Backdoor Roth IRA 2019: a Step by Step Guide with Vanguard

This year, I made my seventh pair of “Backdoor Roth” contributions with Vanguard. If you’ve heard of the Backdoor Roth IRA, that’s great! You’ve been paying attention.

If not, I’ll give you a brief overview, and a number of links to additional articles with more complete descriptions of the history and important caveats.

This post has been updated with fresh screenshots from my 2019 contribution and conversion, which were completed on January 3rd and 4th, 2019. I like to contribute early in the year to start the tax-free earnings as soon as possible, but you have until Tax Day in mid-April, 2020 to complete a 2019 Backdoor Roth contribution.

Vanguard is the company I use, and tends to be favored among many index fund investors, so that’s what you’ll see. The process should be similar with other brokerages, but the screens will look different.

 

 

Backdoor Roth IRA 2019: a Step by Step Guide with Vanguard

 

Backdoor Roth: An Overview

 

Money contributed to Roth accounts does not result in a tax deduction, unlike contributions to tax-deferred accounts. Both Roth and tax-deferred accounts benefit from tax-free growth, unlike a taxable account that is subject to tax drag (which can be minimized). The Roth dollars, unlike tax-deferred dollars, will not be taxed when withdrawn.

One of the first world problems of earning a solid income is the inability to contribute directly to a Roth IRA or tax-deductible IRA.

A modified adjusted gross income (MAGI) of $203,000 for a couple filing jointly, or $137,000 for an individual makes you ineligible to contribute to a Roth IRA in 2019. Phaseout ranges where you can make a smaller Roth contribution (less than $6,00) start at $193,000 and $122,000 for married couples and individuals, respectively.

Many physicians are thus excluded from making either deductible IRA contributions or direct Roth IRA contributions. If your income might put you into or above those phaseout ranges, you’re better off using the backdoor, just in case.

Now, a high income doesn’t mean you can’t contribute directly to a Roth account of some kind. You may have a Roth option within your 401(k) or similar account, although I would argue you’re probably better off with the tax deduction offered by making tax-deferred contributions if you’re in the 32% or higher tax bracket.

 

Related: Should You Invest in a Roth or Traditional 401(k)?

 

Another important distinction is that a high-income does not prevent you from making Roth conversions. The income limits were lifted in 2010, and I took advantage by making a Mega Roth conversion when it was believed the income limits would be reinstated. However, there are still no income limits, and hence, the backdoor remains wide open.

The income limits for a traditional tax-deferred IRA contribution are even lower than the Roth contribution limits. If you participate in a workplace retirement plan, you won’t be eligible to contribute as an individual earning more than $74,000 or as a couple earning more than $123,000 in 2019.

 

Before Attempting a Backdoor Roth

 

While income limits are a non-issue for the backdoor, there exists one important prerequisite to be able to properly execute the backdoor Roth.

You cannot have money in a tax deferred IRA in your name. That includes traditional IRA, SEP IRA, and SIMPLE IRA, but does not include 401(k), 403(b) or similar acounts. If you do hold tax deferred IRA dollars, you’ll be subject to taxes when making your conversion per the pro-rata rule.

If you do have these types of accounts, you’re not hosed, but you need to have a strategy to move that money elsewhere or you can forget about the backdoor Roth.

If the balances are small and you can afford the taxes on the conversion, you can convert it all to Roth and just pay tax on the conversion. This could be a good idea for those in lower tax brackets — residents and students, for example.

Another option for employees may be to roll the IRA into an employer’s 401(k) plan. Not all plans accept rollovers, but mine does, and this was the route I chose with my SEP-IRA a few years ago. Fortunately, my 401(k) offers institutional Vanguard index funds. If I had lousy options, a rollover might not have been worthwhile.

It might also a good idea to avoid having a SEP-IRA in the first place by putting your independent contractor earnings into a solo 401(k) instead. The White Coat Investor covers some of the advantages in this article.

One way employees without a business of their own create one is by obtaining an EIN for a survey-answering business. Earning just a little 1099 money on the side qualifies you as a business owner, and you can open an individual 401(k) a.k.a. solo 401(k) for the business.

