By Dr. Jim 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. We periodically update this post, but if you're doing this process don't be surprised if it looks a little different from what you see here. The most recent update uses screenshots from 2025. Here's all you need to know to do a Backdoor Roth IRA with Vanguard:
Step 1: Contribute to Vanguard Traditional IRA
First, go to your traditional IRA account and click on “Transact”. That will give you a drop down menu where one of the choices is “Contribute to IRA.” Click on that.
This will bring you to this page.
It shows you contributions made so far for years that are eligible still for contributions. You can see we previously maxed out the 2024 contribution, so all that is left is a 2025 contribution. And notice also that it is just going into cash (the federal money market (settlement fund) so it doesn't have a loss in between the contribution and conversion step. Then you need to choose where the money is coming from.
You'll have multiple choices, including all the banks you've linked to this account, sending Vanguard a check, exchanging from another fund, or using your settlement fund. If you can, use the settlement fund in your brokerage account. It will decrease the amount of time for money to “settle” and allow you to complete the Backdoor Roth IRA process a few days faster. This is a bigger deal at Fidelity than at Vanguard, but I've had to wait up to a week between contribution and conversion at Vanguard before when I used money from my bank account to make the IRA contribution.
You'll likely end up at this screen next. In this case, we took the money out of the money market (settlement) fund in our brokerage account, so $7,000 from there and hit continue.
That all looks okay, so hit continue.
Hit accept here and it brings you to the review and submit page.
Check it over and hit submit and you get the confirmation page.
Congratulations! You've made a contribution to a traditional IRA and left the money sitting in cash. At Vanguard, you're done for the day. If you used your settlement fund, come back tomorrow (or the next business day). If you used your bank account, come back in a few days after the contribution “settles” to do step 2.
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, like going to the “exchange funds” link (on the buy and sell menu). But this way seems easiest. You'll then come to a screen that looks like this.
This page is just a warning you don't need to worry about. Hit the “Start my Roth conversion” button and you'll go to the next page.
There's a lot of good stuff on this page, but you can ignore it all if you're a typical white coat investor doing your annual Backdoor Roth IRA. Hit continue.
I love this page. It doesn't ask you if you want to withhold taxes (you don't), it just has you agree not to. Perfect. (You're not going to owe taxes on the conversion of a non-deductible contribution anyway and if they did it would just mean you ended up with less in your Roth IRA and had to wait for your tax refund to get the money back.) Hit “I agree” and then “Continue” and go to the next page.
I like this page too. It's Vanguard's new look and has a nice bar at the top to track your progress through the Roth conversion. Hit continue and move on to the next page. Note the page may give you a warning that looks like this:
That just means the money in your traditional IRA hasn't settled yet. Come back in a day or three when it has. If it is settled, the next page will look like this.
If you're doing your Backdoor Roth IRA process right, you just convert the entire account because all that is in there is this year's IRA contribution. Don't worry about the tax warning. Remember some Roth conversions are taxable, but not in the Backdoor Roth IRA process. Hit continue and go to the next page.
This page seems a little odd when you only have one Roth IRA, but I guess it's necessary. Hit continue.
This is another odd page, but I guess it's an IRS requirement. I don't need a notice saying they're not going to withhold taxes that aren't owed anyway but you can get one if you want. Then hit continue.
This is your review page to double check before submitting the order. The astute observer will notice this form says the conversion amount is $8,000. That's because I used screenshots from both Katie's and my Roth conversion this year and one of us turns 50 this year, and so is eligible for a “$1,000” catch-up contribution for the first time. Your conversion amount should be about the same as your contribution amount. If you have a few dollars extra in there from earnings while sitting in the traditional IRA, convert those too. You'll owe tax on those few dollars but you can afford it I'm sure.
This is just the confirmation page. Go ahead and hit exit. Note that it says you may have to wait 2 days for the conversion to be complete. That wasn't the case for me. The money was immediately available to invest, so I did. Don't forget to invest your Roth IRA money or it'll just sit in cash.
Step 3: Choose Vanguard Roth IRA Investments
Go back to the page listing all your accounts and click on the Roth IRA account.
Click on “Transact” and then “Buy Vanguard mutual fund” (or whatever you want to invest in) and you'll go to a page where you can do so. Mine looked like this.
As you can see, this entire Roth IRA is already invested in the Vanguard Real Estate Index Fund, so this new contribution will go there as well. I just hit “Buy” and it takes me to this page.
So I put in $8,000 ($7,000 when doing Katie's Roth IRA) and hit “Continue order” and on to the next page.
Once more, you just have to hit “Preview order” and move on to the next page. I like the new section here where they update you on where you stand for this year's and last year's IRA contributions.
