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.
If you have a question about the Backdoor Roth IRA and not Vanguard specifically, you should FIRST read this very in-depth Backdoor Roth IRA Tutorial before asking your question in the comments below. I promise you there is a 99% chance your question is answered there.
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!
beyond helpful thank you
This is very helpful.
Quick question on Step 4: if I am converting from Traditional to Roth which was already invested that include gains other than my after-tax contributions (assuming I will pay taxes on gains)- do I still click on “I do not elect” and ” do not send a tax withholding notice”?
Thank you!
Yes, don’t have anything withheld. Just have that tax paid with other money.
I am 86 yrs. old and have no earned income now so the only way I can add money to my Roth is thru the backdoor approach. In Nov. of 2021 I did the Backdoor Roth transferring 10M from my Traditional IRA into my Roth IRA. When preparing my taxes for 2021, which lines on Form 8606 must be completed? This is the first time I did a backdoor conversion.
That’s not a Backdoor Roth IRA. That’s a Roth conversion. While there are similarities (they both involve a Roth conversion), they are not the same thing. This post is for you:
https://www.whitecoatinvestor.com/roth-conversions/
I don’t know if you have any non-deductible money in there, but if you don’t, the only part of 8606 you would fill out for a Roth conversion is Part II, lines 16-18.
I put $6,000 into a traditional IRA account. I made the mistake of purchasing shares with VTSAX and will be doing the backdoor conversion from that instead of the settlement fund. Say I make gains on the 6K. Can I just choose to convert 6k to avoid paying taxes on the gains?
No, convert the whole thing and pay taxes on the gains or you’ll end up getting pro-rated which is worse.
Thanks for an excellent explanation!
My wife and I exceed the Roth IRA income limits and our interested in doing the back door roth for the 1st time. Found this comment on Motley Fool and we’re concerned about our prior traditional IRA accounts (contributed at least 10 years ago).
“if you have additional traditional IRA assets, then there’s another problem. The IRS won’t let you treat the conversion as coming solely from the non-deductible IRA. Instead you’ll have to include a portion of the conversion in your taxable income, based on the pro-rata value of your nondeductible and other traditional IRA assets. That’s generally not desirable, so if you have extensive retirement assets in deductible traditional IRAs, you should think twice before trying to do a backdoor Roth.”
Can you please help explain this impact? We are not deducting anything from our old traditional IRA’s so is this an issue for us?
thank you.
It’s called the pro-rata rule. More info here:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Basically, you need to either convert that entire old traditional IRA or roll it over into a 401(k), or the conversion step of your Backdoor Roth IRA process will be pro-rated, and you don’t want that.
If I roll it into a 401(k), does it go towards the limits of my annual contribution? In other words, can I only roll over more than $20,500?
No limits on rollover amounts. They do not count toward your annual contribution limit.
Why is my 1099-R form throwing off my tax person?? They are saying I need to pay taxes on 12000. Any recourses I can provide to them to point them in the right direction?
Thanks
Because they don’t know how to deal with this. Point out to them that isn’t taxable income and make them fix it or hire someone else. Why do you have to teach them how to do their job? (Don’t feel too bad. I had to teach my accountant’s firm how to do it too and they still screwed it up again and then had to refile my taxes.) Pointing out that box 2b is checked might help.
I don’t have a Vanguard account . My 401k through employer is with Merrill Lynch.
1. Can I open a Vanguard account just to do a backdoor Roth IRA, or should I attempt figuring out the process with ML instead?
2. If funds are limited and I could only do one or the other, what is more beneficial: Roth conversion or backdoor Roth? I max our my 401k as Roth, and my employer puts in 10% which is adding up to quite a big amount over time and could be converted.
1. Vanguard
2. If funds are limited, why are you doing a Roth 401(k)? But at any rate, I’d do a Backdoor Roth of the time (more Roth with no tax cost) versus a Roth conversion of tax-deferred money (more Roth with a tax cost).
Do you have to pay double taxes on the backdoor IRA when done in this manner:
1. Contribute money into Traditional IRA without the tax benefit since I am over the income limit for that benefit. (1st tax)
2. When moving from the Traditional IRA to the Roth, assuming I do move the money through the settlement fund, will my $6k be taxed again? (2nd tax)
Thanks for your help!
