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. Before I get into it, realize that if you are a low earner you can just contribute DIRECTLY to a Roth IRA and skip this Backdoor Roth IRA process. Low earner is defined as a Modified Adjusted Gross Income under a phaseout range in 2020 of $124,000-139,000 ($196,000-206,000 married) and in 2021 of $125,000-140,000 ($198,000-208,000 married). Some docs like residents or even attendings in the lower paying specialties who are married to a non-earner can just contribute to a Roth IRA directly.
Note also that a Backdoor Roth IRA is primarily a two-step process, an IRA contribution and a Roth conversion. If you understand the rules of both of these steps, putting them together is no problem.
Married physicians should be using a personal and spousal Roth IRA, and will usually need to fund both indirectly (i.e. through the back door). Not only does this provide an additional $6,000 each ($7,000 each if you and your spouse are over 50) of tax-protected and (in most states) asset-protected space for both 2020 and 2021, 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. Remember that IRA stands for INDIVIDUAL Retirement Arrangement. So even if the pro-rata rule (discussed below) keeps you from doing the Backdoor Roth IRA, it doesn't necessarily keep your spouse from doing so. Each spouse reports their Backdoor Roth IRA on their own separate 8606, so my tax returns always include two form 8606s.
5 Steps to Making the Backdoor Roth IRA Contribution
Step 1 Contribute to Your Traditional IRA
Make a $6,000 ($7,000 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. Leave it in cash (i.e. a money market fund or settlement fund) while it is in the traditional IRA to keep the math simple. You don't want any losses or much of a gain between the contribution and conversion step.
Step 2 Convert the Traditional IRA to a Roth IRA
Next, 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 $6,000 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. You can do step 2 basically immediately after step 1. Some companies will let you do it the same day. Other companies will make you wait until the next day or even a week or so. But there is no reason to wait months to do it.
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 the conversion step (Step 2) 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 401(k), 403(b), or Individual 401(k). 401(k)s don’t count in the aforementioned pro-rata calculation. Some physicians have even opened an Individual 401(k) at Fidelity or eTrade (the Vanguard Individual 401(k) doesn’t accept IRA rollovers) in order to facilitate a Backdoor Roth IRA.
Step 4 Fill Out IRS Form 8606 Correctly
The next part of the Backdoor Roth IRA is done months later when you (or your accountant) fill out your IRS Form 8606 on your taxes. Don't forget to do it or there is a $50 penalty. Remember that you need one form for each spouse. INDIVIDUAL Retirement Arrangements. 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 have done improperly. If you don't do it right, you'll pay taxes twice on your Backdoor Roth IRA contribution.
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 $6,000. The form can get more complicated if you are doing other Roth conversions at the same time or if you made a contribution for the previous year (i.e. made your 2020 contribution in 2021). See below for more details.
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. If you find you have a few pennies left in the account and are worried you'll get pro-rated, take a look at this post: Pennies and the Backdoor Roth IRA.
The Step Transaction Doctrine
There used to be concern that the IRS would have a problem with the backdoor Roth due to an IRS rule called The Step Transaction Doctrine. This rule basically says that if the sum of a bunch of legal steps is illegal, then you can’t do it. Some wondered if this backdoor conversion from traditional IRA to Roth was a legal transaction considering this doctrine. Those concerns, valid or not, are no longer an issue. The IRS clarified in early 2018 that no waiting period is required between the contribution and conversion steps of the Backdoor Roth IRA and essentially has given its blessing on the whole process. Waiting just makes things more complicated on the 8606, as discussed in Pennies and the Backdoor Roth IRA.
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 2021:
- Made a 2020 IRA contribution (reported on 2020 8606)
- Did a Roth conversion of that contribution (reported on 2021 8606)
- Made a 2021 IRA contribution (reported on 2021 8606)
- Did a Roth conversion of that contribution (reported on 2021 8606)
Your forms would look like this:
2020 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 the calendar year 2020, you only have to fill out lines 1-3 and 14.
2021 Form 8606 (must fill out parts I and II)
Notice a couple of 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 (2020). Second, don't get confused by the fact that this form above says “2020” and line 4 asks about 2021. This is the 2020 form but you will actually be filling out the 2021 form. The 2021 form isn't published yet by the IRS so I had to use the 2020 form for this demonstration. So add one year to anything you see here. Let's go through this line by line.
