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 some attendings working less than full-time 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 not an account, it is a process with two steps:
- A Traditional 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.
2020/21 Contribution Limits
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 even open an Individual 401(k) at Fidelity, eTrade or Vanguard (rollovers from traditional IRAs to solo 401(k)s is a recent addition to Vanguard) 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!
If I open a T-IRA to convert into Roth-Ira. Can I do open it now, and convert it before April 15,2021 and claim it as 2020?
You can claim the contribution on your 2020 taxes, but the conversion will be reported on your 2021 taxes.
This may have been asked and answered in one of the 2,400+ comments before this that I just don’t have time to read, but it is what I believe a simple question that so far I have not seen clearly addressed by anyone talking about backdoor Roth IRA.
Is a backdoor Roth IRA subject to the same contribution limits as a “normal” IRA?
More specifically, if my MAGI is in the phase-out range and limits me to direct contributions of 1/3 of the limit ($2000), am I limited to the remaining 2/3 ($4000) for a backdoor Roth contribution?
Yes, $6K for 2021, $7K if 50+.
There is no contribution limit for traditional IRAs, which is where you are contributing your money in the Backdoor Roth IRA process. Remember there is no account called a “Backdoor Roth IRA.” There is a traditional IRA and a Roth IRA. The process is to put the money into the traditional IRA and then move it to the Roth IRA.
Sorry, but I am confused by your response.
According to the IRS (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits), total annual IRA contributions, including traditional and Roth, are limited by the amounts noted in the first part of your response. Additionally, deductible contributions to the traditional IRA, and any contributions to a Roth, phase out depending on your modified AGI ($66-76k for the traditional portion, and $125-140k for the Roth).
I don’t see it stated explicitly anywhere, but this suggests to me that above $140k MAGI, you can only contribute $6k/yr after-tax to a traditional IRA, which you would almost certainly want to convert to a Roth IRA using the backdoor approach.
Is this accurate — the $6k/yr limit always applies, and above the MAGI limit you can only make this contribution using after-tax dollars?
I agree with your comment. $6K limit always applies. Above the MAGI limit, you can’t get the deduction.
So, if I am in the MAGI phase-out range for Roth contribution, does it make sense to make a direct contribution to the Roth up to the reduced limit, then separate after-tax traditional IRA with a backdoor conversion for the remainder — or just do it all as traditional/back-door conversion?
In my opinion, it doesn’t matter either way. Roth contributions, phased out or not, are after-tax. Since you are in the phased-out range for the Roth, you are certainly making too much income to use traditional contributions to reduce you’re taxable income. In other words, your traditional contributions are after-tax, as well.
If you contribute say $3000 directly to the Roth, then $3000 after-tax to the traditional, followed by converting the $3000 traditional contribution to the Roth, tax-wise it’s the same as contributing $6000 to the traditional and then converting it to the Roth. Still have to file form 8606, except the contribution numbers are different.
This year my husband and I are filing separately. I used the backdoor roth IRA and my husband didn’t.
Next year we were planning on filing jointly. Our income is higher than the MAGI therefore we are not allowed to contribute to the roth IRA directly. However in January and February 2021 he has made contributions to his roth IRA directly (did not follow backdoor roth IRA instructions).
What options do we have now? Should he keep contributing directly and we file againt separately or is there a way to do the back door roth IRA for the remaining months March-December?
thank you!!
https://www.whitecoatinvestor.com/ira-recharacterizations/
Recharacterize to a traditional IRA contribution. Add the rest for the year. Then convert it.
Hi WCI,
1st TY for sharing your knowledge with us all. I have told my fellow Registered Nurses to check out your website for help with back door ROTH IRA.
Question:
I contributed $6000 to a ROTH IRA in 2019 and later found out that I made too much money when doing my taxes in 2020. Most tax preparers told me to withdraw the money (I’m glad I found you). In 2020 I recaractherized the 2019 ROTH IRA to a TIRA and 3 days later converted it back to ROTH IRA, but with a loss, so final amount was $5600. In 2020 I did it the smart way and did the back door ROTH IRA for $6,000 but I gained some money and the conversion was for $6,050. So for my 2020 taxes, does the IRS need to know that I lost money for the 2019 backdoor ROTH IRA and gained money for the 2020 backdoor ROTH IRA, and have my form 8606 show to pay taxes on the extra $50? Or will my line 8 in form 8606 show less than $12,000 and won’t have to pay taxes on the $50 because of the $400 loss the previous year?
