRA (tax hit of $8K or so total.) Then you can still do a 2015 backdoor Roth IRA for each of you.
As far as what to invest your money into, what does your written investing plan say? Don’t have one? Work on that too or hire someone to assist you in doing it.
Thanks for the response. I think I may have been unclear originally because my interpretation of your suggestion is essentially what I was trying to say.
The answer to your question is “yes.” There is no non-deductible money in the traditional IRAs.
What I was poorly attempting to clarify is that I should rollover my traditional IRA into and individual 401k at Fidelity (leaving me with a traditional IRA at Vanguard with a $0 balance). I should do the same for my wife using a new account at Fidelity for her (giving her the same situation). At that point, then could I not just roll $5500 each year into the preexisting Roth IRAs at Vanguard?
Maybe that is where I am confused. Can you only fund a backdoor Roth IRA from new money, e.g. do I have to contribute money to the 401k in 2015 to complete the backdoor conversion in the same tax year? As a resident with two young kids whose wife stays home, I don’t have enough wiggle room in my paycheck to actively contribute to retirement at this point. Can I take advantage of backdoor Roth IRA conversion without adding any new money to retirement accounts?
Yes, you WANT to do a backdoor Roth with new money. $5500 a year. That’s the whole point- get more money into retirement accounts without any tax cost.
If you’re a resident, and want to put money in a Roth IRA, why go through the backdoor? Just contribute directly.
If you want to do a Roth conversion with pre-tax/tax-deferred money, that’s not a backdoor Roth, and it has a tax cost to it.
A backdoor Roth is a way for an attending to still be able to put money into a Roth IRA each year. If that’s not your goal, then the backdoor Roth probably isn’t for you.
I think I understand that. I won’t be contributing a penny to retirement over the next four years (although I realize I could directly fund a Roth IRA due to my low tax bracket).
Can I take existing money that is already in a traditional IRA, move that to a personal 401k, and then move it to a Roth IRA (via the backdoor) without contributing any new money? I am essentially asking can I use the backdoor Roth contribution to move exiting traditional IRA money to a Roth IRA and let it grow there tax free rather than keeping it where it is and it will taxable to me on my withdrawal?
Yes, given your low income, this is a great time in your life to do Roth conversions of your existing tax-deferred assets. However, you still have to have the money to pay the tax bill. You may be better off using that money to just do Roth IRA contributions. I’d have to run the numbers to know for sure which is better.
There is no reason I can think of to move money from a traditional IRA to an individual 401(k) to a Roth IRA. Why not just move it from a traditional IRA to a Roth IRA? Putting it in a 401(k) doesn’t magically make the taxes due go away. You have to pay taxes when you move tax-deferred money of any type into a Roth IRA.
As of today, May 4, 2015, I have a traditional IRA worth 5K. I am in the process of rolling it into my employer’s 401K and expect that to be done by say May 30, 2015.
So, as of June 1, 2015 my total traditional IRA will be zero.
Now, my question – if I make a non-deductible max contribution to the traditional IRA on say June 5, 2015 for tax year 2015 – am I ok to then convert it via backdoor Roth IRA conversion (with zero tax) for tax year 2015 or do I need to wait until next year to do backdoor conversion for tax year 2016.
Thanks in advance for your help.
You can do it in 2015.
In the above schedule, can I do the non-deductible contribution & backdoor roth IRA conversion first e.g. in May 2015, followed by the traditional IRA to 401K rollover e.g. in November 2015 and still be ok for tax year 2015?
Is the deadline for rolling over traditional IRA to 401K December 31, 2015 for tax year 2015?
Thanks.
Yes, as long as you use two different IRAs. Yes, the deadline for moving that money is December 31.
Here is the scenario:
I have a Traditional IRA at Vanguard – lets call it VG-Trad-IRA-OLD. I’m going to rollover this into an employer 401K elsewhere – as of May 2015, the balance of VG-Trad-IRA-OLD is zero.
Now, I’ve opened a NEW Traditional IRA at Vanguard for the sole purpose of doing to Backdoor Roth conversion – lets call it VG-Trad-IRA-NEW. I contributed $5500 for tax year 2015 in June 2015 to it.
I already have an existing ROTH IRA at Vanguard -say VG-ROTH-IRA-OLD – which has regular Roth IRA contributions from many years back.
Assuming this is my 1st backdoor Roth IRA conversion ever, when I do the backdoor conversion from VG-Trad-IRA-NEW, should I convert it to the existing VG-ROTH-IRA-OLD or do I need to create a new Roth IRA i.e. VG-ROTH-IRA-NEW? If I can convert to either new or old Roth IRA, what would you recommend?
Am I doing this correctly or am I missing anything?
Thanks,
PVD
VG-ROTH-IRA-OLD
No need for a new one.
I am 46, finished residency in 2003 and I have been reading your advice for the past few months. I finally did the back door Roth IRA about three months ago. Now that I have done it, I seem to be reading – in one of your recent email newsletters, and elsewhere- that the backdoor is only/mostly beneficial early on in your career or near retirement. I think I am at my peak earning potential currently, being a family physician who became a hospitalist just over a year ago, doing extra hospitalist shifts and moonlighting in the emergency room of a small hospital. I don’t plan to work this hard for more than another five years.My question is : Should I have bothered doing the backdoor Roth, should I keep doing it or should I
recharacterize/?undo it (I think I said that right). Thanks and I love your website
I think you’re confusing the backdoor Roth (i.e. making Roth IRA contributions without any additional tax cost you wouldn’t already have to pay) and doing Roth conversions of tax-deferred money. They are different. No reason not to do backdoor Roth IRAs throughout your career. But do Roth conversions during low-income years.
Got it. Thanks
I have been contributing to a nondeductable IRA for many years and am contemplating doing the backdoor Roth going forward. I don’t want to do a direct conversion because of the large tax hit so my accountant said I should roll over only the appreciated amount into my employer 401k and then I can move the basis amount of the nondeductable IRA into the Roth with little no tax hit. Is this a good strategy or even allowed?
i am getting in way over my head with this IRA stuff and i made a rather stupid mistake before discovering this website. i opened a backdoor roth IRA just two weeks ago, not fully aware of the tax rules. so around the same time 2 weeks ago, i rolled over pre-tax $ (quite a bit) from a fidelity 403B and 457B into a vanguard rollover IRA. i just realized my error with the pro-rata tax rules, so i am in the process of rolling this vanguard rollover IRA $ into my employer plan fidelity 401K. this $ will have sat in the rollover IRA for no more than 4 weeks. am i still going to be subject to the pro-rata tax rule? am i doing the right thing by moving it into the 401k now?
No and yes. You’ll be fine. You just have to have the sum total of all your traditional IRAs, SEP-IRAs, and SIMPLE IRAs be $0 on December 31st.
I Recently opened up a SEP-IRA at vanguard since I’m working as an independent contractor. Should I transfer that into an individual 401k and then open up a separate traditional IRA and fund it with 5500 and then transfer that into a roth IRA? Will I be able to make an additional SEP- IRA next year as well?
Yes, you should do that.
You don’t want to make contributions to a SEP-IRA and an individual 401(k) in the same year.
Hi,
I put in 19K into a SEP IRA for 2014 at Vanguard and have a Roth at Fidelity. I am currently working as an independent contractor but will soon be working part time without benefits. Which account should I rollover my SEP IRA into?
Why not open an individual 401(k) and transfer the SEP-IRA money in there?
Here is the scenario:
I have a Traditional IRA at Vanguard – lets call it VG-Trad-IRA-OLD. I’ve rolled over this into an employer 401K elsewhere – as of May 2015, the balance of VG-Trad-IRA-OLD is zero.
Now, I opened a NEW Traditional IRA at Vanguard for the sole purpose of doing to Backdoor Roth conversion – lets call it VG-Trad-IRA-NEW. I contributed $5500 for tax year 2015 in June 2015 to it.
I already have an existing ROTH IRA at Vanguard -say VG-ROTH-IRA-OLD – which has regular Roth IRA contributions from many years back.
Assuming this is my 1st backdoor Roth IRA conversion ever, when I do the backdoor conversion from VG-Trad-IRA-NEW, should I convert it into the existing VG-ROTH-IRA-OLD or do I need to create a new Roth IRA i.e. VG-ROTH-IRA-NEW? If I can convert to either new or old Roth IRA, what would you recommend?
Am I doing this correctly or am I missing anything?
Thanks,
PVD
old.
I recently opened a ROTH IRA on Vanguard and used the funds in my traditional IRA to convert a ROTH. The only issue was that I hastily choose an aggressive fund for my traditional IRA so there was excess ($75) after I transferred $5500 to a ROTH. Any significant tax ramifications at the end of the year because of this?
Move that $75 to the Roth too. You’ll have to pay taxes on it, of course.
Hi WCI,
My husband just finished residency and we start a new attending position in primary care in a few months. He is salaried for 2 years at 160k and then can go higher on income depending on his performance. His income is our only income until I go back to work in 5 years. My question is: Should we open a roth ira for the two of us and max it out for the years we are under $183k? or should we go the backdoor roth way. Thanks. and thanks so much for this great site. It has helped a lot.
You should do Roth IRAs. If you can do that without the backdoor, great. If not, do the backdoor. If you’re not sure, go through the backdoor.
Hi,
I am just finishing residency and going to be an IC. Based on what I read on your blog, I would like to open a Solo 401k.
What are the steps of setting up a backdoor roth in this situation?
1. Max out Solo 401K (53K)
2. Transfer 5,500 + 5,500 (spouse) from savings account into nondeductible IRA (11k)
3. Rollover this IRA to a Roth IRA. (11K)
So I would have 53K in a solo 401K and 11K in a roth IRA.
the 53K I can tax deduct, but the 11K I cannot correct?
Not sure if I understand this correctly. I appreciate your help!
Correct.
Thank you for all of your help! I finally set up my own Backdoor and now I want to for my spouse. Do I need a separate Traditional IRA and a separate Roth IRA for my spouse?
In order to do my backdoor I opened a traditional IRA at Vanguard and the balance is now zero after conversion, I already had a Roth from years prior. So question – different accts or same? I tried to read through all of your comments but couldn’t find this answer. Thank you!!
Yes. IRA stands for INDIVIDUAL Retirement Arrangement. Separate IRAs, separate 8606s.
Hey Jim – love the blog/book. Been very helpful for me. I’m a new ER attending in NYC and trying to get all my finances sorted.
