By Dr. James M. Dahle, WCI Founder
Setting up a Backdoor Roth can be confusing, so I thought I’d put together a tutorial on the Backdoor Roth IRA steps people can refer to when they go through this process. Let's get started.
Table of Contents
- What Is a Backdoor Roth IRA?
- Who Should Do a Backdoor Roth IRA?tra
- When to Do a Backdoor Roth IRA?
- Backdoor Roth IRA Pros and Cons
- Backdoor Roth IRA Tax Implications
- Backdoor Roth IRA Steps
- How to Fix and Prevent Backdoor Roth IRA Mistakes
- Backdoor Roth IRA FAQs
What Is a Backdoor Roth IRA?
Despite its name, a Backdoor Roth IRA is not an account, it is a process with two steps:
- Contribute to a Traditional IRA.
- Complete a Roth conversion.
If you understand the rules of both of these steps, putting them together is no problem.
Who Should Do a Backdoor Roth IRA
Remember that if you are a low earner you can just contribute DIRECTLY to a Roth IRA and skip this Backdoor Roth IRA process.
Roth IRA Limits and Conversion Rules
Low earner is defined as a Modified Adjusted Gross Income (MAGI) under a phaseout range in 2022 of $129,000-$144,000 ($204,000-$214,000 Married Filing Jointly). Some docs like residents, employee dentists, part-timers, and even some medical attendings in the lower-paying specialties who are married to a non-earner can just contribute to a Roth IRA directly.
Anyone who earns at least $6,000 ($7,000 if 50+) can contribute $6,000 ($7,000 if 50+) to an IRA [2022]. If your income is below a MAGI of $129,000-$144,000 ($204,000-$214,000 Married Filing Jointly), you can contribute directly to a Roth IRA. If you have a retirement plan offered to you at work and your MAGI is below $68,000-$78,000 ($109,000-$129,000 Married Filing Jointly) you can deduct your traditional IRA contributions. Since most readers of this blog have a retirement plan through their job and have (or soon will have) a MAGI over $214,000, they will find that they can neither make direct Roth IRA contributions NOR deduct their traditional IRA contributions. Thus, their best IRA option is the Backdoor Roth IRA process, i.e., an indirect Roth IRA contribution.
Spousal IRAs
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 for each spouse that is 50+) of tax-protected and (in most states) asset-protected space per tax year, but it allows for more tax diversification in retirement. Tax diversification allows you to determine your own tax rate as a retiree by deciding how much to take from tax-deferred (traditional) accounts and how much from tax-free (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 the tax return for a married couple doing Backdoor Roth IRAs should always include two form 8606s.
Married Filing Separately
The contribution and deduction income limits are particularly low if you are filing your taxes Married Filing Separately (MFS). Both the ability to contribute directly to a Roth IRA and the ability to deduct a traditional IRA contribution if you (or your spouse) are eligible for a retirement plan at work phase out between $0 and $10,000. Basically, the best option for anyone filing their taxes MFS is the Backdoor Roth IRA process, i.e., an indirect Roth IRA contribution.
There is an exception to these rules if you do not actually live with your spouse. In that case, your ability to contribute directly to a Roth IRA phases out between a MAGI of $125,000-$140,000 in 2021. If you live separately and are not covered by a retirement plan at work, you can deduct a traditional IRA contribution no matter your income. You can still do a Backdoor Roth IRA process in these situations where your IRA contribution is either partially or completely deductible. The tax bill will be precisely the same, $0 when done properly. However, instead of having no tax cost for either the contribution or the conversion, your deduction on the contribution will precisely equal the tax cost on the conversion, resulting in that same $0 tax bill for the entire process.
Mega Backdoor Roth IRA
A Mega Backdoor Roth IRA is completely different from a regular Backdoor Roth IRA. Despite its name, you actually do a Mega Backdoor Roth IRA with a 401(k), not an IRA. It requires a 401(k) that both accepts after-tax (not Roth) employee contributions and allows for either in-service withdrawals (and thus conversions to a Roth IRA) or, more commonly, in-plan conversions. Using the Mega Backdoor Roth IRA process, one might be able to put as much as $58,000 ($64,500 if 50+) [2021] per year into a Roth 401(k) (or possibly a Roth IRA in addition to your usual $6,000-$7,000 contribution). However, this process has nothing to do with the Backdoor Roth IRA process we are discussing in this post.
When to Do a Backdoor Roth IRA?
Lots of people wonder about the timing of a Backdoor Roth IRA.
IRA Contribution Deadline
There is really only one deadline to meet with the Backdoor Roth IRA process. IRA contributions for a given tax year must take place between January 1st of the tax year and April 15th (even if you file an extension) of the following year.
Backdoor Roth IRA Conversion Deadline
The conversion step may take place at any time. It can take place the next day or even the same day as the contribution. I don't recommend it, but you can wait months, years, or even decades between the contribution and the conversion step. There is no deadline on Roth conversions. If you need to perform a rollover or conversion of a traditional, rollover, SEP, or SIMPLE IRA in order to avoid the pro-rata rule, you have until December 31st of the year you do the conversion step.
When Should You Contribute and Convert?
You should do both steps as soon as possible. Many white coat investors do the IRA contribution step and the Roth conversion step the first week of January each year. This maximizes the amount of tax-free compounding that can occur on those dollars. Minimizing the time between contribution and conversion and doing both steps within the calendar year is not required, but certainly simplifies the paperwork.
Want to really make your paperwork complicated? Contribute to your IRA each month and convert it each month. Then you have 12 contributions and 12 conversions to keep track of each year. Seriously though, if you make enough money that you have to contribute to your Roth IRA(s) through the Backdoor Roth IRA process, you make enough to do it in one fell swoop each year.
Can I Do a Backdoor Roth IRA Every Year?
Yes. My wife and I have done one every year since 2010 and do not plan to stop until we no longer have any earned income. It is just one of the investment chores we perform once a year.
5-Year Rule
One factor that may push you to do a Backdoor Roth IRA earlier is the 5-year rule. Now there are at least three 5-year rules related to IRAs, but the main one to pay attention to here is the 5-year rule after a Roth conversion. This rule determines whether the withdrawal of principal from the account prior to age 59 1/2 will be penalty-free. The 5-year period starts on January 1st of the year you do the conversion, so it could be a little less than 5 years. Roth IRA principal generally comes out tax and penalty-free (it is only the earnings that may be subject to penalties), but that is only the case after the 5-year rule has been fulfilled.
In essence, if you do a conversion of a Roth IRA at age 51, you can then withdraw the principal tax and penalty-free starting at age 56 rather than age 59 1/2. This can provide funding for living expenses to early retirees. If you do a Roth conversion at age 57, you still get access to that principal (and earnings) tax and penalty-free at age 59 1/2. So it's 5 years or age 59 1/2, whichever comes first.
There is also a completely separate 5-year rule on IRA contributions, but this starts from the time you make your very first IRA contribution, not every contribution, so it should not apply to most early retirees.
Backdoor Roth IRA Pros and Cons
There are a lot of great things about the Backdoor Roth IRA, but it isn't all peaches and cream.
Pros of Backdoor Roth IRA
The main benefit of a Backdoor Roth IRA is that it provides you another retirement account. Via the Backdoor Roth IRA process, you can continue to contribute to a Roth IRA even after your earnings rise above the income limit for direct Roth IRA contributions. Retirement accounts eliminate the tax drag that applies in a taxable, or non-qualified account, reducing your taxes and allowing your investment to grow at a higher rate so you can reach your goals sooner.
