[Editor’s Note 1/2/2019: Note that the IRA contribution amount for 2019 is $6,000, not $5,500. If 50+ that increases to $7,000, not $6,500. This post was last updated in September 2018, so 2018 contribution amounts are shown throughout. 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!
I contributed $11,000 in January 2018 via Backdoor to my Roth IRA. This was for 2017 & 2018 years. If I read your post correctly, I should’ve filled out form 8606 when I did my 2017 taxes in order to report the $5,500 contribution to traditional IRA and establish the basis for 2017? Then, when I do my 2018 taxes I will fill out form 8606 and report $5,500 contribution for 2018 and $11,000 conversion that I did in 2018 (for both, 2017 and 2018 years). Does that sound right? If it does, I will have to amend my 2017 returns and file form 8606.
Yes, you should file a 1040X with an 8606 for 2017.
Hi,
Looking forward our first backdoor Roth IRA conversion(s) in 2018 and looking for clarification re what to do with existing balances.
My tIRA with >100k and spouse’s tIRA with > 40k.
I have a W2 as well as 1099 income and my spouse has a W2 income. We have 25+ years before age 67.
Can we backdoor convert previous years’ contributions to the Roth IRA or is the backdoor conversion available only for current year’s contributions?
What should we do with the balances / gains?
Thanks!
Roll your IRAs into your 401(k)s. If you don’t have a 401(k), open an individual IRA at eTRADe and roll it in there. If she doesn’t have one, consider either converting it all and paying the taxes or getting her some 1099 income and opening an individual 401(k) or lobby her employer to start one.
wow… what a super fast reply!
is my reading correct?
we can only backdoor IRA convert the 2018 traditional IRA contributions.
what’s left needs to go into a 401k or converted into the Roth IRA minus taxes.
thanks!
You can actually convert any IRA contributions from any year, but if you got a tax break when you put the money in, you’ll owe taxes on the conversion.
You also generally pay any taxes due with money that isn’t in an IRA.
sorry for the extra questions but, how do I then avoid past years nondeductible contributions from being taxed as they are converted into the Roth Account?
full details: 103k in existing traditional IRA out of which 53k were non deductible contributions over the past 10 years and the rest are gains I was planning on rolling over into a solo 401k.
Looking at f8606 line #1 will be 5500 and line # 8 will be ~48k (if I Roth convert all my past contributions), Line #10 will be much smaller than ‘1’ and the majority of the 53k will be taxed as it goes into the Roth account… Am I supposed to enter 48k in line #2 ?
It’s all calculated on the 8606. You HAVE been doing an 8606 every year for those non-deductible contributions, right? (If not, you can do 3 years worth of a 1099X with an 8606. If you have records that those contributions aren’t deductible you should be able to justify an appropriate basis on line 2 for the first year you do an 8606.)
I’m a little late too this game…
I’ve never filled an 8606 and never converted from my traditional IRA.
I’ve been contributing post tax money to a traditional IRA since 2009 without deducting it on my tax returns (line 32 was always empty).
I now have >100k in a traditional IRA I’m trying to figure out what to do with,
Why not convert it? Most of it will be converted tax-free.
That’s what I would like to do but I am not sure how much of it to convert vs how much to rollover and how to complete the 8606.
do you think that Vanguard staff will be able to guide me or should I reach out to a tax consultant from your links?
I guess you could try to isolate the basis and roll the rest into a 401(k) like I did here:
https://www.whitecoatinvestor.com/how-to-get-your-tax-exempt-tsp-money-in-to-a-roth-ira/
I wouldn’t expect any help on this subject from Vanguard, so if you need some, I’d try the tax folks.
I’m in the same boat. See comment 424 above. Also see my thread in The White Coat Investor Forum. Search: Dr. K How To Get rid of my non deductible traditional IRA.
So I currently have $57k in my roth IRA with Fidelity and $35k with a traditional roth IRA rollover from previous employers also with Fidelity. My salary is $225k. The way I understand it is I either convert the entire tIRA into my roth IRA and pay the taxes or I transfer $5500 and then convert the rest into a 401k? And then repeat every year until my entire previous tIRA is in the roth ? My wifes current job is mom so she has no income but we are married filing jointly. Thank you for your help.
First, roll the entire traditional IRA into a 401(k).
Second, put ANOTHER $5,500 into the now empty traditional IRA.
Third, move that $5,500 into the Roth IRA.
Repeat steps 2 and 3 each year for yourself and your wife.
Hope that helps.
Thanks for the helpful info! I’m in a tricky situation. I recently realized that I incorrectly contributed to my Roth IRA last year. When I was a resident physician in training and single, I made a salary that allowed me to contribute to the Roth IRA – Vanguard autodrafted ~$450 out of my debit account every month while in residency to reach the yearly max. However, I married my husband in Oct. 2017, so for the year, we made too much together as a family. Our “married filing jointly” taxes were done in April 2018. From what I understand, I need to take out that $5500 that I incorrectly contributed to my Roth IRA last year (and get taxed on any earnings). Is it too late to use these funds to do a backdoor Roth for 2017 taxes? I’ve read that I have until October 15 to fix any mistakes.
