By Dr. James M. Dahle, WCI Founder
Every year or two, Vanguard changes its process slightly. If you understand the Backdoor Roth IRA, these little tweaks are no big deal. If it's your first time, they can be confusing. For example, in 2021 I noticed it was a three-day process for us. On Sunday, January 3rd I put in an order for an IRA contribution. I didn't expect it to happen on Sunday as the markets are closed and so is Vanguard, but even by Monday (January 4th) evening, I could not move on to the next step. It wasn't until Tuesday morning (January 5th) that I was able to do the conversion step. However, Vanguard did not let me actually invest the new money in the Roth IRA on Tuesday. That had to occur on Wednesday (January 6th). Again, not a big deal. Here's all you need to know to do a Backdoor Roth IRA with Vanguard:
Step 1: Contribute to Vanguard Traditional IRA
Click on “Contribute to IRA” and it will then take you to a screen that looks like this:
Normally on this page, you would have the option to choose 2021 as the year you want to contribute to (or 2020 too if you haven't done that yet, at least until April 15, 2021). I just forgot to take the screenshot before I actually did it. Then you just pick the settlement fund (the Federal Money Market Fund) for the money to go into.
Step 2: Convert Vanguard Traditional IRA to Roth IRA
So on Day 2, you go to your traditional IRA and hit the “Convert to Roth IRA” button.
There are other ways you can get to the same place. For example, if you just go to the “exchange funds” link (on the buy and sell menu) it will look like this:
Even if you go to the wrong place, it'll still guide you back to the Roth conversion page when you try to move money from your traditional IRA to your Roth IRA. That page looks like this:
In the first step, you simply choose to convert the entire account.
In step 2, you select the holdings in the traditional IRA that you want to convert (it did it automatically for me as my only holding was the settlement fund). In step 3, you select the Roth IRA account you want to move the money into (it did it automatically for me as I only have one).
Step 4 confuses a few people. Remember you don't owe any taxes on a Backdoor Roth IRA, so don't have any withheld. Be sure to check that box that says you elect not to have taxes withheld. You can get an email that tells you that you didn't have them withheld if you want. I have plenty of emails to read so I check the box that says “Do not send a tax withholding notice.” Then you hit continue.
That will take you to the standard Vanguard “Review and Submit” screen.
Look it over, then hit submit and you'll go to the standard Vanguard confirmation screen which looks like this:
Step 3: Choose Vanguard Roth IRA Investments
On Day 3, you can finally choose the investment you want in the Roth IRA. Just go into your Roth IRA account.
You can see the $6,000 credit there. This shot is of my Roth IRA, which is entirely in the Vanguard REIT Index Fund. So I'm going to just add the $6,000 to that fund. Just click the “buy” link at the top left or bottom right and you'll go to this page:
Put $6,000 in for step 1, then use the drop-down menu to indicate your settlement fund in step 2. Then hit continue.
It will then make you consent to electronic delivery of the fund prospectus.
Just hit “Accept” and it will take you to the next screen which looks like this:
Note that this particular screenshot is from my wife's account (which is all invested in the Small Cap Value Index Fund). Also, note that she had a few pennies left in her settlement fund from last year (63 cents to be precise). I just invested that along with the $6,000 contribution for 2021. Once you hit submit, it will take you to the confirmation page.
All that is left now is to go do it for your spouse's account (if any).
Unfortunately, Vanguard is known for low costs, not awesome customer service and great user interfaces. Some brokerages allow you to do the contribution, conversion, and investments steps all in the same day. Vanguard used to let you do this over two days. Now it takes three. In fact, if you bring money in from an outside bank, it might take a whole week as Vanguard waits for the money to “settle” before letting you convert it. But in the end, a couple of days are no big deal as long as you remember to come back and complete the process. It does lead to the “pennies issue” more frequently though.
The process will be slightly different at Fidelity, Schwab, and other IRA custodians, but the basic steps will remain the same.
What do you think? Do you do your Backdoor Roth IRA(s) at Vanguard each year? What problems have you run into? Any questions? Comment below!