How much can that tax protection be worth compared to a taxable account? It depends on the return of the underlying investment, its tax efficiency, and the amount of time the money is left in the account. At my marginal tax rate, $10,000 earning 8% in a tax-inefficient investment over 50 years would grow to $469,000 in a Roth IRA but only $88,000 in a taxable account. More realistically, over 30 years the use of a Roth IRA versus a taxable account for a tax-efficient investment would still result in 29% more money.
Retirement accounts ensure simple estate planning. By using beneficiaries, that money does not go through the probate process, so your heirs get it sooner with less hassle, more privacy, and no cost. They can even stretch the tax-protected growth benefit for another decade after they inherit the account. Retirement accounts like a Roth IRA also provide substantial asset protection in most states, meaning that in the admittedly very rare event of a dramatically above policy limits judgment that isn't reduced on appeal, you can declare bankruptcy and still keep what is in your retirement accounts. Roth money is tax-free forever, so by continuing to contribute each year you can increase tax diversification in retirement.
Cons of Backdoor Roth IRA
Roth IRAs, even when you contribute via the Backdoor Roth IRA process, are still retirement accounts with all of their downsides. Retirement accounts limit the investments you can put in them and prohibit the use of margin investing. If you withdraw Roth IRA earnings prior to age 59 1/2 without an approved exception, you will owe a 10% penalty.
Due to the pro-rata rule (see below), the Backdoor Roth IRA process requires you to either convert or rollover into a 401(k) any traditional IRAs, SEP-IRAs, and SIMPLE IRAs you may have. If you have self-employment income, you will need to use an individual (solo) 401(k) instead of a SEP-IRA to shelter that income from taxes. Doing Backdoor Roth IRAs each year also adds one form (IRS Form 8606) per spouse to your tax return. If preparing your own taxes using tax software, it can be tricky to ensure the software reports the process correctly. If you do a Backdoor Roth IRA instead of (rather than in addition to) maxing out your tax-deferred accounts during your peak earnings years, that can also be a mistake that results in the accumulation of less money.
Perhaps most significantly, there are now two steps to getting money into your Roth IRA each year instead of just one. While I think the process is pretty darn simple, I am continually amazed at all of the unique ways that doctors manage to screw it up. Later in the article, I'll show you how to fix all of those screw-ups.
Is a Backdoor Roth IRA Worth It?
Yes! Most of the time. It really is just a little bit of hassle to do each year, although there may be some additional hassle the first year if you need to take care of another IRA first to avoid the pro-rata rule. There may be times when someone has a large traditional IRA they cannot afford to convert to a Roth IRA and cannot roll over into a 401(k) because they don't have a 401(k) at all, their 401(k) charges high fees, or because the IRA assets are invested in something they cannot invest in within a 401(k). If your employer-provided retirement account is a SIMPLE IRA or a SEP-IRA, the Backdoor Roth IRA process is also probably not worth it. Finally, some multi-millionaires don't want to bother with even the minor hassle of the Backdoor Roth IRA process because getting an extra $6K-$14K a year into Roth accounts just isn't going to move the needle for them.
Backdoor Roth IRA Tax Implications
Roth IRAs are all about avoiding taxation on earnings, so naturally, there are lots of tax implications of this process.
Pro-Rata Rule
The most important tax implication to be aware of is the pro-rata rule. I would estimate that 90%+ of Backdoor Roth IRA screw-ups involve the investor having his or her conversion pro-rated. When you report a Roth IRA conversion on IRS Form 8606 (see below) there is a pro-rata calculation made. The numerator is the amount converted. The denominator is the total of ALL traditional, rollover, SEP, and SIMPLE IRAs, but not 401(k)s, 403(b)s, 457(b)s, Roth IRAs, or inherited IRAs. Therefore it is critical that you DO SOMETHING with any IRA balance you have PRIOR to December 31st of the year in which you do a Roth conversion of after-tax money. Later in this article, I'll describe the exact options you have of what to do with this money.
Tax on Backdoor Roth IRA Conversion
Done properly, there is NO tax on a Backdoor Roth IRA conversion. Zero. Nada. Zilch. While the money you put into a Roth IRA (indirectly via the Backdoor in this case) was taxed when you earned it, it is NOT taxed when you contribute it directly to a Roth IRA or when you contribute it as a non-deductible IRA conversion nor when you subsequently convert that money to a Roth IRA. In fact, it is never taxed again.
Do I Need to Worry About the Step Transaction Doctrine?
There used to be a 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.
How to Report a Backdoor Roth IRA on Turbotax
Reporting the Backdoor Roth IRA properly on Turbotax is unfortunately even more complicated than filling out Form 8606 by hand. The key to doing it right is to recognize that you report the conversion step in the Income section but you report the contribution step in the Deductions and Credits section. Since you generally do the income section first, you report the conversion before you report the contribution, even though you actually did the contribution before the conversion. At the end, you want to look at the Form(s) 8606 that Turbotax generates, just like you would check up on one filled out by an accountant.
More information here:
How to Report a Backdoor Roth IRA on TurboTax
Backdoor Roth IRA Steps, Tutorials, and Walkthroughs
In this section, we'll explain exactly how to do the Backdoor Roth IRA process and how to report it on your tax return, whether you file on paper or using tax software. You can easily walk through these Backdoor Roth IRA steps at Vanguard, complete a Backdoor Roth at Fidelity, or knock out a Backdoor Roth IRA at Schwab, three of the most popular brokerage/mutual fund companies.
How to Perform and Report on Paper the Backdoor Roth IRA Process
While it is really just a two-step process, it is best to think of it as a five-step process. These steps don't all have to be done in order (it might be easier to do Step 3 before Step 1), but they will all need to be done.
Step 1 – Contribute to a Traditional IRA
Make a $6,000 ($7,000 if 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.
Step 2 – Leave the Money in Cash
An account like a traditional IRA is not an investment, of course, just like a suitcase isn't clothing. When putting money in a traditional IRA, you also have to tell the IRA provider what you would like to invest in. In this case, just leave the money in cash, whether a money market fund or a settlement fund. At Vanguard, the settlement fund is the Federal Money Market Fund. You really don't want to have any gains (or especially any losses) between the contribution and conversion step because it makes the paperwork more complicated. The best way to minimize the gains is to leave it in cash (and then of course to do the conversion as soon after contribution as possible to minimize the “pennies” issue).
Step 3 – 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 your contribution as a deduction because you make too much money. You can do Step 3 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 4 – Invest the Money
Now you will need to select an investment for the money in your Roth IRA. If you already have an investment in there, you can simply add $6,000 to it. Otherwise, you will need to select an investment in accordance with your written investing plan. If you do not have a written investing plan yet, you can leave the money in cash or put it into a Target Retirement 2050 or other lifecycle fund until you get that part of your financial plan worked out.
Step 5 – 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 IRA Accounts in Three 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 6 – 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 to avoid screwing this part up. 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.
Do It All Again Next 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 or within a few days. 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 (sometimes other providers will), so I have to wait one day anyway. Occasionally they'll make you wait up to a week. 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.
More information here:
How to Do a Backdoor Roth IRA with Vanguard
How to Do a Backdoor Roth IRA at Fidelity
How to Fix and Prevent Backdoor Roth IRA Mistakes
In this section, we're going to talk about how to fix and prevent common mistakes in the Backdoor Roth IRA process. In order to better organize these mistakes, we will break down the process into the six very clear steps used above and then will explain possible errors with each step and what to do about them.