The fix is to recharacterize the Roth IRA contribution to a traditional IRA contribution. Then wait the prescribed period and convert it.
Awesome. That was my plan, I was just hoping I could contribute retroactively to 2017 and fix my taxes, so I didn’t lose that year’s contribution due to my dumb mistake, but I’ll just plan on a backdoor Roth for 2018. Thanks for all the info and guidance!
On the topic of the pro-rata rule as it applies to those who have made previous non-deductible TIRA contributions: there is a loophole that can let you have your cake and eat it too. I was in this situation a few years ago. In my younger less-informed years, I made non-deductible TIRA contributions for a few years.
As my income increased, I got to the point where I was ready to start making backdoor Roth contributions, but now my TIRA had a combination of pretax and post-tax money. My contribution to the TIRA was post-tax, but the investment gains those contributions had accrued were pretax. If I had converted the whole thing to Roth to clear the way for backdoor Roth contributions, I’d have paid taxes on the pretax balance because of the pro rata rule, as described above.
*However,* according to IRS publication 590-A (first two paragraphs of the second column on page 21), there are some ways to separate the pretax balance. If you have a 457, a 403, or in my case, a TSP, you can roll over only the pretax balance into that account. That leaves you free and clear to roll over the remaining, post-tax balance, to a Roth IRA tax-free. I did this in 2012 after calling the IRS to make sure my interpretation of the document was correct because I couldn’t recall reading about it anywhere online before. They confirmed that (at least at the time) each step of the process was legal.
Yes, I’ve done that too.
https://www.whitecoatinvestor.com/how-to-get-your-tax-exempt-tsp-money-in-to-a-roth-ira/
When can you withdraw backdoor Roth conversion money tax free. Is it after 5 years?
IE I do a backdoor Roth now in 2018 sending $5,500 to the traditional IRA then converting to Roth. Say I do this yearly. Once I hit 2023, I should be able to withdraw the original $5,500 tax free, and then each year after that an extra $5,500 could be withdrawn tax free, correct? (Age would be under 59.5) After 5 years essentially each year $27,500 ($5,500 x 5) would be in limbo, and an extra $5,500 of principal is accessible.
If I were to withdraw any of the “limbo” money earlier, it would result in 10% penalty, correct?
Yes. Kitces has a nice article on it:
https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
Thank you, and thanks for all that you do and all the help you’ve given to me and countless others
Jim
Thank you for this amazing site. I share it with my medical students, residents, fellows and colleagues to educated them.
I have a traditional IRA that I opened up in 2008 with a very modest amount and invested in stocks that have since done remarkably well, cost basis of around $10k, now worth $160k. This account is what is keeping me from doing a backdoor Roth – the tax bill on this account conversion will be substantial.
At what point do the tax implications of conversion (about $60k in taxes – 37% on $160k) outweigh the upside of a yearly Backdoor Roth? I am 45 yo. Or am I missing something about the tax implications here of the conversion? Any other options here for me? I don’t want to roll over into my employer 403B and I don’t want to sell the stocks.
Thanks much
Mike
Thank you for sharing.
Remarkably well is right! Have you given any thought to running a mutual fund?
At any rate, think of it this way. If you pay the taxes on it, you now have more (on an after-tax basis) in the account that you can continue to invest. And since you’re investing it so well, you’ll be super glad it’s all tax-free later even if it cost you $60K now!
On the other hand, if you think you might have just gotten lucky, just roll it into the 403b.
But in general? At 45 you’ve got 10-20 years more of Roth IRA contributions, perhaps $100K worth. That’s probably enough to justify paying $60K now that could be taxed at a lower rate later. But if you said the conversion costs $300K and you’re 55. Definitely not. So if you’re going to do it, do it now (or in the midst of a bear market if one shows up very soon!)
Thank you. I appreciate those insights. Definitely a good arbitrage by paying those taxes now.
Transferring it to A 401(k) would probably limit my investing options in only mutual funds
Keep up the great education!
Mike
Mike,
Can you open up an individual 401k at fidelity? I say fidelity because Vanguard doesn’t allow IRA to 401k conversions or at least it didn’t last I checked about 3 years ago. Once you own your own 401k, you can roll in anything you want that is within the law.
So how do you get an individual 401k? You need a business that has some profit that you can then invest in a 401k. This can be through opening a business, doing some independent contractor moonlighting work, running a blog, or having a tiny online sales business. Once you have a 401k set up just have fidelity rollover your IRA and your done. Running an individual 401k does add a little complexity. Once you have $250k in the account you will need to file a form 5500 with the IRS every year.
Ive given that some thought and can do that. I work at an AMC but have some independent income. Great idea
Hello, Loved your book and your website. I’m just finishing first year out of fellowship and want to get my finances in order .