As long as the plan accepts rollovers (many do), you’ll be able to roll over traditional IRA, SEP and SIMPLE IRA money into it to circumvent the pro-rata rule and associated taxation when attempting the backdoor Roth.

For healthcare professionals, I’ve found that the simplest surveys that take the least amount of time and pay well per question asked come from InCrowd Answers.

 

Here’s how I make my backdoor Roth conversion with Vanguard:

 

Step 1: Make a non-deductible IRA contribution.

 

If you haven’t done so already, you’ll need to open a Traditional IRA. I won’t walk through all the steps, but it should be straightforward. You’ll start by selecting “Open an account” from the top of the page, leading you to a page that looks like this.

 

 

 

Since I opened mine years ago, I start by making a contribution to my existing IRA, an account that Vanguard thankfully leaves open, even when the balance is zero.

Open your Traditional IRA account, select “Buy and sell” then “Buy Vanguard Funds”

 

Vanguard_Backoor_Roth_2019_01

 

 

 

Next, you’ll tell Vanguard where the money is going (and where it’s coming from such as your checking account or a money market). I invest my non-deductible IRA contribution in the Prime Money Market Fund so day-to-day volatility is a non-issue.

 

 

 

 

 

I’ve selected Traditional IRA, and entered $6,000. If I were age 50 or older, I could contribute $7,000. You’ll be asked to consent to the investment you’re making.

 

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Vanguard now wants to know where the money is coming from. Knowing I’d be investing in my Roth IRA shortly, I let the late-December dividends from my taxable account stay in my Federal Money Market fund, and there’s enough there to fund today’s non-deductible IRA contribution.

 

 

 

 

You’ll be asked to consent to electronic delivery of the prospectus if you’d opted to go paperless for these, which I recommend you do to save some trees. 

 

 

 

 

 

Next, you’ll have a chance to review and submit. Look over everything to be sure everything looks right.

 

 

 

Alternatively, if you’re funding the transaction via Electronic Bank Transfer (as I did in 2018 in the screenshot below), the screen may look like this:

 

Backdoor Roth 2018 _04

 

Note: In recent years, all new IRA accounts at Vanguard have been “brokerage accounts” as opposed to “mutual fund accounts.” There are several differences. The brokerage accounts allow you to purchase individual stocks and funds from other brokerage companies.

The brokerage account also has a settlement fund and a number of people have run into delays of up to 7 days when funding a brokerage account IRA via electronic bank transfer, waiting for the funds to “settle.”

Even when funding directly from a Vanguard money market fund in a taxable (non-qualified) account to their IRA brokerage accounts, friends of mine are seeing delays.

 

 

If you have been with Vanguard for some time, I recommend you keep the mutual fund account if prodded to make the transition to a brokerage account unless you are planning on investing in something other than Vanguard mutual funds in the account. Eventually, all accounts may be transitioned to brokerage accounts, but I’ll hang onto the mutual fund account as long as they’ll allow it.

 

 

Next, click Submit and Vanguard will politely thank you.

 

 

Vanguard_Backoor_Roth_2019_16

 

 

 

 

You should also receive an e-mail confirmation.

 

 

 

 

Step 1.5: Wait?

 

There is a thing called the “step transaction doctrine” that had some people believing it’s best to do nothing for anywhere from one statement cycle (a month) to a full year. Most people move on to step 2 without much of a waiting period, and I’m not aware of anyone having issues with the IRS after doing so. For more on the subject, see this article from Ann Marsh or this recent thread at Bogleheads.

[Update: Congress officially blessed the steps of the backdoor Roth as allowed under current law in 2018. See forum thread and links in the White Coat Investor Forum.]

 

Step 2: Convert to Roth

 

I move on to Step 2 the next day. Navigate to “My Accounts” “Balances and holdings”

 

 

 

Backdoor Roth 2018_16

 

Scroll to your Traditional or Roth IRA (or open a Roth account if you don’t have one). Click on  “Retirement contributions and distributions.”

 

 

 

 

On the next screen, be sure to select the correct tax year. Vanguard defaults to the previous year. If you’re making your 2019 Backdoor Roth contribution, be sure to select Tax Year 2019.