And the confirmation page for your trade/order.
That's it, you're done until next year. Don't forget to do a spousal Backdoor Roth IRA if available.
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!
If I contribute + convert now (September 2022) , can I contribute + convert in January 2023 for FY2023? Since the deadline for 2022 is April 2023. Thank you!
Yes.
Super helpful! Using your wonderful step-by-step descriptions (and thank you for the images!), I just completed backdoor Roths for myself and my husband and wanted to give you the good news that Vanguard let me do the Roth conversion and invest on the same day the funds settled. Who knows? Maybe one of your readers shared this feedback with them so they fixed the timing.
Thank you for all you do!
Great! I hope that problem has been fixed permanently.
I deposited $6,000 today into my traditional IRA. The account said I had $6,000 available to trade so I went ahead and tried converting to a Roth IRA immediately even though I figured it wouldn’t let me. Sure enough, it told me I don’t have holdings to convert. I see that in the WCI step-by-step it says to do it the next day, but I spoke with Vanguard and they told me that you have to wait 7 days. When I mentioned that this is contrary to what others have reported being able to do, he insists it has always been that way and he doesn’t know what I’m talking about. How is WCI able to do it the next day and not have to wait 7 days?
I’ve had to wait 2 days, 5 days, and 7 days before. No big deal. Just wait a week and then complete the process. It may depend on what the money went into originally (settlement fund or a money market fund). I agree it’s dumb, but it isn’t a big deal to wait a week.
If I contribute $6k to a traditional IRA and immediately convert to back door IRA this year, do I contribute $6k each subsequent years and keep doing a conversion? It doesn’t seem like I can contribute directly to a Roth IRA due to income or else I would have opened a Roth IRA to begin with.
Yes
Thank you for putting this together. Super helpful.
I had a follow-up question on this topic. Are the steps the same? Move funds to the traditional account, then convert to the existing Roth account…?
Yes.
I have a bit of a unique question –
I did a recharacterization of purchased ETF/Mutual fund shares in 2021 due to income limits. In 2022, I bought $4k in ETF/Mutual fund shares and I left $2k in my settlement fund after reading your article. I just converted the entire account from Traditional to Roth, however since the market has been doing poorly this year, my conversation is at a loss not a gain. I converted around $10.8k instead of $12k (2021 and 2022 contributions).
I read your section about “Not Investing in a Money Market Fund in the Traditional IRA” but I’m a little confused on the explanation. I couldn’t find any answers online and I’m looking for some elaboration if possible.
1) What do you mean when you say that there will be left over basis that I carry over indefinitely for years?
3) Is there any additional paperwork required to carry over losses year over year?
4) Are there any options to neutralize this tax loss without penalty so I’m not carrying this loss indefinitely?
Thanks in advance!
1. It means that your 8606s will show a loss until you have an offsetting gain in an IRA prior to conversions. Not a huge deal, but it does make the paperwork slightly more complicated.
3. No, just the 8606
4. Yes, next year when you do a Backdoor Roth invest the money and let it grow enough to offset the loss before doing the conversion.
I have a few questions…
1.) Do you add the ROTH IRA when you do your taxes at all?
2.) If this is your first backdoor roth, how does the second one go? Do you create a new Traditional and convert it again thus creating another account? Or move to existing roth?
1. Not sure what you mean by this question. Yes, you tell the IRS about your Roth IRA when you do your taxes. The Backdoor Roth IRA process is recorded on Form 8606.
2. No, you use the same traditional and Roth IRA every year. They just sit open. No problem having $0 in that traditional IRA at Vanguard and most other places.
Great, thank you. What I should have said is do you report the ROTH IRA to the IRS despite it not being taxable. Are there any tips to know for this form?
Have you seen this post?
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Should tell you all you need to know. Yes, you do report Roth IRA contributions (directly or indirectly) but they don’t raise or reduce your tax bill at all since it’s post-tax money going in.
I just finished a Roth conversion in my Vanguard account on Dec. 31,2022. I then noticed it wouldn’t be processed until Jan. 3, 2023. Is the conversion still good for 2022 taxes? Thanks
Dave Reincke
Vanguard web portal has changed significantly, and these steps are much different and no longer apply.
Bump..
For traditional IRA with Vanguard, I recently contributed 6000K for year 2022 and 6500 for 2023 on 1/20/23. When I went to do the backdoor conversion to Roth IRA, can I convert the whole 12500 for both years (I forgot to do backdoor conversion for 2022 last year) at the same time? I don’t see the option to backdoor convert for 2022 and 2023 separately. I just went ahead and convert 6500 just now but don’t know what to do about 6000K that is sitting in traditional IRA that I intended for 2022. Thank you for your help.
