Every March and April I am absolutely inundated with Backdoor Roth IRA questions. This year was no different and I found my prior post on 17 Ways to Screw Up a Backdoor Roth IRA to be inadequate. Not only are you guys incredibly good at finding new ways to screw Backdoor Roths up, but that post focused too much on the errors and not enough on the solutions once the errors have been made. I haven't given up on prevention, but I am now focusing more on treatment.
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For a process that seems so incredibly simple to me, it can be amazing all the different ways to screw it up. In 2019, I noticed a couple of trends in the questions I was getting that probably deserve some time on the blog. Before we get into them, let me explain the VERY SIMPLE way to do a Backdoor Roth IRA. There are essentially six steps. I'll go over them and then go over how to fix errors that occur with each step.
6 Steps to Successfully Contribute to a Backdoor Roth IRA
- Step #1: Contribute to traditional IRA ($6K, $7K if 50+ for 2019).
- 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.
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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 $137,000 ($193,000 Married Filing Jointly) for 2019. Now what?
Enter the Recharacterization
Well, 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.
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 2018 for the 2018 tax year, you have until October 15, 2019 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.
Step #2 Error: Not Investing in a Money Market Fund in the Traditional IRA
I ran into a new issue this year from a couple of people. 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.
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Step #3 Error: Forgetting to Do the Conversion
If you were dumb and 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 2018 IRA contribution in April 2019, instead of reporting both the contribution and the conversion on your 2018 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 2019 tax return due in April 2020. Your 2018 IRS Form 8606 becomes a little simpler and your 2019 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 2018 contribution they need to have a balance of $0 at the end of 2018, even if they didn't do the conversion step until 2019. That's simply not the case. The pro-rata rule isn't applied until the year of the conversion, i.e. December 31st, 2019.
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.
Again, if you're not sure how to enter this into Turbotax, check out Harry Sit's excellent tutorial. I still occasionally refer to it myself.
Still Confused About the Backdoor Roth?
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.
- Need more help with a Backdoor Roth IRA? Here is my Backdoor Roth IRA Tutorial (along with 1800 comments on it).
- If you did your contribution after the end of the year, check out Late Contributions to the Backdoor Roth IRA.
- The Physician on FIRE walks you through a step by step Backdoor Roth IRA at Vanguard.
- Harry Sit walks you through 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.
What do you think? Which Backdoor Roth IRA mistakes have you made? How did you fix them? What errors do you see others making? Comment below!
Do you expect new forum posts to drop by 30% now that you have created an essential guide to fixing backdoor roth mistakes? 😉
Yea right, but at least there’s somewhere easy to refer them!
I would like to start making contributions to my ROTH IRA but currently make too much money. I have a Traditional IRA at Vanguard, with a balance greater than $100K of which I made three years of Non-deductible contributions ($16,500). My 401K at Fidelity will accept the pretax portion of my Trad IRA. After the transfer from Vanguard to Fidelity, I believe I would only have $16,500 (non-deductible total) remaining at Vanguard.
This $16,500 could then be put in my ROTH IRA tax free correct? Giving me a zero balance in my Trad IRA, allowing me to do Backdoor contributions without pro-Rata problems.
I found a new way to screw up a back door Roth IRA. I contributed and did the back door Roth IRA for my wife and I early this year like a good white coat investor. I then joined a new employer part way through the year who has a simple IRA. So now I’m not going to have a zero and be subject to the pro-data rule.
That is a new way to screw it up. Congratulations!
I guess you might be able to put off your SIMPLE contribution until January. Or reverse it/not do it. Not a great solution there to just being pro-rata’d.
Did the exact same thing, backdoor Roth contribution on 1/1/2020, started contributing to SIMPLE IRA since August. Now can’t move SIMPLE IRA due to 2-year penalty.
What should I do? Reverse the backdoor Roth conversion? How?
You can’t recharacterize a conversion. Sounds like you’ll be pro-rated. It’s not illegal to be pro-rated, it just kind of defeats the purpose. SIMPLE IRAs don’t mix well with the Backdoor Roth IRA process.