You should have carried that $400 loss over on your 8606s, so that $50 should be tax free.
In doing the 8606 everything looks good until I get to line 14. I looked at all the comments for a similar example and didn’t find one. Could you help explain how Line 14 is not 0 and how to fix calculation, for us that loose money when doing a late backdoor roth IRA?
This is For 2020 taxes with a late backdoor roth IRA for 2019 taxes done in 2020 & also a 2020 backdoor roth IRA.
Line 1: 6,000 (2020 contribution)
Line 2: 6,000 (2019 contribution)
Line 3: 12,000
Line 4: 0 no contributions in 2021 for 2020
Line 5: #3 – #4 = 12,000
Line 6: 0
Line 7: 0
Line 8: 11,650 (amount actually converted to ROTH IRA due to loss)
Line 9: #6 + #7 + #8 = 11,650
Line 10: #5 / #9 = 1
Line 11: #8 X #10 = 11650
Line 12: #7 X #10 = 0
Line 13: #11 + 12 = 11650
Line 14: #3 – #13 = 12,000 – 11650 = 350 (I THOUGHT THIS HAD TO BE 0)
Line 15a: 0
Line 15b: 0
Line 15c: 0
Line 16: 11650
Line 17: 11650
Line 18: 0
You lost money between contribution and conversion. So now in some future year you can have $350 in gain without having to pay taxes on it.
Hi,
I have a question on 529 plans. I live in TX and also earn some income (W2) from SC for part of the year. Since I will be paying state tax on income from SC, can I open a 529 in SC for Tax break from SC state tax? Will living in TX mess up any tax advantage on SC income? Please note I will be residing in SC part of the year.
Thank you.
Yes, a non-resident or a resident can claim a 529 deduction in South Carolina against their South Carolina income.
https://www.whitecoatinvestor.com/best-529-plans-reviews-ratings-and-rankings/
Hi, thank you for the helpful posting!
However, I have a question.
I contributed to Traditional IRA in 2020 ( all $6000 ) and did not covert to Roth right away. Instead, I bought some EFTs and the earning became $200 which made total about $6200 when I made Roth conversion in Feb.
I made a conversion to Roth all my balance ( $6000 + $200 ) .
Also I contributed another $6000 for 2021 and made a conversion to Roth right away. So my balance in Roth is now around $12200.
And I have not filed tax for 2020 yet. I understand that I need to fill a form 8606 for $6000 contribution (not earning) for 2020.
Here is my real question. When a tax filing for 2021 comes, how should I write the 8606 form for 2021? I read over your posting but I am not sure where I should write down my earnings. Could you tell me where I need to put those earning in form 8606 in part 1 and 2? It is very confusing.
Thanks.
Yea, these studies are garbage in, garbage out for sure. If you assume you’re paying 2% to an advisor every year and 2% in mutual fund expense ratios, investing in insurance starts not looking too bad by comparison. Wade Pfau’s study had similar issues.
I’ve already contributed $7000 to my Vanguard Roth IRA for 2021 and my wife has contributed to hers with monthly payments. I am now realizing that our modified adjusted gross income for 2021 will most likely be over $198,000. How can I remedy this situation by using the backdoor Roth?
https://www.whitecoatinvestor.com/ira-recharacterizations/
Where could I have put this link so you would have seen it without having to post your question as a comment?
I did Backdoor Roth IRA conversion for 6k in Jan 2020 when I was PGY-3 and planning to start working after graduation likely potentially earning over the income limit. But I ended up starting fellowship so my AGI is far less than income limit. Do I need to fill out 8606? The 1099-R I received states 6K for both Gross distribution (Box 1) and Taxable amount (Box 2). I am confused why its making 6K taxable as I have already paid taxes on them. Thanks in advance for your help!
Yes, you should fill it out since you went through the backdoor even though it turned out you didn’t have to. No biggie though.
See if there is a little box checked saying “taxable amount not determined”. I bet there is.