Yes. Go back and do another $6,000 conversion.
Hi! I just opened a traditional ITA with 12,500($6K for 2022 and $6,5K for 2023). When I’m converting to Roth Brokerage IRA- do I convert all $12,500 OR convert $6000 first then come back and convert $6,500? Thanks!
Do it all together. It’s fine.
I am a fresh new attending and finally starting to try to figure out my financial strategies. I had previously opened a traditional and Roth IRA at fidelity in January of 2023 and had plan to do a backdoor Roth at fidelity. However, life got hectic, and the January to-do list fell into February. Now, I have 6018.50 when I had previously placed 6K into the traditional IRA. Yet, that’s not the most confusing part. After reading through your blog as well as physician on fire, I have grown to be more fond of Vanguard and its mutual funds. It’s only Feb 2023, so I have time for this year, but wondering if I can now open a traditional IRA at Vanguard, then transfer IRA from Fidelity to Vanguard, which shouldn’t be a taxable event as I am not withdrawing the money. Then invest that money into Vanguard and do a backdoor Roth conversion. There is yet another question to this one. The 6018.50 is likely to become more, but is still under the 6500 limit for 2023. I will still need to enter 6000 contribution to the form 8606 and pay taxes on the 18.50, but I still can convert this all through the backdoor Roth for 2023 because it is under the $6500?
There is no limit on conversions, only contributions. Move the money to Vanguard. convert it to a roth IRA. Contribute your $6500 for 2023. Then convert the whole wad and pay taxes on the $18+.
I got really late in the game for 2022. Basically contributed to traditional IRA 2 days ago for 2022. But when I am trying to buy the Federal Money Market, the 2022 contribution field is greyed out. Will I be able to contribute 6500 towards 2023, then buy Federal Money Market with 12500 and convert all to ROTH IRA at some point this year? Is buying Federal Money Market necessary before conversion? Forgive me for not going through everything before asking. I know answer might be somewhere in there.
Well that’s weird. I’d call them up. Are you SURE you haven’t made a 2022 contribution already?
You may not have to buy a money market fund formally, but you certainly don’t want to buy a non money market fund! You just want money to sit in cash until conversion, no matter what that is called.
I made a direct Roth IRA contribution in February of 2022 (for tax year 2022, for which I qualified based on my individual income). Then my partner, who is a doctor, and I got married later in 2022 and now our joint income (since we will be filing MFJ) disqualifies me for a direct Roth IRA. I followed the steps in your post about recharacterizations, however, when I went to do the next step of the conversion, step 2 says “Pay taxes on that money” (https://www.whitecoatinvestor.com/roth-conversions/). Does that mean that I should NOT check the box in Step 2 of this post regarding Tax Withholding: “I elect NOT to have federal and state income taxes withheld…”?
Will I still need to complete Step 3 to finish the conversion? OR am I done once the money has transferred from the traditional IRA back to my Roth IRA?
Thank you!
Shouldn’t be any taxes due in your case so I WOULD NOT have anything withheld.
Basically recharacterize to a traditional IRA then do a Roth conversion.
I am doing this back-door Roth conversion for the first time (income limits don’t allow me to do direct Roth contributions), and your book (White Coat Investor) and blogs have really been a good help to me. I have completed rolling over all pre-tax money out from the traditional IRA account to company 401(k) this year. As the next step, I plan to contribute after-tax non-deductible money to the traditional IRA and then do Roth conversion immediately. If I understand correctly I can only contribute to the max of $6500 to my traditional IRA (2023 IRA limit), correct? I can make this after-tax contribution and Roth conversion this year without any taxable event/implications even though in my IRA account I did have pre-tax money earlier this year (currently rolled over to company 401(k)). I am not super clear if the historic presence of pre-tax money in the IRA for the current year would trigger any pro-rata tax rule when I do the conversion. I hope not!
Thank you for this guide! I was nervous about doing a backdoor Roth, but your guide helped me to feel confidant enough to finally get it done!
Happily, I was able to select my investments on day two, FYI.
Our pleasure. Well done.
Hi, I just completed steps 1 & 2 and about to do step 3 and I get this notice “You have reached your contribution limit for all available tax years and you must use your settlement fund to pay for this order.” It will still let me complete the order but I’m a little hesitant to do so. Do I need to wait until the funds go into the settlement fund to be safe? I see in your example you didn’t have money there either and still moved forward which I assume is safe to do so. Thanks!
That’s really weird. I can understand hitting your contribution limit. If you put $6,500 in for 2023, you’ve hit your contribution limit. I also understand that one would have to use their settlement fund to pay for an order. You’ve got to pay for it with something. It’s just weird to have it all in one message.