I guess I’ll have to wait for 2 years to do another Backdoor Roth IRA. Time to start a side gig with a solo 401k, so I can rollover the SIMPLE IRA after 2 years. Thanks for clarifying!
Did you eventually figure out a way around? I’m in the exact same situation.
Thanks for this post, Jim.
I can attest that even CPAs aren’t always aware of how to handle the backdoor Roth IRA.
Even though I warned my CPA of the fact that I contributed to our Roth IRA using the “backdoor,” when our tax return came, it was missing Form 8606.
When we got this corrected, it dropped the amount of taxes I owed by a few thousand dollars.
So make sure to check the work of your tax preparer!
— TDD
Agreed. You need to check your own 8606 to make the accountant didn’t screw it up.
Yes, exactly.
In Error #4, you mentioned leaving the money sitting in cash for months in an IRA. I asked my employer’s 401k manager the allocations on my 401 and he said the allocation is 85% stocks/15% Fixed Income. The fixed income includes bonds and cash alternatives. What do you think of that type of allocation?
It’s actually pretty aggressive to be 85/15.
So I have $1 Million in a IRA and want to do a conversion to a Roth IRA. I thought I could do a little at a time after I retire and in a lower tax bracket (maybe $250K a year). Your article sounds like I have to do it all at once.
Is that right?
you can do it a little at a time. The conversion is fully taxable.
Thanks
Agreed.
This is very timely for me. Contributed $1,000 to my Roth IRA back at the beginning of the year, thinking there was no way I was going to make enough in 5 months of attending salary to put me over the limit. Have never been so happy to be wrong, but it does mean I screwed up step number 1.
I have a question though: as I go to correct this, will I recharacterize just the initial $1,000, or will it be $1,000 plus any growth? That is, can I recharacterize the original $1,000, add another $5,000 to the new non-deductible traditional IRA, and then convert the $6,000? Or will my final pre-conversion contribution need to be something less than $5,000 if growth has occurred on that original $1,000?
I get the impression from your link that it is the latter, but wanted to be sure.
Hope this question makes sense, thanks for everything you do.
Thanks for this resource! One question – Do Inherited Traditional IRAs count as part of Step # 5: Ensure you have no money in a traditional IRA, SEP-IRA, or SIMPLE IRAs? And if so, could I convert funds from an inherited traditional IRA into a Roth IRA for both myself and my husband?
Appreciate the clarification.
Terri
No. They don’t count.
Hello and thank you for all the resources on the conversion process. I have a question to which I am not able to find the answer. Perhaps it is here and I missed it in the long comment threads. But here goes…
I deposited for the first time into a traditional IRA last year before I knew about the backdoor Roth. I have not yet deposited any money into the IRA this year.
Other than doing the conversion now and paying the taxes, is there anything else I need to do? Do I need to fill out the Form 8606 now that I’m doing the conversion a year late?
Thank you for your help.
Assuming your IRA contribution was not deductible last year, you should have filled out an 8606 last year, so you may need to file a 1040X with an 8606. And yes, you’ll need an 8606 for your 2019 taxes too.
Thank you for the article!! After reading it, I realized I made two mistakes..
1. I incorrectly reported the backdoor Roth (I used TurboTax) and it didn’t generate 8606. I’m not sure how to fix this.. I guess re-entering information in TurboTax following a link you provided would help me resubmit 1040x?
2. After converting Vanguard IRA to Vanguard Roth, I made sure $0 in Vanguard IRA. I didn’t remember that I have balance in TDAmeritrade IRA (rollover from previous employer 401k). This violates pro-rata rule, correct? How do I fix that?
Other questions: a. Assuming all my backdoor Roth issues are solved; is there any potential risk moving Vanguard Roth to TD Ameritrade Roth? I want more flexibility in buying/selling options, that are not available with Vanguard. Or am I stepping into more potential issues?
b. I also did backdoor back in 2014, with the same issue on tax reporting (no 8606 form). How do I fix this?
