[Editor's Note: The following post originally ran in Forbes magazine. It seemed fitting to run it here the first week of January when I traditionally do my Backdoor Roth IRA.]
The Taxpayer Relief Act of 1997 reestablished Individual Retirement Arrangements (IRAs) and created Roth IRAs for the first time. Due to Congressional rules, both traditional IRAs and Roth IRAs had income limits that prevented high-income professionals from deducting traditional IRA contributions, from contributing to Roth IRAs at all, and from converting traditional IRAs to Roth IRAs. The 2006 Tax Increase Prevention and Reconciliation Act included a change in just one of these rules, the prohibition on Roth IRA conversions. However, that change did not actually take effect until 2010. A few wise people quickly realized this would allow for an indirect process whereby a high-income professional could start contributing to Roth IRAs and some even began funding traditional IRAs for 2008 and 2009 in preparation of a 2010 conversion.
Personally, my income was low enough in 2008 and 2009 that I could still contribute directly to Roth IRAs for my spouse and myself, so my first “Backdoor Roth IRA” was in 2010. We have done it every year since. In January 2019, we will fund a Roth IRA for the 10th time via that same indirect or backdoor process. In celebration, I thought it would be worth stepping back for a minute and considering what has been learned from this.
How A Backdoor Roth IRA Works
Some are still not familiar with the Backdoor Roth IRA despite it being widely used now for a decade. It is basically a four-step process.
Step one is to make a contribution to a traditional IRA. If you are under 50, you can contribute $5,500 per year ($6,000 in 2019). Those over 50 can contribute $6,500 ($7,000 in 2019.) You can also contribute to a separate IRA for a non-working spouse. A high-income professional with a retirement plan available at work is not allowed to deduct this contribution.
Step two is to do a Roth conversion of the traditional IRA you just established, basically moving the money from the traditional IRA to the Roth IRA. A Roth conversion is a taxable event, but in this case, the tax cost is $0 because the basis of the traditional IRA is equal to its value. Put more simply, you don't have to pay to convert those dollars because they have already been taxed.
Step three is to ensure that you have no money in a traditional IRA, SEP-IRA, or SIMPLE IRA as of December 31st of the year you do the conversion. This is to prevent a “pro-rata” calculation that the IRS requires on Roth conversions. You can learn more about the calculation by looking at line 6 of IRS Form 8606. Existing tax-deferred IRAs must be either rolled into a 401(k) or also converted to a Roth IRA (which may add a significant tax bill for the year.)
Step four is to make sure the tax paperwork is filled out correctly. Both amateur and professional tax preparers frequently make errors on Form 8606 or fail to file it at all.
Tax Reduction Strategies Spread Slowly
One of the more interesting lessons we've learned from the Backdoor Roth IRA is just how slowly tax strategies like this spread. Bloggers, online financial forums, financial advisors, accountants, and financial journalists have been writing about this strategy for over a decade now, yet many who should be funding Roth IRAs indirectly still don't know about the strategy.
Tax Diversification Is Useful
Another important lesson here is that tax diversification is useful. If a retiree has money in tax-deferred accounts, tax-free accounts, and non-qualified (taxable) accounts, she has a great deal of control over her tax situation in retirement. Tax-free withdrawals from a Roth IRA are particularly useful, both for the retiree and her heirs, and perhaps the best way to ensure a sizable Roth IRA in retirement is to make regular Roth IRA contributions throughout her working career and invest them aggressively.
Backdoor Roth IRAs Are A No Brainer
There are other methods of building a Roth IRA for tax-free retirement withdrawals, including contributions to Roth 401(k)s and Roth conversions of previously untaxed dollars from 401(k)s, traditional IRAs, and similar tax-deferred retirement accounts. However, both of these methods require the payment of taxes that otherwise would not be paid. Pre-paying these taxes may still be the right financial move, but in both cases, a careful calculation and evaluation of your situation should be made. In contrast, a Backdoor Roth IRA is essentially a no-brainer. Since a high earner cannot take a deduction for the traditional IRA contribution, and investing the money in a taxable account leaves the money exposed to creditors and taxes as it grows, there is no reason to avoid putting that money into a Roth IRA, via the backdoor.