I have a 403 b from fellowship w/ 14 k in it
I have a rollover IRA from residency with 29 k in it
and about 34k with my new employer. 457 plan
I want to do a back door IRA this year but want to park the fellowship and residency money elsewhere. Can I put the 5,500 for a back door roth in there and then the remainder of the fellowship or residency money would I put in an individual 401 k or what in order to not break the pro rata rule. I’m new to this but trying to learn.
You JUST have a 457 with the new employer? No 401(k) or 403(b)? That seems weird. Ideally, you do and you can roll the old 403b and the rollover IRA in there. Of course, you could also just convert it all.
THEN do the Backdoor Roth IRA.
Thank you so much for your valuable content and thoughtful replies!
I have a Roth IRA with vanguard from years ago before I started medical school.
I have a 401k with Fidelity and TIAA both in the target 2050 retirement funds from my training programs.
I started a job in August and was told they would start contributing/I could start contributing to a SEP-IRA after 3 months – they said that “was law” (coming up soon – early November?). I finally have the 5,500 to do a backdoor! I’ve been waiting to do this for years 🙂
Goal is to open a traditional Roth IRA with vanguard and then can roll into my already established Roth at Vanguard.
My 3 questions are – since I don’t know much about the SEP-IRA that will be set up and my office has been very vague about it but I want to set up my backdoor ASAP to take advantage of any growth
1. is there any possibility that the SEP-IRA won’t be able to be rolled into my already established 401k options – as in, do some limit this ability?
2. since work is doing the SEP-IRA am I able to do the rollover to the 401k every year? or once I roll over will it close it? do they have rules where it can only be rolled into a 401k one time?
3. should i just wait until i get the sep-IRA set up … ?
thank you!!
1. You’ll have to do it every year unless you want to wait to do the conversion step in your Backdoor Roth IRA. Make sure the plan allows basically instantaneous rollovers and you don’t have to wait until you leave the employer.
2. Check with work. I think so though with a SEP. I suspect they’ll leave it open, but even if it has to be reopened each year, no big deal. There’s no IRS rule preventing multiple rollovers.
3. You have until April 2019 to complete the contribution step. The conversion step can be done at any time. The Backdoor Roth IRA will be cleanest if you do the contribution and conversion step in this calendar year and the contribution and rollover of the SEP-IRA this year.
My employer provides a SIMPLE-IRA which I contribute the maximum amount to each year. I currently have $372,000.00 in that account. I have a Roth IRA with a balance of $157,000.00. I contribute the max to a non-deductible IRA each year. That balance is $68,000.00 currently.
My employer does not want to switch to a 401K plan.
1) If I’m still contributing to a SIMPLE-IRA I can’t zero that out to take advantage of the back-door Roth IRA conversion.
2) Any other suggestions for me?
Thanks!
Nope. You’re one of a very small percentage of high income professionals who can’t do the Backdoor Roth IRA. One thing you could do, if you think you’ll leave the employer at some point in the near future, is just do the contribution step each year and wait to do the conversion step until you can roll the SIMPLE somewhere else or your employer puts one in place. Don’t know that I’d bother if it looks like this is the long-term situation.
Hi, I just received an email from Vanguard saying that conversions to Roth IRA’s can no longer be reversed. What exactly does this mean and does this have any effect on all the previous post about converting traditional IRA to Roth IRA?
No. You can still do Roth conversions. What you can no longer do is recharacterize them back to traditional IRAs.
For Pro-Rata rule. If I have 2 IRA accounts. One is vanguard, another one is fidelity. I roll over my 401k to Fidelity. But I only contribute after-tax money to vanguard. When I do backdoor in vanguard IRA, will there be Pro-Rata rule issue?
Yes. All IRAs are combined for the pro-rata calculation.
Here is my situation and I would like to get guidance on the approach.
1) Our AGI is above the Roth limits
2) Wife has a traditional IRA
3) She has a 401k through her employer that accepts non-conduit IRA rollovers
I want to do a roth contribution with out tax consequences and here is my question
Is it better to do the tIRA rollover to 401k, tIRA contribution and tIRA->Roth conversion all in 2018 itself? The other option I am considering is
a) 2018 – tIRA rollover to 401k
b) 2019 Jan – tIRA contribution and tIRA->Roth conversion for 2018
Also what forms do I have to fill for tIRA rollover to 401k?
Thanks
Yes.
The 401(k) should have a rollover form on its site. If not, call them. This is all easy to do and you should be able to pull it off by the end of the year, but get started Monday. It doesn’t happen instantly.
I am not getting a clear answer on what to report to IRS on line 15a of 1040 though all of it is a non taxable event.
1) Should it be the contribution $5500 (tIRA->Roth IRA conversion in 2018) + $20K (tIRA-> 401k rollver)? Write the word “Rollover” in the margin next to the “Taxable amount” line though only $20K was rolled over instead of $25500.