1. File a 1040X with an 8606. Maybe just do it by hand. It’s not too bad.
2. Yup, you violated it. You just prorated your conversion. You can fix it this year though. Just move the IRA into a 401(k) or convert it and pay the tax. Then make sure the 8606s are right.
a. Risk? Not really. If you want it at TDA, then move it there.
b. A little late there. I bet you gave the government an extra $2K that year and you probably can’t get it back now. Look at your taxes and see if you paid taxes on that conversion that you shouldn’t have.
Thank you for the reply! Really appreciate it.
Regarding prorating my conversion.. details were: $3K back door Roth, while having $30K in IRA, so only $300 considered after tax and now I owe tax for $2700 – for 2018. This means, I have to submit 8606 & 1040X for 2018 to document all this, correct? Questions:
a. Any resources from this site on how to fill out 8606 in this situation? Or recommended CPA that could potentially help me with this.. it seems daunting to me..
b. Paying tax on $2700 hurts (especially the fact that I’m paying twice!), but curious, is there a way to reverse the whole thing? I’ll let go even trying back door roth in 2018 (since I couldn’t back date $0 in IRA on 12/31/18). If the paperwork to do this is too much, maybe I’ll just pay the tax.
c. Assume above issues are taken care off and I make sure IRA balance for 2019 is $0 for back door Roth this year, do I put $0 in basis for 8606?
d. Looks like in 2014, I contributed to Roth directly (not back door), without realizing the income limit restriction – since opening & contributing didn’t check for AGI. What’s the implication on this mistake? How do I take care of it, now that I know about it?
Yes
A. Have you read the 8606 instructions yet? They’re really not that big of a deal. Here are people who can help:
https://www.whitecoatinvestor.com/tax-strategists/
B. You’re not paying twice on that $2700. It hasn’t been taxed yet. What’s your plan with the other $27K? Are you going to convert it? If so, I’d just press forward. I don’t think you can really reverse the conversion at this point though.
C. Which 8606? 2020? Yes.
D. You’re already past the 3 year “statute of limitations” with the IRS. I guess no reason to do anything about it at this point, but might be worth asking an accountant.
A. Got it. Form 8606 completed: Line 15: $0, Line 18: $2700, put that in 1040X – owing tax for the $2700. Submit both for 2018 yr.
B. You’re right, it’ll be taxed twice once I submit 1040x and 8606 for 2018; right now not yet.
Regarding 27K IRA, now it’s 50K from aggressive trading; Ideally, I’d like to $0 IRA by Dec 2019, do another back door Roth this year. Is it going to complicate 8606 (2019 tax) with the basis? Is it $2700 or $0 (since by Dec 2019 it’ll be $0 balance)?
If I decide to press forward and convert 50K (current balance, not balance by Dec 2018) to Roth, aside from just rolling the fund from IRA to Roth. Is this projection close: 2019 tax form 8606 taxable amount 50K, basis from 2018 $2700. Pay tax on 50K? I guess, I can still do back door Roth 2019.. although it gets complicated..
Am I seeing these 2 options clearly?
Thank you so much for all you do here and your inputs! I really appreciate it.
I didn’t follow everything you wrote, but basis is all the money you put into it that you didn’t get a deduction for. So if you have $10K worth of non-deductible contributions in a $50K IRA and you convert it all to a Roth IRA, you owe tax on $40K.
Thank you so much for all your inputs & insights! Question:
I won’t be able to $0 my IRA for 2019 (one real estate investment can’t be liquidated prior to end of year). In your opinion, is it still worthwhile doing back door IRA, knowing that I’ll be paying tax on the majority of the amount (pro-rata rule).. considering that when I pull the money in retirement, the return will be not be taxed?
Why not just make the contribution and hold off on the conversion until that issue is resolved?
In fact, you could even wait until April to make the contribution if you like.
Wow! That’s right! I didn’t think of that option. Let me walk it through along with the following year back door, so I don’t make another mistake.
– Contribute X for 2019 anytime up to April 2020.
– Contribute Y for 2020 – anytime in 2020 (in this case assume the same year, for 2020 back door).
– Convert X + Y or separately (?) in 2020, no tax as long as Dec 31, 2020 all IRA is $0.