Question on the back-door conversion: I currently have just $1300 in a traditional IRA and based on my income I recognize the difficult situation we are in of 1) not being able to contribute to a Roth because of the income and 2) not being able to deduct contributions to the trad IRA. Conversion seems like a logical option.
I’m just not sure what you mean above…Step 1 says to get rid of the money in my traditional IRA account. But then Step 2 says to make a $5500 contribution. So I should find a way to eliminate that $1300 and then make a separate/new $5500 contribution? I’m confused. Cant I just open a roth IRA at the same company where I have my trad IRA and convert it?
Thanks,
Michael
Yes, you can do that. You can put in the $5500, then convert all $6800.
Ok great. And then once the Roth is open I can directly contribute each year OR do I have to contribute to TRAD IRA each year and convert it over to my now existing Roth?
Yes, you have to do the backdoor each year, sorry!
So just to be clear. Each year I put in $5500 to the same traditional IRA and then covert it over to the same existing Roth?
And I DONT have to pay taxes on the conversion?
That’s correct. But neither do you get the deduction when you make the contribution. No deduction, no tax due on the conversion. Seems fair, no?
Sounds great! Thanks for helping us all out with this…
Something else I thought of: when you contribute to the trad IRA each year, do you just keep the $5500 there and not invested in any fund/stock/etc and then quickly convert it to Roth? The amount I currently have in the trad IRA is already in various ETFs…
Yes, that’s what I do. No that big a deal though if you invested it. Just a little more complicated 8606.
For 2015, should I just contribute the difference to $5500 (and not invest it) and then covert it over?
Seems reasonable.
Can I convert my non-deductible basis in my traditional IRA to a Roth IRA FIRST, and THEN transfer my pre-tax portion to my 401k, so that it’s easier for the employer plan to take everything left inside the 401k? In other words, does the IRS care which order these two steps are taken in?
No, you can’t do that. You have to isolate the basis, then convert it.
I just made my 2015 max contribution, but it in a Vanguard Target Retirement Fund instead of Prime Money Market. I want to do the conversion to my Roth now but there has been a small loss and now the amount I am converting is less than $5,500. What should I do from here and how complicated does this make things for me moving forward?
Take a look at the 8606. Instead of $5500 you’ll put $5450 or whatever on the line that shows how much you converted. No big deal.
Love this site.
I have a 457b Roth plan that I’ve been maxing out each year ($18000 this year). Can I do a backdoor Roth IRA in addition to this, even though the other plan is a ‘Roth’ plan?
Thanks!
Yes. I agree the time frame for rebalancing should be no more frequent than once a year due to that same data Bernstein quotes.
I have SEP-IRA account. The money is contributed by my employer (S-corp). I am W-2 employee of the S-corp.
Can i just open an individual 401k and roll over the money into there? Or does the S-corp have to open the 401k?
Also, my husband has a Roth IRA open already- can he still directly contribute to it?
Yes.
The S Corp would open it.
Probably not. He probably has to do the backdoor Roth too.
Just want to mention that anyone doing taxes as married filing jointly for IBR purposes will only be able to do a backdoor Roth IRA and not a traditional Roth IRA.
You mean married filing separately?
You warned of the “pro-rata calculation” if there are multiple IRA’s open. Does this only apply if one makes a contribution to another IRA in the same year as making a conversion to a Roth IRA?
Context: I am the resident in the family and contribute $5,500/yr to my Roth simply from my income. My husband has a large balance in a traditional IRA that he rolled into from an old employer 401(k) after he quit his big tech job to work at a small start-up with no employer-offered retirement plan. He has been converting from the tIRA to his Roth IRA each year in varying aliquots depending on how much we think we will be able to pay in taxes. He has not, however, been contributing to that tIRA, he is only converting it to Roth but there is still a balance in the tIRA.
Does the pro-rata calculation still apply to us? Is there any benefit to rolling all of that tIRA money to an Individual 401k?
Thank you.
Yes. The pro-rata calculation applies to all of your IRAs. But remember that it is a separate form for you and your spouse. So you can do a backdoor Roth, but he can’t. So the benefit of putting his tIRA money into a 401(k) is to allow for him to do a backdoor Roth IRA.
I am setting up for the backdoor Roth. I opened a new traditional IRA specifically for this purpose and, of course, opened a Roth IRA. I put in the $5500 for 2015 into a money market, and then by end of July, it made a whole $.03. So now I have to do something with that 3 cents so that it doesn’t mess up a clean form 8606 when I do my taxes. The idea is to come out to zero so that I don’t pay any taxes, right?
As I’m going through the process of rolling over my SEP and other IRAs into a Solo 401K (not completed yet, at least for another month because I still can’t decide which custodian would be best for the Solo 401K), that gain of 3 cents will likely increase. I know it’s just 3 cents, but let’s say it will be something like $100, what should I do with the gain on that $5500 that’s going to be converted? Do I roll that 3 cents into the Solo 401K just like all of the other money in the IRAs or do I consider it a distribution and report it on form 8606 and pay taxes on 3 cents plus whatever penalty for being under 59 and half?
I know I probably won’t be paying taxes on 3 cents, but it made me think about the penalty, because I’m not sure I can rollover that 3 cents into the Solo 401K to keep all my IRA balances at zero.
What do you think should be done?
You can round 3 cents down to zero dollars. There are no cents on my tax return. But I avoid this issue by converting the day after doing my IRA contribution and just leave it in a MMF overnight.
Any significant gain is taxed at the time of conversion. If it is rolled into a 401(k), it remains tax-deferred.
If I contribute $5500 to a traditional IRA this year and then convert it to a Roth IRA, can I contribute another $5500 to fill up the traditional IRA again this year? I have absolutely no retirement accounts at this point. I work as an employee, but there is no 401k plan available at my work, and I am not eligible for a Stealth IRA (HSA) because I am a member of MediShare. Therefore, I am trying to find ways to maximize my tax-deferred retirement accounts. Thank you for the great site and all your help.
No, $5500 a year total to all your traditional and Roth IRAs in any combination.
You can do a deductible traditional IRA though, if you find that appealing. But you can’t do it in addition to a Roth IRA.
Hi, thanks for your great site. I’ve learned so much. Currently I do not have a 401(k) but am about to take a job (in 2015) with a 401(k). I have both a traditional IRA and Roth IRA at Vanguard. I haven’t made an IRA contribution in 2015 because I anticipated this job change and wanted the ability to max out the 401(k), roll-over my traditional IRA into the 401(k) (I checked and this is possible), and finally Backdoor a Roth IRA contribution. However, if I do the traditional IRA to 401(k) roll-over on say, November 5, can I make the $5500 contribution to my would-be $0 balance traditional IRA and Backdoor it to a Roth IRA without a pro-rata tax consequence on say, November 6? Or, do I have to keep the balance at $0 until December 31 and wait until after January 1 for the $5500 contribution and Backdoor? Of course, I can then do two contributions (2015 and 2016) at that time. Thanks for your help.
As long as you do the conversion by December 31st, I think it is okay to make your 2015 contribution in 2015. If the rollover is taking forever, just do the 2015 contribution in the first 3.5 months of 2016. What you don’t want is to do the contribution and conversion in 2015 and then due to some screw up end up not getting the rollover done in 2015.
Thank you. If for some reason the rollover takes forever and doesn’t materialize until after January 1, 2016, can I still backdoor the Roth for 2015 without a prorata tax since the balance was not $0 on December 31, 2015? (Assuming in this case I wait until Jan-Apr of 2016 to make 2015’s contribution.)
I would just wait to do the conversion until after the rollover is complete. No biggie doing the contribution prior to year end, you just don’t want to do the conversion if there is going to be an outstanding rollover.
I understand you don’t want to do a conversion with an outstanding rollover. My question is regarding the $0 balance specifically on Dec 31 of the particular tax year in which you are crediting the contribution. My goal is to get $11,000 backdoor to Roth (2015 and 2016) without getting hit with the prorata tax. The issue is that if the rollover doesn’t happen until 2016, regardless of when I contribute the $5500 for 2015, the balance of my t-IRA would not be $0 on Dec 31, 2015. Thus, would I be hit with the prorata on 2015’s contribution?
The key is the balance at the end of the year in which you do the conversion, not the contribution.
Ok, I may be confused. Suppose the following took place:
1) $5500 tIRA contribution made in 11/2015
2) tIRA rollover to 401k didn’t happen until 1/2016
3) $5500 tIRA converted to Roth
Would I get prorata taxed because the balance was not $0 on 12/31/2015 since the tIRA contribution was for 2015 tax year?
Or, I suppose it could go like this:
1) tIRA rollover to 401k didn’t happen until 1/2016
2) $5500 tIRA contribution (for 2015) made in 2/2015
3) $5500 tIRA converted to Roth
Is this any different than first scenario re: prorata tax?
Thanks for your help.
Look at the 8606 to answer your questions. You only get nailed with the prorata if you’re doing a conversion that year.
So even though I have now been doing the backdoor Roth IRA now for 2 years, something has me concerned I am doing this wrong. It is related to a SEP-IRA I opened last year at the suggestion of my accountant (due to some “moonlighting” type of income I had). The SEP-IRA contains a small amount (around $3000). Because of the pro-rata rule, I understand that this SEP-IRA money will have negative tax implications. So do I (1) somehow roll this into my work 401K/Profit Sharing plan (and if yes, is this in addition to $18,000 limit or included in it? or (2) somehow convert this SEP-IRA to a Roth and pay taxes on it? I guess this SEP-IRA has me confused- I don’t anticipate much of this and if its a hassle then I may avoid contributing this in future. Any help will be appreciated….
Yes, roll it into a 401(k) or convert the whole thing. Either is fine. You’ll have a complicated 8606 this year and you’ll probably have to redo your 1040 and 8606 for last year.
Thank you White Coat Investor for your great article. I have recently purchased your book and have been reading it for the past few weeks and have learned a lot!!! I’ve highly recommended it to many of my colleagues.
I am a bit confused about my retirement plans and would like to seek your input on this. This is my last year of residency. I’ve done a lot of moonlighting and my total income is well above the Roth IRA contribution limits; therefore, I’d like to use the backdoor Roth IRA strategy. Last year, I opened a SEP IRA with Vanguard and contributed about $3k to it from my 1099 earned income. This year, I transferred about $14K from a 457(b) Fidelity plan (from a previous employer) to my current Vanguard SEP IRA. I am not sure how to proceed with backdoor Roth IRA transfer in my situation.
1) Do I need to open a solo 401K (probably with Fidelity since Vanguard doesn’t accept transfers?), transfer my whole SEP IRA to the solo 401K, then transfer it to my Roth IRA account (which is with Vanguard)?