Part I
- Line 1 – That's the money you contributed for 2021
- Line 2 – This is your basis. Since you made a contribution for 2020 but didn't do a conversion during 2020, your basis is $6,000
- Line 3 – $6,000 + $6,000 = $12,000
- Line 4 – Remember this is asking about 2022, not 2021 and since you won't make the mistake of doing your contribution late again, this will be zero.
- Line 5 – $12,000 – $0 = $12,000
- Line 6 – This is the line that triggers the pro-rata issue. Even though you made a 2020 contribution, you did so AFTER December 31st, so this line would still be zero if you filled it out for 2020, which you didn't because you didn't do a conversion in 2020 and got to skip lines 4-13. But this is the 2021 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 $12,000 this year to a Roth IRA, so $12,000.
- Line 9 – $0 + $0 + $12,000 = $12,000
- Line 10 – $12,000/$12,000 = 1
- Line 11 – $12,000 * 1 = $12,000
- Line 12 – $0 * 1 = $0
- Line 13 – $12,000 + $0 = $12,000
- Line 14 – $12,000 – $12,000 = $0 Note that when you do this form for 2022, line 2 will be $0. (Line 14 on 2021 form = Line 2 of 2022 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 $12,000 so $12,000
- Line 17 – Line 11 is $12,000 so $12,000
- Line 18 – $12,000 – $12,000 = $0
Backdoor Roth IRA with Vanguard
Every year or two, Vanguard changes their process slightly. If you understand the Backdoor Roth IRA, these little tweaks are no big deal. If it's your first time, they can be confusing. For example, in 2021 I noticed it was a three day process for us. On Sunday January 3rd I put in an order for an IRA contribution. I didn't expect it to happen on Sunday as the markets are closed and so is Vanguard, but even by Monday (January 4th) evening I could not move on to the next step. However, by Tuesday morning (January 5th) I was able to do the conversion step. However, Vanguard did not let me actually invest the new money in the Roth IRA. That had to occur on Wednesday (January 6th). Some screenshots that may help:
The Contribution Step
Click on “Contribute to IRA” and it will then take you to a screen that looks like this:
Normally on this page, you would have the option to choose 2021 as the year you want to contribute to (or 2020 too if you haven't done that yet, at least until April 15, 2021). I just forgot to take the screenshot before I actually did it. Then you just pick the settlement fund (the Federal Money Market Fund) for the money to go into.
The Conversion Step
So on Day 2, you go to your traditional IRA and hit the “convert to Roth IRA button”
There are other ways you can get to the same place. For example, if you just go to the “exchange funds” link (on the buy and sell menu) it will look like this:
Even if you go to the wrong place, it'll still guide you back to the Roth conversion page when you try to move money from your traditional IRA to your Roth IRA. That page looks like this:
In the first step, you simply choose to convert the entire account.
In step 2, you select the holdings in the traditional IRA that you want to convert (it did it automatically for me as my only holding was the settlement fund). In step 3, you select the Roth IRA account you want to move the money into (it did it automatically for me as I only have one.)
Step 4 confuses a few people. Remember you don't owe any taxes on a Backdoor Roth IRA, so don't have any withheld. Be sure to check that box that says you elect not to have taxes withheld. You can get an email that tells you that you didn't have them withheld if you want. I have plenty of email to read so I check the box that says “Do not send a tax withholding notice.” Then you hit continue.
That will take you to the standard Vanguard “Review and Submit” screen. Look it over, then hit submit and you'll go to the standard Vanguard confirmation screen which looks like this:
The Investment Step
On Day 3, you can finally choose the investment you want in the Roth IRA. Just go into your Roth IRA account:
You can see the $6,000 credit there. This shot is of my Roth IRA, which is entirely in the Vanguard REIT Index Fund. So I'm going to just add the $6,000 to that fund. Just click the “buy” link at the top left or bottom right and you'll go to this page:
Put $6,000 in for step 1, then use the drop down menu to indicate your settlement fund in step 2. Then hit continue. It will then make you consent to electronic delivery of the fund prospectus.
Just hit “Accept” and it will take you to the next screen which looks like this:
Note that this particular screenshot is from my wife's account (which is all invested in the Small Cap Value Index Fund.) Also note that she had a few pennies left in her settlement fund from last year (63 cents to be precise). I just invested that along with the $6,000 contribution for 2021. One you hit submit, it will take you to the confirmation page.