Worst case, if the fund is still not liquid until the following year again, can I contribute to max amount for 3 years, then convert all to Roth on the year I can have IRA $0?
Exactly. I mean, we often lump it all together as one process but in reality a Backdoor Roth IRA is a two step process (contribution and conversion) and the steps can be divorced/separated in time.
Thanks for your posts! A financial dummy doctor like me finds your articles so helpful. Regarding my backdoor Roth conversion…I opened up a Vanguard traditional IRA account last year and put in $5,500. I didn’t convert it to backdoor Roth last year but did so this year. This year, the entire traditional IRA money now is $5,656.33. I just converted this whole amount into a new Roth account within Vanguard. Then in addition for this year, I contributed $6000 to the traditional IRA account. Can I now also convert that $6000 from my traditional IRA to the Roth account this year without having to pay any tax penalty? That would mean I end up with $11,656.33 all converted to Roth for this year, leaving me with 0 in my traditional IRA. I have no other IRA accounts from the past. Thank you.
I have a timing question on emptying out a pre-tax IRA by rolling the pre-tax proceeds to a 401k before 12/31/19 and thus avoiding the Pro-Rata Rule and calculation. Does both the Pre-Tax IRA need emptying by 12/31/19 and the proceeds posted to the 401k by 12/31/19? Or does just the Pre-Tax IRA need emptying and the proceeds can be ‘in-transit’ to the 401k? Thanks
I’ve been doing the backdoor Roth for a few years now and it worked flawlessly in past years. But in 2019, USAA transferred my mutual funds to Victory Capital. As a consequence, they couldn’t complete the conversion from my Traditional IRA to my mutual fund Roth IRA. They had me open a new mutual fund Traditional IRA with Victory Capital. Then they told me they would need to leave a small amount of money in the new Traditional IRA account to keep it open, otherwise I’d be charged fees each year for closing down the account. So they had me transfer $6000 into the new Traditional IRA and convert $5990 to my Roth IRA, leaving $10 in the Traditional IRA. I’m not too happy with the way things are set up – it seems unnecessarily complicated. But I think I can figure out how to enter everything on my tax forms. Apart from having to pay what I’m guessing is a small tax, is there a problem with having $10 in my Traditional IRA on December 31st year after year and am I violating the pro rata rule? Thank you.
I’ve been doing the backdoor Roth for a few years now and it worked flawlessly in years past. But in 2019, my mutual fund Roth IRA was transferred to a different branch or subsidiary of the financial institution and my money market Traditional IRA stayed behind. As a consequence, they couldn’t complete the conversion from my Traditional IRA to my Roth IRA. They had me open a new mutual fund Traditional IRA and close out the old one. Then they told me they would need to leave a small amount of money in the new Traditional IRA account to keep it open, otherwise I’d be charged fees each year for closing down the account. So, they had me transfer $6000 into the new Traditional IRA and convert $5990 to my Roth IRA, leaving $10 in the Traditional IRA. Upon their advice, I am indeed making some of the errors you listed above. But apart from complicating my tax forms and having to pay what I’m hoping is just a small tax, is there a huge problem with having roughly $10 in my Traditional IRA on December 31st year after year and am I unduly violating the pro rata rule? I’m not too happy with the way things are set up and I still might make some changes. Thank you.
No, but why not move to someplace like Vanguard, Fidelity etc that doesn’t require that sort of thing like everyone else?
Hello,
This will be my first time doing any major investing as unfortunately I am only discovering this website and my options. I have a 457 through work with around 1100 from 3 years of residency. I have accepted a job starting August 2020 which will put me over the income limits for 2020 Roth contributions however I can still contribute prior to April for 2019 correct? When I do a backdoor Roth IRA for 2020, those contributions can be added to the Roth I create for 2019 correct?
Does the 457 count against for pro-rata rule? What would you recommend I do with that? I know it’s taxed if you withdrawal the money so should I try to rollover the funds to the Roth for this year?
I appreciate all help to a newbie.