No Waiting Period Required
A lot of people, including some financial professionals, were concerned for many years that the IRS might apply the “Step Doctrine” to this indirect Roth IRA contribution process. The Step Doctrine is a concept occasionally employed by the IRS that if the sum of a number of steps is illegal, the process is illegal even if each of the steps is legal. It's easy to see why one might worry this could apply to the Backdoor Roth IRA process. Due to this fear, many advisors actually advocate waiting for some period of time (weeks, months, sometimes a year or more) between the contribution and conversion step, or worse, recommended against doing it at all. However, despite thousands of investors doing this every year (and reporting it to the IRS on Form 8606) the Step Doctrine was never applied. Finally, in 2018, the IRS issued clarification that no waiting period was required, essentially giving the Backdoor Roth IRA their blessing. Unfortunately for those who never funded their Roth IRAs or complicated their tax paperwork and ran up the tax bill on the Roth conversion step by leaving the money in the traditional IRA for lengthy periods of time, there was no going back.
[Update prior to republication: Note that since they converted their IRAs to brokerage accounts a couple of years ago, Vanguard seems to make people wait a couple of days for the contribution to “clear” before allowing the conversion.]
Congress Should Allow Everyone To Make Direct Roth IRA Contributions
It is also clear that Congress should simply eliminate the Backdoor Roth IRA process completely by allowing high earners to contribute directly to a Roth IRA. Those who know about it are doing it anyway and it is bad public policy to allow significant tax breaks only to those who are very familiar with the tax code. This is costing taxpayers additional money paid to tax preparers and financial advisors. In addition, it causes taxpayers to make decisions they otherwise would not. Self-employed individuals who wish to use a SIMPLE or a SEP-IRA for the sake of simplicity are forced to either establish a 401(k) or miss out on Roth IRA contributions. Taxpayers with existing IRAs are forced to roll that money back into a 401(k) or miss out on continuing to fund Roth IRAs. Those without an available 401(k) may end up doing Roth conversions that would otherwise be inadvisable. Congress should stop wasting our time and money and allow direct Roth IRA contributions.
Funding a Roth IRA indirectly has helped high-income investors meet their financial goals and achieve tax diversification now for a decade. It's time for Congress to simplify the process.
What lessons have you learned from doing a Backdoor Roth IRA? Comment below!
Backdoor Roths and Beating the $51K limit are the 2 WCI posts that had the biggest impact on my financial life. 8 years ago I picked up a locums side job purely to create 1099 income for a solo 401(k). I thought I was just clearing the path for the Roth and avoiding the pro-rata rule. Little did I know that discovering the world of side income and extra retirement accounts would create a monster.
I don’t know if the Backdoor Roth will always exist, but I’ll keep stuffing it every January while it lasts.
What I love about Roth money are the back end benefits. I love how there are no RMDs. I love not being taxed on it again, and I particularly love the idea of a Stretch Roth IRA for heirs.
Roth money is the best money. In fact, I like it so much there is always an ongoing debate in my mind on pre-tax versus Roth in my 403B that I have to walk myself through regularly. While I’ve settled on the traditional pre-tax 403B contributions during my peak earning years, the benefits of having more Roth money is quite tempting.
TPP
This is my dilemma- so I am aiming for 50-50 most of the tax deferred in our 401k equivalents since they have an RMD (as I read the rules) even if they are Roth. Not sure if I am benefiting our likely heirs or ourselves, but once I review RMDs, social security payouts delayed until 70 (15 years off so think we will actually get about what they promise today) , and our current passive income I see Roth conversions now protect us from a huge tax bracket jump at age 70. So 50-50 is my bet for covering the total unpredictability of what the tax brackets will be by then. If my crystal ball becomes clearer I might convert more before that expected jump in income.
As the amount we are likely to leave the kids becomes clearer we have to be certain they understand not to blow the advantages of the various types of retirement accounts they might inherit, and how to best choose in which order to tap them.
Roth 401(k) RMDs can be eliminated by rolling the Roth 401(k) into a Roth IRA. No big deal.
Thank you very much! Sometimes you can teach an old dog a new trick. (New to me, anyway, if only because I didn’t understand it the first few times.)
I started doing them in 2011, so only a year or two behind you. I was still convinced at the time that maybe I was doing something illegal and that I’d get in trouble. You can’t believe everything you read on the internet 😉
Now that I’m financially independent and semi-retired from my W2 I don’t have to do the backdoor anymore – I can go through the front door! My salary is cut in half as a part-timer, and I’m not complaining at all.
I agree 100% that it is absolutely ridiculous to have an income cap limit for direct ROTH contributions.