I think this post will answer your concerns about settlement.
https://www.whitecoatinvestor.com/unsettled-funds/
At any rate, the rush is to get step 2 done quickly after step 1. There’s really no rush on step 3. So don’t spend any time worrying about that. As long as the money will be in the settlement fund in time, you can go ahead and invest.
Your blog is amazing and filled with much needed, helpful information. Thanks for what you do!
I’m in a bit of a unique situation. I’ve been trying to follow the advice on the blog pretty carefully, but I had a little mix up.
I graduated in June 2022, and started my first job in Oct 2022. I did not have an employer sponsored retirement plan for Oct 2022-Dec 2023. An employer-sponsored 401k will start in January 20424. I initially was not aware that I could deduct my contribution to a traditional IRA as I did NOT have an employer sponsored 401k. So I was following the steps to complete a Backdoor Roth IRA, and ALSO started the process of opening a solo 401k with Vanguard (got a EIN, have not started making any side money but was planning on completing some medical surveys) as I was reading along with recommendations here.
I already converted my $4,000 rollover IRA (from my residency 475b) to my Roth IRA. Rollover IRA fund is $0.
I added $6,500 into a Traditional IRA and the funds are now available (after waiting a few days). I had planned on doing the Backdoor Roth, but fortunately learned yesterday (from reading another post!) that I CAN deduct my contributions to a traditional IRA due to lack of a 401k.
However, will there be an issue in my qualification to “deduct” now that I have started an application on Vanguard (which is “processing” currently) for a 401k in Dec 2023 and created an EIN??
What steps should I take at this point? If I don’t actually have any 1099 income (don’t take any medical surveys) and don’t have any contribution to a solo 401k, am I still able to deduct my Traditional IRA contribution?? Or do I need to take action to somehow cancel the application on Vanguard and close the solo 401k in order to qualify to deduct my traditional IRA $6,500?
My income is currently too high to contribute to the Roth IRA directly, so starting 2024 I will need to take the Backdoor Roth IRA route. However, I am wondering what is the best thing to by the end of 2023 given my current situation?
Thank you so very much.
I’d just go ahead and finish your backdoor Roth IRA process on this money. You won’t want that tax-deferred IRA hanging around in the future anyway. Whether you get a deduction and then pay tax on the conversion or never get the deduction and then don’t pay tax on the conversion is all the same. of course.
Wow thanks SO much for the quick reply. Appreciate it as I want to do something quick with the $6,500 that’s available to take action on.
Does the recommendation stay the same (to do the Backdoor Roth IRA for 2023) even if I will transfer that $6,500 (tax deferred) Traditional IRA to my employer sponsored 401k in Jan 2024? This is the part I was wondering what was “best” and if that opportunity changes anything…
1) Deducting $6,500 Traditional IRA for 2023 then rolling over to employer sponsored 401k in two weeks (Jan 2024). And figuring out what to do with this solo 401k in process (which is this a big deal enough to make decisions based on? ) to allow me to deduct.
OR
2) Backdoor Roth IRA for 2023 (I can’t imagine I’ll have anything significant in the solo 401k if I keep it as I haven’t done any medical surveys yet nor know how much I can even accomplish for this 2023 tax year at this point) is still ultimately the best choice??
That could be okay if you really want to do that. I don’t think you’ll get prorated because you didn’t have any after-tax money in that IRA at any point in 2023, right? So there’s nothing to get pro-rated. You converted $4K but then will have $6500 sitting in there at the end of 2023.
But I do have to wonder why you wanted more Roth in March but not in December. That’s not logical. I still think I’d just convert it all to Roth this week. Why not do that? Is the tax bill an issue? Do you really need that deduction now?
Hmm I’m a bit confused regarding your first paragraph as the $6,500 sitting in the Traditional IRA by the end of 2023 won’t matter with the Backdoor Roth and thus any pro-rata concerns if I were to elect to NOT do Backdoor and rather deduct the $6,500 in the Traditional IRA and then rollover the $6,500 to the employer 401k in January 2024? My question is, does taking the deduction this year in a traditional IRA then rolling over the $6,500 into the 401k make MORE sense financially than the Backdoor Roth IRA?? My assumption was that I would like be taxed on a converstion for the traditional IRA rollover to the 401k.
I’m not tied to either option, I’m just trying to see what’s most recommended to do given my overall situation of no employer 401k in 2023. Albeit I do have a solo 401k in process (which I’m sure I can close). I just read in a post that in your peak earning years deducting may be preferable over a Backdoor Roth if you don’t have a 401k, hence my question of what’s the best option for me for 2023.