No, there should be no tax due on the conversion of after-tax money.
I’m lucky enough to be doing my first back door Roth. I just wanted to say thank you for the amazing walkthrough here. This is making something I dreaded actually quite fast and straight forward.
Just curious, do you do your own taxes or have a firm do them? If I did what LD did above does all that get handled on the Form 8606? Thanks
I did my own taxes for many years. Last year I had an accountant do them (who promptly screwed up Form 8606 twice). Hopefully they do it right this year.
I recall some of your earlier writings and podcasts mentioning Vanguard did not allow the backdoor Roth. Would you clarify if that has changed recently?
I have no idea what you’re talking about, but I don’t recall ever saying or writing that, much less it ever being true. Vanguard’s individual 401(k) didn’t allow IRA rollovers into the 401(k) for a long time. Their individual 401(k) doesn’t have a mega Backdoor Roth IRA option either. Maybe you were thinking of one of those things.
Once you put money into this Roth IRA Brokerage account, you may not withdraw any of it until retirement age without being penalized, correct? I am trying to figure out if the Target Retirement Funds only allow you to withdraw money at retirement age or if you can withdraw anytime from those. I have target retirement funds within my Roth IRA brokerage account.
when the account is converted to Roth, can i buy stocks instead of a vanguard fund? is that an option for me?
thank you so much for putting a nice guide together, agree the customer service is below par at vanguard. They have improved their app recently hopefully its sign of update to the website is coming.
You could, but I wouldn’t recommend it.
https://www.whitecoatinvestor.com/uncompensated-risk/
Thank you makes sense, loved the linked article.
Hello,
Once I did the conversion of the $6,000 from traditional to ROTH the amount converted became $6000.03 due to a dividend. Will this 3 cents cause an issue with taxes??
If so, what should be my next step?
No.
Nothing.
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
Do I need to have a Roth IRA beforehand in order to do a IRA conversion?
I just opened a Traditional IRA
thank you
You can open a Roth IRA at any time, but yea, you’ll need one to do a conversion. The money has to move into a Roth IRA for it to be a Roth IRA conversion.
Is anyone else having trouble with Form 1099-R using Turbo Tax? I entered the amount on the form, checked box 2b and it’s saying I owe takes on $12K. I’m not tracking why Turbo Tax thinks this or how to resolve it.
You know about this, right?
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
Perfect! Just what I needed. I have to say – your posts are AMAZING. Specific, detailed, and practical. This did the trick, and I figured out that I need to file an amended 8606 because I did not have the correct total basis in line 2 on that form in 2020 (carrying over from 2019). I had two years worth of after tax contributions to my IRA before I converted it to a Roth IRA. So, onwards and upwards. Thank you!
Hello
I’m 64 yrs, have Roth account at Mas Mutual . But I haven’t contributed years with a reason.
So I want to take place backdoor today 4/4/22
By opening accounts at Vangur.
1. Is it not too late?
2. I have to open two new accounts for ira money market AND Roth ira at Vanguard ?
3. Can I have Roth ira account at Vangurd besides mas mutual?
1. No.
2. Yes. If you want to do the Backdoor Roth IRA process at Vanguard, you will need both a traditional and a Roth IRA there.
3. Yes. But the total IRA contribution limit for all accounts is $7K for 2021 and $7K for 2022.
Make sure you understand the pro-rata rule.
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Hello,
So I have 35k in a traditional IRA with Vanguard, all invested in VTSAX stock. Due to marriage, I’d like to pursue the backdoor Roth IRA moving forward.
Sadly, I found out that my company 403b will NOT accept traditional IRA rollovers.
So is the best option for me: To move all this $ to my Roth IRA first, then contribute an additional $6000 to the traditional IRA, then convert that $6000 to the Roth IRA, and finally invest all the money that’s sitting in my Roth?
Follow-up Q: will I be penalized in having a traditional IRA account open with $0 sitting in it?
Thanks so much for any guidance!
Maria
Best? Dunno. It’s certainly one option though. It’ll probably cost you $10-15K in taxes though so make sure you can afford that if you decide to convert the whole thing. Another option is to not do BD Roth IRAs.