6 Steps to Successfully Contribute to a Backdoor Roth IRA
- Step 1 – Contribute to traditional IRA ($6K, $7K if 50+ for 2021).
- Step 2 – Invest the money in a money market fund.
- Step 3 – Move money from traditional IRA to Roth IRA (i.e., a Roth conversion).
- Step 4 – Invest in your preferred investment (typically a stock, bond, or balanced index mutual fund).
- Step 5 – Ensure you have no money in a traditional IRA, SEP-IRA, or SIMPLE IRA on December 31st of the year you do the CONVERSION step.
- Step 6 – Report the transactions correctly on your taxes by filling out Form 8606.
Seriously. That's it. If you can do a cholecystectomy, you can do this. If you can work up a pulmonary embolus appropriately, you can do this. If you can manage hypertension well, you can do this. If you can fill a cavity, you can do this. Super easy.
However, people still manage to screw up on EACH of those six steps. Let's go through the mistakes people make, step by step.
How to FIX Backdoor Roth IRA Mistakes
Step 1 Error – Contributing Directly to a Roth IRA
An error that commonly occurs with a first Backdoor Roth IRA is that people simply don't realize that their income is too high to do a direct Roth IRA contribution. So instead of doing it indirectly (i.e., going through the Backdoor), which is no big deal even if you're under the limit, they contribute directly to a Roth IRA. Then they realize their Modified Adjusted Gross Income (MAGI) is over $$125,000-$140,000 ($198,000-$208,000 Married Filing Jointly) for 2021. Now what?
Enter the Recharacterization
If you have made this error, now you have to recharacterize the Roth IRA contribution to a traditional IRA contribution. This basically makes it as though you never contributed to a Roth IRA but contributed to a traditional IRA instead. You usually have to call your IRA provider to get this done, but it's no big deal. In this section, I'll walk you through the details of how to do it.
You have until the due date of your tax return to do this (including extensions). So if you did an IRA contribution in January of 2021 for the 2021 tax year, you have until October 15, 2022 to do a recharacterization. There's no penalty or anything to do it. You can do the opposite as well if you contributed to a traditional IRA but meant to contribute directly to a Roth IRA.
Bear in mind that starting in 2018, you can no longer do recharacterizations of Roth CONVERSIONS (not contributions). This eliminated the “Roth IRA Conversion Horserace” technique for tax reduction.
Until recently, I had thought there was a waiting period after a recharacterization to then reconvert the money to a Roth IRA. However, that rule was only for recharacterizations of conversions, not contributions. There has never been a waiting period for a recharacterization.
Any gains that occur before the final conversion are, of course, fully taxable at your ordinary income tax rate in the year of the final conversion.
The Income Limit
The first thing to determine is whether this post even applies to you. If your income is below a certain amount, you can just contribute directly to a Roth IRA. That amount depends on several things. First, it is a MODIFIED Adjusted Gross Income (MAGI). That number is very similar to your Adjusted Gross Income (AGI). Remember how tax form 1040 works.
The first income line you come to is line 7b, your “Total Income.” When people think about income, this is generally what they think of. The third income line on the form is line 11b. This is your “Taxable Income.” This is what your tax bill is actually calculated from. It is basically your total income minus all of your deductions. In between those two, on line 8b, is another income, your “Adjusted Gross Income.” This is “the line” that people are talking about when they use the phrases “above-the-line deduction” and “below-the-line deduction.” If it comes out before your AGI is calculated, it is an above-the-line deduction. These are deductions such as self-employment tax, self-employed retirement plans, self-employed health insurance premiums, HSA contributions, student loan interest, alimony, tuition, and any IRA deductions. If it comes out after your AGI is calculated, it is a below-the-line deduction. These are EITHER your standard deduction OR your itemized deductions, like mortgage interest, state/local/property taxes, and charitable contributions. A MAGI is just a slight tweak to your AGI.
Below are the MAGI limits for direct Roth IRA contributions [2021]. If your MAGI is below the first number, you can just contribute to a Roth IRA directly. If your MAGI is over the second number, you cannot contribute at all. If your MAGI is between the two numbers, you can make a partial direct contribution (most shouldn't bother with this, just do it all through the Back Door).
- Married Filing Separately (and lived with spouse for at least part of year): $0-$10,000
- Married Filing Jointly: $198,000-$208,000
- Single or Head of Household: $125,000-$140,000
If you think you'll be anywhere close to that first number, do yourself a favor and just do your Roth IRA contribution indirectly, i.e., through the Back Door (contribute to a traditional IRA and then convert that contribution to a Roth IRA). Since 2010, there has been no income limit on Roth conversions and there has never been an income limit on traditional IRA contributions, just your ability to deduct them.
So how does a MAGI differ from an AGI? It's a very slight difference. Bear in mind that there are other MAGIs out there. We're only talking about the one that affects Roth IRA contributions here. But to get your MAGI, you simply take your AGI, you subtract some income from it and you add back in some other income to it. The worksheet showing you how to do this is Worksheet 2-1 in Publication 590.
Basically, you subtract income from a Roth conversion and you add income from IRA deductions (not sure why you'd have this), student loan interest (if you are using this worksheet, you probably don't have this), tuition deduction (you probably don't have this), a couple of rare deductions for foreign income/deductions (you probably don't have these), some savings bond interest you probably don't have much of, and some employer-provided adoption benefits. As you can see, for most people your MAGI = your AGI since all of these deductions are pretty rare for the folks worried about this limit for direct Roth IRA contributions. So focus on your AGI. That means if you contributed directly to a Roth IRA but late in the year realized you probably should not have, one easy fix is to get your AGI below that limit by contributing to an HSA or a self-employed retirement plan like an individual 401(k) or SEP-IRA. Note that giving a bunch of money to charity is NOT a solution to this problem because that is a below-the-line deduction.
How to Do an IRA Recharacterization
If you can't get your MAGI low enough, you will have to do an IRA Recharacterization. With a recharacterization, as far as the IRS is concerned it is as though you never made the Roth IRA contribution at all, but made a traditional IRA contribution instead. You don't report a recharacterization separately, you just report a traditional IRA contribution. Keep in mind as you read on the internet about recharacterizations that there used to be two types of them—a recharacterization of a Roth IRA CONTRIBUTION and a recharacterization of a Roth IRA CONVERSION. The second type was outlawed in 2018, but the first one, the one we're talking about today, is still perfectly legal. If you decide you want to undo a Roth conversion these days, you're simply out of luck. Here is how you do a recharacterization of a Roth IRA contribution:
- You tell Vanguard (or wherever your IRAs are) to recharacterize the Roth IRA contribution to a Traditional IRA contribution.
Yup. That's it. They take care of the rest. I mean, you can read all about all of the rules in Publication 590 Chapter 1 if you want, but that's basically what they say. Don't believe me? Fine. Here are the IRS instructions:
How Do You Recharacterize a Contribution?
To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information:
- The type and amount of the contribution to the first IRA that is to be recharacterized.
- The date on which the contribution was made to the first IRA and the year for which it was made.
- A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA.
- The name of the trustee of the first IRA and the name of the trustee of the second IRA.
- Any additional information needed to make the transfer.
In most cases, the net income you must transfer is determined by your IRA trustee or custodian.