All that is left now is to go do it for your spouse's account (if any.)
Unfortunately, Vanguard is known for low costs, not awesome customer service and great user interfaces. Some brokerages allow you to do the contribution, conversion, and investments steps all in the same day. Vanguard used to let you do this over two days. Now it takes three. In fact, if you bring money in from an outside bank, it might take a whole week as Vanguard waits for the money to “settle” before letting you convert it. But in the end, a couple of days are no big deal as long as you remember to come back and complete the process. It does lead to the “pennies issue” more frequently though. Come on Vanguard, you can do better than this.
The process will be slightly different at Fidelity, Schwab, and other IRA custodians, but the basic steps will remain the same.
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 and How to Fix Backdoor Roth IRA Screw-ups to fix them.
What do you think? Are you doing Backdoor Roth IRAs? Why or why not? Any questions about it? Comment below!
This is immensely helpful. Thank you so much for the step by step clarification.
My questions is:
I took advantage of the extension of tax deadline in 2019 and made my first backdoor Roth contribution in April/May 2020 for 2019 tax year. I also made a contribution for 2020 in December of 2020. Moving forward, I plan to make all my contributions in the same calendar and tax year as suggested, but this time I have to go through the complicated process.
When I do the 2019 8606 for my 2019 contribution that I actually made in 2020, for # 4 where it asks “Enter those contributions included on line 1 that were made from January 1, 2020, through April 15, 2020” , wouldn’t that be $6000 since I made that contribution after Jan 2020? The video tutorial on youtube that was done in 2017 for this scenario of contributing after Jan but before tax date has “0” for this line. Maybe I misunderstood the vidoe, but i just wanted to make sure as this will be my first time doing the 8606.
Also, do I go back in turboxa and amend my 2019 filing? Or is it sufficient that my 2020 8606 will carry this forward as basis as such it will be evident that contributed 6000 for 2019 tax year, 6000 for 2020 tax and converted 12000 in 2020?
Thank you again,
Ami
You mean redo your 2019 8606, of course, since those taxes were due months ago. So I presume you’ll be filing a 1040X for 2019.
Yes, that’s the line you put your contribution on for your 2019 8606. Not sure if the video is wrong or if you just misunderstood the situation it was talking about.
Yes, you’ll need to amend your 2019 return.
Ok, thank you for the clarification.
I actually didn’t do 8606 when my husband and I first filed (jointly) taxes for 2019 because we hadn’t contributed anything by that point. We filed our 2019 taxes before April 2020. When I realized that I cold still contribute to 2019 backdoor Roth until July 15 2020 due to the tax submission deadline extension that year, I made the 2019 Roth contribution (sometime end of April or May, 2020 believe) we actually filed out taxes in 2020. The contribution was just made for me and not my husband for 2019.
This year, I made back door roth contributions/conversions both for my husband and I in December 2020, so the 2020 tax year, the contribution and conversation will have been done the same year and will be easier.
I will go back and amend the 2019 taxes submission to include the 2019 8606 form.
Thanks again,
Ok, thank you for the clarification.
I actually didn’t do 8606 when my husband and I first filed (jointly) taxes for 2019 because we hadn’t contributed anything by that point. We filed our 2019 taxes before April 2020. When I realized that I cold still contribute to 2019 backdoor Roth until July 15 2020 due to the tax submission deadline extension that year, I made the 2019 Roth contribution (sometime end of April or May, 2020 believe) we actually filed out taxes in 2020. The contribution was just made for me and not my husband for 2019.
This year, I made back door roth contributions/conversions both for my husband and I in December 2020, so the 2020 tax year, the contribution and conversation will have been done the same year and will be easier.
I will go back and amend the 2019 taxes submission to include the 2019 8606 form.
Thanks again,
jim this guide has been massively helpful. even though i did use a tax guy (when i botched up my SEP IRA ) and plan to use him again this time, the insights i have learnt here are invaluable.
quick Q about fidelity – i am planning to open an individual 401k there. does it need me to register as LLC or S or C corp ? or can i just do it as an individual ? thanks
No, you can’t do it “as an individual.” Businesses open 401(k)s. However, a sole proprietorship is a business. No LLC or corporation required. You just have to get an EIN which takes seconds online and costs nothing.