It absolutely makes no sense as a tax revenue strategy to eliminate the high income earners as those are the same individuals who actually pay more to have the same contribution (since it is after tax money, the high income earners will pay 37% based on their marginal rate). The fact that the IRS makes backdoor ROTH contributions legal just adds complexity to a process that does not need it.
For the longest time I didn’t do a backdoor roth conversion because of inertia and because of the pro-rata rule (thought it would be more complicated that it actually was to just roll it over into my 401k plan). I finally did it last year for the first time and it went very smoothly. I had waited so long that my cost basis I had in the conversion was over 65k (and because of the long bull market run we had I know I had lost a lot more from the gains which had to be rolled over when it could have been in a ROTH from the get go).
POF is not as enthusiastic:
https://www.physicianonfire.com/value-of-backdoor-roth/
That’s because you didn’t run the numbers out for decades nor did take into account the estate planning or asset protection benefits. But if you don’t want additional money in a tax-protected/asset-protected account because it takes 30 seconds of hassle, that’s your choice.
I discovered your blog not long ago and did the Backdoor Roth for the 1st time this past year. Problem was I made the mistake you warned about by making a 2017 tIRA contribution of $5500 (opened at Vanguard like you suggested) in 2018. I did convert to Roth the next day. I didn’t make a 2018 contribution & now have decided not to do so. I want to start clean & make a 2019 contribution for this year & convert right after. How will I have to fill out my 8606 forms to correct this, though? I read the old blog post, but it assumes I made 2 contributions in 1 year (2014 in 2015 and 2015 in 2015) so I don’t know how to apply it to my situation. Thanks!!! Love your site. So wish I had discovered it sooner.
I wouldn’t avoid a 2018 contribution just because the paperwork is slightly harder to fill out. More info on how to do the forms here:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Thanks for responding so quickly! I’m avoiding the 2018 contribution for lack of available money (I don’t have an extra 11,000 now), not due to the paperwork, but I do want to make a 6,000 2019 contribution. I just do t k is how to account for that in the upcoming tax paperwork. Thanks again.
That doesn’t make sense. Make the 2018 contribution. You have 16 months to come up with the money for a 2019 contribution.
Pull out form 8606 and start filling it out. Let me know if one of the lines stumps you and I’ll help you with it.
Thanks for this great blog!
I just found out about the backdoor IRA (from your site, better late then never). I opened a vanguard traditional IRA account and have the $5500 in the account but have NOT yet converted it to the Roth IRA. My question is this: I have other traditional IRAs at different financial sites which were roll overs into a traditional IRA from previous employers retirement accounts. The total of these traditional IRAs is $40,000. If I go ahead for the backdoor roth conversion for 2018 will I be taxed on those existing traditional IRAs due to pro-rata rules?
If so, what is my best option for 2018? I do NOT have a solo 401K set up yet. Would to make more sense to skip the 2018 backdoor conversion? Can I convert all my previous trad IRAs to roths (is there a limit to how much can be converted)? Some background: I have a day job and max out my work 401K and have about $20,000 side income from 1099’s.
thanks again!
Yes. You need to do something with those IRAs by December 31st, either convert them or roll them into 401(k)s. But you’ve got 361 days to take care of it, so I wouldn’t skip a 2018 conversion just for that reason. That’ll get /reportedtaxed on your 2019 taxes. As long as you have a plan to take care of it this year, you can do the conversion now.
Since you qualify to use a solo 401(k), rolling the IRAs in there seems like an obvious solution.
My problem is line 6 of form 8606 for last year. I will transfer everything into a solo-401k in 2019, but if I do the backdoor conversion of $5500 to the roth for last years contribution before tax day i will have to enter $40,000 on line 6 and pay pro-rata since i have those traditional ira’s. What do you suggest to avoid the pro-rata tax for last year since i did not have a solo 401k set up as of dec 31, 2018?
A conversion done now is reported on 2019 taxes, so no big deal. It’ll be zeroed out by Dec 31 2019.
starting to make sense, so even though I made a contribution into a traditional IRA IN 2018 for 2018 (albeit in the last few days of 2018 and it did not clear until 2019) does that mean I do not report it on form 8606 or elsewhere on this year’s taxes but will do so on next years taxes along with the 2019 contribution? I thought that was only the case if it was contributed between Jan 1-april 15th? what a mess…sorry I didn’t do this cleanly earlier!
The answers to these questions become obvious when you sit down to fill out an 8606. Basically, the contribution for a 2018 IRA, whether done in 2018 or 2019, is reported on a 2018 8606. All conversions done in 2019 are reported on a 2019 8606.