Yes. Yes. No. If it is a government 457, then you can roll it over to an IRA and convert it to a Roth IRA. If it isn’t, you have to either leave it there or withdraw it and pay the taxes on it. For only $1100, I might just do that.
My 1099-R from Vanguard appears wrong.
January 2019: Successfully (or so I thought) executed my first backdoor Roth for the 2018 tax year in the amount of $5,500.00. The account did sit for a couple weeks while waiting for verification causing some growth (around 8 bucks) and accidentally converted it all to a Roth. Oops.
Fast forward to December 2019: Successfully executed my second backdoor Roth for the 2019 tax year in the amount of $6,000.00. Converted same day so no extra dollars seeping in.
Now January 2019: Receive my 1099-R and box 1 says $11,508.00
Why is Vanguard adding the $5,508.00 to my 2019 tax year? Was I supposed to get a separate 1099-R for my 2018 conversion and 2019 conversion? It appears Vanguard recorded a my 2018 distribution in order to convert to a Roth for the 2019 tax year.
The taxable amount not determined box is checked but my concern while doing my 2019 taxes is that the amount contributed to my Roth doesn’t match the 1099-R received causing me to pay unnecessary taxes?
Because you converted $11,508 in tax year 2019. No big deal. If you fill out the paperwork right you’ll only owe taxes on $8. Your 2018 contribution should have been reported on your 2018 taxes (Form 8606). Was it?
It doesn’t appear to be correct now that I am looking at it.
2018 8606 reads:
Box 1: 5,500
Box 2: 0
Box 3: 5,500
Box 10: X
Box 14: 5,500
All other boxes blank.
Why isn’t Line 4 5500? But it really doesn’t matter much since Line 14 is right.
I’m still not clear what your concern is. Are you worried that you’ll be paying taxes twice on your 2018 contribution? If you fill out your 2019 8606 right you won’t be.
Why isn’t Line 4 5500? – I must have missed this box on Turbo Tax while doing my 2018 taxes. Damn.
Just generally concerned I will be paying unnecessary (obviously I will be on the $8 which was fine) taxes due to my 2019 1099-R looking like I tried to contribute to my 2019 Roth twice. Since I am new to this, I was expecting 2 1099 documents referencing the appropriate tax year. Seems sort of logical but maybe it doesn’t upon further thought. Not even remotely a tax expert.
What would my 2019 8606 look like in this case?
The 1099 just says what conversions you did in 2019. Which is $11,008. when you do your 8606, you’ll pull forward your $5500 basis from 2018 and add your $5500 basis for 2019 and you’ll be left with paying taxes on $8.
Just work your way through the form and you’ll see it’s not big deal. Line 2 will be $5500, the rest is very self-explanatory. More here:
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
Thank you!!
Thanks as always for the helpful info and commentary on screw-ups.
I want to do my first backdoor Roth conversion but need to empty out my IRA into 401k which I am beginning to do. However my IRA contains both rollover money (the majority) and a few years of non deductible contributions (the minority about 20 k). Is it correct that I should move the previous rollover money into the 401k but leave the 20 k of non deductible contributions in the IRA to convert? This will have some taxes presumably but afterwards the account will be zero and I can do it the way described at the beginning of each year moving forward. Or should I rollover the entire IRA into 401k even though it includes the non deductible contributions if this even allowed.
Thanks
Sure, that’s a great way to isolate the basis. Why would there be taxes due?
Your 401k likely doesn’t allow you to roll non-deductible money in.
Thanks for your quick reply.
Not sure but for some reason I assumed that since the non deductible money would be more than the typical yearly contribution (about 3 years worth) that it would be taxed as opposed to an account with zero that than added a 1 year contribution and immediately converted. Probably didn’t think it through fully. Glad it wont be.
Ditto, Thanks for great website. I tell all my coworkers.
The way I understand it , is choice One. Move all the money over to the 401K, Except the non deductible portion.
Then move all the non deductible to a Roth Ira.
My IRA is over $500,000 with $86,000 non deductible (I been doing this awhile). The $86,000 come from filling out form 8606 every year and keeping track.
Fidelity said I can do this, I plan on checking again before I start moving the money.