2) Or do I just transfer the whole SEP IRA to my Roth IRA?
3) If I open a solo 401K with Vanguard, should I just contribute to the 401K from now on and avoid contributing to the SEP IRA? I am not sure whether there is any advantages/disadvantages to each for someone like me.
If I am not mistaken, somebody at Vanguard told me that there is no limit with “transferring” to a Roth IRA, but there is a $5500 limit for contribution. Is this correct? Or I can only “transfer” $5500 to my Roth IRA account and leave the rest in my solo 401K or elsewhere.
We also did the same type of transfer for my wife from her Fidelity 401k (from previous employer) to a Vanguard “Rollover IRA.” She only receives W2, so I am not sure how she can use the backdoor Roth IRA contribution since she will not be able to open a Solo 401k. Right?
Both my wife and I have 403(b) retirement plans with our current employers and contribute to these accounts as well.
Thank you for taking the time to help us with these questions.
1) The least costly option is to open an individual 401(k), but you must have some self-employment income to do so. If you don’t, converting the entire $17K is a great option too, especially while the market is down. You don’t move the money into the 401(k) AND convert it. You do one or the other to allow the backdoor Roth.
2) That’s a reasonable option as noted.
3) Yes, if you have self-employment income. The advantage of the individual 401(k) is higher contributions if you haven’t used your employee contribution elsewhere, or at the very least, the ability to do a backdoor Roth.
No limit on conversions, but $5500 a year IRA contribution ($6500 if over 50).
You may also be able to roll those SEP-IRAs/rollover IRAs into your 403(b)s. Read the plan document or talk to HR.
WCI,
So I put $5500 (the maximum allowable, and the amount I converted) in Line 15a of Form 1040 right?
Thank you!
What did your 8606 say?
I’m a first year attending anesthesiologist and your book and website have been an incredible resource for me. Here’s my question:
We have a Rollover Traditional IRA in my wife’s name with approx 52K. I have no investments. I’m wondering if the Rollover IRA in my wife’s name will be considered for tax purposes if I fund a backdoor Roth in my own name.
Thanks again.
No. 8606s are individual. When you do a personal and spousal backdoor Roth, you have to do two.
Awesome. Thank you again! Sorry if this is redundant, but just to make sure I’m clear, please tell me if this is correct:
I will have no tax issues creating a backdoor roth for myself. However, if my wife wants to create a backdoor roth for herself, she should roll her 52k IRA balance into her current employer’s 401k (or other avenue) to reduce the tax burden.
Sounds right.
We did the backdoor roth in 2014 and I don’t think my husband filed correctly because our IRA contribution was actually filed as a deduction even though we’re at a high income level (not even sure how that’s possible on Turbo tax).
I want to ensure we do it correctly this year and I”m also pretty sure we’re subject to the prorata rule. I have two traditional IRA accounts that were likely tax deferred totaling approximately $8,800. My husband had an employer 401k plan that he rolled over to a Traditional IRA (total 24,000). I have a self employed individual 401 K plan. My husband does not but since he has a LLC he could set one up.
1) Is the best plan for both of us to transfer/convert any of our tax deferred accounts into individual 401k’s?
2) we already did our backdoor roth conversion for 2015. Do we need to undo it, transfer the tax deferred IRA’s, and then redo the conversion?
3) Given the likely mistake with filing backdoor roth for 2014, If we fix it this year will that likely take care of any problems or do we need to do an amendment and file that 8606 form for 2014? If we do the amendment will we owe taxes on all those other deductible IRA accounts we haven’t moved yet?
We thought we were on top of it…
If you didn’t have a retirement account, the contribution would have been deductible.
1) Usually, yes.
2) If you’re not converting everything, probably no big deal. But since you’re not, it may be best to unwind it, then redo after sorting out the prorata issue.
3) If you did make a mistake, do the 1040X and 8606 for 2014. If you should have paid taxes and didn’t, then yes, you’ll owe some money.
I just graduated resident in July and had very little disposable income and had not started saving. So at this time I have no IRA accounts. So at this point the best thing to do would be to contribute to a traditional IRA and convert it. Am I understanding this correctly? Also, can I then open a traditional IRA during this year at 5500 for both myself and my wife and then contribute additionally after July 1 for the 2016 year?
sorry meant to say January 1st. Thanks.
Yes. Yes.
You can do a backdoor Roth IRA for 2015 for you and your spouse and then do it again in 2016.
Recently discovered your website – only wished I had found it earlier!
I am looking to do a backdoor Roth as you have outlined but was hoping to clarify a few points. I have been contributing to a traditional IRA despite being over the income limits and thus all the funds there are non-deductible. I have about a total of $60k with $9k in gains.
My employers 401k will accept the roll-over IRAs I currently have. I am confused about what to do with my current traditional IRA. Should I directly convert it to a Roth and pay my taxes now or can I back door but pay taxes on the gains? Thanks for your help and insight!
What do you mean backdoor? If I had a $60K IRA with a basis of $51K, I’d convert the whole thing today.
how do you know if your $5,500 put into the traditional IRA is non-deductible before you convert into the Roth IRA?
You need to consider two questions- Do you have a plan at work and how much you make. Those two factors determine whether or not its deductible. For most docs, it isn’t due to their income.
This year (starting Aug 1st) my salary is $160k. At work I have a 403b. No other retirement accounts.
And whether or not you’re single. If you’re single, you definitely need to go backdoor for 2016 but probably okay for 2015. If you’re not, then it’ll be close for 2016 depending on what your spouse makes. You can look up the details here:
https://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015
Hello WCI
I have Vanguard traditional IRA for me and my wife as well as my own Roth IRA (from residency). I don’t have employer sponsored retirement plan of any sort. I do make over 200K. I was told my by accountant that I can continue to contribute to traditional IRA as long as I don’t have employer sponsored retirement plan regardless of my income. Is that true?
If I can continue with traditional IRA, do I ever have to do the backdoor Roth that you’re describing in this post?
I do have 1099 income coming in. So, I was going to start individual 401K this year. I put some into SEP IRA last year because I passed the deadline for establishing i401K. Any reason to still keep this SEP IRA. I finally decided to go with vanguard for i401K.
Appreciate your input very much
Yes, it’s true.
No, you never HAVE to do the backdoor. If you can deduct your contribution, that’s probably better than a Roth in your peak earnings years.
No. Just roll the SEP into your i401(k) or your traditional IRA.
Thank you for the quick reply. 2 more follow-up questions please:
I can’t roll over SEP into i401K because I have it with Vanguard. My Vanguard SEP from last year only has ~4K; if I roll this over into vanguard traditional IRA this year, does this count toward the maximum allowable contribution of 5500/year?
Question regarding i401K: If I have about 18K in 1099 income for 2016 and I put 5500 into traditional IRA for me and my wife (total 11K), then does that mean I can only put 7K into i401K; or can I put all of 1099 income into i401K and the 11K can be deducted from my W2 income (of which there may be about 220K).
No, rollovers don’t count toward the contribution limits. Nor do Roth conversions, another good option for you with a little $4K account.
No, IRA and 401(k) limits are completely separate and don’t influence each other.
Yes, if you haven’t used your employee 401(k) contribution elsewhere you could potentially put essentially all $18K you made into the i401(k).
What if your household income is based on performance and is going to be close to the max salary set to be able to directly contribute to a Roth IRA? Would it be smart to wait until after the beginning of the year to see what your income ends up being then make your contribution for the preceding year since you have until April to do so? So if your over the limit you do this backdoor conversion and if you are below the limit you do a direct Roth contribution…
If you don’t have another IRA/SEP-IRA/SIMPLE IRA etc, you can just go through the backdoor. My first year out of the military I thought I’d be over the limit, but wasn’t. I still went through the backdoor, no big deal.
Thank you very much for the advice…
Hey again WCI,
Love the new website look. Way to go!
My wife will be eligible come 07/01/2016 for an employer sponsored 401k, a safe harbor account where they contribute 3 percent of annual salary. Exciting stuff.
So from what I’ve gathered from your site and the retirement account planning links on here, a young physicians portfolio could look something like:
6 months of salary, emergency fund.
Personal and spousal backdoor roth IRA contributions — 11K
401(k) = safe harbor 3 percent from employer is about 6K. How much more should we add?
Any other account I’m forgetting about? We have a mortgage.
From there we are thinking pay down student loans. Most interest rates on the student loans are around 4 percent. We are feeling prepared thanks to your site and book. How is our outlook?
Emergency fund = 3-6 months of EXPENSES not salary
There are lots of other accounts out there that may or may not be available to you, but paying down student loans is also a great use of money.
I was married in the last several months and both my wife and I have already contributed the maximum $5500 this year to each of our Roth IRAs through Vanguard. However, we just realized that with our combined income, we are now over the contribution limit for Roth IRAs.
I am assuming that we can we take the $5500, recharacterize it as a traditional IRA, then prompty reconvert it into our Roth IRA accounts through the backdoor method.
I haven’t looked at the exact numbers yet, but what do I do if I have income or loss on the initial $5500 that I have already invested
Thanks!
That’s correct. You must recharacterize, wait, and convert. Don’t forget that key second step:
https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Recharacterization-of-Roth-Rollovers-and-Conversions
Is there a minimum waiting period to reconvert the money to a Roth IRA following a recharacterization?
Yes, if you recharacterize all or part of a rollover or conversion to a Roth IRA, you cannot reconvert the amount recharacterized to the same or another Roth IRA until the later of:
30 days after the recharacterization, or
the year following the year of the rollover or conversion.
The waiting period to convert applies only to amounts you recharacterized. For example, you can convert amounts from a different traditional IRA to a Roth IRA immediately.
So I have to wait until 2016 to be able to put the money back into the Roth IRA?
WCI, are you sure the waiting period applies in this situation? The way I read that IRS link, the waiting period applies to RE-conversions of a recharacterization of a rollover a conversion (but NOT recharacterization of a contribution). I think it’s possible that no waiting period is necessary between recharacterizing a contribution from Roth IRA to IRA, and then converting that IRA to Roth IRA. What do you think?
You may be right. I tried looking up that specific question and couldn’t find an answer on the irs.gov site. The safest thing to do is wait unless you can find a definitive source saying waiting isn’t required after recharacterizing a contribution like it is after recharacterizing a conversion.
Thank you for sumarizing this complicated issue – article is very helpful.
I have a question though.