Ultimately I just want to make the best financial decision, I just don’t have the confidence knowing which is best for this current 2023 year.
The 457b was converted to the rollover IRA and has just been sitting around until now when I converted it into the Roth IRA. I have no idea if anything was deducted it to be honest. I had a friend help with the rollover after residency and then just took the standard deduction on Turbotax for 2022… Should I have done something tax-wise about the 457b rollover? The funds grew since the rollover from $3,637.67 to$4,134.36.
The $6,500 (after-tax money) in the traditional IRA was added on Sunday in efforts to start the Backdoor Roth IRA process. I created a Traditional IRA for this.
Could you clarify about the question regarding “more Roth in March but not December”?
I am late to my IRA contribution for 2023 bc I didn’t have a clue and just realized I need to make a contribution for 2023.
2021, 2022 I did the direct Roth IRA in residency.
I have no issues with the tax bill nor need the deduction. I’m just trying to figure out what the best financial decision is ultimately for 2023 given my current situation *without an employer 401k.
I guess I got a bit mixed up as I started to think that taking the deduction for a traditional 401k was the better financial choice if you don’t have a 401k, but now I’m seeing maybe it’s not?
Thank you so much. Trying to learn/understand, and execute as needed.
It’s only $6500. So I wouldn’t sweat too much the tax-deferred vs Roth decision. And since you can afford to pay the taxes on the conversion I’d just do that. But if you really want to try to optimize this decision, this post should help you make a tax-deferred vs Roth decision on that money.
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
It’s about 401ks but the principles are the same in your case.
My comment about the $6500 at year end refers to the pro-rata calculation from line 6 of Form 8606. Most of the time, you don’t want any money in traditional IRAs at the end of the year or your Backdoor Roth IRA conversion step gets pro-rated. That won’t be the case for you because all of your traditional IRA money is tax-deferred. There’s nothing to pro-rate because there are no after-tax dollars.
In March you decided to do a Roth conversion for some reason instead of waiting to roll that money from the 457–>traditional IRA into a new 401(k). Whatever logic applied to that decision, applies to this decision. It’s the same decision.
Bottom line: You have both options. It doesn’t matter much which one you’d do. I’d do the conversion.
Okay great, thank you. I went ahead and completed the Backdoor Roth IRA process, woohoo!
That’s what I was looking to hear…that it “doesn’t matter much” either way. I just didn’t want to choose the worse of the two options due to being unknowledgeable.
And yes, that was exactly my question/similar situation I was wondering…”waiting to roll that money from the 457–>traditional IRA into a new 401(k)” I wasn’t sure if $6,500 traditional IRA –> new 401k would be the superior option over the Backdoor Roth…
I reread my initial post and not sure where March is coming from? It probably doesn’t matter, but do you mean what I did in October/now?
Oct 2022 someone helped me transfer my earnings in a Fidelity 457b from residency into my Vanguard “Rollover IRA”. However, as I become more financially literate, I am wondering: In Oct 2022, why we didn’t convert the Rollover IRA funds into a Roth IRA (when I was in a significantly lower tax bracket) OR just put the 457b directly into a Roth IRA?? This someone is a wealth adviser by trade so I just went with what she recommended, but as I learn more, I am curious why she made that decision. Do you have any thoughts? Was it just poor decision-making? She also advised I put my Roth funds into a VTTSX Vanguard Target Retirement 2060 Fund which I recently learned wasn’t a good choice so I stopped asking her for advice…any recommendations on what mutual funds or ETFs to choose instead??
The $4,000 that I converted now (December) was a small number and I hadn’t opened a solo 401k at that point, though I had wondered about the benefits of moving it there. I just didn’t think too much into it and wanted to start the Backdoor Roth process so I did what your website advised and converted it to Roth. I don’t think the logic wasn’t the same for the $6,500 because I do/did have the option to deduct (unlike the $4000?) and then roll it over to a 401k… I still don’t quite understand the ins and outs of the tax implications so I’ll have to continue to learn about this. But I went with your advice on doing the Backdoor this year and not deducting.
I am in my peak earning years and at the highest tax bracket I’ll likely ever be in, and thought I was reading on some posts that in this case the deduction was the way to go (when there’s no 401k of course), so I just got a bit confused.
Speaking of, for my employer 401k starting 2024, they do offer a traditional vs Roth 401k option. On the post you sent: “#5 If you save and invest more than 20% of your gross income, lean a little more toward Roth investments. If you save and invest less, use tax-deferred accounts preferentially.” Right now I have $250,000 student loans remaining which I’ll save heavily this year and hopefully pay off most of that in 2025…my monthly expenses are very low, so I save a great deal. It’s also my #1 priority (as I am learning via your blog!). Do you think I’d be better off choosing a Roth 401k for 2024? I’m in the 35% tax bracket and likely won’t go any higher in my career.