I want to do a backdoor ROTH IRA conversion but have money in a SEP and traditional IRA already. That business has an employee so I can’t open a solo IRA. Can I create a new business entity so I can open a solo 401k? Can I move an IRA from one entity into a different entity’s 401k? How about into my wife’s solo 401K?
No, because the businesses would be considered to be affiliated since you own both. Yes, you can roll IRAs into 401(k)s.
Thanks for the response. I meant can I roll my IRA into my wife’s 401k?
No. All retirement funds are individual. Yours are yours and hers are hers. Unless one of you dies.
Thanks. So unless I’m ok paying pro-rata on my current IRAs doesn’t seem like I can do a backdoor roth
Just got my 1099 for 2020.
I followed exact instructions as above but I want to make sure IRS doesn’t think I owe taxes.
My 2020 Form 1099-R
Gross Distribution: 12,000.52. (Box 1)
Taxable Amount: 12,000.52. (Box 2a)
Taxable amount not determined X. (Box 2b)
Federal Income tax withheld: 0.00. (Box 4)
Distribution Code: 02 (Box 7)
State tax withheld: 0.00 (box 14)
For clarification.
For 2019 Roth
December 2019–>$6,000 to traditional. It converted to Roth with $6000.26 on 1/2/2020
For 2020 Roth
December 2020–> $6000 to traditional. It converted to Roth with $6,0000 on 12/22/2020
Have I screwed this 2019 up because although I “converted ” before 2020, it didn’t register the conversion to the Roth until 1/2/20.
I hope the 8606 form can clear it up. I hope.
Your 2019 IRA contribution should be documented on your 2019 8606.
Your 2020 IRA contribution and the $12,001 conversion you did in 2020 as documented by your 1099-R should be documented on your 2020 8606.
If you screwed up and put a $6000 conversion on your 2019 8606, you better refile it.
Thank you. Can I submit a 2019 8606 with this year’s taxes (plus 2020 8606)?
No.
Before I ask my question, let me start by saying a big ” Thank You ” for all the great content on this website and on the YouTube channel. It has really helped me gain knowledge regarding Backdoor Roth IRA.
I first came across concept of Backdoor Roth IRA in May 2020. By that time I had already filed my taxes for year 2019 and had got my refund in my bank account. However, because of COVID-19 situation, the deadline to file taxes for year 2019 was extended to 15 July,2020 instead of 15 April,2020. Hence the last date to contribute in my traditional IRA and then convert that money to Roth IRA for year 2019 was also 15 July,2020. I went ahead and exactly did that. I contributed $6000 to my traditional IRA account for year 2019 and converted that money to Roth IRA on or before 15 July,2020.
In October 2020, I made the $6000 contribution to my traditional IRA account for year 2020 and converted that money to my Roth IRA account.
In both the transactions, I immediately converted money from Traditional IRA to Roth IRA the very next day and my account balance in traditional IRA on 31 December,2020 was $0. I do not have any other IRA accounts except traditional IRA and Roth IRA. I have never made any contributions to my traditional IRA before May 2020 so last year was the first time I ever contributed in my traditional IRA.
My questions are:
1) For this year when I am filing tax returns for year 2020, should I add basis of $6000 in my form 8606 ? Will my form 8606 look something like image in this section – ” 2021 Form 8606 (must fill out parts I and II)” ? (This section is referred from this article)
2) Before starting any of these contributions, I had already filed tax returns for year 2019. That means I have not filed form 8606 for year 2019 obviously. What can be done regarding this ? Can I file that form with tax returns of year 2020 and will it look something like image in this section – ” 2020 Form 8606 (only have to fill out part I)” . (This section is referred from this article)
1. Yes. Might want to go back and file a 2019 8606 documenting that contribution as well.
2. File it. I’d attach it to a 2019 1040X.
Thanks a lot for the prompt response !
I made a late contribution a few weeks ago for 2020 however I just had an appointment with my accountant and mentioned to him about making the contribution. He said that since I made the contribution in 2021 it would not be counted for 2020 despite explaining to him I’m eligible until April. Is there a way to submit the form myself? Don’t think I’ll be going back to him after this haha
Yea, fire him. Your 8606 needs to be included in your 2020 tax forms. Why pay an accountant to file a return you know will have to be amended because he doesn’t know how to do it?