You mention: ‘Get rid of any SEP-IRA, SIMPLE IRA, traditional IRA, or rollover IRA money. ‘
During fellowship, we had the option of diverting the money that would go toward social security to a Tax-Deferred Annuity account which I did. So now I have a TDA under my name with retirement money in it. First, was this a good idea? Second, is this an account that I would need to get rid of ?
Much thanks!
Bishoy
I’m not sure as I don’t have the details. If it is a 403(b), then no, you don’t have to get rid of it. You can roll it into a traditional IRA and convert it to a Roth in the year you leave fellowship though. If it is something else entirely, then I think it’s fine, as long as it isn’t a SEP, SIMPLE, or traditional IRA.
Sorry – yes it is a 403(b).
So I can contribute to a Backdoor Roth IRA in January without having to get rid of this account, correct?
I am currently an attending – started in July. You mention rolling the 403(b) into a Roth IRA. Is there a particular benefit to doing this? Is it because I am in a relatively lower tax bracket now? Also, If I do roll it into a Roth, can I still put $5500 into a Backdoor Roth in January?
Much thanks
Bishoy
Correct. But I would convert that 403B to a Roth IRA this year if I could possibly afford the taxes. You’ll surely be in a higher bracket the rest of your career and maybe even retirement than this year, right?
And yes, the conversion has nothing to do with your backdoor Roth IRA this year or next.
And weird that they let you do a 403(b) in lieu of Social Security. Not sure you got that right but who knows.
Thanks
Since I’m an attending for half the year and did some moonlighting as a fellow, I am in the 28% bracket. Next year, 33%. Also, if I do convert, does that money then count as income? If so, it may bump me up to the 33% bracket for this year.
So not sure converting would be helpful?
I stumbled across your website and I appreciate all the knowledge since I believe it is helping me make the right decisions for the future. Thanks to you I just consolidated my student loans from 6.5% to 1.9% through a link on your site!
I started my solo practice in January and I want to get a 401k started but having a hard time deciding which company to go with.
Here are my issues:
1. My wife (who is now a stay at home mom) rolled over her old 401k money (now 20K) into an IRA with Vangaurd about 2 years ago. I wish we would have converted this to a Roth back when I was in residency, but we didn’t know. Will we need to convert her IRA back to a 401k before doing a backdoor Roth? Have you heard of anyone making a wife an employee so she can rollover an IRA to the new 401k?
2. I have 1 part time employee that works about 5hrs/wk helping with billing. I want to exclude my part time employee from the 401k as I would like to contribute close to the max amounts, and don’t want to also add an extra 25% of her salary to the 401k. Do you know which companies allow this? And will this prevent my wife from joining the 401k?
3. What company do you generally recommend I start with? Will Fidelity or Etrade typically cost me more in the long run than a Vangaurd account? I am pretty inexperienced when it comes to picking mutual funds.
Thanks
I love how people think it’s an accident they arrived here. Trust me when I say I spent a lot of time and effort getting you to stumble in here!
1. Yes, or else pay the taxes and convert it all now. Yes, you could make her your employee (just be sure to give her some real work.
2. That’s a good question. I think you can probably exclude that employee, but you should talk to an expert to make sure you can use an individual 401(k) instead of a “real” one given that you have an employee.
3. Picking mutual funds is relatively easy once you’ve designed your asset allocation. There are ways to make Fidelity and Vanguard just as inexpensive, and perhaps less expensive, in the long run than Vanguard. Especially since Vanguard’s individual 401(k) won’t let you use Admiral funds. Not sure if you’ve seen this article or not:
https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/
I had a traditional IRA at Vanguard valued just under $5500 that I just converted to a Roth after reading this. Does this transaction mean I am done for the year and count as my $5500 limit? Or can I now do the backdoor IRA process that you have described by depositing an additional $5500 and converting it to a Roth?
Thanks!
No, you are allowed to contribute $5500 per year to all of your IRAs and Roth IRAs. A conversion is not a contribution.
Hi WCI, this site is such a fantastic resource. I just spent the last two hours reading through all the comments above. It’s time to test my knowledge, so here’s my situation. I currently have no retirement savings and I am a W-2 employee. I am not eligible to contribute to my employer’s 401k until January 2016. So here’s my plan:
1. Contribute $5500 to a traditional IRA before the end of 2015. This should be tax-deductible since I am not eligible to contribute to my employer’s 401k plan. This should save me nearly $2000 in taxes for the 2015 tax year.
2. Max out my 401k in 2016.
3. In 2016, transfer the amount in my traditional IRA to my 401k plan (to avoid the pro rata rule)
4. Contribute $5500 to a traditional IRA in 2016 (and put it in a money market account)
5. The next day, convert the money in the Traditional IRA to a Roth IRA (Backdoor Roth IRA).
Is this sound reasoning? Did I get all the steps right? Thank you!
Sounds like a great plan to me.
Hi WCI,
Husband and I are both physicians. I just opened a solo 401 K and plan to contribute the maximum by next April 15. My husband already set up to max out on his retirement accounts, 401k/defined benefits/HSA. Next step is looking at how to set up a backdoor Roth. Is this something we should try to do before end of 2015 or wait until beginning of 2016? Also, I just read your book and was wondering how having a stay at home spouse is a tax advantage–because they are counted as a dependent for tax purposes?
That’s correct. Plus you get to use the married filing jointly tax brackets. You can still do a backdoor Roth up until April, but it would be best if you can get it done before the end of the year.
Remember employee contributions for an i401(k) must be done before the end of the year, but you have until April to do the employer contribution.
Hi WCI
I thought you do your Backdroor Roth early January. What is the benefit of doing it prior to the end of 2015?
Thanks – Bishoy
I do my backdoor Roth in January for the current year, not the previous one. The sooner you do it, the more tax-free compounding you enjoy. The benefit of doing both the contribution and the conversion in the same year is the 8606 is cleaner.
As an independent contractor, how do employer vs employee contributions work for my i401k? My i401k account is set up through e-trade, do you recommend a certain company to open up traditional IRA non-deductible funds to do backdoor conversions?
I am confused about non-deductible vs deductible retirement accounts. So our 401k is deductible and lowers our taxable income while traditional IRAs are non-deductible because of our high income bracket and thus better used for backdoor Roth?
Hi WCI,
I did a backdoor Roth for my spouse and I earlier this year for tax years 2013 and 2014 after extensive reading on your website. I introduced a couple colleagues at my job to the backdoor and they both bought and read your book. We all have both W2 and 1099 income. We are all maxing out our work 401K. My colleagues both have SEP IRAs but no backdoor Roth. I have the backdoor Roth but no SEP IRA. I just save my 1099 income with plans to invest it in taxable accounts in the near future. My colleagues are encouraging me to open a SEP IRA. My question is; Can I open a SEP IRA for my 1099 income while having a backdoor roth, and wouldn’t this affect the prorata calculation? If I can indeed open a SEP, would I have to relinquish it at the end of the year to continue my yearly bacdoor conversions? Having maxed my work 401K, am I still eligible to open an individual 401K for my 1099 income? I think that my only option is a taxable account but my colleagues say I am wrong, that I can open a Roth. I told them I will ask get your opinion and then go from there. Please advise and thanks.
Sorry, I meant ‘that I can open a SEP’ (second line from the bottom)
No, you can’t do a SEP and they shouldn’t either. You should all do an individual 401(k) for your 1099 income, roll your SEP-IRA money in there, and do a personal and spousal backdoor Roth IRA every year. (Assuming you can save that much and want to save that much for retirement.
That is what I thought. Just one more question – Can I still create and contribute to an individual 401K with my 1099 income even though I am currently contributing the maximum to the 401K at my job?
Yes.
Thanks, that’s what I thought! One more thing -Can I still open and contribute to an individual 401K with 1099 income even though I am making maximum contributions to my work 401K? They say I can’t but just want confirmation if that is the case. Thanks so much!
Who’s they? Read this:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Great article, like most articles on your website.
I have been using this backdoor entry to the Roth IRA since 2012.
My views that are identical to yours are found here – http://wp.me/p6V9kv-3X
I have both a ROTH IRA and TRADITIONAL IRA with American Funds. I was trying to figure out how to use their online system to make a backdoor Roth transfer but the web site could not support it. When I spoke to customer service to ask for help, they said that it could be done, but that any such transfer would have to be reported to the IRS as an early distribution with penalties assessed. This seems different from the “Taxable event” warning given in the tutorial. Did something change in the tax code or is this a peculularity of American Funds?
American funds is correct – neither the tax code has changed nor is this specific to American Funds. I think the tax code is a little confusing at times BUT backdoor entry is for real. I have been doing it for the last 4 years. In fact, I am expecting my Roth IRA account to cross $100,000 any day now…..I already have a blog post drafted for the purpose, will publish it as soon as I reach six figures.
Coming back to your case – American funds is right. This will be considered a distribution. You will receive a 1099-R at year end with distribution code (box 7) as ‘2’ and ‘IRA/SEP/SIMPLE’ also checked. This means you will not owe taxes on the ‘principal contributions you made to traditional IRA that you are rolling over’. You still will owe taxes on any earnings. Try not to take the ‘money’ … ask American Funds to do the distribution and rollover ->this way chances of an error are minimized.
Sure. It’s a distribution. And it’s taxable. It’s just that the tax due is $0.
Just make sure that the contribution funds that are there in the traditional IRA were not tax-deductible, else the contributions will also be taxed on Roth conversions
Seems like a great reason to leave American Funds to me. Nothing has changed. Most likely, the person you spoke to has no idea what they’re talking about.
American funds is correct – neither the tax code has changed nor is this specific to American Funds. I think the tax code is a little confusing at times BUT backdoor entry is for real. I have been doing it for the last 4 years. In fact, I am expecting my Roth IRA account to cross $100,000 any day now…..I already have a blog post drafted for the purpose, will publish it as soon as I reach six figures.
Coming back to your case – American funds is right. This will be considered a distribution. You will receive a 1099-R at year end with distribution code (box 7) as ‘2’ and ‘IRA/SEP/SIMPLE’ also checked. This means you will not owe taxes on the ‘principal contributions you made to traditional IRA that you are rolling over’. You still will owe taxes on any earnings. Try not to take the ‘money’ … ask American Funds to do the distribution and rollover ->this way chances of an error are minimized.
Thanks for the info, WCI! I’ve been doing these backdoor Roths for several years since reading about them in a financial magazine. I’ve also tried to spread the word to colleagues, although usually their eyes glaze over when you start talking about this stuff.