Thanks for every response. I am working my way through the Fire Your Financial Advisor Course and really looking forward to becoming financially literate!
I don’t know where I got March from. Maybe confused you with someone else.
I agree you should have done a Roth conversion on that money in 2022. I don’t think there’s anything wrong with a TR fund though. More on portfolios here:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
I’m not sure if you should do Roth or traditional contributions for 2024. Here are the factors to consider:
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
The rule of thumb is tax deferred in peak earnings years, but anything more specific than that requires making assumptions and running the numbers.
I’m so sorry. Beat me over the head, please. But the more I listen to your podcasts, read comments on the posts, the more confused I get if I made the right decision. So this may be redundant, but I’d really like to get a better understanding on your recommendation here, bc elsewhere in some posts and podcasts it sounds like someone in my situation should’ve taken the deduction?
Forgive me if I’m wrong! Just looking for some clarity.
When I reached out, I had funded my deductible Traditional IRA and was curious if I should stop there and take the deduction, or continue to complete the Backdoor Roth. Could you please help clarify why you recommended the Backdoor Roth for my case?
I know you said it’s just $6k, but…what was the advantage over not taking the $2k deduction, is there something I’m missing? Some other advantage to consider that is provided by doing the Backdoor Roth instead?
Just to simplify I’ll lay out my question/situation again:
1. In my peak earning years, 35% (highest career) tax bracket
2. 2023 no employer 401k
3. 2023 added $6,500 into Traditional IRA (Deductible)
4. 2024 employee 401k begins (can rollover $6,500 Traditional IRA to 401k in 2024 to prepare for 2024 Backdoor Roth process)
5. Dec 2023 naively opened up a solo 401k but earned no income so far (had side question of do I/should I cancel this account so I can deduct traditional IRA which I thought was the better route)
I’m guessing there’s something I’m not comprehending given your Backdoor Roth recommendation for this year instead. Could you help me understand the rationale? I’m in the very new stages of financial literacy so every bit helps! I just want to feel more confident in/understand my decision. Thanks!
It might be my problem. On any given day I am trying to help 3 or 4 people with their Backdoor Roth IRA process and it’s not uncommon that I can’t keep them straight. So thanks for putting it all in one place. I’ll try to read more carefully and be more helpful.
The main advantages of the Roth IRA in your situation over taking the traditional IRA deduction that you’re entitled to include:
1) You are actually saving more money in a retirement account on an after-tax basis
2) No trouble with future Backdoor Roth IRAs from having tax-deferred money in a traditional IRA
3) More Roth money later providing more options for tax planning in retirement
4) Doing a Roth conversion takes less paperwork hassle and time than doing a 401(k) rollover. This is especially relevant the last week of December.
The case for taking the deduction and rolling it into your 401(k) is
1) You’re in your peak earnings years and there’s a good chance you’ll save 35% on the contribution now and take the money out at a lower overall rate later
So, to summarize there are pros and cons both ways. The academically correct answer may very well be to keep the dollars tax-deferred. I wouldn’t bother for only $6K. I’d just stick it in the Roth IRA and not worry about it. But I’ve made much bigger errors in the past with the Roth/traditional decision. It’s a tough thing to determine and what you think is best now can easily turn out to be wrong later!
Thanks for getting back to me and laying it out so well.
So I realized it’s in essence a $10,613.56 ($4,113.56 Rollover IRA + $6,500 Traditional IRA) mistake 🙁
Is it possible to reverse this, and take the deductions for 2023 and rollover everything (both the Traditional and Rollover IRA) in January 2024 to my employer 401k?
Am I still able to reverse what I did on Vanguard:
1) $4,113.56 Rollover IRA Conversion to Roth?
2) $6,500 Backdoor Roth conversion?
3) Would I save a total of 35% taxes on $10,613.56 if I reverse (then rollover to employer 401k in 2024) and take the deductions (2023)?
4) What paperwork/tax forms am I looking at given these changes and what complications might I run into?
5) An *unfunded ($0 balance) solo 401k should not give me any issues with a being qualified to take a deduction, correct?
6) Even given all this (now $10.6k), would you still instead leave everything as is (per the Backdoor Roth I’ve completed)? Or is it ultimately worth reversing at this point.
7) Could you expand on your comment: “4) Doing a Roth conversion takes less paperwork hassle and time than doing a 401(k) rollover. This is especially relevant the last week of December.” Don’t I have until April to reverse and complete paperwork? Since I’m not racing to complete Backdoor Roth steps before end of December, and rather take a deduction?