Couldn’t agree with you more. Was disappointed. Would I amend my taxes after he submits it? If he can’t do it, I’ll figure it out and do it myself!
i have around $10,000 in my traditional IRA, what is the process in order to withdraw this capital or at least make some improvements to have higher yearly gains.
That’s a very vague question. Can you be more specific? I mean, the way you spend the money in your IRA is you have them transfer it to your checking account. They can withhold taxes for you if you want. If that process is unclear, call the IRA custodian (Vanguard, Fidelity etc) and they can help you do it.
If you want to “make improvements” that usually means changing investments. You simply put in an order to sell one investment and buy another.
I am using TurboTax Deluxe. TurboTax pulls in the 1099 R form from where you did your backdoor ROTH
However, TurboTax tries to make you pay taxes on the money that you put into traditional IRA and convert to a ROTH IRA.
It tries to make you explain why you should not have to pay taxes on that 1099 R. The way around this is to fill out form 8606 but turbo tax does not do this automatically.
Have the problem every year and keep forgetting how do you get the form 8606 to generate so that you do not have to pay taxes on the $7000 dollars that you put into the traditional IRA and converted to a ROTH IRA.
See that Finance Buff tutorial on BD Roth with Turbotax.
Thanks for the website and all the information. Hoping you might provided insight into a unique situation. I am trying to figure out how exactly to file everything correctly as to not be penalized. I’m using turbotax online.
Situation:
I intended to do a backdoor roth. Fidelity initially advised me incorrectly when trying to do the Conversion step and instead carried out a recharacterization. It has since been corrected and recharacterized back to the traditional but this step occurred after dec 31. Now i’m trying to untangle everything. Have spent several hours on the phone with both turbo tax and independent CPAs and i’m still confused.
Timeline/Background:
Nov 2020 — contributed $6k to traditional IRA, incorrectly recharacterized trad-> roth
Jan 2021 — realized mistake, recharacterized roth ->traditional to correct. money already invested and had some growth. fidelity folks figured out correct amounts to move
Jan 2021 — converted the funds trad-> roth through the backdoor.
So essentially for 2020 I have contributed $6000 to a traditional IRA and not converted
I have a 1099-R for the traditional showing a $6k gross distribution and a code of “N” in box 7
My 5498 for the traditional shows $0 in the traditional at the end of the year.
My 5498 for the roth shows a contribution of $6000.
Fidelity says I won’t get another 1099-r til next year to reflect the recharacterization from roth->trad
I have account letters reflecting both recharacterizations.
Any thoughts on the best way to handle this? I know that the actual backdoor conversion will be on 2021 taxes, but the rest I’m struggling with.
-My understanding of the paperwork as of now and how the IRS sees it is that it looks like I made a $6000 contribution to a roth that I am ineligible to make?
-Does having a 1099-r for the traditional with a “N” recharacterization code hurt me? If it wouldn’t have been recharacterized incorrectly, would I still have gotten this form with $6000 listed as a distribution?
-Will not having a new 1099-r for the roth->trad be an issue? Fidelity has told me the recharacterization letters can be used instead to prove the contribution is legitimate but I’m not so sure.
-Do I add/report a 1099 for the correction without actually having it yet, and if so what would it look like?
Thanks for any insight.
I agree, your 2020 8606 will show a $6000 traditional IRA contribution.
I wouldn’t worry about the rest. If the IRS starts asking questions, you have the answers it looks like to me. No, I wouldn’t add 1099s that I didn’t receive.
Hello! Thank you so much for posting this! I just wanted to run this by you to confirm! I contributed the max $6000 directly to my Roth IRA last year, 2020, in February, since I thought my MAGI would be the around the same the previous years. But this year, 2021, I calculated my MAGI was over the limit to make full contributions to my Roth. So last month, I recharacterized the 2020 contribution and all of its earnings into a Traditional IRA, then after that was done, did the Backdoor conversion a day later into my Roth.