Quick, probably stupid question.. A couple years ago, I contributed the full $5,500 to a Traditional IRA with this plan, but I accidentally didn’t convert it for another month or two. By then, it had earned a few cents of interest. I didn’t think I could convert more than the $5,500.00 I had contributed without some weird tax questions, so I left the 4 cents there. This year, could I contribute $5,499.95 to the traditional and then convert the full $5,500? Thanks!
Just contribution $5500 and convert $5500.04 this year. Remember you round your tax return to the nearest dollar. So no complications from a few pennies.
Thanks!
Thanks for your advice! One additional question.
My wife is self-employed (non-physician). We created a Solo-401(k) for her at Vangaurd this year and contributed her employee amount of $18 000 into a Roth account.
Now I am about to do the Backdoor Roth for the two of us. When she converts her $5500 traditional IRA into a Roth IRA – should this go into a different Roth IRA account or can it be to the same one she has set-up for her Solo-401(k)? And if the same one, will this lead to any problems regarding the $18000 limit that she can contribute to her Solo-401(k)?
Thanks!
The IRA is a different account than a 401(k). I can’t remember off hand if you can then roll Roth IRA money into Vanguard’s Roth 401(k), but even if you could, I wouldn’t as expenses are lower in the IRA. But it would have no effect on the 401(k) contribution limit.
Understood – thanks!
IRS website says “Roth IRAs can only be rolled over to another Roth IRA.” See here – https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Rollovers-and-Roth-Conversions
IF it were allowed, then like WCI mentioned – expense ratio would be the main consideration.
Most 401k plans have really bad investment choices as far as expense ratio is concerned but once in a while people do get lucky – for example, my current 401k has an S&P 500 index fund with an expense ratio of 0.02% – better than any other index fund I have ever seen 🙂
Thanks for the great link. I had either forgotten you can’t go Roth IRA to Roth 401(k) or never realized it in the first place.
Strange. Just tried doing this for the wife. Says it cannot be completed at VG. Anything I am doing wrong?
Opened a tIRA. Funded 5500. Money came in. 1 -2 days laters opened a ROth IRA at VG. Tried to transfer shares from tIRA to Roth IRA. Get that message about cannot be completed. Call VG hhhhmmmmm
Occasionally I have someone who has to call Vanguard to do it. No big deal. 5 minutes on the phone. Not sure if it is due to the recent combination of brokerage and mutual fund accounts, but as I recall it occasionally happened even before that.
Can you pm me and walk me through the steps for a backdoor IRA. I was told we do not qualify for a roth IRA because of our income. we currently have mutudal funds through Fidelity, so figured opening an IRA through fidelity would be best. Can you walk me through the steps to get started?
There are no private messages on a blog. I have your email. This post was written to walk you through the steps. I’m not sure what else I can write to you that I haven’t already written into this post, especially when you consider the 593 comments below covering just about every imaginable scenario. Do you have a specific question? If you’re just looking for an advisor who can physically do the required steps for you I can refer you to some, but it would be a lot cheaper to learn to do yourself. It’s not that complicated. First contribute to a traditional IRA. Then move that money to a Roth IRA.
You are not doing anything wrong, this is exactly the way this is supposed to be done.
Sometimes Vanguard just needs a filled in form. Read here: https://personal.vanguard.com/us/insights/guide/tips-rothira-conversion
I came across this discussion recently and am currently reading through it. I was planning to make 2015 and then 2016 contributions to my TIRA but now I’m thinking of doing the backdoor Roth. The problem is that my TIRA has at least a one year deductible contribution in it (I had no employer plan that year) and then the other years contributions are non deductible. I’m not sure how this would effect a backdoor Roth conversion. Any thoughts? Thanks
Tax calculations can get complex if your traditional IRA has prior contributions that were tax deductible and/ or there are earnings present in the account.
When you rollover assets from IRA to Roth IRA, you cannot choose which assets to rollover. If your IRA has contributions on which you got tax deduction in contribution years and other contributions that were not tax deductible; you cannot just choose to rollover either of them. The rollover has to be pro-rated. There is no way to differentiate dollars within IRA account.
Let us take an example – Let us say your total current balance in IRA (2014 contributions and before) is $25,000 – let us say 20k is principal contribution and 5k is gains part. Let us say, all of the 20k was tax deductible (you contributed 5k each for 4 years and were able to deduct the 5k when you filed your taxes).
Now you contribute 5.5k more for 2015 today (non-deductible), so total balance becomes 30,500. Tomorrow you convert all of that into Roth, you pay taxes on 20k ‘deductible’ contributions and 5k (profit).
If you were to convert only 5.5k tomorrow….then following is the calculation: Total balance = 30,500 out of which 25,000 is ‘taxable’ – so 82% is taxable…. so 82 cents of every dollar is taxable. Now if you convert 5500, then 5500 *.82 = $5,210 is taxable.
You can read my entire article here (I copy pasted the above example from my post): http://wp.me/p6V9kv-3X
You’ll have to convert it and pay taxes to do so. But if it is only a year or two of contributions, the bill won’t be too high so I’d go ahead and do it anyway.
So it appears I made one deductible contribution of $4000 in 2006 to my TIRA. If my employer 401k or 403b will accept it, can I just roll $4000 into the 401k or 403b and then just backdoor Roth the balance? It seems that thefinancebuff backdoor Roth instructions suggest this… But, do I somehow figure out and account for the earnings on that $4000? Thanks!
Please read my earlier response again – you cannot just convert $4,000. You cannot differentiate between the dollars present in your TIRA. It has to be pro-rated.
So if you have deductible contributions and non-deductible contributions, you cannot just choose to rollover deductible contributions.
As for figuring out the earnings – either you can do it yourself or ask the broker to do it – the rollover form has an option.
That’s not entirely true. Basis can sometimes be separated out using rollovers. You cannot just convert after-tax dollars to Roth dollars, however, without first separating out the basis.
Can you please give an example to explain what do you mean when you say basis can be separated out using rollover?
Sure, here’s an entire post about how I did it:
https://www.whitecoatinvestor.com/how-to-get-your-tax-exempt-tsp-money-in-to-a-roth-ira/
Nicely written post but we are talking about different things in my humble opinion.
Your article talks about how to get the Thrift money to a Roth IRA. That part I have been doing very well for the last several years myself. http://wp.me/p6V9kv-eW
I was talking about traditional IRA accounts in particular – let us say there are some dollars in there that were tax deductible in the contribution year, there are some dollars in there that were not tax – deductible, and then there are some dollars that are gains. Between these three categories, I do not think there is a way to separate them – one cannot choose to do anything (say a rollover) with just the tax- deductible dollars or just the non tax – deductible dollars or just the gains dollars.
When I moved the money out of the TSP, what was the situation? Some of it was after-tax and some was pre-tax. Same as your situation. Read about separating basis. I mean, you can say it can’t be done all you like. I’ve done it.
Some more about it here: http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/
but I did it prior to the 2014 rule changes that make it easier. As the article explains, even experts disagreed on the rules.
It depends on your employer’s plan document. Some, like the TSP, only accept tax deferred money. So if you just roll in as much as you can, your basis (the after-tax money) will stay behind and you can convert it to a Roth tax-free. If the plan doesn’t specify that, or if it is just too weird for anyone to let you do it (this sort of thing is fairly rare), it probably isn’t the end of the world for you to just buck up and pay to convert both the $4K contribution and the earnings on all the money in the account. All you have to know is your basis- i.e. the total of the non-deductible contributions you have made in the past. You should be filing a form (8606) with your taxes every year which will tell you what that is.
Ok, so it appears in 2006 I put the deductible contribution of $4000 into vanguard target retirement then in 2008 I exchanged the whole balance into vanguard tips fund and have made no further contributions since then into this fund. All non deductible contributions have gone into other funds. So…I should be able to rollover the whole tips fund balance into a 401k or 403b and it would include the original $4000 plus all the additional earnings, correct? Then, the entire balance in the IRA will be non deductible contributions which can be converted to Roth. I just need to find out if my employer plans (fidelity) will accept the rollover. Am I missing something or am I good too go?
It isn’t that they accept the rollover, it’s that they will only accept the pre-tax money and not the after-tax money.
I contributed money earlier this year, first for myself and then for my husband, with the intention of doing the backdoor Roth. I did the conversion for myself about a month later but delayed on doing the one for my husband. He has earned $4.00 in interest on $13000 (he is over 50 and I contributed for 2014 and 2015). I saw an earlier post where someone earned $0.02 and you advised them to round it off to zero( around post #150, I think).
My questions are:
1. Do I convert his entire amount including gained interest to the backdoor roth or just the $13000, leaving the interest of $4.00 in the IRA,
2. If I leave the $4.00 in the IRA, do I contribute 6500-4=6496 for him in Jan 2016 to even it off for future years, thus avoiding this problem?
3. If I convert the $13000 with the gained interest, which line items will change on the form 8606?
Thanks so much. I was thinking of calling Vanguard to ask, but I trust to hear your thoughts first. Thanks
1. All of it. You’ll owe $1.00 in taxes.
2. Don’t leave it in there. But if you do, it has nothing tod o with the 2016 contribution. Put another $6500 in there (if over 50.)
3. Just follow the instructions for the form, it won’t be that bad. Also look at this post: https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Don’t expect tax advice from Vanguard. If you can’t figure it out yourself (which you almost surely can) and can’t get a little help on a specific question here (which I’m more than willing to answer although I’m not going to reproduce an entire 8606 for everyone) or on a forum like Bogleheads or Fairmark, then you can hire a tax advisor to help.
You do not have a choice in the matter, you cannot just choose to convert the contributions.
Here is how I look at it – each dollar in the IRA is comprised of a taxable component and a non-taxable component, depending on the overall composition. Let us say your account balance was 20,000 and you had 13,000 non-deductible contributions and 7,000 gains. Then 35% is taxable. So 35 cents on every dollar you rollover to a Roth IRA will be taxed. If you roll over $5,000 dollars, then $1,750 will be taxed (and the rest $3,250 won’t be).
In your case – Like WCI asked to round off the $0.02, I think your $4 gains will also be rounded to zero. The last I checked, the taxable threshold from an IRA account was $10.
Even if you get taxed on $4, what is the big deal? You might pay $1 – $2 in taxes, not worth further research in my humble opinion.