See what I mean? It's just a phone call. Any earnings that the account had in between the contribution and the recharacterization just go over with the contribution. No big deal.
You have until your tax filing date to do this. Most of the time, that's April 15th of the next year. However, the IRS is even more lenient than that. You actually can do this for an extra six months after your tax filing date, but you will have to refile your return.
Where Do You Report a Recharacterization?
If you hire somebody else to prepare your taxes, you can skip this section. If you do it yourself, you'll need to make sure you report this correctly. According to Pub 590, you report it on our old friend Form 8606.
Pub 590 says this:
Actually, that's really misleading. If you read Form 8606, you will see that the only time it ever mentions a recharacterization is to tell you NOT to put it on the form.
So what is Pub 590 talking about? They're talking about this section in the 8606 instructions:
Reporting recharacterizations.
Treat any recharacterized IRA contribution as though the amount of the contribution was originally contributed to the second IRA, not the first IRA. For the recharacterization, you must transfer the amount of the original contribution plus any related earnings or less any related loss. In most cases, your IRA trustee or custodian figures the amount of the related earnings you must transfer. If you need to figure the related earnings, see How Do You Recharacterize a Contribution? in chapter 1 of Pub. 590-A. Treat any earnings or loss that occurred in the first IRA as having occurred in the second IRA. You can’t deduct any loss that occurred while the funds were in the first IRA. . .Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2019, include the amount transferred from the Roth IRA on Form 1040 or 1040-SR, line 4a; or Form 1040-NR, line 16a. If the recharacterization occurred in 2020, report the amount transferred only in the attached statement, and not on your 2019 or 2020 tax return.
The bottom line is that you just report this recharacterized contribution on Form 8606 as if it were the regular old non-deductible traditional IRA contribution that you should have made in the first place. You also need to include a statement. What should your statement look like? I would write something like this:
To whom it may concern:
I made a 2021 Roth IRA contribution of $6,000 on March 13th, 2021, because I didn't know about the whole MAGI limit thing when I made the contribution. After becoming smarter, I recharacterized $6,137.14 (original contribution plus earnings) to a traditional IRA on November 4th, 2021, Thank you for helping our country fund its government. You're the best.
Hugs and kisses from your favorite taxpayer,
James Dahle
Seriously. It doesn't say what has to be on the statement, just that there is one “explaining the recharacterization.” You don't even have to tell them why you did the recharacterization. If you had a loss in the account between contribution and recharacterization, no big deal. It's still as though you made a $6,000 contribution to a traditional IRA and THEN it lost money. If you were able to deduct the contribution (you probably can't) you would get a $6,000 deduction. The IRA provider may also send you a Form 5498 (which has the recharacterized amount on line 4), but you don't actually do anything with it when you file your taxes. It's just an informational return.
Reconverting the IRA
Now here is where it gets interesting. You've now fixed your mistake in the eyes of the IRS, going from an illegal Roth IRA contribution to a legal traditional IRA contribution (that is probably not deductible for you). But you really aren't done with what you meant to do, which is put money into a Roth IRA. You now need to do a Roth conversion. You do it just like you normally would as if you had contributed originally to the traditional IRA. You can do it the very next day if you like. You can probably even do it the same day, just make sure there is a paper trail showing the money was actually in the traditional IRA at some point. There used to be a waiting period after a recharacterization before you could do a Roth conversion on that money, but that waiting period only ever applied to the recharacterization of a Roth CONVERSION (which is no longer allowed starting in 2018) NOT the recharacterization of a Roth CONTRIBUTION. So there is no waiting period. Just reconvert convert it and go on your merry way.
I hope this information helps you fix your mistake. Just do your Roth IRA contributions through the Back Door going forward and you won't have this problem again.
Step 2 Error – Not Investing in a Money Market Fund in the Traditional IRA
What happens if you LOSE money in between the contribution and conversion step? This problem is easily avoided by using an investment like a money market fund that does not go down in value for that time period, but some people fail to do so and end up losing money. When they work their way through their IRS Form 8606, they discover they have basis left over that they can then carry forward indefinitely for years! No big deal, it just makes your paperwork more complicated. Perhaps at some point in the future you'll do a Roth conversion of tax-deferred money and this carry forward basis will reduce the tax on that event.
What if you MADE money in the account between contribution and conversion? This actually happens most of the time, so I wrote an entire post on it called Pennies and the Backdoor Roth IRA. Technically, any money earned between the contribution and conversion step is fully taxable at ordinary income tax rates in the year of the conversion. If it is less than 50 cents, you just ignore it. More, you report it on your 8606 and pay taxes on it.
If it is still in the traditional IRA, either do another tiny Roth conversion or leave it there until you do next year's Backdoor Roth IRA process, either is fine. If you were smart and just used a money market fund and did the conversion as soon as your IRA provider allowed it (usually less than a week and sometimes as early as the next day), this won't be much money and there won't be much tax due.
Step 3 Error – Forgetting to Do the Conversion
If you forgot to do the conversion step for eight months afterward, it could be a huge gain you're paying taxes unnecessarily on. No way to fix this one, just pay your stupid tax and move on.
Step 4 Error – Forgetting to Invest the Roth IRA Money
Even worse than paying taxes on a huge gain, is not getting the gain in the first place because you left the money sitting in cash for months. No way to fix this one either. Your “stupid tax” this time comes in the form of opportunity cost. Just get the money invested ASAP to stop the cash drag. Maybe you even got lucky and the market went down in between contribution and investment so now you get to buy low.
Step 5 Error – The Pro-Rata Rule
Some of the most common questions I get are from people who make a late contribution to a Backdoor Roth IRA. What do I mean by late? Well, you are allowed to make an IRA contribution AFTER the calendar year ends. In fact, you have until tax day, usually April 15th unless you get an extension of up to six months. While it is to your advantage to contribute to retirement accounts as quickly as possible so that money can start compounding in a tax-protected way, I understand that we all have lots of good things to do with our money and sometimes this gets pushed back into the next calendar year. All it really does is complicate your paperwork a bit.
For example, if you made your 2020 IRA contribution in April 2021, instead of reporting both the contribution and the conversion on your 2020 taxes, you would report only the contribution there. The conversion would be reported on the taxes for the year you did the conversion, i.e., your 2021 tax return due in April 2022. Your 2020 IRS Form 8606 becomes a little simpler and your 2021 IRS Form 8606 becomes a little more complicated. Not a big deal if you can follow the simple instructions.
What confuses people, however, is the pro-rata rule. This is the rule that says you need to empty out your traditional IRA by December 31st of the year you do the conversion. Since these folks have never filled out a Form 8606 (or apparently read the instructions) they assume that for a 2020 contribution they need to have a balance of $0 at the end of 2020, even if they didn't do the conversion step until 2021. That's simply not the case. The pro-rata rule isn't applied until the year of the conversion, i.e., December 31st, 2021.
Emptying the IRAs
So how do you empty out those IRAs? You usually have two choices.
- Do a Roth conversion of the whole thing. This is what I generally recommend for small IRAs where the tax bill on the conversion would not be too onerous. It is quick, easy, and increases the amount of tax-free assets you have.
- Roll the money into a 401(k) or 403(b), either that of your current employer, that of a past employer, or to your own individual 401(k) if you are self-employed. This is usually a better option if you have a large IRA where you would rather deal with the hassle than pay the tax bill during your peak earnings years.