On the 8606, I filled out lines 1-3 and 14 like how you specified in “Late Contributions to the Backdoor Roth IRA” the 2020 part I portion. I didn’t make a statement of the recharacterization when I filed my taxes. Will I get penalized? And also, since I did the Backdoor conversion this calendar year in 2021 of that original contribution in 2020, does that Backdoor count as a 2021 contribution? Meaning I can no longer do a Backdoor Roth for this year?
You didn’t make your contribution late. You made it in February 2020. You just did the conversion late. So line 4 should be zero. But otherwise, looks the same. I don’t know what happens if you don’t send in a statement. Maybe they’ll audit you/ask you questions, but I doubt there’ll be a penalty. No, the contribution is a 2020 contribution, not a 2021 contribution. You can still do a 2021 IRA contribution.
Thank you for responding! Do you know how long the statement has to be? I can just say “I did a recharacterization of my 2020 contribution?”
I’d probably include dates and amounts and maybe a reason why, but yes, stick to the facts. The shorter the better when communicating with the IRS. No more than a paragraph certainly.
Perfect! Along with the written statement, I would have to file an amended return with form 1040-X, just filling out Part III that I’m adding a statement for the recharacterization since I’m not changing anything else, correct?
Or because I did the recharacterization this year, I don’t have to include a statement with my 2020 tax return, only for 2021?
I would include the statement on my 2020 return.
That’s what I would do.
Ahh okay! I’ll complete form 1040-X and include a statement for 2020s tax return. Thank you!
I have a traditional IRA and a sep IRA with contributions both before December 31st. The traditional IRA was non deductible contribution, sepIRA was deductible. traditional IRA is only about 4% of the sep IRA amount. I made 2020 contribution to sepIRA last year, I havent made any for traditional IRA for 2020
If I rollover the sepIRA to an individual 401K now, contribute to traditional IRA for 2020 and do the backdoor roth before april 15 I would incur taxes because of the prorata rule. Is that correct? Since the traditional IRA portion is only 4% of the sep IRA amount; will I only then pay tax on 4% of traditional IRA contributions before december 31st tha/t is rolled over?
If I rollover the sepIRA to an individual 401K and contribute to traditional IRA for 2020 now, then do the backdoor roth after april 15 would I avoid the pro rata rule
No, if you roll the SEP-IRA into a 401k before the end of 2021, you won’t be pro-rated on your 2021 conversion which will be reported on your 2021 taxes. Doesn’t sound like you did a 2020 conversion, so no biggie.
Great post! So I have a rollover IRA (from previous employer), which is considered traditional IRA? I have deposited 6000 for the year of 2020 and would like to convert to a Roth. It came with a question asking how much income tax withholding percentage I’d like to withhold during the process of conversion, any good suggestions on what number to put?
Thank you!
Yes.
Don’t withhold because no taxes will be due if done properly.
Remember to do something about that rollover IRA before doing Backdoor Roths or you’ll get prorated.
Sorry I wasn’t clear about my question. So I deposited 6000 last year (which is after tax) to my rollover IRA (from previous employer) account. If I’d like to move all the money in rollover (6000 after tax and 43000+ pretax money) to roth, do I NOT withhold the tax? or pay tax prorated since majority of the fund is pretax money from my previous job?
If i need to withhold, then how much percentage should I do?
Thank you again!
You’ll owe taxes on the $43,000, but you don’t have to have anything withheld. You can pay those taxes from another pot of money so you maximize how much stays in the Roth IRA.
Hi,
I wanted to take advantage of the backdoor Roth IRA (I have contributing to my Roth IRA for the past few years and I am in the “phase out” range, hence I contributed $2,600 in 2020 and $2,500 in 2021), so I opened a Traditional IRA a week ago and made a non-deductible contribution of $4,400 for 2020 (the difference between the $7,000 max I am allowed to contribute to IRAs and the $2,600 I already contributed for 2020 in my Roth) to it with the intention of doing a backdoor conversion to my Roth right away.
However, when I called Fidelity, they told me I cannot do the backdoor conversion for 2020 in 2021, so now I am stuck with the 2020 Traditional IRA contribution and don’t know what the best way to “get rid of it” is. I also already filed the 2020 taxes before I made the 2020 Traditional IRA contribution. Does anyone know for sure that you cannot do a backdoor conversion for the prior tax year?