Thanks. Do I need to show that I actually own a business / sole proprietorship ? I am asking for my wife, who is currently not working due to covid. Also, I am actively employed by the hospital, can I also get a EIN for me ?
Thanks.
When you get an EIN, you tell the IRS the name of the business. So that’s basically establishing the business. You really do need a business to do it.
Thanks for the step-by-step guidance for backdoor ROTH conversion. Since I had tax deferred IRA in Schwab from years ago when I was eligible, I can not do ROTH conversion in Schwab due to pre-rata rules. May I open a new non-tax-deductible IRA in Vanguard or Fidelity using after tax money and convert into backdoor ROTH right away? Thanks.
First, you CAN do a Roth conversion if you want. It just gets pro-rated.
Second, no, you can’t just open up another IRA since line 6 on Form 8606, where the pro-ration happens, asks for the balance of ALL of your IRAs.
Oh, no! I just noted that I had quite some traditional IRA funds I invested into Real-estate crowd equity funds that could be locked in for up to 5 years! That would prevent me from doing backdoor ROTH conversion due to Pro-rata rules or I may have to pay double tax on my ROTH. Not worth it!
Yea, that’s unfortunate. Maybe you could do a Roth conversion of that money though without selling the investment.
I have an existing IRA account with funds that I will reverse-rollover to my existing 401k (these were originally funds from an old 401k that I will reverse to a new 401k with a different employer). Once my traditional IRA account is zeroed out after the reverse rollover, can I use that same account to make new contributions (for purpose of a reverse rollover to an existing ROTH IRA account that I have). Does that traditional IRA account actually convert over to become a new ROTH-IRA account, or do I just use those two existing accounts to transfer just the funds ($6,000), year after year?
Yes.
You just use the two existing accounts year after year.
By the way, “reverse rollover” is not really a term anyone uses.
I’ve been reading your site for years—love it and thank you!
One of my good friends and I were recently discussing…
He is the sole income earner in his household, and has been contributing the max into a traditional IRA for his wife the past few years. These contributions have been with post-tax dollars as he is above the income threshold. He didn’t know about the Backdoor Roth (until now).
My friend’s accountant seems to think he can convert his wife’s traditional IRA account to a Roth and only owe taxes on the capital gains. Is this accurate? More simply, if I contributed $6k to a traditional IRA from 2016-2020 (with post-tax dollars), can I convert $30k in 2021 to a Roth as a nontaxable event?
Thank you,
Steve
Yes, she’ll only owe taxes on the earnings.
It’s technically a taxable event, but no taxes are due. If you didn’t get a deduction when the money went in, you create “basis” and you don’t pay taxes on it when you convert it.
Hi,
I just wanted to confirm my last post went through.
Thanks,
Steve
If your last post is asking about your friend’s wife’s IRA, then yes.
I was told that the IRA Aggregation rule precludes a straightforward BDR conversion. I already have a traditional IRA in addition to my employer 403b. Does this mean I have to rollover my traditional IRA into my 403b in order to do the BDR? Thanks!
Yes, you will get pro-rated if you don’t.
I wish I knew about your website earlier.
I just opened a traditional IRA account and contributed 6K on 1/22/2021 with hopes of doing the backdoor Roth IRA conversion as soon as the funds get deposited. I want this to count for the previous 2020 tax year.
Can I make another contribution of 6K this month, Jan 2021, and do the backdoor Roth conversion for the current 2021 tax year or can I only do this backdoor Roth conversion once in a year? If so, is there a time frame before I should do my 2nd contribution this year or can I do this asap?
Thanks for your time.
An article about the backdoor Roth posted at https://www.schwab.com/resource-center/insights/content/backdoor-roth-is-it-right-you indicates that the IRS has not officially commented or provided formal guidance on whether the back-door Roth violates the step-transaction rule. If the IRS decides that the loophole is a violation, it suggest you could owe a 6% excise tax for overfunding your Roth. I don’t recall you or anyone else talking about this potential risk. Do you have any comments on this potential risk?