I just wanted to triple check everything before making the final decision to leave it be, or take steps to correct. I totally understand your points about not knowing until the future if ultimately the correct choice was made. I’ve been super overwhlemed about this process with it being my first time and right out of Residency, so thank you for all your help.
1. No.
2. No.
3. Doesn’t matter
4. N/A
5. No.
6. You don’t have a choice. You haven’t been able to recharacterize conversions since 2017.
7. It’s just less paperwork. Not sure what else I can expand on. It’s like 10 seconds to do a Roth conversion online but it’s a rare 401(k) rollover that takes less than 2 or 3 weeks to complete.
Could you please expand on this:
The main advantages of the Roth IRA in your situation over taking the traditional IRA deduction that you’re entitled to include:
“1) You are actually saving more money in a retirement account on an after-tax basis”
Could you explain how it works specifically in terms of saving more money on an after-tax basis in a Roth IRA?
You can put $7000 into either a traditional IRA or $7000 into a Roth IRA. If you have a 50% marginal tax rate, $7,000 into the traditional IRA is really $3500 after tax. $7000 into a Roth IRA is really $7000 after-tax, twice as much money saved for retirement.
My wife and I got overtime/bonus that popped us over the income limits and we had been doing weekly contributions to the Roth IRA. How do we convert back to traditional so that we can Back Door?
That’s a mess. I’m so sorry. The truth is that if you make enough that you have to do your Roth IRA contributions through the Backdoor, you make enough that you should just do it all at once as a lump sum each year. I think your mess is about as bad as one I saw last week though. All you have to do is recharacterize the contribution and then reconvert it. The problem is that you made 52 contributions and figuring out the gains on each of them is going to be a major pain.
https://www.whitecoatinvestor.com/ira-recharacterizations/
Hopefully that Roth IRA doesn’t have any other money in it or is only invested in one or two investments so that part isn’t so complicated.
This is a very helpful guide! An odd thing happened when I tried to do the backdoor roth ira for Tax Year 2024. On Step 3, the rolled over money in my Roth IRA showed up as Money Market fund shares rather than a cash credit. Should I just sell the MMF and buy the investments I want, or did something go wrong?
I’m sure it’s fine. Cash credit and MMF shares are basically the same thing. But yes, once your money is in the Roth IRA, go ahead and investing it according to your written investing plan. If you don’t have one, get one:
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
Thanks for all the super useful info. I’ve been out of training for about a decade now. I first heard about back door Roth IRAs about 5 years ago and somehow it took me 5 years to get going on the process. Fearing I was too late for 2023, and preparing to start off 2024 right, I started my research via your website just last week and I was pleasantly surprised to find out that the deadline for contribution for the previous year is not until April 15th. So, I opened up a traditional IRA account with Vangaurd, transferred over 2023’s and 2024’s contribution (for a total of $13,500). I waited a few days, and now I see the money in my settlement fund / moneymarket account. However, when I click the “Convert to Roth IRA” button, I get to the next page, but a pop-up comes up that reads “There are no available accounts for this conversion.”
I am sort of baffled by what this meant. Poking around the site lead me to a page where I can change my settlement fund to either a Vanguard Federal Money Market Fund or a Vanguard Cash deposit. I know that for simplicity’s sake, I want to avoid investing the money prior to converting it to a Roth, so I definitely don’t want to select the first option. Do I have to first convert to a cash deposit BEFORE I can allowed to convert to a Roth? Seems like the most obvious next step, but I didn’t want to make an uncorrectable error this late in the season. Looking at your tutorial pics, I don’t see that you had to do this step, and were able to convert straight from the moneymarket funds, so that also makes me weary. Thanks so much for any guidance!
The money market fund is fine, it’s just cash like a savings account or settlement fund etc. I’m not sure why you’re getting that message. Have you not opened a Roth IRA yet? It might also be that fudns just need to settle for a couple more days before they let you do the conversion. If neither of those is the case, pick up the phone and call.
Ok cool. I did not open up a Roth, just a traditional IRA and was planning on just converting my traditional into a Roth. Sounds good. Thanks, I will wait til next week and if not I’ll give them a call.
Sounds like you need to open the Roth IRA. Then you’ll have an account to convert the traditional IRA into. I know the word “convert” makes it sound like you change the account, but you really don’t. The traditional IRA account will still be there afterward. You’re only converting the dollars. You’re transferring them from one account to the other. So if there is no Roth IRA set up yet, it probably won’t let you do a Roth conversion.
I added funds to my spouses traditional IRA on Monday. I recieved a message that funds were still pending when I checked yesterday. Today however it didn’t give me the “pending funds” message anymore.