You can read my entire post and personal experience at http://wp.me/p6V9kv-3X
I have a question about my wifes IRA. I just finished residency and my wife now stays at home with the kids. She currently has around 20k in a roth ira and 80k in a traditional ira. I really would like to take advantage of her roth ira but will not be able to roll her ira into a 401k, etc. To avoid the taxes of a backdoor roth. Would you slowly just pay taxes to convert all of it to a roth or leave it where it is. I will be making over 300k
Tough question. If it was $300K I’d say forget the backdoor Roth for her. If it was $30K I’d say just pay to convert it all. At $80K…..I could go either way. One thing you can do is just make non-deductible contributions for now and decide later whether to pay to convert. But bear in mind this is probably your lowest tax year for a long time to come.
Are there any state tax considerations for this conversion? I live in Michigan.
As a general rule, if you don’t owe federal taxes, you won’t owe state taxes. For a typical backdoor Roth IRA, no state or federal taxes are owed on the conversion.
I am trying to figure out the pro-rata rule and how it could apply to me. I have a 403b and a 457b with my current employer (which I am maxing out) and a traditional IRA with funds that were rolled over from my 401k from residency (~$20,000). If I wanted to fund a Roth account through the back-door, it is my understanding, that I would either have to convert all of my current traditional IRA into a Roth or roll it into and individual 401k (which I don’t think I can do since I am an employed physician). Am I correct in saying that I couldn’t just leave that traditional IRA alone, open another traditional IRA and use after-tax contributions in that account to convert them to a Roth?
If the existing traditional IRA is in my name, could I still fund a back-door Roth in my wife’s name if we are filing taxes jointly?
Thanks for your help. I am new to the blog and have found it insanely helpful. I bought the book and have used it to catch up. I wish I would have known about all of this in med school.
You could roll your IRA into your 403b and then do your own.
You could do your wife’s backdoor without doing anything.
Or you could just convert the $20K and pay the taxes on it. No big deal. Obviously if it was a $300K IRA that’d be a different story. Think of it as making an additional retirement account contribution.
So if my wife and I do not have an ira set up and we don’t qualify for a Roth because of our income do you know what options I can go with through fidelity? What kind of Ira should I open? Then convert to Roth next day?
Traditional IRA. Traditional IRA. Yes.
I have finished training this year and my wife has been working as an attending for 5 years. I was trying to set things up to do backdoor conversion this year and had already moved $9K (on 8/3/2015) that I had in a Rollover IRA into a traditional IRA at Fidelity where I also have a Roth IRA. I realize that if I convert the rollover IRA to Roth I will be subject to taxes on that portion, but I may already be committed since I moved it from a Rollover IRA to a traditional IRA? I don’t know if my current 403B accepts roll-ins, but since I already moved the money, probably best to just do the conversion and pay the taxes this year so we can continue to do this in the coming years? Thanks so much.
You can move money from both a rollover IRA or a traditional IRA into a 403B. They’re really the same thing. So you still have the option to either move the money into a 401(k)/403(b) or just pay to convert it. On $9K, I’d just pay the taxes and have a bigger Roth.
I just opened a Traditional IRA with Vanguard on (12/27) and contributed $5,500. I planned to convert the money the following business day. However, I found out my money is on hold for 7 days due to funding a new account with an electronic bank transfer. My money is not available until 1/4. You mentioned, I must convert the money to my Roth IRA by 12/31. What will be the consequences?
Are you sure the money isn’t available to do a Roth conversion or that the money isn’t available to be withdrawn?
If you truly can’t do the conversion until 1/4, it’s not that big a deal, it just makes the 8606 a bit more complicated. But do try to do it by the end of the year. Perhaps calling and talking to a rep this week would help.
After I opened my traditional IRA and converted it to a roth ira, what do I do next year? Do I do the same thing every year or directly contribute to the roth? THanks for all your help in this!
Unfortunately unless your income drops or the law changes, you have to repeat the process every year.
Thanks! Do you recommend having your taxes withheld or not withheld when doing the conversion?
There should be no taxes on a backdoor Roth IRA conversion, so not withheld. If it is a standard Roth conversion, then I also would not have them withheld (but make sure you have the money elsewhere.)
Thanks! I am 29.. Are you a fan of target date funds for the investment option for a roth? If not, what would you recommend for my fidelity investment options for the roth?
https://www.whitecoatinvestor.com/7-reasons-i-dont-use-target-retirement-funds/
Fidelity has some great low-cost index funds, usually labeled “Spartan.” I’d probably use a reasonable combination of those.
First of all, thanks very much for having this website – found it as I was graduating residency, and it has been most helpful (along with the book).
I have a quick question, as I’m still new to all of this. Looking back at my 2015 numbers, I seem to have made a mistake in doing this backdoor Roth. In January 2015, I contributed $5500 to a traditional IRA. A few weeks later, I converted to a Roth IRA. However, in the intervening time, the value of the traditional IRA had gone up to $5540 (I must not have read carefully the part about putting contributions in a money market fund and had it in a Target Date fund). So it seems that I made an excess conversion to Roth. I still actually did contribute only $5500 but converted $5540.
Is this a problem, and if so, how can I fix it?
Thanks!
That’ll cost you about $10-15 in taxes. No big deal. No such thing as an excess conversion, you just owe taxes on the earnings.
Hi,
Given the hefty bills from CPA’s, I am planning on doing my own taxes this year using turbo tax. I am an independent contractor and have a home office. Can you please advice which of the two versions, Premier or Home & Business, will be appropriate for my case?
Appreciate your time.
Regards,
PM
Don’t know, they keep changing the product. But if you buy Premier and need home and business, you can always upgrade.
Questions-
Spouse and I both have a traditional IRA and Roth IRA and I would like to start doing backdoor Roth IRA for my accounts. However, Spouse is not interested in this method for his accounts yet. Will there be an issue come tax filing time since we file jointly? Do both traditional IRAs have to have zero balance in order for the backdoor conversion to be legit/ penalty free?
Thanks, and Happy New Year to all!
I converted $11K from traditional IRA to Roth IRA prior to 12/31/15, but an unfortunate issue has arisen. Since my wife changed positions, her prior employer issued an unauthorized distribution on her non-governmental 457B and closed the account. The total value of the account was 100K. The employer withheld 10K and sent a check to us for 90K (I/m guessing this will be 1099 income). In order to avoid a taxable event with this distribution, TIAA-CREF (current 457b holder) is suggesting starting a rollover IRA and completing tax form 5498 that would be allow us to keep this money and not get taxed this year. I had asked if they accepted indirect rollovers directly to the 457, but seems with this response, the answer is no.
I am a little conflicted because I am guessing this creates a situation where we are not eligible for Roth conversions if the distribution payout is in a rollover account. The alternative is to take it on the chin for the tax this year in order to be able to continue Roth conversions in the ensuing years. We are 37, so potentially the money lost to income tax this year would be reclaimed in as little as 5 years of Roth conversions, and we may stand to gain longterm if Roth conversions remain in their present state. Am I correct on this or am I missing something other than the fact that you have to pay attention to 457 accounts!
They’re willing to let it go into a traditional IRA? Do you have some kind of 403b or 401(k) you can roll that into? If so, just do that.
WCI, thank you so much for this website. A fellow physician friend of mine recently suggested your site, and it has completely changed my perspective on investing for retirement. If you don’t mind, I have a couple questions regarding the backdoor Roth. Like most residents, before I knew any better, I was approached by a financial advisor that set up a traditional IRA for me a few years back. I now have roughly 184K in that traditional IRA, which if I tried to convert now would be taxed heavily. My thoughts are to roll all of that money into an individual 401K at Fidelity like you mentioned, and then start over with your steps for setting up a backdoor Roth. A couple of caveats though, I also have an employer sponsored SIMPLE IRA, and my unemployed wife has a “spousal” Roth IRA. Can I still also have a backdoor Roth too? Thanks for your help.
When the student is ready, the teacher will appear….
Your spouse’s IRAs have nothing to do with yours. Totally separate. She can start/continue doing spousal backdoor Roth IRAs no matter what you do. The 401(k) rollover will work for your traditional IRA, but you’ve still got an issue with the SIMPLE with no good solution.
Hello WCI,
Young padawan investor here in my first year out of residency. During residency I contributed to my Roth fully every year. Now am making enough that I no longer qualify for a Roth IRA , but since i am single I qualify for a deduction on my traditional IRA. In 2017 I will get married, and be bumped out of the qualifying for IRA deduction.
Long story short should I not deduct my IRA (is this possible?) this year so that I can convert it without being a taxable event. I’m assuming (hopefully) that I will continue to climb tax brackets in the future so if there was ever a time not to deduct this would be it.
Thanks,
jeff
You seem mistaken. The IRA deduction phaseout is lower than the Roth IRA contribution phaseout. If you don’t have a plan at work, there is no phaseout for the IRA deduction, of course.
I’d just do the backdoor Roth if I were you.
Dear WCI,
Thanks as always for the excellent articles and advice. I am making the transition from Resident to Attending this calendar year, and for the first time my wife and I are each doing a Backdoor Roth IRA.
I have a rather trivial question, however maybe one that others have ran into after following the above tutorial.
Last week, I opened a Traditional IRA account, put $5,500 into the Vanguard Prime Money Market Fund. Vanguard would not allow me to convert the following day as it said that I had unavailable shares, the transaction was not settled. It took until the following day. Then I did the Roth conversion of the entire $5,500, the money was again kept in the Vanguard Prime Money Market Fund since I could not actually select another fund until the transaction was settled. I logged in the following day and was able to allocate the $5,500 according to our plan. All seemed to be well…
Then, I logged in today and found that there was a dividend posted on the Traditional IRA account in the amount of $0.18. The dividend posted after I had already done the conversion, and did not go with the $5,500. The 18 cents sits in the Traditional IRA account not in a fund, and not in the brokerage account settlement fund. I honestly don’t care about the 18 cents, and wish I did not get a dividend because it seems that all available options now will result in the processing of more useless paperwork.
Of the following options, which will result in the least amount of paperwork come tax time next year or the least amount of taxes? The only other IRAs we have are Roth, no others to mess up the Pro Rata.
1) Withdraw the $0.18 from the traditional IRA to zero the account. I assume Vanguard would supply a form that said I made an early IRA withdrawal of earnings which would be taxable plus the 10% penalty, and then I just pay the 10 cents in tax.
2) Attempt to convert the $0.18 into my Roth IRA to zero the account. I imagine this would make me need to file two Roth conversion forms and not just one, making that much more hassle for essentially no gain.
3) Leave the $0.18 in the Traditional IRA account. I assume this is bad as it would screw up the Pro-Rata calculation since the total traditional IRA account balance would not be $0.00 on Dec 31 2016.
4) None of the above.