That article was published before the IRS clarified this issue. I’ve been talking about that risk for a decade, but stopped a few months after that article you cite was published when the IRS basically said there’s no reason to wait between contribution and conversion. For example, in the post you just commented on is a paragraph about The Step Transaction Doctrine:
The Step Transaction Doctrine
There used to be concern that the IRS would have a problem with the backdoor Roth due to an IRS rule called The Step Transaction Doctrine. This rule basically says that if the sum of a bunch of legal steps is illegal, then you can’t do it. Some wondered if this backdoor conversion from traditional IRA to Roth was a legal transaction considering this doctrine. Those concerns, valid or not, are no longer an issue. The IRS clarified in early 2018 that no waiting period is required between the contribution and conversion steps of the Backdoor Roth IRA and essentially has given its blessing on the whole process. Waiting just makes things more complicated on the 8606, as discussed in Pennies and the Backdoor Roth IRA.
Here’s a link: https://www.forbes.com/sites/ashleaebeling/2018/01/22/congress-blesses-roth-iras-for-everyone-even-the-well-paid/?sh=56f6f2607471
I think your Step 3 should actually be Step 1.
I think many high earners have heard of an IRA and probably have contributed to a Traditional earlier in their careers to get the deduction.
Later in their career as high earners, they then hear about this “Backdoor Roth” concept and want to take advantage of contributions that grow tax free rather than tax-deferred.
So their first step would/should be how to clear out their (non-Roth) IRAs in order to make this backdoor mechanism work. Honestly for me on the first time, that was the most difficult step (mainly because I had both deductible and non-deductible contributions in my tIRA). Figuring out where and how to dump my tIRA deductible contributions and tax-deferred growth took much more time than the other steps you have outlined.
Just a suggestion.
The order doesn’t matter as long as the conversion and taking care of the IRA occur in the same calendar year. Step 3 doesn’t even apply to many people (like me).
In 2019 I contributed 6k into a Roth IRA, didn’t realize until 2020 that I was over the contribution limit. recharacterized in early 2020 but amount had grown to 6,678.83. Then I did a backdoor conversion for the full 6,678.83 in 2020 for 2019 money before April. Then in addition, I did the backdoor Roth for 2020 the correct way. I followed the “Late Contributions to the Backdoor Roth IRA” instructions on the WIC website. my questions is how will my 8606 look like for 2020 compared to the example in the WIC site (the 678.83 that will be taxed. My 2019 8606 form I just filled exactly like the WIC example for “Late Contributions to the Backdoor Roth IRA”. Thank you.
Just follow the instructions and if there is a line you have a question on, let me know. At the end, you should have $679 in taxable income from the process. Basically, your 2020 8606 will show a contribution of $6K and a conversion of $12,679.
My concern is that nowhere on the form does 679 show up. For 2020 8606 form, Will my line 2 be still be 6000 and line 8 would reflect the 12678.83? thanks.
Can you imagine what it is like to do 5 or 6 8606s a day? I ought to open a new business “8606s R Us”! 🙂
Start at the top and work your way down.
Line 1: 6000
Line 2: 6000
Line 3: 12,000
Line 4: 0
Line 5: 12,000
Line 6: 0
Line 7: 0
Line 8: 12,679
Line 9: 12,679
Line 10: 0.94644688
Line 11: 12,000
12: 0
13: 12,000
14: 0
15a: 0
15b: 0
15c: 0
16: 12,679
17: 12,000
18: 679
I dunno. I see a 679. Which line did you screw up? All I did is follow the directions on the form. Did you not go all the way to line 18 or something?
Line 2 was messing me up between 6k and 6678, but it all makes sense now. Thank you very much for all that you do.
Yea, the 679 isn’t basis. Line 2 is actually where most errors take place. Everything else is just following directions, but lots of people get confused when we start talking about basis. Basis is just your after tax money.
Hi WCI,
Thanks to your tutorial, I have been able to do the backdoor roth IRA for a few years.
I am planning to convert the funds (all pre tax money) in an old 401K into my Roth IRA account. Will I still be able to do my usual backdoor Roth IRA conversion of $6K or will doing it in the same year as the 401K conversion complicate things too much? Thank you for any insight you might have.
Yes, no problem. Roth IRA balances don’t affect the pro-rata calculation and contribution amounts are not affected by conversions or rollovers.
Awesome, thank you for your quick reply, I really appreciate it!
Hello.
Completed fellowship and started my first post-training job in 2020.