There’s no penalty at any institution I know of or use to have $0 in your traditional IRA. There’s probably some dirtbag institution out there that may charge you a fee though.
True. I could just not pursue it altogether and continue contributing non-deductible amounts my Traditional IRA every year instead (but then pay taxes on any gains that I withdraw after 60 years old)
Definitely going to mull it over some more and discuss with my spouse.
Thanks again for all your help!!
Maria
The audience here may also wanna look at this. Nicely explained!
https://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html
Hi,
So I was interested in doing my very first ever backdoor roth for my husband and I but was reading that the deadline was April 15.
Does this mean I need to wait all the way until next year to contribute to an IRA?
Thanks again for all of your help and everything that you do!
Natalie
You can contribute to your 2022 traditional IRA now and then convert it to a Roth IRA. But you can no longer make a 2021 IRA contribution.
I have a sizeable amount in a rollover/traditional IRA that was rolled over from previous employer, a 401K from my current employer, and Roth IRA from when I was under the income limit. I am now over the Roth direct contribution income limit. I have self invested in both my Roth and Traditionals. The Roth and Traditional, both with Fidelity. New 401k from new employer, different firm
Confirming -In order to do the backdoor, do I need to
1. Sell all the investments in Rollover, to convert to Cash
a. Would this come with a lot of tax liabilities..? is there a better way to do this?
2. Open Individual 401K with same company my Roth is in
3. Roll over the cash from step 1, to this new 401K ..?
4. Select my 401k Investments
5. Jan 2nd contribute to this Rollover IRA, leave as cash
6. Once cash is available, convert to the Roth IRA I currently hold in same investment firm
Trying to figure out the best strategy to convert to backdoor Roth with minimal tax obligations. Thanks for your posts – very informative! If you have other suggestions with this scenario, I’m all ears!
1a. No. Probably not.
2. Doesn’t need to be same company. Make sure you qualify to open an i401(k).
3. Ok
4. yes
5. If you want
6. Yes
There should be no tax cost for anything you’ve described. An easier alternative (especially if you don’t qualify to open an i401(k) because you have no self-employment income) may be to roll that rollover/traditional IRA into your employer’s 401K(k).
I’m a fellow that’s graduating this July my salary in fellowship has been 70,000. I’m starting a job making 350,000 September 1st. I’m guessing (based on rough calculations) that I will be above the 140000 which allows me to contribute to a Roth IRA. I accidentally contributed 1000 at the beginning of the year because I didn’t think about changing jobs and my increase in salary later in the year. Any advice on what I do with that 1000 dollars and should I do a backdoor Roth now or wait until next year to start?
Thanks!
Do this with your $1,000, then do the rest through the BAckdoor.
https://www.whitecoatinvestor.com/ira-recharacterizations/
I have an IRA, a 457(b) and a defined benefit pension plan through my employer. Can I still do a backdoor Roth?
Yes, but you’ll be prorated on it because you have money in a traditional IRA. You need to either convert that to a Roth IRA, move it into a 401(k) or 403(b), not do IRA contributions at all, or at least not do the conversion step of the Backdoor Roth IRA process or you’ll be pro-rated.
It’s okay. It’s not the end of the world to save $6K in taxable a year instead of $6K in a Roth IRA.
I have a profit sharing account through Vanguard. I am confused if I can just convert to Roth IRA directly through Vanguard (as it allows this) or if I need to convert to a 401K first due to the pro-rata concern that I am reading about here? I have another 401K account with my employer, through Fidelity, and that’s it.
If you’re allowed to withdraw from the profit sharing account then you can transfer it directly to a Roth IRA. If you aren’t, the profit sharing account must allow in service conversions. So ask HR if that’s an option.
No pro-rata issue here unless you put it in a traditional IRA and leave it there and then do a Backdoor Roth RIA each year for some reason. So don’t do that.
My wife put money into her traditional and left it in there for awhile before conversion so there was 6001.87 and she was able to convert the entire amount to a Roth – did this cause issues since it was >6k?
You’re going to love this post:
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
Bottom line it’ll be fine.