2) Fill out 8606 just for the contribution $5500 (tIRA->Roth IRA conversion in 2018) and rollover won’t be mentioned in 8606?
3) Is there a need to skip the contribution of $5500 ( tIRA->Roth IRA conversion in 2018) this year since rollover is happening as well?
I’m not an accountant; I’m just some yeahoo on the internet. But when I have questions like this, I go to the instructions for the form and read them. So let’s go there:
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf
Lines 15a and 15b
IRA Distributions
Special rules may apply if you
received a distribution from
your individual retirement arrangement
(IRA) and your main home
was in one of the Presidentially declared
disaster areas eligible for these special
rules on the specified date. Special rules
also may apply if you received a distribution
to buy or construct a main home
in one of the Presidentially declared disaster
areas eligible for these special
rules, but that home wasn’t bought or
constructed because of the disaster. See
Pub. 976 for details.
You should receive a Form 1099-R
showing the total amount of any distribution
from your IRA before income tax
or other deductions were withheld. This
amount should be shown in box 1 of
Form 1099-R. Unless otherwise noted in
the line 15a and 15b instructions, an
IRA includes a traditional IRA, Roth
IRA (including a myRA), simplified employee
pension (SEP) IRA, and a savings
incentive match plan for employees
(SIMPLE) IRA. Except as provided
next, leave line 15a blank and enter the
total distribution (from Form 1099-R,
box 1) on line 15b.
Exception 1. Enter the total distribution
on line 15a if you rolled over part or all
of the distribution from one:
Roth IRA to another Roth IRA, or
IRA (other than a Roth IRA) to a
qualified plan or another IRA (other
than a Roth IRA).
Also, enter “Rollover” next to
line 15b. If the total distribution was rolled
over, enter -0- on line 15b. If the total
distribution wasn’t rolled over, enter
the part not rolled over on line 15b unless
Exception 2 applies to the part not
rolled over. Generally, a rollover must
be made within 60 days after the day
you received the distribution. For more
details on rollovers, see Pub. 590-A and
Pub. 590-B.
If you rolled over the distribution into
a qualified plan other than an IRA or
you made the rollover in 2018, include a
statement explaining what you did.
Exception 2. If any of the following apply,
enter the total distribution on
line 15a and see Form 8606 and its instructions
to figure the amount to enter
on line 15b.
1. You received a distribution from
an IRA (other than a Roth IRA) and you
made nondeductible contributions to any
of your traditional or SEP IRAs for 2017
or an earlier year. If you made nondeductible
contributions to these IRAs for
2017, also see Pub. 590-A and Pub.
590-B.
2. You received a distribution from
a Roth IRA. But if either (a) or (b) below
applies, enter -0- on line 15b; you
don’t have to see Form 8606 or its instructions.
a. Distribution code T is shown in
box 7 of Form 1099-R and you made a
contribution (including a conversion) to
a Roth IRA for 2012 or an earlier year.
b. Distribution code Q is shown in
box 7 of Form 1099-R.
3. You converted part or all of a traditional,
SEP, or SIMPLE IRA to a Roth
IRA in 2017.
4. You had a 2016 or 2017 IRA contribution
returned to you, with the related
earnings or less any loss, by the due
date (including extensions) of your tax
return for that year.
5. You made excess contributions to
your IRA for an earlier year and had
them returned to you in 2017.
6. You recharacterized part or all of
a contribution to a Roth IRA as a contribution
to another type of IRA, or vice
versa.
Exception 3. If all or part of the distribution
is a qualified charitable distribution
(QCD), enter the total distribution
uted is a QCD, enter -0- on line 15b. If
only part of the distribution is a QCD,
enter the part that is not a QCD on
line 15b unless Exception 2 applies to
that part. Enter “QCD” next to line 15b.
A QCD is a distribution made directly
by the trustee of your IRA (other than
an ongoing SEP or SIMPLE IRA) to an
organization eligible to receive tax-deductible
contributions (with certain exceptions).
You must have been at least
age 701
2 when the distribution was
made.
Generally, your total QCDs for the
year can’t be more than $100,000. (On a
joint return, your spouse also can have a
QCD of up to $100,000.) The amount of
the QCD is limited to the amount that
would otherwise be included in your income.
If your IRA includes nondeductible
contributions, the distribution is first
considered to be paid out of otherwise
taxable income. See Pub. 590-A for details.
You can’t claim a charitable
contribution deduction for any
QCD not included in your income.
Exception 4. If all or part of the distribution
is a health savings account (HSA)
funding distribution (HFD), enter the total
distribution on line 15a. If the total
amount distributed is an HFD and you
elect to exclude it from income, enter -0-
on line 15b. If only part of the distribution
is an HFD and you elect to exclude
that part from income, enter the part that
isn’t an HFD on line 15b unless Exception
2 applies to that part. Enter “HFD”
next to line 15b.