Trying to reconcile tax implications of doing both Backdoor Roth IRA and conversion of Roth and non-Roth 403(b) funds with tax software (TaxAct). Details as follows:
~$52,000 in 403(b) assets (2019 + 2020):
$19,000 (2019 Roth 403(b) after-tax)
$19,500 (2020 Roth 403(b) after-tax)
$ 8,200 (2019 + 2020 403(b) pre-tax mandatory contributions with employer match)
$ 5,300 (2019 + 2020 403(b) Roth after-tax “ordinary income / taxable amount”)
$6,000 for Backdoor Roth IRA (2020):
$6,000 (non-deductible Traditional IRA post-tax)
~$52,000 rolled over (2020 – separate date from Backdoor Roth IRA):
$46,700 (Roth component rollover to Roth IRA)
$8,200 (non-Roth component rollover to Traditional IRA, immediately converted to Roth IRA)
~$14,200 listed on 1099-R (2020):
$6,000 (non-deductible Traditional IRA post-tax)
$8,200 (non-Roth component rollover to Traditional IRA)
Box 7 Distribution Code 02 (early distribution, exception applies)
Goal was to max Roth IRA contributions during post-training year with lowest taxes (50% fellowship, 50% attending) and take tax hit on converting the non-Roth components of the 403(b) (i.e. the mandatory component and employer match).
My understanding was that income taxes would only be paid on whatever marginal rate was for the $8,200 component, but NOT the $6,000; both were separate transactions and 2020 year-end Traditional IRA balance is $0. I guess I would like to know if:
(a) the pro-rata conversion rule perverts this
(b) I am not correctly entering fields into the program
(c) something is else amiss
Either way, I figure worst-case scenario is that I end up paying taxes on the full ~$14,200 converted and best case scenario is that the 1099-R considers the whole thing as part of an eligible rollover and I end up paying nothing on the full amount (…though I doubt that the latter is the case).
I can tell you how the taxes work, but I can’t tell you how to get TaxAct to report it all right.
But it’s not clear to me what you actually did. You listed a bunch of numbers that don’t make sense to me. For example, you said you put $6,000 into a Backdoor Roth IRA AND $6,000 into a non-deductible traditional IRA. You can’t do both of those in the same year. I really have no idea what you actually did so I can’t tell you anything about what taxes you owe.
You should owe taxes on pre-tax money converted to Roth money and that’s it. Conversions of post-tax money should be tax-free.
Sorry for the confusion – formatting looked different when composed than when posted.
Numbers after the colons are breakdowns of the specific components of each quantity and not transactions themselves; $6,000 is the Backdoor Roth IRA (i.e. non-deductible traditional IRA contribution, subsequently converted to Roth) and ~$8,200 is the portion of the ~$52,000 403(b) rollover which was the pre-tax component.
Having reconciled with your “17 Ways To Screw Up a Backdoor Roth IRA” post, it sounds like points #13 and #15 are most pertinent here. Namely, Line 15c should ultimately somehow be $8,200 (i.e. the taxable portion of conversion which should be reported on 1040 Line 4b).
Bottom line – only $8,200 of the $14,200 total conversion should be taxable, correct?
I still don’t understand what you did, but if you did a $14,200 Roth conversion and $6,000 of it was post-tax money that you put into a traditional IRA as part of the Backdoor Roth IRA process and $8,200 of it was pre-tax money that came from somewhere else, then yes, you’ll owe taxes on $8,200.
That’s exactly what I did.
$6,000 was the Backdoor Roth IRA (contribution of post-tax dollars to non-deductible IRA, subsequent Roth conversion).
~$8,200 was component of 403(b) rollover from fellowship which had to be rolled over to a traditional IRA and subsequently converted because it was pre-tax money as part of mandatory contribution (and employer match).
Everything else (~$46,700) was post-tax Roth 403(b) contributions and earnings which was directly rolled over to a Roth IRA because I had already paid taxes on it.
Issue is reconciling Form 8606 so that only the ~$8,200 is taxed.
Okay, seems pretty straightforward. How can I help? Which line are you having trouble figuring out? Did you get lines 2 and 8 right? That’s where most mistakes are made.
Quite frankly, all of Part I is confusing.
Part II rather eloquently accounts for exactly what I did:
Line 16: $14,200 (net amount converted from tIRA to rIRA in 2020)
Line 17: $6,000 (basis in 2020)
Line 18: $8,200 (taxable amount, i.e. Line 16 – Line 17)
Working backwards from Part II, Line 16 is amount from Line 8 in Part I (net amount converted) and Line 17 is amount from Line 11 in Part I (nontaxable amount converted). This seems straightforward, but I can’t get values in Lines 8 or 11 of Part I to equate if working forwards.