Happy New Year! This is how I start my year too.
I made our contributions to a nondeductible IRA earlier this week ($13K total) + $5K to our state’s 529 for the $1K tax credit. Will convert the $13K into Roth IRAs today.
I started doing conversions in 2011. Last week I gave a talk to doctors and several didn’t know it was possible. They asked, “When did that change?” Amazing.
How’d you get $13K? Shouldn’t it be either $12K or $14K (if 50+)?
I’m guessing his spouse isn’t 50 maybe? 7 + 6 =13
Yup, you solved the mystery Toby, I robbed the cradle and am married to a 40 something!
You’re a wise man.
Regarding your last paragraph, that “Congress Should Allow Everyone To Make Direct Roth IRA Contributions”, I get frustrated every time I think about what Congress *should* do about taxes. The rate cuts that came alone with TCJA are cool, and I’ll take them, but they blew a huge opportunity to meaningfully simplify the tax code. All they did towards simplification was sweep the long list of itemized deductions under the rug of a larger standard. And don’t even get me started on 401K reform.
But thanks for all your posts on Backdoor Rothing over the years. Seeing explicit instructions on how to do it, and especially how to fill out the corresponding tax paperwork, has been immensely helpful, and my wife and I are backdooring for the first time this year.
I am not understanding how all of you high income folks get around the pro-rate rule and have zero holdings in IRAs. Hard to believe that no one has rolled over 401 accounts from prior jobs into an IRA ? What am I missing?
We have, but have subsequently rolled those IRA’s back into a workplace or Solo 401(k). I work at a MegaCorp and the 401(k) funds/fees are actually lower than what I can get in a Vanguard IRA, so it makes sense to keep my tIRA at a zero balance.
My impression from blogs etc is how “Horrible” the fund choices are in workplace retirement plans and how high the fees can be ? Isn’t the benefit of using a personal IRA that one can invest in any fund one chooses and can base that choice on fees ? Also, how does one setup or create a solo 401 ?
401(k)s are generally getting better. And if you have more than one 401(k), you obvious rollover into the better one. If you have self-employed income, you can open a solo 401(k) at etrade, Vanguard, Fidelity, Schwab etc.
Do you know if I can rollover 401K to TSP (Federal employees’ equivalent to 401K)?
thanks
Depends on your age and if you still work for the place where you have the 401k. How old are you, and do you still work for that employer? And assume you have a non zero TSP balance?
I’m 35. Not working anymore at the 401k site, and I have a balance in my TSP.
Thanks.
Then yes you should be able to rollover your 401k to the TSP.
We either convert them or roll them into 401(k)s. Or keep the old 401(k)s and never roll them into IRAs. It’s been 10 years now, and really 12 or so, since we’ve known about it, so no big deal for docs in the know in the early to mid career.
I really got messed up when Vanguard decided they weren’t going to do 401ks (temporarily). They made me convert my old 401K into an IRA, and I haven’t had the chance since then two converted into my own 401k and did not want to put it into the government TSP. Doctor, high income when not on sabbatical/ semi retirement, paying taxes pro rata on my Roth conversions.
Why not the TSP? That’s a very attractive 401(k) for rollovers. I’ve already done one and I plan another this year when our CBP closes.
I turn 50 in May. Can I contribute and convert $7k now, or should I wait until after my birthday?
Oooh. New question. I don’t know. Let’s look it up.
Pub 590 doesn’t say.
For 2018, the most that can be contributed to your traditional IRA generally is the smaller of the following
amounts.
• $5,500 ($6,500 if you are age 50 or older).
• Your taxable compensation (defined earlier) for the
year.
What I take from that is if you turn 50 in 2019, you can contribute $7K. The IRS isn’t told the date you contributed on, so I don’t think they’re going to care if you “cheat” a few months.
you’re right. You can make a catchup contribution to IRA ( or 401k ) in the calendar year you turn 50. If you turn 50 anytime in 2019, then you can have a catch up contribution anytime in 2019
The IRA Roth is the account that you put $10k in and 20 years later you’re a guaranteed millionaire tax free?
I assume you’re joking because there is no guarantee on investments and turning $10K into $1M over 20 years requires an annualized rate of return of 26%. If you contributed $10K a year for 20 years and earned 8% you could end up with $457K though.