I followed the steps above but when I went to click continue I am getting this error message
“This transaction cannot be entered online because it exceeds your funds available for withdrawal. Money recently added to your account may not be available for withdrawal. Call us at 800-992-8327 if you have questions. ”
Do I need to wait a few more days to convert it?
I’d try again in a few more days and then call Vanguard if it still doesn’t work.
Thank you for all this information, it’s been very helpful.
I already had a traditional IRA with Vanguard that only had about $6000 in it. I went ahead and converted it to a Roth IRA to zero out the balance.
My question now is about the next steps. Can I now go ahead and deposit $7000 into the zeroed out traditional IRA to convert immediately? Also does the previous initial conversion affect the upcoming backdoor Roth conversion? Thank you!
Yes.
No.
Thank you.
One more follow up question. I went ahead and finished the process of contributing the $7000 into my Vanguard traditional IRA and converting it into my Roth IRA. Now, when I check my Roth IRA account it says I’ve contributed $7000 for 2024. Did I mess something up, shouldn’t it still say I’ve contributed $0 for 2024 since I didn’t contribute directly into the Roth? Thanks again!
No. The IRA contribution limit is a total limit into either traditional or Roth IRAs. If you put $7000 into a traditional IRA, you can’t put another $7,000 into a Roth IRA, even if your income was low enough to allow you to do so directly.
Thanks so much for this step-by-step guide. A few questions:
1. If I already have $2000 in my traditional IRA that has been invested from 2019 (and grown to $2000 now) and today I add the $7000 max to my traditional IRA, can I convert the whole $9,000 total via backdoor Roth or can you only backdoor the max $7000?
2. If I can convert the whole $9000, what are the tax implications and is it worth it or should I just keep the $2000 in the traditional IRA account?
3. Do you have any suggestions of what to invest the funds in? I’m 32 and started working in March of 2022, thinking about either a target fund date option or just putting in S&P 500 but I am very new to investing and retirement knowledge etc.
4. Do you have any suggestions for a reputable CPA and/or financial advisor that understands our situations to help prepare taxes and help manage finances in the most efficient manner? I’m in Illinois.
5. Do you have any suggestions of things we can do to lower AGI/tax bracket as a W2 employee with a mountain of student loan debt?
Thanks so much 🙂
1. Yes. You can convert as much as you want.
2. When you do a conversion, you’ll owe tax on any gains and on any pre-tax dollars converted. Yes, it’s worth it for $2K. If you don’t convert that $2K (and it’s pre-tax money) your conversion will get pro-rated and that sucks.
3. You need an investing plan. Invest new dollars in accordance with that plan, whether the new dollars are in a Roth IRA, your 401(k), or your taxable account. https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
4. Here’s our lists for both services:
https://www.whitecoatinvestor.com/financial-advisors/
https://www.whitecoatinvestor.com/tax-strategists/
5. Max out tax-deferred retirement accounts, give to charity, buy a house with a big fat mortgage, stop earning so much money, get married, find a new way to earn income that isn’t taxed as highly etc. Lots of options, most of which involve you living your financial life differently. Don’t let the tax tail wag the investment dog (or the life dog). Everybody wants a lower tax bill. Few actually want to do the things that lower that tax bill.
Thanks so much! Another question for you, can one person have multiple IRA accounts? Like two traditional IRA accounts?
You could, but the pro-rata calculation takes all into account and the contribution limit is the same whether there is one IRA or 80.
So if you have a traditional IRA from a long time ago that has grown to $10,000, and you open up a new one and contribute $7,000 and backdoor it, what exactly happens to the $10,000 IRA?
The conversion is pro-rated. You don’t “backdoor” that second $7K. You do a $7K Roth conversion. So you end up converting $7,000/17,000 * $7000 = $2,882 of after-tax money and $4,118 of pre-tax money and will owe something like $1500 in taxes.
Okay makes sense. Thank you!
Just wanted to say thank you for all the useful info and tips on this site. I had a question about monthly contributions and the backdoor, but my question was already answered up there – no, I have to lump sum the 7k and backdoor it all at the same time. So thanks for already having answered my question!
Hello, I am doing a back door Roth for the first time through Vanguard. When I go to convert my traditional IRA to a Roth IRA, it gives two options regarding withholding taxes. It says:
By selecting “I agree”, you acknowledge that taxes will not be withheld as part of this transaction if you proceed. You will need to pay the taxes on this Roth conversion from other assets.
OR
To withhold federal income tax as part of the conversion, you must complete a separate process.
Which one should I choose? Thank you!
Perfect. “I agree”. Did not withhold because no taxes will be due and you’ll end up with a smaller Roth IRA than otherwise.