An HFD is a distribution made directly
by the trustee of your IRA (other
than an ongoing SEP or SIMPLE IRA)
to your HSA. If eligible, you generally
can elect to exclude an HFD from your
income once in your lifetime. You can’t
exclude more than the limit on HSA
contributions or more than the amount
that would otherwise be included in your
income. If your IRA includes nondeductible
contributions, the HFD is first considered
to be paid out of otherwise taxable
income. See Pub. 969 for details.
The amount of an HFD reduces
the amount you can contribute
to your HSA for the year. If you
fail to maintain eligibility for an HSA
for the 12 months following the month of
the HFD, you may have to report the
HFD as income and pay an additional
tax. See Form 8889, Part III.
More than one exception applies. If
more than one exception applies, include
a statement showing the amount of each
exception, instead of making an entry
next to line 15b. For example: “Line 15b
– $1,000 Rollover and $500 HFD.” But
you do not need to attach a statement if
only Exception 2 and one other exception
apply.
More than one distribution. If you (or
your spouse if filing jointly) received
more than one distribution, figure the
taxable amount of each distribution and
enter the total of the taxable amounts on
line 15b. Enter the total amount of those
distributions on line 15a.
You may have to pay an additional
tax if (a) you received an
early distribution from your
IRA and the total wasn’t rolled over, or
(b) you were born before July 1, 1946,
and received less than the minimum required
distribution from your traditional,
SEP, and SIMPLE IRAs. See the instructions
for line 59 for details.
More information. For more information
about IRAs, see Pub. 590-A and
Pub. 590-B.
Let’s do your questions.
# 1 I think what applies here for conversions is under exception 2 part 3. It says if you did a Roth conversion you don’t enter anything on 15b. It really doesn’t matter what you put on 15a as far as your tax burden because only what goes on 15b becomes taxable. So I’d put in 15a whatever your 1099-R shows and leave 15b blank. I wouldn’t write Rollover because that’s what you do for exception 1 not exception 2. If the IRS wants to know what’s going on, they can look at your 8606. I don’t have my tax returns with me, I’m not sure if I have anything at all in 15a for my usual backdoor Roth IRA.
In your situation, you also have a rollover going on. If they send you a 1099-R for it, then you’ll need to report that on 15a, leave 15b blank and write rollover there.
# 2 You’ll need to document your backdoor Roth IRA on Form 8606, but I don’t think an IRA to 401(k) rollover shows up there anywhere. You just report IRA contributions, conversions, and Roth IRA distributions there.
# 3 No.
Dear WCI. I started a Roth conversion for my wife a few years back (account with Betterment). While she hasn’t worked in a few years, she had worked several years ago and has an employer-sponsored traditional IRA plan (currently holds $4,726), which is just sitting in that account. Can I roll that money into her Betterment IRA, make up the difference to equate to $6,000 limit for 2019, and then convert that into her Roth? Thanks ever much for your sage advice!
Better yet, you can roll the $4726 into her IRA, contribute ANOTHER $5,500 for 2018 and then on January 2nd, ANOTHER $6,000 for 2019 and then convert it all. You’ll owe taxes on the $4,726.
By the way, there is no such thing as an employer-sponsored traditional IRA. Maybe it used to be in an employer sponsored plan, but if it is in an IRA< it isn't there anymore.
Might have been answered, but my wife and I are new attendings and planning to fund backdoor Roth IRAs as you describe above. My question is: If I created an account at Vanguard, can I open both IRAs (and both Roth IRAs) under my account, or does my wife need a separate login/password? Thanks
You wife needs a separate login. She can actually eventually give permission for you to see her accounts from your login, and I think even transact from there. But she’ll need one initially.
Thank you!
Hi WCI. I have just come across your website and I must say this is a great resource and this is a great post-thank you. .I am a first year attending working primarily Locums and so I will be filing a 1099.I have tried looking among the responses here for how a backdoor IRA works for someone working Locums(filing 1099) but have not found many relevant responses. I have not filed for a Sole Proprietorship( PLLC) yet or have an EIN but will be in the next few months. I do not have any retirement accounts and just started researching retirement options.
My questions are:
1- Currently in my position filing a 1099, can I do the backdoor Roth IRA?( i.e open a traditional IRA and Roth IRA and transfer the funds)
2- Can I do it this year before before Dec 31st so that my sum in my traditional IRA is 0? ? Or should I wait until January 2nd like you and do it then?
3- If I could do it this year before Dec 31st, can I then on January 2nd 2019( or sometimes later in 2019) contribute to traditional IRA and then transfer the funds to Roth IRA( do the backdoor IRA again or do I need to wait?)
4- Should I do some have other retirement accounts instead because I’m filing a 1099?
Thanks in advance
It’s no different for an independent contractor working for a locums company versus an independent contractor working for someone else versus a partner versus an employee. Why would it be?
1. Yes. You don’t need a sole proprietorship “filing” (whatever that is) nor do you need an EIN. This isn’t a business associated retirement account like a 401(k). It’s an INDIVIDUAL Retirement Account (technically “Arrangement”, not account).