Thanks for any thoughts you have. I honestly just wanted all of the numbers to stay $5,500, and did not think I would be getting a Money Marked Dividend after 3 total days in the account.
You’re right, it’s trivial. But surprisingly, it is a question I get at least a couple of times a month.
# 4- Leave the $0.18 in the account. In one year, when you do this again, move $5500.18 into the Roth IRA. Since you only report whole dollar amounts on your taxes, the IRS doesn’t care about that money.
I can’t however, figure out why you couldn’t do the entire thing at Vanguard over two days. This year, that probably worked to your advantage (as the market has dropped all week), so no sense in complaining, but I made my contribution, at Vanguard, on Monday into Prime MMF, then converted and invested it on Tuesday. Usually you can use “unsettled funds” to invest, you just can’t transfer them out to your bank account. As I recall, a box comes up and you have to click yes to do that. Maybe you checked no.
What is the advantage of transferring $5500.18 next year rather than doing it this year?
Never mind; I re-read the story. It sounds like Zach only converted $5500, but if I’m not mistaken, he could have converted the whole amount in one go, since there is no conversion limit for traditional –> Roth in a single year.
Thanks for the reply. I am glad I can do as you say and not fill out any extra forms.
As to why I could not do the Vanguard transactions over two days total, I am not sure either. I tried to transfer the funds from the account the next day from the Traditional IRA to the Roth IRA as you suggested, and it came up with a box that says “click ok to complete a Roth Conversion” or some such language. It knew that my attempted transfer was really a Roth Conversion and prompted me to a different page. On the main account balance page, one of the tabs on the Traditional IRA account actually says “Convert to Roth” Doing either of these methods pulls up the same page that gives the scary tax warnings about the conversion being a taxable event and allows one to complete the conversion. I had to wait another day to wait for the funds from the conversion to “settle” and then I was able to change the allocation.
Maybe the feature of being able to transfer / convert unsettled funds is a perk of being a Voyager or a Flagship level investor? At my lower level, Vanguard waited until the funds cleared from my bank to allow me to convert, and then waited until the conversion completed to allow me to reallocate.
Thanks again,
Zach
Well, I am a bit late getting to this, but here goes… I opened a non-deductible IRA and put in a total of 10K (2010, 2011; 5K each year). I ended up not doing the Roth conversion because of the pro rata concern (I have a rollover IRA). The non-deductible IRA monies have been invested, and so there has been an ~$1,500 investment increase.
Can I still do the Roth conversion? If so, does this trigger any tax?
Thanks!
Have you fixed the pro-rata concern? If so, then you should only have to pay taxes on $1500 of gains, and then you get a $11,500 Roth IRA.
Hey,
I am still pretty confused as to the benefits of a Roth IRA. I am a new EM attending and had no 401K or IRA open prior to starting work this year. I am married and my wife has a 401K plan through her work and has made the maximum contributions this year. I have also made full contributions to my 401K (18K) this past year (2015) through my job. After reading your post I decided to open a traditional IRA a few days ago, have not yet contributed any money to the account. If I do make the 5500$ contribution to the account and then do a conversion to the backdoor IRA in the next few weeks, will I be able to reduce my taxable income this year by 5500 dollar? If not, what is the true benefit of going through all the hassle of opening the IRA and doing the conversion.
No.
Tax-free growth forever.
I have had a Fidelity Roth IRA for years. If I now open a SEP-IRA, should I also open it at Fidelity and then be able to make a backdoor transfer into my existing Fidelity Roth?
Is your goal to do a Megabackdoor Roth IRA via a SEP-IRA? Otherwise, why the SEP instead of an individual 401(k)?
I guess I should clarify my question. My goal is to set up an individual 401k and a Roth IRA. I can’t set up the 401k for tax year 2015, so for this year my plan is: 1. open a SEP-IRA and make a contribution for tax year 2015, 2. roll the SEP-IRA into an individual 401k during 2016, 3. plan to do a backdoor Roth IRA contribution in 2017.
– Does this sound right?
– Do I need to open the SEP-IRA at Fidelity because my existing Roth is with Fidelity? Or, does the SEP-IRA need to be at the same bank as the 401k because my plan is to roll it over (ie, Vanguard SEP to Vanguard 401k)? And then contribute to a Fidelity traditional IRA and convert to the existing Fidelity Roth?
I know this is basic but it’s new to me, and I hope my question makes sense. Thanks!
1) No, not quite right. The SEP for 2015, an individual 401(k) for 2016 and rolling the SEP money into the individual 401(k) DOES sound right. However, no reason to skip making 2015 and 2016 IRA contributions. Put your SEP money in before April 15th, put your individual 401(k) money in before the end of the year. Get your 2015 IRA contribution in before April 15th, then put in your 2016 IRA contribution at some point before April 15th 2017 (but best before end of 2016) and convert the IRA in 2016. On December 31st 2016, you should have no SEP money (it’ll all be in the 401(k) and no traditional IRA money (it’ll all be converted to Roth.)
2) You don’t have to, but if it is convenient to you, sure. I would have your traditional IRA and your Roth IRA at the same place.The rest doesn’t matter so much.
My wife and I love your site. Hope you can help us with a question.
A little background. My wife is a physician in a private group and I am a stay at home dad know and do a little real estate on the side.
We have a question about rolling over my 403b to either a IRA or Individual 401k.
At first we were thinking about rolling it straight into an IRA, but after reading more about backdoor IRA we would lose the tax advantage of a backdoor IRA do to the 403b rollover being so large ($40,000).
Our thinking is that we can open an individual 401k for me since I’m self-employed and deposit 25% of his wages into it and roll the 403b into the individual 401k without losing our ability to do the backdoor IRA.
Does that sound correct or do you have other advice.
Thanks
Great combination of careers. Yup. The individual 401(k) sounds like a great idea for you. Not only do you get to do backdoor Roths, but you get the 401(k).
Thanks for the quick response!
I am in the process of working on my tax return for this year. Under the IRA piece of the return, it is telling me that I’m going to be penalized 6% of the total of my roth IRA because my income is too high for roth IRA contribution. I tried to follow your step by step process on the website from last year, but it seems to be different this year. Are you going to have a new tutorial this year for this situation?
Nothing has changed. If you followed instructions as far as doing the backdoor Roth, you’ve probably just screwed up the tax form. Are you doing it by hand, with Turbotax or what? If with Turbotax, check out this tutorial:
http://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html
We have a traditional ira that we opened up in residency, and put pretaxed money in it. If I convert it to a roth ira, i will still be taxed on it, correct ? My understanding is that it is better to convert while we are in fellowship (lower income bracket), as opposed to waiting until attending since we will be taxed higher then. Is that correct?
Another question: Since money in a roth is already taxed, does that mean any profit I make won’t be taxed at withdrawal time (assuming i withdraw it correctly without incurring any penalties?), or will the profit also be taxed?
Yes.
Yes.
Yes.
No.
thanks!! concise 😉
Hi,
I tried to read through all the answers above before asking this question, so I apologize if I missed it.
I make a 5500 dollar contribution yearly via the backdoor roth. In addition to the backdoor roth, can I contribute an additional 5500 to a non deductible traditional IRA? Or is the backdoor considered my 5500 dollar contribution for the tax year? (Ie, can I contribute 5500 dollars to the backdoor roth and 5500 dollars to a nondeductible IRA?)
Would there be any incentive to make this $11k every year? Does a non deductible IRA provide any advantages over the same index fund offered through Vanguard as a mutual fund? I ask because in reading the answers above, it seems that many docs had been contributing to a non deductible IRA prior to the backdoor roth, and I’m wondering I’m missing out on!
Thanks so much. Your passion for this is wonderful.
No.
Yes.
No, you can’t do both.
Sure, but you’re not allowed to do it.
Not really. Perhaps if the fund is very tax-inefficient and you hold it a long time then it might be better in a non-deductible IRA than a taxable account. Plus you get some more asset protection.
Please forgive me if you’ve covered this is an earlier post. I’m currently employed and contributing the max to my company sponsored 401K. My wife doesn’t currently work and has a 403b from her last employer, my income is higher than the allowed IRA limits. That said can I open a traditional IRA and convert/roll it over to my existing Roth? Also, can I open a traditional Ira for my wife and then roll it into a new Roth in her name?
Thanks in advance!
Yes. Yes. Beware the pro-rata rule of course- I’m assuming neither of you has a tax-deferred SIMPLE, SEP, or traditional IRA hanging around out there.
Correct and thank you for your response, on that note my wife has an old 403b would it be wise to roll it into the same Roth IRA in the same year? Or, because we have a small side business would it be better to open a self employed 401k and roll it into that vehicle?
Thanks!
It depends. Do you want to pay the taxes and convert it? If so, then the Roth IRA is fine. If not, then the 401(k) is better.
If I roll the 403b into a TIRA first then convert to a ROTH how will the pro rata rule affect us? Our side business isn’t yet profitable so the self employed 401k may be a less desirable option. Thoughts?
The pro-rata rule won’t affect you but you will have to pay taxes on the pre-tax money in the 403(b) upon converting it to a Roth IRA.
I’m sure this has been answered in this thread already but I’m having trouble finding it. We contributed 4500 dollars to the 2015 traditional in December 2015 and converted to Roth shortly thereafter in 2015. Then in January 2016 we put in the other 1000 to traditional 2015 and converted shortly after. We’ll contribute the full 5500 and convert to Roth for 2016 actually IN 2016. For 2015, line 1 will be 5500 but line 5 will only be 4500. Most of the rest of the fields for 2015 where the example above reads 5500 will read 4500 in my case, correct?
But I’m more concerned about 2016 taxes. Where do I factor in the other 1000 dollars on my 2016 8606? I’m trying to go through it but I’m not quite sure. Line 8 will read 6500. The only way I can see this working out correctly is if I put the other 1000 dollars on line 2. Am I figuring this correctly? If so, why does the 1000 dollars go on line 2? If not, how do I get this to work out? Thanks for your help!
On a side note, loved the book. I recommended it to all of my colleagues!
Boy, you’ve really tried to make it more complicated, haven’t you? Now you see why I do it all in the same year! Let me pull up the form and see if I can help. Remember I’m not a licensed accountant, so this is the equivalent of a discussion in the doctor’s lounge-i.e. you can’t sue me if I screw this up, go see a real CPA, this isn’t official “tax advice” etc
So 2015 8606
1. 5500
2. 0
3. 5500
4. 1000
5. 4500
6. 0
7. 0
8. 4500
9. 4500
10. 1
11. 4500
12. 0
13. 4500
14. 1000
15. 0
16. 4500
17. 4500
18. 0
2016 8606 (assuming you do it “right” in 2016)
1. 5500
2. 1000
3. 6500
4. 0
5. 6500
6. 0
7. 0
8. 6500
9. 6500
10. 1
11. 6500
12. 0
13. 6500
14. 0
15. 0
16. 6500
17. 6500
18. 0
Not too bad but would have been a little simpler to just do it all in December, no? 🙂
Thanks for the walkthrough! That’s what I was thinking, I just like to make things complicated… I’m totally blaming this one on the wife!