I never thought about moving all the money to the 401K and if Fidelity would/could track any of non deductible funds.
I retire in 2 years so hope to get done before then.
Yes I also called Fidelity where the 401k is and they said it could be done.
Just need to contact vanguard where the IRA is and figure out logistics of rolling over all money minus the non deductible portion
Fidelity or whoever is getting the money will let you know what can be tranferred into the 401K. There are some funds (like certain Mutal Funds, penny stock, foreign equities they might not take). Every one takes cash and since it is all qualifed money, it will not be a problem (with taxes).
Good Luck
No, pull the money to Fidelity, don’t push it from Vanguard.
Im actually doing 2 rollovers into Fidelity 401k. One from the vanguard IRA I have been discussing and another from my previous employer 401k and I think Fidelity told me I had to deal with both from the other end. Will check again. Thanks.
Sometimes you have to fill out paperwork for both, but having done a dozen rollovers, it’s almost always better to “pull” the money.
Well. I did it. Didn’t think after reading so many articles that I could completely mess this up…
But I completely forgot about a previous USAA traditional IRA with something like 12k in it.
Did the 6k traditional to Roth conversion earlier this year through Vanguard, thanks to the tutorial.
Since I missed the 2019 conversion of the 12k traditional, I’m trying to figure out what tax I pay on the whole thing…
The total traditional IRA is now 19k, 6k of which has already been taxed, and is now going to be taxed again?
By not converting the prior traditional by end of 2019, how much extra am I giving to the government? Assuming tax rate of 30%
Did you do a Roth conversion in 2019? If not, then you haven’t screwed anything up yet and have until December 31st, 2020 to roll that IRA into a 401(k) or convert it to a Roth IRA.
How do people forget about their retirement accounts?
Nope, I went and converted in 2019 like a dumb dumb. Honestly my earlier USAA investments were pre-residency and I always thought in my mind they were only brokerage accounts. No idea why I would have had a traditional IRA as a student. How does someone not remember their retirement accounts? I don’t know—life, career?? How does someone buy whole life?
So you’re pro-ratad for 2019, but if you can afford to just convert it all in 2020 it’ll work out okay still.
It’s one thing to buy whole life. Entirely different to forget you bought it! But I keep running into people who forgot about retirement accounts, even when reminded by reading a blog post to make sure they don’t have any old IRAs. I just find it fascinating. Happens all the time, you’re hardly alone.
What if it is past the October 15 deadline to fix the mistake of contributing directly to a Roth instead of through the backdoor? I started contributing to a backdoor Roth IRA last year, making contributions for both 2018 and 2019 tax years around the same time in early 2019, and somehow managed to make this mistake for one of them and not the other. Unfortunately, the mistake was on the 5,500 allocated to 2018, so it looks like it is too late to do a recharacterization. I filed my taxes for 2018 and filled out an 8606 reporting the 5,500 as though it was a backdoor Roth (because that is what I thought I had done), so I paid taxes on the contribution. Is there a way to fix this other than taking a distribution of the 5,500 and getting hit with the penalty, plus filing an amended tax return for 2018? Can I recharacterize from the Roth to a traditional, and then convert the traditional back to the Roth? I assume not, but I don’t think the 2018 rule comes into play because I am not trying to recharacterize a previous conversion (since the contribution went straight into the Roth rather than being converted).
Uhhhh…that’s a pretty good screwup. You’re past the deadline to recharacterize, so I think you’re right that you’ll need to take a distribution and file an amended return. I bet you don’t make that mistake again.
Thanks. Definitely won’t be making that mistake again. I managed to do 2019 correctly, so I still have no idea what went wrong with 2018, since I did them right around the same time last year. My guess is that I mixed up the account numbers when ordering the wire transfer, because I certainly didn’t mean to deposit straight into the Roth. The most frustrating part is that my tax return reflects the right approach and what I wanted to do all along. It’s not like I took a deduction that is not allowed, or went over the limit for a traditional IRA for the year.
It’s possible you did everything right and the custodian botched the contribution too.