2. Yes. You can do it now for 2018.
3. Yes. You can do one for 2019 starting January 2nd.
4. Sure. You should also do an individual 401(k). That will require an EIN.
Hope that helps. Y
Thank you for the response!
Before pulling the trigger just wanted to run this by you.
My wife and I both have Roth IRA accounts with Vanguard from when we were in residency. More recently we have 403b contributions. I have a 401K through a previous employer with Fidelity. We don’t have any SIMPLE or SEP or Traditional IRAs.
Our plan was for each of us to open a Traditional IRA at Vanguard, put the $5500 in a money market account, and then the next day covert it to our Roth IRA already in Vanguard. See anything wrong with that?
Also, now that we are both employed by a non profit, can we contribute $18,500 into the 403b and then on top of that do the above Backdoor Roth for a total of $24,000 each?
Lastly, I work part time for the VA and I contribute to the TSP. I don’t see how that is categorized ie 403b, 401K, etc. Can you please comment on how this plays a role?
Thanks very much!
No.
Yes.
Like a 401(k), doesn’t count toward the backdoor Roth IRA pro-rata calculation.
Thanks very much for the response. As we were trying to do the backdoor, we realized that my wife has contributed $4300 directly to a Roth IRA for 2018, when we don’t qualify due to the income limit. Instead of funding the Individual IRA with money from the checking account, can she just roll over the contributions from the Roth IRA into the new Individual IRA?
The correct term is “recharacterize” the contribution from a Roth IRA to a traditional IRA. Wait the required period, then convert it to a Roth IRA. No big deal but recharacterize it ASAP.
Perhaps someone can help out.
I am 40. I currently max out my Employee-401K (We are a C Corp, so I get the Employer and Employee total of $55,000), and I do some side work which I have previously maxed out a SEP-IRA. I would like to start a backdoor Roth.
Between an old Rollover IRA and SEP-IRA I have about $41,000. The pro-rata calculation would make Backdoor Roth conversion a poor choice without first sheltering my IRA money. I was looking into a Solo-401K, however it is my understanding that I could not contribute side hustle money into a 401K, because the $55,000 limit is per person, not per employer. Is this correct? What would you recommend as my best option?
Not sure what the ownership structure of the C Corp is but if you own the whole thing you can’t do both a 401(k) and the SEP-IRA just like you can’t do a 401(k) for each business. So that’s the first issue.
Your main question is what to do with an old IRA. There are four choice. # 1 roll it into your 401(k). That’s a good option. # 2 Convert the whole thing to a Roth IRA. Also a good option, but it’ll cost you something like $15K+ in taxes for the conversion. # 3 Don’t bother with a Backdoor Roth IRA. This is not a great option. # 4 Do the Backdoor Roth IRA and suffer the pro-rata issue. The worst option in my view.
Your money. Your choice.
The $55K limit is per unrelated employer, not per person. See this post:
https://www.whitecoatinvestor.com/multiple-401k-rules/
So if you are still doing both jobs AND they’re unrelated (not entirely clear to me what’s going on with the C Corp) then you could do a 401(k) for each with a $55K limit for each. You would still only get one $18.5K employee contribution total though. So one 401(k) would have employee and employer contributions and the other would only have employer contributions. But that’s the same amount of money as you can put in a SEP-IRA, so no big deal.
Thank you for the response. Your page has helped me considerably. I made a lot of the common errors (expanded lifestyle, excessive debt, divorce,) but have managed to redirect my focus thanks to your advice and example and barring catastrophe should be in a profoundly different place 2 years from now.
Fortunately, I was able to find the page on multiple 401(k)s after I posted my question. Unfortunately, I wasnt able to redact or edit my question.
Congrats on your success!
I’m going to be utilizing a backdoor Roth for the first time in 2018 and was hoping for some clarification/validation to ensure I’m doing it correctly and my plan will work.
Background: military ER doc, moonlighting on the side
Previously have contributed to Roth IRA’s for my wife and myself as always below the limit; had automatic deposits set up at a different financial institution that deposited money ($458.33 monthly for each of us) in Jan, Feb, and March before I recognized that my MAGI may be over the limit this year so I stopped them. This summer I felt I had enough financial literacy to break off from my financial advisor at my old institution and I moved all my investments to Vanguard.
I now am fairly certain that my moonlighting income will push me over the MAGI limit so I will need to utilize backdoor Roth. Unfortunately, as above, I had already contributed money to Roth accounts this year.
I have a traditional IRA at Vanguard (a prior rollover from residency) that is in process of rolling over to the TSP – so by Dec 31 of this year that account should have $0.
My wife has no competing IRA’s (only has a Roth IRA at Vanguard).