Details for working forward from Part I:
Line 1: $6,000 (nondeductible contribution to tIRA)
Line 2: $8,200 (…”you rolled over any nontaxable portion of your qualified retirement plan to a tIRA…”)
Line 3: $14,200 (Line 1 + Line 2)
“Yes” (made a Roth IRA conversion)
Line 4: $0 (contributions from 01/01/2021 – 04/15/2021)
Line 5: $14,200 (Line 3 – Line 4)
Line 6: $0 (value of all IRA as of 12/31/2020)
Line 7: $0 (IRA distributions in 2020, NOT including rollovers or conversions)
Line 8: $14,200 (total amount converted from tIRA to rIRA)
Line 9: $14,200 (Line 6 + Line 7 + Line 8)
Line 10: 1.000 (Line 5 / Line 9)
Line 11: $14,200 (Line 8 * Line 10, “nontaxable portion converted to rIRA)
Line 12: $0 (Line 7 * Line 10, “nontaxable portion of distributions not converted to rIRA)
Line 13: $14,200 (Line 11 + Line 12, “nontaxable portion of all distributions”)
Line 14: $0 (Line 3 – Line 13, “total basis in tIRA for 2020 and prior”)
Line 15a: $0 (Line 12 – Line 7)
Line 15b: $0 (“qualified disaster distributions”)
Line 15c: $0 (Line 15a – Line 15b, “taxable amount”)
Line 15c in Part I should equate with Line 18 in Part II.
…thoughts?
Line 2 is not $8,200. It’s probably $0 isn’t it? See if that fixes your issue. Basis is the post-tax money not the pre-tax money.
I think so.
With Line 2 as $0: Line 5 becomes $0, Line 10 becomes 0.423, Lines 11 and 13 become $6,007, Line 14 becomes -$7 ($0?) and Lines 15a-c are unchanged ($0).
This then makes Lines 16, 17 and 18 $14,200, $6,007 and $8,193, respectively.
As such, taxable portion of contributions (Part I, Lines 15a-c) is $0 (expected for Backdoor), taxable portion of conversions (Part II, Lines 16-18) is ~$8,200 (expected for untaxed part of rollover) and taxable portion of distributions (Part III) is $0 (no distributions).
I think my issues were:
(a) assuming the Line 15c and Line 18 values for 1040 Line 4b amount were supposed be equivalent (looks like they should be additive)
(b) misreading Instructions For Line 2 (initially read “include nontaxable portion of rollover” as “portion of rollover which was not previously taxed”)
Thanks for the insight!
If anything, this is a great example as to how one learns about the tax code by doing his or her own taxes.
I’ve been researching if I am able to do a backdoor Roth considering I have a Rollover IRA. Line 6 asks for the value of all traditional, SEP, and SIMPLE IRAs. Would rollovers count as any of those? I have no idea. However, I have decided to just transfer the rollover ira to my employer’s 401k to remove any doubt. I thought I had to forgo this year’s contribution since I have an IRA for now, but since I read that line, as long as I have 0 in IRA accounts at the end of the year, I should be good to contribute this year, correct?
Yes, a rollover IRA is a traditional IRA. You’ll get prorated so you did the right thing rolling it into a 401k. You can still contribute for 2020, just follow this guideline:
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Hi,
I am wondering, if you do this every year, is each conversion a new account, or do they get combined? (I.E., over the course of 10 years of doing a conversion each year, will you have 10 Roth IRA accounts or can you put into one?)
You would use the same Roth account for all your conversions over the years, unless you dont want to.
Ha ha 10 Roth IRAs. That would be a pain. No, I use the same traditional IRA and the same Roth IRA every year to do this.
I’m in the process of moving Trad IRA accounts to solo 401k (Keogh plan at Fidelity)
My understanding is that I make non-deductible contributions for 2020 before April 15, and for 2021 and then immediately convert to Roth IRA.
Should I wait for the above steps till I move Trad IRA acct to solo 401k or do I need to do this move before 12/31/2021 since I’m doing the back door conversion this year?
For a spouse that has both Trad IRA and Roth IRA account, I’m not sure how this would work. I’ll have to find out if her employer 401k plan accepts IRA transfers.