I’m sure this has been answered already but I can’t find it. I haven’t contributed to a backdoor ROTH IRA nor have I contributed to a SEP account but was hoping to contribute so that I had a tax break on both the ROTH as well as the SEP as I own a side business. If the balance of the SEP was 0 on December 31, 2015 am I okay to contribute to the SEP this year to get the tax break without incurring the “pro-rate” problem? As long as I convert my SEP to either a Roth IRA or a traditional IRA by the end of 2016 for 2016 tax purposes?
Thank you!
Yes, a SEP and a backdoor Roth IRA can be compatible if you convert the entire SEP each year such that its balance is $0 on Dec 31st. Any reason you don’t want to use an individual 401(k) instead of the SEP?
Well, the main reason was because my accountant suggested a SEP because my business is basically my second job and I have a 401K through my main job and I max out the contributions to that. Is there a better option? Thanks!
Yup, there is. I’m disappointed your accountant didn’t know about it.
https://www.whitecoatinvestor.com/multiple-401k-rules/
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
Full disclosure – I love this site but am not in your industry. However, many of the same situations apply to me so I pretend. 🙂
We earn over 320k a year together (married filing joint). We are both employed, husband has a 403b at his job and I have a 401k at mine. Both are maxed out every year. I also earn about 40k as a partner in a side business, I receive a 1099 at the end of the year.
We want to start doing a backdoor roths for both of us but my husband has a traditional IRA which we’d need to convert. I can proceed with one for 2016 as I only have 401k and roth accounts in my name. My husband plans to retire in about 12-14 years.
Questions:
– Our finance guy says my husband can’t move his IRA to an individual 401k because he’s not self-employed. However, he can move it to a regular 401k although “he sees no advantage do doing this”. (From what I’ve read it sure sounds like this would be worthwhile to contribute 11k per year, earning tax free for life). Am I on the right track here?
– Is there another option available to me since 40k of my income is earned in partnership/ownership of a business?
– My husband also has a small amount in an inherited traditional 401k, on which he has to take minimum distributions. Does this screw him up anyway?
Thanks in advance for any info you feel inclined to provide!
The advantage is $5500 a year into a Roth ($6500 if over 50). You can still do your $5500. Totally separate. You can do an individual 401(k) and put something like $26K a year into it. An inherited 401(k) won’t screw it up. I’m not sure if it is an inherited IRA. I’d have to look into that. First time I’ve had that question.
Are you saying I can do an individual 401k with my business income even though I contribute through work and make out my company 401k? Just clarifying.
*max out my company 401k. Sorry.
Yes.
https://www.whitecoatinvestor.com/multiple-401k-rules/
So helpful, thanks!
Last question (hopefully), I have 3 other partners in my business. Do we all have to participate in a profit sharing account in order for me to contribute? In other words, I believe what you are saying is I can’t contribute more than the 18k I have maxed out at my job as an individual; but my side business with my partners can contribute to a profit sharing account up to the percentage allowed. But do we all have to contribute in order to make that happen?
It is an inherited IRA. Not a 401k.
The instructions for Line 6 of Form 8606 don’t mention inherited IRAs, for better or for worse. Since you can’t convert an inherited IRA, I would argue you don’t have to put it on line 6, thus you can do a backdoor Roth IRA if that is your only tax-deferred IRA. That advice may be worth what you paid for it though. If you’re worried, do your own research or hire a tax professional to do so.
I appreciate the free advice!
Hi, I was told by a financial adviser that I could convert my 2013 contributions for traditional IRA into a roth ira, but just pay taxes for it at the rate that I will owe for my 2015 taxes. I did this and so far, I got a tax statement saying I will owe taxes for the converted amount, as expected. My question is, if I plan on contributing the max to my roth IRA for the 2015 year, will I still be able to put in 5500? Or am I only allowed to put in 5500 minus whatever I converted?
Converted amounts are separate from the annual contribution limits.
As a follow up to Jeff’s question, and to clarify for myself, if I have $2000 balance in my traditional IRA on December 31, 2015, can I convert that to ROTH now and still contribute $5500 to traditional IRA (and convert to ROTH in 2016)? Thanks
Yes. Your 8606 will be a little ugly.
Just came across this site. Great article and thank you in advance.
Here is my situation. I have some money in both traditional and roth IRA accounts. I also have a 401k account with my employer. I understand I would have to transfer all of the funds from traditional IRA to 401k first. What’s confusing is the deadline of Dec 31st. Is it already too late for me for 2015?
If it’s not too late, after transferring funds from my tradition IRA to 401k, all I have to do it contribute 5500 to my traditional IRA first then convert it to roth IRA, correct? Will I still be provided 1099-R form from my broker to be used in 2015 tax return?
I’m sorry it is confusing. That is probably due to my lack of talent as a writer. There are deadlines, but most of them have a work around, except one, the contribution deadline. You must make a contribution for a 2015 IRA by April 15, 2016. Other than that, you can do a conversion at any point. It just makes your 8606 uglier if you don’t do it all in the same year. You can still do it though. So it isn’t “too late” for 2015.
So for you, you can put $5500 into a traditional IRA for 2015, plus another $5500 into it for 2016, then convert the whole thing to Roth IRA. Don’t put the new contributions into the old traditional IRA with the tax-deferred dollars in it unless you’ve first moved those dollars to your 401(k). Try to do that by the end of the year, of course. So either a separate IRA, or get the tax-deferred dollars out of it before making your contribution. I don’t know about the 1099-R question. That’s up to the broker. But you don’t have to have that form to do your taxes.
Thank you for clearing it up. Keep up the great work.
Thanks for your blog! I have a question about the 8606 form. This past January (2016), I contributed $5500 to a traditional IRA and then converted it to a Roth for the 2015 tax year. I am having a hard time figuring out the 8606 form because $5500 has to be placed in line 4. It seems like this would make the final box 18 have $5500 (taxable amount). Any help would be greatly appreciated. Thanks!
If you’re doing this for 2015, then line 4 is $0.
I have a couple traditional IRA accounts, most contributions were deductible, and about 10 K were after-tax contribution since my income did not allow me to deduct IRA contributions for the past several years. How should I handle this situation? Should I transfer all deductible IRA to solo 401K? How about the after-tax (non-deductible) contribution?
BTW, is Fidelity still the only one allowing traditional IRA rollover to solo 401K?
Thanks.
You could do that to try to isolate the basis, or if the tax hit isn’t too big, the easiest thing to do is just convert the whole thing. More on individual 401(k)s here: https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/
Dear WCI, I’m having tax time IRA confusion of galactic proportions and wondering if you can help. Here’s the scenario. My MAGI is too high for a Roth IRA, so way back in 2009 I had a financial advisor that set up a traditional IRA for me, which now stands at 189K for 2015. After getting married, my advisor opened a traditional IRA for my wife in 2013 that was maxed to 5,500. He then did a Roth conversion in 2014 of my wife’s IRA, and I had an accountant handle our taxes that year. Now I’m using TurboTax for 2015 and it keeps saying that my MAGI is too high for my wife to have a Roth. Am I missing something here? Oddly enough, the end of year statement from American Funds still lists my wife’s IRA as “traditional” even though a conversion was performed? Thanks for your help.
I can see why you’re confused. First, I would quit mistaking a commissioned salesman as a financial advisor. A true financial advisor is very unlikely to recommend you invest in a loaded mutual fund such as those from American Funds (although as loaded funds go, several of theirs are quite good.)
Second, figure out exactly what you own. If American Funds calls it a traditional IRA, it ain’t a Roth IRA, no matter what your “advisor” told you. I hope that “conversion” didn’t cost you anything since it apparently didn’t happen. You need to understand what type of account the money is in and what the basis is on any money in traditional IRAs.
Your MAGI is too high for your wife to do a direct Roth IRA contribution, but not a backdoor Roth IRA. There is no MAGI requirement to have a Roth IRA, only to contribute to one.
Oops! I may have made a mistake then. I agree that my advisor wasn’t doing me any good, so I had him liquidate my traditional IRA, taxable account, and my wife’s Roth IRA and moved them to Betterment. Well, I’m not worried about the traditional or taxable accounts, but I moved my wife’s investment to a Roth. If we file jointly, and our MAGI is too high, them I’m assuming that I shouldn’t have done that. In other words, I shouldn’t be contributing to a Roth even if it is a conversion?
You can do Roth conversions with a high MAGI, but not a direct Roth contribution. Do you understand the difference?
I know the difference now; however, unfortunately the damage has already been done. We have errantly made two months worth of contributions to a Roth IRA. I will need to contact Betterment and have her Roth recharacterized as a traditional IRA. I was under the initial impression that once you converted, you could contribute. I now know that she needs to maintain a traditional IRA to which non-deductible contributions are made, and then at the end of every year convert it to a Roth. Well, I’ll see what tax penalties I get slapped with come next tax season.
I have been reading and rereading your article (greatly appreciated).
I have a brokerage rollover IRA from residency and first post-residency position with about 480k. Unfortunately before I knew better I also placed non-deductible IRA funds into this account for about 3 years (no idea which years; but will have to figure that out somehow). In more recent years I also contributed the max to a Vanguard non-deductible IRA. I would really like to do a ROTH backdoor conversion but am unsure if this will be possible.
I also currently max out my current employers profit sharing plan and also contribute to a taxable account.
My question is can I place the brokerage IRA (with mixed deductible and nondeductible funds) and the Vanguard IRA (deductible funds only) into a 401K at Fidelity (once I open it)?
Or with the mixed funds would it will be too much of a hassle to bother doing a backdoor ROTH?
You’ve got a real issue here. The only reasonable solution for you to be able to do a backdoor Roth IRA is to somehow isolate the basis in the IRA. If Fidelity allows you to roll tax-deferred money in but not tax-exempt money in, then you could isolate and then convert the basis that way.
Do you have any idea whether the backdoor Roth will be going away any time soon?
This year’s Obama budget proposed closing the loophole. That’s really just a wishlist though, especially with Republicans controlling both houses of Congress.