Correct regarding turning 50 during 2019. I do in June and just completed TIRA yesterday and
Vanguard automatically informs you about max contribution and states 7000, still waiting for funds to post to MMF so can convert to Roth
Completed Vanguard TIRA contribution yesterday and turn 50 in June. They automatically report 7000 as max contribution for 2019.
Now waiting for funds to post to MMF so can convert to Roth, 2nd year doing so. Have step daughter who is pediatrician and told my daughter she makes too much to contribute to Roth, got her WCI book for Xmas for her to learn about all the ins and outs of backdoor.
Set up Roths for both my children for Christmas presents and teaching them about compound interest and investing and dad match in the beginning.
Thanks!
What about funds in a traditional IRA from a private practice job that were rolled over into the TSP?
Why not leave them there? That’s what I would do.
I dont have a Roth IRA yet. Haven’t been able to contribute due to income limits and only recently found out about Backdoor Roth IRA.
Thank you for your blog btw – big fan!
Question:
I have large amounts ($500k) in my traditional IRAs (rollovers from previous 401ks). If I have to get this backdoor Roth IRA going starting from this year, please confirm the sequence of my steps and associated concerns below:
Step 1: contribute to IRA
Q1) Do I have to open a new IRA (or I can contribute to one of the two IRAs I already have with balances)?
Q2) Am I limited to $6k contribution or $12k (for me and my wife?)? My wife is non-working. Assuming I need to open a separate IRA account for her to do this Roth IRA conversion?
Q3) Will this contribution of $6k come into picture for 2018 taxes that I file for 2018 or 2019?
Step 3:
Currently my IRAs are invested in number of MFs. ETFs, IRAs. My assumption is when those rollover to 401k, they will all be liquidated to cash and then need to reallocated to mutual fund options available in the 401k plan. Is this correct?
Q1- Use a new one because you’re going to do something with the old ones.
Q2- $6K a piece if <50, $7K a piece if 50+
Q3- Yes, 2018 IRA contributions are reported on your 2018 IRS Form 8606
What happened to step 2?
Yes, that's typically what happens.
Thank you!
I’m a recent graduate and just started my full time position in private practice. I had been maxing out my Roth while in residency, in addition to contributing to my company’s 403b/401k. After residency, I decided to roll over the money in my 403b to my Roth, since hopefully, this past year will be the least amount of money I will make for the rest of my career (only half a year of my private practice salary + half a year of residency salary – thus putting me in the lowest tax bracket). Unfortunately, I am not eligible with my current position for any type of retirement plan yet. I am also moonlighting in local urgent cares, so I will be a 1099 employee as well. My questions are:
1. How would you recommend that I save money this year while I am waiting to be eligible for my employer’s program?
2. Since I currently don’t have any 401k, should I consider opening a Roth 401k due to my 1099 employment status?
3. If I’m planning on having a Roth 401k, can I still do a Roth IRA backdoor conversion for 2019?
Thanks in advance!
You should continue to do a backdoor Roth. And open a solo 401k for your 1099 income. You can contribute your first $19,000 of net self employment earnings to the solo 401k, either pretax or Roth, and this has no effect on your backdoor Roth. Consider making a post on the forum if you want a more comprehensive discussion of your situation.
Jacoavlu is right as usual.
1. Solo 401(k).
2. Probably not since you’re now in your peak earnings years.
3. Yes.
I have to thank this site for discovering the backdoor roth. I agree that they should just open up the Roth to everyone so there’s no “back door”. Personally, I’d go for something like the FairTax (consumption tax) which would just eliminate the IRS. This would make all investing “pre tax” which and not just simplify but basically eliminate the tax code.
I have a love/hate feeling for this article…
I love the article and the information. I also love that you got something published in Forbes. Congrats as that is awesome!
However, I also hate that you got this published in Forbes. Too much attention. I now foresee a certain faction of people grabbing this information and writing a counter article about how “rich people are abusing the tax code” and then pushing for Congress to change the code to eliminate this option. I guess you picked a good time when the Republicans still control the Senate and Presidency so it is unlikely to disappear in the next 2 years. But celebrating this stuff only seems to add gas to politically charged flames. I agree with your suggestion to eliminate the need for this and just allow everyone to contribute to a Roth. However, if it is ever eliminated I doubt it will go down as you suggest.
Thanks,
It’s not the first time this subject has been published in Forbes.