Good news! The person you talked to at Fidelity doesn’t know what they’re talking about. While they’re right that you can’t do a conversion “in 2020” (because it is no longer 2020), that doesn’t mean you can’t convert money that you contributed for the 2020 tax year whether you contributed it in 2020 or 2021. The conversion gets reported on your 2021 8606.
Just convert it all to a Roth IRA in 2021.
There is no limit on when you can do conversions. You could contribute every year for 20 years and then convert it all in one year if you wanted. You SHOULDN’T do that. But you CAN do that.
Thank you very much for confirming what I suspected 🙂 The conversion of 2020 TIRA contribution went through fine at Fidelity, so if their statement was true, I would have expected the transaction to not go through.
P.S. I wish I had run across your site/blog a lot sooner. It would have saved me lots of research time (and not only for this topic) and I would have made better investing decisions.
I already filed my 2020 taxes, but I am doing the 2020 nondeductible contribution to the Traditional IRA and the backdoor conversion to Roth after the 2020 tax filing. Can I just submit the 8606 form for 2020 without filing an amended return?
I think you should send it in with a 1040X. Don’t worry, it’s pretty easy to fill out especially when the only change is an 8606.
Thank you so much for the quick response! Just curious, but if the 1040X would be exactly the same as the 1040 I already filed, what would be the benefit of sending a 1040X along with the 8606? Is it just to make it easier for IRS to identify that the 8606 is being submitted for a return that is already filed? I filed using H&R and was thinking to just mail the 8606 to IRS along with a letter explaining why the 8606 is being filed after the 2020 return was filed.
There’s a spot on the 1040X where you explain what changed. That’s “the letter” you want to send in. Look at the 1040X and you’ll see what I mean. Look at Part 3:
https://www.irs.gov/pub/irs-pdf/f1040x.pdf
Hi I have a question:
Im a fellow in training, I just opened a Roth IRA and have funded it with $6000 towards 2020 contributions
For 2020, I am single and my MAGI is < $124,000, so I can contribute the full amount
1) For 2021, I anticipate my MAGI will be around ~124,000-140,000..if it is above ~140,000, I will need to use the backdoor method, correct?
2) If I need to use backdoor method, should I just create a traditional IRA now as well?
1. Yes
2. Whenever you’re ready to contribute. It only takes 5 minutes to open it.
A little confused about tax issues/advantages with backdoor Roth conversions.
So when you put money towards a traditional IRA it is of course tax deductible for the tax year for which it counted, up to the legal contribution limits.
When you convert $6000 of it towards a backdoor Roth, do you lose that tax deductibility on the $6000 or is it still in place since it was originally put in as traditional IRA funds?
Also, is there a point at which the $6k conversion is materially so small that it may not be worth it? Mid-late 40’s approximating $4M in retirement accounts (some recent pull back last month or two though), with expectations of >$10M IRA accounts at full retirement age. Is it worth it to bother in this scenario?
No, for high earners who have a retirement plan at work, a traditional IRA contribution is NOT deductible.
But if for some reason you got that deduction, then yes, you would pay taxes on the conversion.
I agree this isn’t worth a big hassle for you to do at your level of wealth. But if you don’t have a traditional, SEP, or SIMPLE IRA, why not?
Thank you for the information. I notice you stated this was your 9th pair. Do you have to open a new Traditional and Roth every year?
First off, thank you for your work and helping everyone navigate through the world of retirement financing.
I wanted to start contributing 6k to Roth IRA through the backdoor option for me and my wife separately.
But I came to find out today that she has an old 401k from previous employer that got rolled into traditional IRA and is sitting in bank A. I was going to open her accounts at Vanguard, but does her TIRA at the other bank matter? Does she have to have no active funds in any traditional IRA to do the backdoor conversion or is that irrelevant since the accounts are at different institutions?
This is probably a stupid question but I am very new to this.
Thank you very much!
Yes, it still counts even if it is in a separate IRA at a separate instituion.
It isn’t that she can’t do a conversion if she has pre-tax money in a traditional IRA, it’s that the conversion gets pro-rated and most people don’t want that to happen.