So how large is large and how small is small? Well, it's going to vary by the person and how much disposable cash they have. Most would consider an IRA under $10K to be small and an IRA over $100K to be large. In between, it's a personal decision as to which would be better for you.
What If You Didn't Empty the IRA?
So what if you screwed this one up? Well, your Backdoor Roth IRA conversion step just got pro-rata'd. There is a tax bill associated with that because most of your conversion was of tax-deferred money rather than post-tax money like it was supposed to be.
The fix for this is going to vary by the individual, but the easiest fix is to simply convert the entire IRA to a Roth IRA now, so you end up getting all your post-tax money into that Roth IRA. Another possible fix is to figure out a way to separate your basis in that IRA, roll the tax-deferred money into a 401(k), and then convert the basis left behind in the IRA.
Do yourself a favor and just empty the darn IRA by December 31st. Keep in mind that this is usually not an instantaneous process, so don't put it off until you're on holiday break at the end of the year.
Step 6 Error – Screwing Up the Tax Forms
Both individual taxpayers and professional tax preparers screw up IRS Form 8606 all the time. In fact, some of them haven't even heard of a Backdoor Roth IRA. (Incidentally, this is one of the best questions to ask while interviewing a potential tax professional—”How many backdoor Roth IRAs did you help last year?”)
The usual fix to this error is to file a 1040X (Amended Tax Return) and a new Form 8606. You can do this for the last three years if necessary. If you didn't file Form 8606 at all, you'll definitely want to do this. The key is to check lines 15c and 18 on Form 8606. They should both be a number very close to zero if the form is being completed correctly.
The tax preparer should NOT be filing Form 5439. If you did Steps 1-5 right, this form probably doesn't belong in your tax return.
A lot of people wonder about the 1099-R sent to them by their IRA provider and worry that it was done wrong and that it will cause them to pay tax they shouldn't have to pay. Sometimes the form was filled out wrong, but mostly this is just a lot of anxiety. What gets people anxious is finding something on Line 2a “Taxable amount.” As long as the box on Line 2b is also checked “Taxable amount not determined,” you're golden. Don't worry about it. If it is not, have the IRA provider send you a new, correct form, either with $0 in 2a or the box in 2b checked (usually the latter). Here's what mine looks like every year from Vanguard:
Note that Box 2b is checked, even though they are reporting a taxable amount of $5,500.07 to the IRS [$6,000.07 in 2021].
Again, if you're not sure how to enter this into Turbotax, check out my Turbotax tutorial.
Still Confused About the Backdoor Roth?
Need more help with a Backdoor Roth IRA? I wish Congress would just lift the rule against direct Roth IRA contributions for high earners and save us all this hassle, but who knows if that will ever happen.
- If you did your contribution after the end of the year, check out Late Contributions to the Backdoor Roth IRA.
- Here's a step-by-step tutorial for doing a Backdoor Roth IRA at Vanguard.
- Here's a step-by-step tutorial for doing a Backdoor Roth IRA at Fidelity.
- Here is a step-by-step tutorial reporting the Backdoor Roth IRA in Turbotax.
- Here is my prior post on 17 Ways to Screw Up Your Backdoor Roth IRA.
- You can hire a professional to help you, either a good financial advisor or a good tax strategist can assist.
- You can also ask your peers for help on the WCI Forum, the Private WCI Facebook Group, and the WCI Subreddit.
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.

Your Roth IRA contributions will need to go through the “backdoor” many times as you build your portfolio.
Form 8606 – 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.)
- 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 FAQs
Can I still do a Backdoor Roth IRA for last year?
You have until tax day (generally April 15th, but as late as October 15th if you file an extension) of the following year to make your traditional IRA contribution. There is no deadline for the Roth conversion step; it can be done at anytime. Make sure you fill out the paperwork properly according to the section above about late contributions.
Can I do last year's IRA contribution and this year's IRA contribution at the same time and convert them at the same time?
Yes. Just remember to report last year's contribution on last year's Form 8606 and this year's contribution and the conversion on this year's Form 8606.
Does my 401(k), 403(b), 457(b), Roth IRA, or inherited IRA count toward the pro-rata calculation?
No. Only traditional IRAs, rollover IRAs, SEP-IRAs, and SIMPLE IRAs count. See line 6 of Form 8606 for details.
What if it is a separate IRA? Does it still count?
Yes. All IRAs count toward the pro-rata calculation.
What should I do with my rollover or traditional IRA to avoid pro-ration?
If it is small, convert it to a Roth IRA along with this year's traditional IRA contribution and pay the tax due on it. If large, try to roll it into your employer's 401(k) or if you have self-employment income, into your individual 401(k).
I got pro-rated. What now?
The easiest solution is to convert the entire IRA, SEP-IRA, or SIMPLE IRA that caused the pro-ration and is now composed of both pre-tax and after-tax money. That is also the most expensive solution. A harder solution that may save you some taxes involves isolating the basis in that IRA by rolling the rest of the account into a 401(k) and then convert just the basis to a Roth IRA.
I am leaving my employer. Should I roll my 401(k) or 403(b) into a traditional IRA? If not, what should I do with it?
If you put it into a traditional IRA it is going to cause any future Backdoor Roths to be pro-rated. Better options include leaving it where it is, rolling it into your new employer's 401(k) or 403(b), rolling it into your individual 401(k), or if it is small, just converting the whole thing to a Roth IRA.
How much can I contribute to a Roth IRA via the Backdoor Roth IRA process?
In 2021, you are allowed to contribute $6,000 ($7,000 if 50+) per year for you and $6,000 ($7,000 if 50+) for your spouse. This includes all contributions to traditional and Roth IRAs. Rollovers/transfers do not count toward the annual contribution limit.
What should I invest the money into?
While in the traditional IRA for a day or two, leave it in cash. Once it is in the Roth IRA, invest it according to your written investing plan. If you don't have one, get one, but in the meantime it would be a good idea to put it into a lifecycle fund such as a Vanguard Target Retirement Fund.
Can I use the same traditional and Roth IRA each year or do I need new ones?
You can use the same ones each year.
The Backdoor Roth IRA process leads to more tax-free retirement account money for doctors and other high-income professionals. If you follow the simple steps outlined above, you will pay less in taxes, boost your returns, facilitate your estate planning, and increase your asset protection. Most members of The White Coat Investor community do these every year and you should too.
What do you think? Are you doing Backdoor Roth IRAs? Why or why not? Any questions about it? Comment below!
[This updated post was originally published in 2014.]
Ditto all the above. Nobody watches your Money better than you! As pointed out many times on the WCI articles.
I made a Backdoor Roth contribution in 2021.
My investment company sent me a 1099-R tax form for 2021, stating $6000 in “Gross Distribution” / “taxable amount.”
Do I file this only on the 8606 Tax Form, or do I have to file/enter this form separately as well? If I enter this information twice, I am concerned that I will end up paying taxes/penalties because it is classified as a taxable “Gross Disturbution.”
Please advise. Thanks.
You can always check your 1040 to see if it got counted twice. Not sure what software you’re using but this post might help:
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
I just made my contribution to a traditional ira today for 2021 with plan to convert it to a roth ira later this week, just before the tax deadline. However, I have already filed and paid my taxes for this year. Do I need to make an addendum to the tax forms to add the ira contribution or can I do it all on next year’s taxes?
Yes, you need to amend. 1040X + 8606 (although some argue you just need to send in the 8606, I’d do both).