Using Fidelity and only have Roth IRA and Rollover IRA and three prior workplace (401K/403b/457b). I do not make enough income on my S-corp to open a solo 401K or a Sep-401. So how do I do this? My CPA said to transfer my 3 workplace accounts into Roth, then do backdoor. Confused? Fidelity told me rollover all three and open a solo 401K . But how do I open a solo 401K?
If you transfer 3 workplace accounts into a Roth IRA you’ll owe tax on them.
There is no such thing as a SEP-401. There are 401(k)s and there are SEP-IRAs.
The only account you need to get rid of by December 31st is the rollover IRA. So roll that into a workplace plan or convert it to a Roth IRA if you wish to do a Backdoor Roth IRA This year.
If you are self-employed, you should be able to open a solo 401(k) that you can roll the rollover IRA into if you like.
I did a backdoor Roth in 2017 with a Schwab traditional IRA funded with 2016 and 2017 contributions. $11500 in contributions, $11505 converted to Roth, paying taxes on $5. Turbotax completed form 8606. I also have a separate traditional IRA with Vanguard, worth $55k, so it seems there may be a pro rata problem for the backdoor attempt. I did not forget about the account, but I didn’t completely understand the method, so it appears a mistake was made.
Does simply converting the whole $55k traditional IRA (and $19.5k subsequently added to the traditional IRA holding account at Schwab) this year cure the problem? Together the traditional IRAs are worth $74.5k, funded by $47.5 non-deductible contributions. Does this mean I would owe taxes on the $27k difference?
Does the total taxable amount change if my only records of contributions come from my account statements (for years in which my income exceeded the limit for deductible contributions) or do I need an 8606 for each of the previous years’ contributions?
Thanks.
There’s no “may be” about it. You have a pro-rata problem and your conversion should have been pro-rated on your 2017 8606.
Yes, the easiest (but fairly expensive tax-wise) method is to just convert it all. That’s what I would do if I could afford it.
Why are you adding $19.5K to the IRA? The goal is to get rid of it, not make it bigger. Can’t you leave that in a 401(k)?
Yes, you don’t pay taxes on basis, so money is only taxed once.
Yes, you’re supposed to file an 8606 for each year if you’re trying to keep track of basis.
Hopefully a simple question that I haven’t been able to find the answer elsewhere…I’ve been going over my tax year 2018 documents, and I am now realizing that my tax preparer last year did my Form 8606 (and my wife’s) incorrectly.. My IRA basis should be 0 (I emptied my traditional IRA before 12/31) but she somehow got 10,999 on each of our forms.
My question is this: do I need to submit an amended return to correct just the basis discrepancy? Since I had very little increase in my funds between the contribution and conversion, the tax owed calculated was fortunately correct. I utilized some IRS algorithm and it seemed to suggest that since the tax owed info itself was correct that an amended return may not be necessary.
Any input is greatly appreciated, and I can clarify if any of this doesn’t make sense. I will also be doing my own taxes from here on out, lesson learned.
Yup. Tax preparers seem to struggle with this form for some reason. If it is wrong, you should probably resubmit it with a 1040X. Does it really matter? I guess not if it doesn’t change the tax due. I mean, what is an auditor going to say?
But make sure it’s wrong. Remember basis isn’t based on your IRA balance on 12/31. It’s how much already taxed money you had in the IRA at the beginning of the year, not the end. So if you contributed $5000 for 2017 in early 2018, that $5000 would be basis when you go to fill out your 2018 8606.
Thanks for the clarification. I went back and looked to confirm, and I think the traditional IRA basis still should be 0. Starting 2018, 0 balance in tIRA. I actually had no tIRA account prior to 2018. In March, I did a contribution for 2017, then a conversion. In December, I did my contribution and conversion for 2018. So I knocked out 2017/2018 contributions in 2018, and had the total 11,000 converted in 2018. I filled out my Form 8606 based on your blog post about the contribution FOR XX year but converting IN XY year. Based on my math, I believe basis should be 0, but the 10,999 is what got entered by tax preparer. Any follow up thoughts, or is my thinking incorrect? Thanks for your time in clarifying!