Is this the same N. Kaufman maligning both me and my followers on Twitter this week?
No, this is not, perhaps some other N.Kaufman..
Yesterday was the first time I’d heard about you and this site.
Unfortunate coincidence.
The answer to your question is that the order doesn’t matter much, so long as it is all done during the same calendar year. You just need to zero out that traditional IRA by 12/31 of the year you do the conversion. More info here:
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Remember even if you can’t do this for your spouse, you can still do your own and vice versa.
No worries.. I was just taken aback when you asked that 🙂
But there are going to be haters no matter what, that’s why i tend to stay away from social media.
Instead of the above link, your article – https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/ states – ” 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.”
perhaps the information is similar in both places. Will look at it,
Thanks again for the step by step.. Wish I’d known about this earlier. 🙂
Any folks have knowledge of whether completing Roth IRA backdoors for years without filing form 8606 (ignorance) and then subsequently filing a form 8606 would trigger an audit?
No, but you can go back and do the last 2-3 years of them with 1040Xs. That’s what I would do.
Thanks for the excellent tutorial. On 12/31/2020, I still had assets in a traditional IRA account. If I make a non-deductible contribution in Feb 2021 for tax year 2020, will I run into an apportionment problem for 2020?
In Jan 2021, I zeroed out the IRAs as you’ve depicted so that I won’t have this problem in tax year 2021 and following. I’m just wondering if I can do a backdoor ROTH for tax year 2020 (haven’t filed taxes yet in Feb 2021) without apportionment issues.
Thanks again
You mean a pro-ration problem? No. It’s about what is in the traditional IRA on 12/31 of the year you do the conversion step. If you convert in 2021, then you need to empty the IRA by 12/31/21.
Thanks very much. Really appreciate the quick response!
I have 2 retirement accounts 401k/403b from previous employers and want to move them to a self-directed traditional IRA to invest in a fund. I also do a back door Roth IRA each year. Will self-directed IRA will trigger pro-rata calculation, if yes should I convert self-directed traditional IRA to Roth. Thank you.
Yes.
That would be one solution to the issue.
I did a backdoor roth contribution of $6,000 and conversion of $1,662 from a rollover IRA for my wife last year. I think I have it correctly put into Tax Act, but I just want to make sure it is correct. Form 8606 shows the following:
Line 1: $6,000
Line 2: –
Line 3: $6,000
Line 4: –
Line 5: $6,000
Line 6: –
Line 7: –
Line 8: $7,662
Line 9: $7,662
Line 10: 0.783085
Line 11: $6,000
Line 12: –
Line 13: $6,000
Line 14: –
Line 15a: –
Line 15b: –
Line 15c: $0
Line 16: $7,662
Line 17: $6,000
Line 18: $1,662
I really appreciate your help and value the content of your website. Go Cougars!
Yes, you’re paying taxes on a $1,662 conversion and no taxes on a $6,000 Backdoor Roth IRA. Looks right to me.
do you have a tutorial on how to open a individual 401K ?
also , if my wife opens a individual 401k (is that same as self-employed 401k) , can i contribute to it as a spouse , even though i am a salaried W2 employee and have my company 403b ?
No, just this post: https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/
It’s a paper application with Vanguard and I suspect most of the others. It’s not too bad, but definitely more complicated than opening a Roth IRA or even a SEP-IRA.
If you are an owner or employee of your wife’s business, then yes, you can contribute from your share of the profits or your salary. But if you’re not actually doing anything in her business, then no, you can’t contribute to it. And you certainly can’t contribute money you earned in another business to it.
When I converted last year, the total amount was $6000. After reviewing my Vanguard account, it’s telling me that my total contribution was $6000.03. Is this from interest from the time it took for the funds to become available to make the conversion? Do you know if I will be subject to a penalty for this? Maybe I should just consult a CPA.
Thanks.
Yes.
Yes I know that you will not be subject to a penalty for this.
If you want you can consult a CPA, but I wouldn’t bother for this. I’d read this instead: https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
Can a retiree use a part of his Required Minimum Distribution to buy a $7,000 Roth IRA, assuming his income is under #124,000?
Only earned income can be used for a Roth IRA contribution. So if you have $7,000 in earned income, you can make a Roth IRA contribution despite taking an RMD from an IRA or 401(k) in the same year.