Thank you so much for your videos and tutorial. They are soooo helpful! We have learned a lot!
I have pre-tax money ~$20k in my Rollover IRA in the past a few years, and distributed all this money to my employer based pre-tax 401k in March 2022. After reading your tutorial, I learned that I will be taxed if I do the backdoor in 2021. However, can I contribute $6000 after-tax to my Rollover IRA and do backdoor conversion to my Roth in year 2022?
Or should I wait until January 2023 to make 2022 tax year contributions in order to avoid mixing my pre-tax and after-tax contributions?
Any conversion you did in calendar year 2021 will be prorated, but you can now in 2022 convert a 2021 contribution and it won’t get prorated.
Go ahead and do your Backdoor Roth for 2022 now.
Two years ago, employer’s financial vendor changed and I had a chance to convert 403 (B) to Rollover IRA, cash out or change to 401k !
so i converted my 403 B to rollover IRA just because of more investment options.
(i am still working with same employer though and now i have 401 k (INSTEAD OF OLD 403 B)
QUESTION – can i still do back door roth IRA conversion of 6000$ EVERY year from after tax contribution to non deductible IRA ?
does pro rata rule apply due to my 403b –> rollover IRA that was done 2 year ago ? does rollover IRA CONSIDERED as IRA aggregate money to trigger pro – rata ?
asked my tax guy and he has no idea
thanks
Yes.
Should you? Not really. You’ll get pro-rated because it does count. Find something else to do with that rollover IRA.
Get a new tax guy.
Thank you for your fast reply. It really helps.
You said to do something else with the rollover IRA. It’s currently invested in stocks and ETFs. What else I can do with that?
Maybe move the roll over IRA money to the new 401K, if allowed. Then when you do the backdoor IRA there is less aggregate IRA money.
Ditto get a new tax person.
Roll it into a 401(k) or 403(b), convert it all to a Roth IRA or stop doing Backdoor Roths.
Rollover Ira has better investment options so I don’t want to roll in to 401 k , also extra paperwork . I will stop back door for future due to pro rata.
Can I convert Roth back to after tax traditional IRA (where it was originally) ? Or Roth conversion already done cannot be reversed ?
Also can I still continue back door for wife . She does not work . We file Married jointly.and she has no other IRA ?
You can no longer recharacterize Roth conversions. That option went away a few years ago. You’re stuck with it.
Yes, you could do BD Roth IRAs for your wife.
Thanks
1- Suppose If I have approximately 500 K in rollover IRA on December 31,2022 and did $6000 Roth conversion for 2022. And I am in 24 % tax bracket. how much approximate tax I have to pay for the Roth conversion?
2- If I stop doing Roth conversions going forward, from 2023 , do I need to pay tax again for anything? Or is it just for this year Roth conversion?
24% x $6,000 x ((500000-600)/500000))
So about $1500
You’re only getting pro-rated for this year assuming you don’t do another conversion. Of course, when you withdraw that money from that IRA, you’ve got nearly $6,000 coming out tax-free. It’s not like you don’t get anything for paying the taxes now. It’s not a penalty. You’re just prepaying taxes you didn’t have to pay.
Just to refresh my previous question background . I have how about 500 K in pretax IRA account, I did backdoor 6000k Roth IRA this year, that will trigger pro rata. So I have to do something before the end of this year with my IRA account .
1-I called my employer and they do take incoming roller from pretax traditional IRA to 401 K. So that option will be open for me.
2-can I convert my pretax traditional IRA into Roth account after paying taxes..
3- should I just pay taxes based on a prorata next tax season and stop doing back door in the future.
Which option do you feel for the better,? And why ?Thank you
2. Yes
3. I wouldn’t
I’d just do # 1. Why not? Is it a terrible 401(k) or something?
great tutorial, can you please provide some guidance on my situation.
i made a late roth ira contribution on year 2022 for tax year 2021, like most clueless newbie, i made a direct contribution to roth ira and later discovered my mistake (not eligible due to MAGI limit). followed your extensive tutorial and made request to recharacterize my roth contribution to a traditional ira, but after completing the recharacterization process, my traditional ira ended up with more than my initial contribution (with earnings or gains). i filled up tax year 2021 form 8606 correctly (for the first time) with lines 1-3 and line 14 only and also attached recharacterization statement including the rechacterized amount (contribution plus earnings).
now i want to correct my mistake and move (or convert) my 2021 contribution plus earnings and also my 2022 contribution to roth ira. based on my understanding of the process from your tutorial, i would
step 1 – contribute 6000 to my traditional ira for year 2022
step 2 – convert all of my traditional ira balance (assume no SEP or simple ira account) before year end 12/31/2022
step 3 – complete form 8606 to be filed next year (tax year 2022)
step 4 – invest after roth conversion
my challenge (and need guidance) is how to complete form 8606, your tutorial gives great guidance in completing form 8606 for late contribution and converting it together with the current year but without any gains.
based on my understanding of the process from your tutorial, form 8606 line 8 would be the total traditional ira balance to be converted (as an example, it can be 12500 with 6000 as 2022 contribution and 6500 as 2021 contribution plus gains from recharacterization). form 8606 line 15c will still be 0 and line 18 will show the 500 as taxable amount, and also on form 1040 line 4b will show the same 500 from form 8606 line 18.
do you think the process and steps described above correctly follow the irs guidelines? or maybe there are mistakes or missing some steps? thank you for your help and providing great tutorials.
Just take the form step by step. When it asks how much you converted, put the amount you converted. You’ll owe tax on the difference between the amount converted and the $6K.
You’ve got the steps right though.
thank you for your great advice, i think i understand the backdoor roth process more clear now.
based on the situation described with current 6500 (6k non deductible 2021 contribution and 500 earnings) on traditional ira account and making year 2022 contribution soon, the form 8606 would be filled as follows:
line 1 = 6000
line 2 = 6000
line 3 = 12000
line 4 = 0 (contributions will be made on year 2022 for tax year 2022)
line 5 = 12000
line 6 = 0 (traditional ira full balance of 12500 needs to be converted on year 2022 to end with 0)
line 7 = 0
line 8 = 12500 (traditional ira full account balance to convert)
line 9 = 12500
line 10 = 0.960
line 11 = 12000
line 12 = 0
line 13 = 12000
line 14 =0
line 15a = 0
line 15b = 0
line 15c = 0
line 16 = 12500 (converted amount)
line 17 = 12000 (nontaxable portion)
line 18 = 500 (taxable amount, form 1040 line 4b)
Extremely helpful post! I am new to IRA and trying to contribute for both 2021 and 2022. I followed the instructions and submitted two transactions of $6K to traditional IRA for each year. Fidelity labelled them both for 2022. The post states that one can contribute for the previous year until the tax filling date, including extension. I have tax-filing extension until October 2022. But Fidelity is refusing to relabel one of the $6K transactions for 2021, saying that the deadline (April 15) has passed. Not sure if that labelling matters. But is there a reference from IRS that allows a late contribution until the tax filing date (October) that I can show them? Appreciate your help.
SEP IRA and employer 401(k) contributions can be made later than April 15th (18th this year) if you file an extension, but IRA/Roth IRA contributions can’t.
I’m sorry. I’ve corrected the post above where it says that and mislead you.
Question, I’ve been contributing to a vanguard traditional IRA for about a year and a half. I did buy investments and did not keep it in money market all this time. It’s a measly amount $4000 and with the market right now, has incurred about $500 loss. So I don’t have any earnings on it at all at this time. Can I just roll this over to a Roth IRA? What happens to the $500 loss?