So your 2017 8606 established basis which should be reported on your 2018 8606. So the basis ought to be something like $5-6K, no?
Absolutely. My 2017 8606 had 5500 as my basis that I carried over to the 2018 8606. But in 2018, I had the initial conversion plus my 2018 contribution and conversion (exactly as described in your video tutorial) and filled out my form accordingly. According to your tutorial, and from my math doing the form, line 14 for 2018 should’ve ended up 0, which it did not when my tax preparer re-entered the form.
So now in 2019, I’m having to fill out the form with line 2 as 10,999. I see by completing the form that line 2/14 doesn’t really affect what I pay now, I mainly want to make sure it’s correct so this doesn’t end up causing me big issues in the future. It does appear that with each successive year, as long as I fill the form out correctly, that the basis should never really change from the current 10,999..
Sorry, a friend talked me through this and made me realize the need to clarify: the “basis” on line 2 of the forms (both 2017 and 2018) have been correct. The “basis” I’ve been referring to as incorrect has been line 14 of the 8606, since as of 12/31 of 2018 there was 0 dollars in the tIRA. My tax preparer must have interpreted that I had all 2017 and 2018 contributions (and conversions) still in the tIRA, which would have made line 14 close to 10,999, but that was not the case.
First, thank you for all the info you share. My wife and I have learned a ton!
We did a IRA contribution for my wife’s 2018 IRA in 2019 and did conversion in 2019 (not smart). We are not doing IRA contributions for 2019 and am having trouble accounting for the 2018 conversion done in 2019 on this years taxes. I’m using Turbo tax. Any insight on how to do it since not contributing in 2019?
Thanks
https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html
If you still haven’t converted it then it just gets carried forward as basis. If you convert it then you report the conversion.
I converted it 4/19. I thought I cleared everything out of traditional by end of year but there is still $3 in it. Will that change anything?
Yea, but only by $1 or so. You’ll be prorated.
Hi, thanks for all your help. This will be my first time to do a Backdoor Roth IRA (using part of a bonus I got earlier in the year) so hopefully what I’m asking makes sense. I was planning to do a contribution and conversion for me and my wife ($6k each) for this year (2020), but I just realized that if I hurry I can do a Backdoor Roth IRA for us for the 2019 year as well. I have already filed my 2019 taxes (jointly with my wife). Let’s assume I can get the contribution and conversion done before April 15 for both 2019 and 2020 (so, $24k total; $6k each for 2019 and and for 2020), since I’ve already filed my 2019 taxes, would I need to amend them to account for the late contribution/conversion I’m making now for the 2019 year?
Yes. You’d need to file a 1040X with an 8606.
Great, thanks. And I’m glad I posted here because I’ve already screwed this up. In Vanguard, I contributed 6k for me to a traditional IRA for 2019 (step one of the back door). I just went back and looked at my 2019 taxes and realized my MAGI is actually just under the limits allowed to contribute directly to a Roth IRA (under any phase out amount). So I should and could have just contributed directly to my Roth IRA account. My plan is to call Vanguard tomorrow and request that they recharacterize the 6k contribution from a tIRA contribution a Roth IRA contribution. The plus side—I think (but I’m new at this, so correct me if I’m wrong)—is that once the contribution has been recharacterized to a direct Roth IRA contribution, I won’t need to amend my 2019 taxes after all (it’s my understanding that direct Roth IRA contribution do not need to reported). Does all that seem right?
That could be a great solution for you.
Hello,
I accidentally made 2 mistakes with my backdoor adventure, and I have the following questions:
1. I forgot to submit the 8606 for 2019. Can I do it through turbotax ? Do I need a 1040x?
2. I rolled over and old 401k, and I also did a backdoor this year. It seems like I have activated the PRO RATA Rule. Is there a penalty to transfer the rollover money to my 457b in the eyes of the IRS?
Thanks for everything you do.
I haven’t even filed 2019 taxes yet, but if you have then yes, you need to file a 1040X and an 8606. I don’t know if you can do a 1040X on Turbotax, I usually do them by hand.
Thank you very much.