My plan:
1. Get money out of trad IRA as above (I have no other competing plans that would prevent the backdoor conversion).
2. On Jan 2nd, I will open a traditional IRA at Vanguard for my wife and contribute $4,125 to it ($5500 – the $1375 ($458.33 x 3) contributed to Roth as above) and contribute the same amount to my traditional IRA
3. On Jan 3rd, I will transfer $1,375 from each of our Roth IRAs to our traditional IRA’s
4. On Jan 4th, I will transfer the entire $5,500 in each account back to the Roth accounts
5. Then I will very carefully fill out the 8606 forms following the above post and late contribution post guidelines
A few questions/concerns:
A. Should I actually contribute $10,125 to each traditional IRA account on the 2nd (and then transfer $11,500 from each account back to Roth account the next day) as I am actually doing my 2018 AND 2019 contributions at the same time (with the limit increasing to $6,000 in 2019)?
B. I’m not sure exactly which funds the $1,375 I’ve already put into each Roth account went into – does that matter? Or can I just transfer $1,375 out of the fund I have the most in? If it does matter, I’m not sure how to recall/transfer the money out of those specific accounts and am at risk for being penalized for contributing to a Roth in a year in which my MAGI is too high – any advice?
Thank you for your help!
Why no recharacterize your 2018 Roth IRA contributions to traditional IRA contributions, wait the requisite time period, then reconvert them, perhaps when you do your 2019 Backdoor Roth IRA?
Vanguard can help you do the recharacterization. Not sure how they decide which funds to pull the money out of it, probably pro-rata. I’m sure they have a computer program that figures out how much is gain etc.
Do I call and re-characterize now (prior to the rollover of trad IRA funds to TSP), or wait until after rollover is complete and call and re-characterize in the first few days of 2019? So essentially exactly what I said above, but instead of transferring the $1,375 I will be re-characterizing it.
I’m worried about ending up with that money in a traditional IRA on Dec 31, preventing me from doing the backdoor Roth.
And just to be sure, when you do a backdoor Roth in Jan every year, you are doing it for that year, not the previous year, correct?
I’d try to recharacterize before the end of 2018. The pro-rata rule doesn’t apply until the end of the year in which you do the conversion. If you don’t do the conversion in 2018, the Dec 31st you care about is Dec 31st 2019.
I do my Backdoor Roth IRA for the current year each January, but you could do either or both.
My wife does not have a 401k to roll the money over to. If I re-characterize between now and Dec 31, she will almost certainly have the $1,375 in a (newly opened) traditional IRA. If my re-characterization does not occur prior to the rollover into the TSP (again, paperwork submitted and would expect it to happen in next week or so), I also will end up with the same amount in my traditional IRA. Then we would not be able to do an backdoor Roth conversion at all, correct?
If I re-characterize in January (and had $0 in trad IRA accounts on Dec 31 2018), wouldn’t I avoid this risk?
Shortly after the re-characterization, I would maximize my contributions for 2018 then re-convert both back to Roth.
I would then contribute $6,000 for each of us to the traditional IRA’s and then convert them to Roth’s, leaving $0 in the traditional IRA’s for the rest of 2019.
Filling out the 8606’s for 2018 will be a pain, but from 2019 on this whole process should be much more simple.
Thanks again, this whole situation is complicated…
I’m a little lost here on what’s going on. It’s okay to have money in an IRA on Dec 31 if you didn’t do a conversion in that calendar year. So just recharacterize, keep it separate from the IRA that’s getting rolled over and put off the conversion steps until 2019 and then make sure the 8606 is filled out right.
Okay, I think I understand it now. It does not matter when I re-characterize, or if I have money in an IRA at the end of Dec 2018 (even for my 2018 Roth conversion if the conversion takes place in 2019). After re-characterization, I can maximize my contribution, do the conversion to the Roth between Jan-April 2019 as well as contribute to a traditional IRA and convert it to Roth in the same period for my 2019 taxes/conversion – as long as my trad IRA has no money in at at the end of 2019 both conversions are legit.
Sound right?
My hang up was that I was concerned that if I had money in a traditional IRA at the end of 2018, I would be unable to do the conversion for my 2018 taxes.
Thank you!
Yes. You’ve got it now.
I’ve been doing the backdoor Roth for a while. This is the most straightforward guide I’ve seen. Everyone else seems to make it more complicated!
Yea, it’s really no big deal.
Huge fan of the site. Read the book first and now go to the site for in-depth reading on specific topics.
Quick question, sorry if it has been answered somewhere in the mass of the questions/comments in the past 4 years above.
My wife has a Traditional IRA (about 20K) from previous employers 401K rollover in it. I will not meet the income limit for Roth contributions this year, but will next year. Can I both contribute 5500 directly to her Roth IRA and convert all 20K from traditional to Roth in the same year (and be taxed on the 20K)?
Much appreciated,
matt
Yes.
Great info WCI!
How do I calculate the taxes owed on an IRA prior to doing the backdoor Roth? I currently have an IRA rolled over from an old 401k with about $200K. About $30k of that is gains after the rollover. Or is the better option to just roll this IRA into my current 401k plan?
Thanks in advance!