People sure do like Roth’s around here. Before you do any Roth conversion, IMO remember to first consider family HSA if you’re eligible given their advantages over Roth/tIRA/other retirement vehicles. You just ultimately need to use the funds for healthcare needs and there are no early withdrawal penalties when used for healthcare needs. If you have further resources for funding then the (backdoor) Roth is a good next option.
Another way to contribute to Roth IRA’s if you’re above the income threshold is to make a direct contribution to a Roth for which you’re not the beneficiary. I’ve been doing this for my teenagers for a few years now since they have earned income by working for our family business (their income also serves to lower our effective household tax rate). $6K/year Roth contributed to each of them starting over a decade younger than I started investing for retirement is one heck of a head start given the compounding benefit with starting so young. Given that they plan on professional education too, the contributions can probably continue over a decade so long as they continue to work, so they don’t have to delay retirement planning to an older age as many physicians (myself included) had to do.
You get to a point where you know you’ll have more than enough for retirement and the focus starts transitioning to legacy planning. The earlier you get to this point the better off your children (and estate) will be, and the more time you have to plan and execute estate directives, given annual contribution limits for retirement plans. Roth contributions for your children can be a part of that plan which comes at relatively little cost but can have huge impact over a lifetime of compounding. This tactic can also be extrapolated to Roth contributions to grandchildren when the time comes. While you personally don’t benefit directly from these Roth contributions, some very special people in your life will. Based on my specific resources, my goal is for each child to have a net worth of at least $250K-$500K upon completion of their education. Not that zero or negative net worth feeling I started with. The Roth accounts (contributions plus returns) can be a significant portion of that with the great advantage of being tax free upon withdrawal after age 59.5 for penalty free.
I would hope most of my readers could max out both HSA and Roth IRA(s) each year.
Technically YOUR CHILDREN contributed to their own Roth IRAs with their own earnings and you gave them a $6K cash gift. You didn’t contribute to their Roth IRAs because that would be illegal.
Most readers here can probably max out both, just making sure they remember to consider the HSA if eligible.
Are you saying the funds for our kid’s IRA’s can’t come annually from our accounts for deposit into their Roth accounts? Regarding who technically makes the contribution sounds like semantics, from what I understand it can be both a gift and a contribution, not mutually exclusive. Otherwise wouldn’t it then be a requirement that the Roth funds be withdrawn from the child’s own account? Practically speaking I have read many times on the internet that anyone (even a random friend) can make the contribution to the account. Also neither my accountant or Roth custodians (Vanguard prior and now Fidelity) have expressed any funding concerns.
This article from the Motley Fool, written by a CFP, specifically stated “anyone can make the contribution”:
https://www.fool.com/investing/2021/01/06/5-rules-for-opening-a-roth-ira-for-your-kid/
Fidelity says this:
“Convincing a child to hand over his or her hard-earned cash to invest in a Roth IRA may be challenging but remember that as long as the child has earned income to qualify for Roth IRA contributions it doesn’t matter where the contributions come from. As an alternative, you may want to consider an arrangement where you or another adult make contributions as gifts to reward the child for working, or one where the child contributes a portion of his or her earnings to the Roth IRA and you match that amount (assuming the total doesn’t exceed the lesser of the child’s earned income for the year or $6,000).”
https://www.fidelity.com/learning-center/personal-finance/retirement/turbocharge-childs-retirement
I saw this on zacks.com:
“No Money Tracking
As long as your adult child has enough compensation, the IRS doesn’t care whether she uses your gifted dollars or her compensation to contribute to her Roth IRA for the year. Suppose she has a part-time job that pays her $15,000 for the year and she spends all $15,000 on her basic needs. If you give her $5,000 more, she can put that money in her Roth IRA even though that $5,000 wasn’t compensation.”
If you feel differently or get different feedback from a CPA/tax attorney let me know I’ll reconsider how the Roths are funded or any other adjustment.
In the end, the point is about optimizing the appropriate use of Roth accounts, back door or otherwise for high earners (in this case the benefit is in the realm of estate planning rather than direct monetary gain for the “gifter”.
I don’t think that the account it comes from matters much (never heard of an audit looking at that), but mine do come out of my kids’ checking accounts into their Vanguard accounts. It’s just a technical point I was making so people understand that you can’t just contribute to your kid’s Roth IRAs, they actually have to have earned income equal to the contribution.