Just a data-point for Fidelity. I’ve noticed that in the past few years, it has taken 7-8 days before Fidelity will let me convert my IRA to Roth. Very frustrating this year when I did the ACH pull/transfer on the Fidelity website on Jan 1st and wanted to convert and buy stock while it was still on sale from the Down December…
I was hoping you could answer a question. I have a roll over IRA and traditional IRA with enough in them that it would not make sense to convert. I have a 401 k with my group plus prophet sharing. I also have a side gig. For the side gig, I have a defined benefit plan. My wife is employed as a nurse and makes ~60,000 per year and has a 401 k that she maxes out. Is it possible to open a IRA in her name and then covert it? Thank you!
Yes.
Also, why not roll over your IRAs into your 401(k) and do it for yourself too?
Is it okay to have an individual 401 if I have a defined benefit plan? Thank you!
yes, but you should talk to whoever administers your defined benefit plan, the plans kind of go hand in hand and have to fit together like a puzzle, best if they’re administered by the same people. Though I must say I have close to zero knowledge about personal defined benefit plans. They’re certainly less common than solo 401ks.
I have a dilemma. I am getting ready to start doing backdoor roth conversions for both myself and my wife. We both have old roth ira’s from when I was in residency. The issue is my wife has a traditional IRA (from previous teaching) with $46,000 in it (only $40,500 is taxable as we contributed $5,500 to it last year post tax in anticipation of converting to roth). She is a stay at home mom who occasionally teaches some online classes now. My accountant thinks I am crazy to convert the entire amount due to us being in the 35% tax rate. I think it may just be worth it to roll the whole thing over and pay the tax in order to get that much more in her roth bucket and then con’t doing the backdoor roth yearly. My other option is to have her do some tutoring or something and create an i401k for her and roll it into that. Is there a good way to decide how much in a traditional IRA is worth converting? If we converted it I would pay all the tax out of a different taxable account/savings which I know helps.
We also already max out my work 401k and 457b.
Appreciate anyone’s thoughts on this!
You’re kind of in a gray area. If you’ve got $15K sitting around, I don’t think converting it is too crazy. But if she’s got an i401(k), that’s an easy tax-free solution. No right answer there. Either is fine.
I’ve been executing the backdoor Roth through my and wife’s VG accounts for the last few years and have been running into an issue of around $1 left in my tIRA after backdoor even though I have the $6k in the money market settlement fund for only 3-4 days. Apparently it accumulates some gains during that brief time. Should I withdraw back to my bank account or roll the overage into the Roth causing a slight contribution overage? Fantastic blog, thanks for all your insight.
It’s not a contribution overage. The contribution was into the traditional IRA. You will owe taxes on the conversion of that extra dollar though. More details here:
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
I opened a solo 401k and rolled over my SEP-IRA into it. I wanted to do the backdoor roth IRA contribution but am finding I will be taxed (form 1099-R) if I do so from the solo401k. Should I have kept the SEP-IRA open for the sole purpose of the roth conversion (form 8606)?
What do you mean “if you do so from the solo401k”? You don’t doa Roth IRA from the solo 401(k). And no, there is no reason to keep a SEP-IRA in order to do a Backdoor Roth IRA.
We both were hired at new jobs last year which pay more. We both contributed to our Roth IRA 5.5k for 2018 and 6k for 2019. Doing our taxes, apparently we made too much money to contribute to a Roth IRA. I am assuming the steps are.
1. Notify our financial institution that we need to withdraw our 2018/19 contributions and any earnings from that money.
2. Each open a non deductible traditional IRA.
3. Deposit 11.5k each in our respective IRAs.
4. Implement the backdoor Roth IRA and convert the traditional IRA to deposit the money in the same Roth IRA we just withdrew it from.
5. Pay taxes on the earnings from the ineligible contributions we initially directly deposited into the Roth IRA.
Ultimately it is my own fault for not knowing that the 24k standard deduction does not count towards the Roth IRA income limits. However, the money is going to end up in the exact same place after the backdoor Roth conversion is complete. We are being penalized for being successful and for an idiotic tax law.
Just recharacterize to a traditional IRA, wait the required waiting period, then reconvert.
With the recharacterization, I would still have to sell the investments to make sure there is enough money to recharacterize the contributions and earnings to a traditional IRA. But, what you are suggesting seems like fewer steps since I see my financial institution has a form to recharacterize which will move the excess money directly from the Roth IRA to the Traditional IRA I just opened up.
There is a mention of a waiting period, does this mean the 3 days or so for the funds to clear or something else?