What you’re proposing is not a backdoor Roth IRA. You’re simply talking about a Roth conversion. Assuming the entire IRA is pretax, then any conversion to Roth is taxable at your marginal income tax rate. Pretax contributions, or earnings in the IRA, or rollover funds, doesn’t matter. Do you know your marginal tax rate?
If you’re in your earning years it probably doesn’t make sense to convert. But rather moving the pretax IRA funds into a 401k via rollover is likely a better plan.
Then, with $0 in pretax IRA funds, you can actually do a backdoor Roth IRA – nondeductible contribution followed by Roth conversion
Value of conversion minus basis x marginal tax rate. So if you have a rate of 28% federal and 5% state, that’s 33% * $30K = $10K in taxes.
Rolling the IRA into the 401(k) involves more paperwork but not taxes. I usually recommend a tiny IRA just be converted and a large one be rolled over. I’d consider $30K to be relatively small, but if you don’t have the $10K, then you may not!
The IRA is $200k. The $30k is earnings. I assume the basis on the rollover IRA is zero so the $200k conversion is fully taxable, way more than $10k in taxes.
A conversion of that amount could easily push someone into a higher tax bracket, into or beyond phaseouts for tax credits, into Medicare surtax and net investment income tax territory, etc. So the calculation of the true marginal rate is more complex would require a lot more info.
Regardless, such a conversion likely doesn’t make sense if someone is still working and has access to a qualified plan where the IRA could be moved via rollover.
Taj if you feel a higher level discussion of this would benefit you I’d encourage you to make a post on the forum.
I assume the basis in the $200k rollover IRA is zero. So the full $200k is taxable on conversion.
Thank you for the response.
I also just opened an IRA for my wife and funded it with $5500 but have not yet purchased anything yet with it. Can I now just transfer the $5500 cash to the Roth IRA?
Thanks again in advance!
Essentially, yes. What you’re doing is a Roth conversion. The mechanics of how you do this depends on what brokerage you’re at. If Vanguard, there are blog posts that show precisely how to do this, with screenshots and everything. There are probably similar posts for Fidelity, Schwab, maybe others.
Why is this not a back door Roth? My understanding is that I may have to pay some tax on a Roth conversion…
A “backdoor Roth” is a series of steps where one who has income above the limit for a direct Roth IRA contribution, and also above the limit for a tax deductible traditional IRA contribution, makes a nondeductible contribution to a traditional IRA followed by a conversion to Roth. Because the contribution was nondeductible, the traditional IRA has basis, so the conversion to Roth is not taxable. It’s like you’re making a Roth contribution, but in a roundabout way, AKA “backdoor Roth”.
If what you really have is a rollover IRA as you describe, then those are pretax dollars in your traditional IRA. This is very common. You certainly can do a Roth conversion, of $1 or the entire balance from your rollover IRA. But the entire conversion is taxable. Because you’re converting the dollars from pretax to Roth.
Hello all.
I have started putting money into Back door after realizing the benefits of it on this website. Thanks.
So I contributed 5500 for me and my wife in March 2018 as a 2017 contribution and rolled over to Backdoor next day.
I contributed 5500 again in December 2018. Should I roll over before Dec 31st into Roth or wait for 2019 to roll over? Or it does not matter?
Thanks for the guidance.
I’d do it now for a cleaner 8606. I assume you reported your 2017 contribution on a 2017 8606.
Oops!!I did not file the 8606 for 2017 contribution.
What should I do at this point?
1040X + 8606 for 2017.
DS – I am in the exact same boat. I did a backdoor Roth in March of this year for a 2017 contribution and then another one this month for a 2018 contribution. I specifically asked my tax advisor about the 8606 form for my 2018 taxes, and he said that it should not be filled out this year but next year during 2018 taxes. I hope that was the appropriate advice. It seems like it will make the 2018 8606 much more complicated since now you were dealing with two years of backdoor Roths. The good news is that going forward from 2019 on it will be much cleaner with just one back door Roth transaction each year. White Coat Investor, do you think this creates any problems for us when filing our 2018 8606 ??
You should have filed form 8606 with 2017 tax return documenting the 2017 nondeductible contribution.
You need to file form 8606 with 2018 tax return documenting the 2018 nondeductible contribution, and the Roth conversion during the calendar year.
The above x 2 if also done for a spouse. 8606 is individual.
Was 2017 the first year you made a nondeductible IRA contribution.
Hi,
I am 1 year out of training and had contributed to a Roth IRA through Vangaurd during my residency training and have not contributed to it since graduation. Roughly have 11k in the Vanguard Roth IRA. Do I have to convert or get rid of that? or can I just leave it alone and still have a “zero” to avoid a “pro-rata” calculation?
What would you convert it to? It’s already a Roth IRA. No, you don’t have to do squat with it. It’s the receiving account for your Backdoor Roth IRA. Contribute to a traditional IRA, then move the money to your already existing Roth IRA the next day.
Roth IRA totals are not included in line 6 of IRS Form 8606.