Yes.
It gets carried forward indefinitely until you use the loss. A slight bookkeeping pain but that’s it.
Great post. We’ve avoided the back-door ROTH because my wife and I both have substantial SEP-IRAs from an S-corp with other employees.
Yes, it doesn’t work for everyone.
Great post and very helpful – thank you! Seeking some clarification as I’m in the process of opening/funding Backdoor Roth IRAs for my wife and I. We both have Roth IRAs that we funded throughout residency/fellowship, but can no longer contribute to as we exceed the MAGI starting this year (2022). Is there anything I must do with these existing Roth accounts before beginning the Backdoor Roth IRA process (i.e rollover, conversions)? My understanding was as long as there are no traditional, rollover, SEP, and SIMPLE IRAs, nothing needs to be done with existing Roth IRAs.
Thank you!
No. Roth money doesn’t enter into the pro-rata calculation because it isn’t listed on line 6 of Form 8606.
I always read your posts and learn a lot. I recently opened new IRA and Roth IRA accounts and did the contribution to IRA and transfer to Roth without any problem. My question is that I have a previous IRA and SEP IRA with pretax and post tax contributions from over the last 25 years. What are my options? I have 401K and defined benefit through my practice. I also have IRA for my wife with post tax contributions. What are her options since she did the rollover to Roth this year too.
Should have thought about that beforehand, but you’ve still got 7 months to solve your pro-rata issue.
You can:
1) Convert it all to a Roth IRA
2) Roll the pre-tax dollars into a 401(k) and then convert whatever is left
3) Have your conversion step be pro-rated
I tried to do the first option of converting the whole to Roth IRA but fidelity doesn’t give an option to do so.
That doesn’t sound right. I’d try another representative.
Hi and thanks for this thorough explanation!
I have only recently learned enough about the Backdoor Roth to realize I should be doing it. However, I am not sure how to proceed given my current account status, as I’ve seemingly made some decisions that work against me.
Trad IRA balance (Fidelity): $157k comprised of two 401k rollovers and a few years’ worth of non-deductible contributions
Current investments*: about evenly split between A) 50k in an individual stock B) 44k in nasdaq composite index C) 64k semiconductor fund
My current 401k provider DOES allow IRA->401k rollovers. On the form there’s a line: “This rollover includes after-tax contributions in the amount of $_____. The remainder would be taxable income to me if I did not roll it over.”
So if I’m understanding, would this mean I can move all my prior 401k money over without penalty*, and then the last 2 years of trad IRA contributions are the “after tax” listed on the form, and then I would keep this year’s $6000 in my trad IRA acct to start the Backdoor process?
*Are my current investments going to screw me over here? Do I have to rollover into substantially similar funds?
How do you recommend approaching this?
THANK YOU from another kind of doctor (PhD).
If it’s in an IRA, rolling it out would be an IRA to 401(k) rollover. Talk to HR again and ask (weird that they would take 401(k) but not IRA rollovers), but otherwise, you’re just out of luck unless you want to pay taxes on a $157K rollover. More likely, they’ll allow the rollover of pre-tax money but not after-tax money (perfect, that’s what you want because then you just convert the rest tax-free to your Roth IRA).
I don’t see why the investments have anything to do with this. While I don’t particularly like your portfolio, there is zero tax consequence to or rules against selling it all in a retirement account and buying what you actually want.
Hi,
I started my IRA in 2019, and currently have an unrealized long term capital gain of $357 on a portfolio of $19,000. If I convert this whole thing to a Roth IRA, am I just paying the tax on the $357 or on the entire $19,000?
If it’s the $19k, and I don’t mind paying the tax, is it better to convert or just roll it over into my 401(k)?
Did you get a tax deduction for the $19K? If so, you’ll pay tax on $19,357. If not, you’ll pay tax on $357.
No such thing as a “capital gain” in a retirement account though.
Both conversions and rollovers have advantages. It’s not a simple yes/no answer to the question.
https://www.whitecoatinvestor.com/roth-conversions/
https://www.whitecoatinvestor.com/roth-conversions-and-contributions-principles/
I currently have a roth IRA with vanguard that I contributed to in 2020. In 2021, I made more than expected and did a recharacterization of my Roth IRA contributions in Dec 2021 to a traditional IRA with plans to then do a backdoor conversion. I thought (wrongly) it would be easier to wait until I contributed my $6,000 for 2022 and then convert the whole amount at the same time. Now I have losses in my traditional IRA from the recharacterization which seems like it makes things a lot more complicated and I’m not sure if I should do the backdoor conversion. What’s the best way to go about this? Is it worth it to still do the conversion? Any advice is appreciated.
Thinking to open IRA at Merrill, since I do most of my banking at BofA, anyone has encountered difficulties doing the Back Roth IRA with them?, if so I might just go with Vanguard to avoid the hassle. Thanks for sharing with us!!!!!!!
Every bank has its own plus and minus. I have BAC stock but don’t really bank with them. Fidelity is one of the biggest company out there that does IRAs and Schwab is running a special now where they give you a $100 when you open an account with $50. It’s all on the internet. Good Luck
Not a fan of B of A or Merrill, but I do think you can do a Backdoor Roth IRA there.
Hello there,
Thanks for this great article! I was wondering, what happens if you gain a little interest in the Traditional IRA before you convert to a Roth IRA? As an example, I transferred $4000 from my bank account to my Traditional IRA at Fidelity, and it took almost more than 7 days for the money to settle and become available for transferring/converting. Once the money became available for transfer, I immediately converted the funds to my Roth IRA. A few days after the conversion, I noticed that my Traditional IRA’s balance went from a zero balance to $0.62 (I am guessing this is the interest earned while I was waiting for money to settle as I did not purchase any stocks in the Traditional IRA). Do I just convert this to the Roth IRA as well, or do something else with it like transfer elsewhere (I wouldn’t mind paying taxes/penalties on $0.62)? Thanks!
If only there were a post written specifically for you on this subject….. 🙂
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
You are really just awesome! 🙂 sorry for another obvious question. Do you have a post or advice for someone who doesn’t transfer the whole amount (aka $6000) at once, but does like $2000 each time x 3 different conversions? #poorclinicalfellow
Do I have to fill out three separate documents of those tax forms to show each conversion come tax time? Thank you so much!
Uhhh…yea.
Stop doing that. You’re making your life more complicated than it needs to be. If you make enough that you have to do your Roth IRA via the Backdoor, you make enough that you can put it all in at once. 🙂
But no, the tax form looks the same whether you do it all at once or spread it out throughout the year.
Duly noted! Thanks!! Wife and I make only a little more than the MAGI limit and there was poor planning on our part, but we will make single transactions moving forward to make life easier. Thanks for all your great advice! 🙂
I am just out of training and am expecting a major increase in magi – just learned about backdoor roth, so I am in the process of trying to prepare for it. I rolled over all my funds from prior 401ks into my Roth IRA already. However , just noticed from years ago I did have a trad IRA open with about 30K that has accumulated from investments / contributions.
Will I also be able to roll this over into my Roth IRA as well? or will my prior rollover subject me to pro-rata-ion since I have already rollovered. Also, when I finish all my rollovers, can I still contribute another 6k for this tax year (2022) through backdoor Roth?
Really appreciate the advice !
As long as you convert your existing IRA to a Roth IRA by the end of the year, you won’t be prorated on any conversions made in 2022.
Yes, you can contribute $6K per year, whether you do it before or after you do your rollovers.
Thank you for all this info. I have a SEP IRA from many years ago, and currently work for an employer that provides a pension plan, not a 401(k). I also have a 457(b) through my employer. Can I do a backdoor ROTH also?
Yes, but the conversion step will be prorated due to the SEP-IRA. So convert the SEP-IRA< get some kind of a 401(k) and roll it in there, do the contribution step but not the conversion step, get pro-rated, or just save in taxable instead. Those are your options.
Hello, I was wondering if I can still perform the backdoor roth ira right now in august for my 2022 contribution as I have not made any contributions to roth ira this year yet? I see that above it mentions backdoor roth can only be done between january and april 15 of the tax year? I’m confused about this then do I wait until January 2023 to make my 2022 contribution? Thank you some insight would be very helpful.
Yes, you can still do it until April of 2023.
Thanks for all the fantastic info you & your team provide! (esp for things like the backdoor Roth)
Quick question: is there a limit on the number of traditional IRA to Roth IRA conversions that are allowed in a year? I’m not interested in doing it 12 or 26 times a year (ha)…maybe just twice
RE: MEGA Roth backdoor conversion:
Hi Dr. Dahle,
thank you for sharing this blog. I purchased your book via audible. I am a university-employed physician with a DCP plan that is a post-tax plan which allows a MEGA conversion. Because of your blog, I learned about this option recently: THANK YOU!
Question: I am 51, and can contribute a maximum of 61,000 yearly, a portion of which I can convert into a Roth IRA. There is an additional 7k that I can contribute to my IRA for which I can do a backdoor conversion to a Roth. I live in expensive California, so no way I can contribute that much. Therefore, does it even make sense to have a separate IRA and engage in a backdoor conversion to a Roth IRA? I think I can manage 7k contributions per year, possibly 8k per year, max, since I am already maxing out my 403b contributions and 457 b contributions. Should I just stick with the DCP plan and simplify paperwork?
What I am not too sure about is what portion of the DCP I can rollover. I know it is not the full amount.
thank you,
CPK
You’re welcome.
If you can’t max out both and there is no employer match, I generally prefer an IRA to an employer plan due to lower costs and more investment options, but in some states (such as California) an employer plan gets significantly more asset protection. So your plan is fine. Do your best to continually save more. Maybe some year you’ll be able to max out all those retirements accounts you have access to.
As far as the rollover amount, I’m not sure what you’re asking exactly but I bet HR has the answer.
Thank you for your reply. I have recommended your book to 3 of my friends so far. One more simple question. I rolled over an old SEP IRA as you indicated to my 403b account after implementing a backdoor IRA conversion of 7k. After I did this, I earned dividends of about 45 $ on one of my stocks. If I simply transferred the 45$ to a n investment account, do I simply pay tax on the 45$ or are there additional penalties to consider? If there are no additional penalties, I may go this route to save time/hassle.
Thanks!
Carla
Tax plus the 10% penalty. Might be easier to roll it in to the 403b as a second rollover. Dunno. I’d explore both.
Hello, as an independent contractor I am planning to opening up a solo 401k. Should I still max that out before going the back door Roth contribution? Or try to do a mix of both? For example let’s say I want to contribute 20,000, should I do that all into the solo 401k or split it 14,000 to 401k and 6000 to backdoor Roth? Wasn’t sure if in 2022 the former was still the recommendation! Thank you!
I’d try to do both to the max if you can. If you can’t, I generally prefer an IRA, but if you’re in your peak earnings years, you may wish to do more tax-deferred and thus do the solo 401(k).
I have read a few places on this site that people should be doing back door Roth contributions for both themselves and their spouse. It never says this, but can I assume that is only if the spouse doesn’t work? There isn’t a scenario where two high earning spousing can be making Roth conversions for each other, correct?
That’s the way I understand it. Each person can only do $6000 ($7000 if over 50). So if you both work that’s the limit, and if the other person doesn’t work that is still the limit.
You can’t put in more than that limit per year if you work or don’t work and one of you has to have earned income. I defer to WCI.
You’re both correct. One contribution per year for each person and between the two of you you must have at least as much earned income as was contributed.
Hi! Okay I think I understand, but let me just make sure. I’m not a Dr. I have an active 401k at my current employer, and I max out my annual contribution. I also have an IRA with Wells Fargo, where I’ve aggregated all of my previous employers’ 401ks, and also contributed the extra $6K (after tax & non-deductible) yearly since 2019. This account is over $500K. Based on what I’m reading, the backdoor Roth is not a good idea for me because I’d have to convert the entire $500K. Is that right? If so…I’m so mad! I could’ve just left the old 401ks where they were and done this backdoor Roth contribution process yearly? I suppose there is still the positive that the $6K is growing tax free?
My 2 cents, If your current employer lets you move your IRA (but not the part you payed taxes on, from form 8606) into the 401K (at your current employer). Then you can take the remaining IRA (which you all ready paid taxes on) and convert that to a Roth IRA (with very little taxes due) . Now your traditional IRA should be zero and you can back door every year (till they change things again).
Good luck and run this by WCI. If your current employer doesn’t let you do this then plan B would be some type of side job where you set up your own 401K that lets you do this.
Thats my understanding of all this, and again run it by the WCI.
You could just roll that IRA into your new 401(k) and then do Backdoor Roths rather than converting it all.
Thanks for your incredibly helpful posts on this topic. I feel I have a reasonable grasp of form 8606.
Here’s a question with a twist. Let’s say in 2021 the taxpayer makes a $6000 contribution to a a traditional IRA. This was funded, per the usual, with after tax dollars. The taxpayer also has another traditional IRA of around $55,000 that was originally from a 401k that was rolled over 7-8 years ago. The money in that account, because it was rolled over from a pre-tax employer 401k – has never been taxed.
The taxpayer has completed a backdoor Roth with the entire amount ($61,000). Using form 8606 – the taxable amount still shows up as $0. Sure -the $6k doesn’t get taxed, but where does the taxation happen for the $55,000?
Have a great day!
So was all this ($61,000) moved to a Roth in 2021? You will definitely owe taxes on the $55,000 (which will be included in your taxes owed). I not sure how you got zero taxes due. If you did all this moving the money in 2022 then you will settle up when you do this years taxes.
So again if you did all this in 2021 I would go back and recheck how you filled out the form 8606, because you should of had taxes due from moving the $55,000 (which was never taxed) over to the Roth IRA. That is the way I understand it, good luck.
Thanks for the response. Yes – tax would certainly be owed on the 55k. It just wasn’t coming together on Form 8606. The error was with Line 2 (see the other response from earlier). Once the correct entry for the basis in Line 2 was entered, everything fell into place.
You mean a Roth conversion, not a Backdoor Roth. And the taxable amount is $55K. I bet the 1099 “the taxpayer” got shows the “taxable amount not determined” box checked.
Yes indeed – I meant a Roth conversion. Thanks for the correction.
Understanding that the taxable amount is 55k – where / how is that represented on the return? On form 8606, the taxpayer is not seeing anywhere that differentiates money that has already been taxed or not. So simply using Form 8606 and answering each question – still arriving at $0 tax. Does the $55k get inputed on Form 1040 under 4b?
Thanks!
It shows up on Form 8606 on line 8 and then carries over from line 15c/18 to Form 1040 Line 4b.