 

Note: if you’ve never done the Backdoor Roth, and you’re financially able, now is a great time to make one contribution for 2018 and another for 2019. If you’ve got an eligible spouse (and by eligible I’m referring to backdoor Roth eligibility), the two of you can sneak $23,000 into Roth accounts this year as long as you complete the 2018 contribution by mid-April, 2019.

 

 

 

 

 

Look for the dropdown menu in the lower right labeled “I want to…” and select Convert to a Roth IRA.

 

 

Vanguard_Backoor_Roth_2019_09

 

 

 

Next, we tell Vanguard where the money is coming from (Traditional IRA) and where it’s going (Roth IRA). I chose the REIT fund since that is a little underweight based on my desired allocation.

 

 

 

 

 

You’ll be warned that a conversion is a taxable event. This isn’t true in this case because the initial IRA contribution was a non-deductible contribution. This can safely be ignored.

New this year is a warning that the contribution cannot be reversed. Tax Reform has eliminated the ability to recharacterize (undo) Roth conversions.

 

 

 

 

 

Since it’s not actually a taxable event, do not withhold any federal income tax.

 

 

 

 

Click “CONTINUE” one last time.

 

 

Vanguard_Backoor_Roth_2019_14

 

Click “Submit,” and you’re done!

 

Vanguard will say thank you and send you an email of the transaction submission.

 

 

 

You’ll also be able to view the transaction in your Transaction history.

 

 

 

 

Step 2.5: Repeat for Spouse (if you’ve got one)

 

Step 3: Fill out Form 8606 in your 1040

 

The IRS has instructions here and the form here. I see no need to repeat them. The Finance Buff tells us what it should look like in this post, which includes instructions for TurboTax, H&R Block, and Taxact.

 

Additional Resources

 

If you have additional questions, you may find answers in the following posts.

 

Looking for additional investment opportunities now that you’re maxing out your tax-advantaged space? Look to my Crowdfunded Real Estate Resource Guide.

 

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Is the Backdoor Roth Worth the Trouble?

 

I would say “Yes.” If you’re considering the backdoor Roth, the $5,500 or $11,000 most likely takes the place of a portion of your investments that would otherwise be invested in a taxable account.

As long as the money remains in a Roth account, it will grow without tax drag. Currently, my tax drag is nearly 0.6%, but with the right investments (index funds) and an ability to land in the 0% capital gains tax bracket in early retirement, tax drag can be quite close to zero.

Also, as a taxable account appreciates, you can end up with substantial unrealized gains, which may eventually force you into a higher tax bracket as you realize those gains to have spending money in retirement.

Clearly, Roth money is more valuable from a tax perspective than money in a taxable account. I see no reason not to take advantage of this opportunity, as long as it exists, unless you have IRA money that would subject to the pro rata rule, and no good rollover options (such as an employer’s or solo 401(k)).

 

Was this helpful? Please consider subscribing to this site. I’ll give you a spreadsheet full of useful and fun (yes, I said spreadsheet and fun in the same sentence) calculators, and you’ll know when new posts are published.

 

For more information, be sure to check out additional articles on the Backdoor Roth:

 

 

 

Have you taken advantage of the backdoor Roth? What’s holding you back?

395 comments

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  • SM

    Thanks very much for the helpful info. I am interested in doing a Backdoor this year (first time).

    I do have a Traditional IRA with not much in it. I found out I can roll this over to my 401K. Since it is March 2019 and I currently have funds in my traditional IRA, am I too late to participate in Backdoor this tax year?

    Thanks!

    • Nope, you can do this for 2019 as long as you have the rollover complete by the end of the year.

      If you try to do it for 2018, you will pay some tax.

      Best,
      -My News List

  • MR

    If you have an IRA that is funded solely with non deductible contributions can you convert it entirely to a ROTH IRA, then you would have to pay taxes only on the capital gains, right?

    • That’s essentially correct.

      I would replace “capital gains” with “earnings” as it’s all gains including dividends, too, that will be taxed.

      Best,
      -My News List

  • Kevin

    THANK YOU for your great info on Backdoor Roth IRAs.

    I have a quick question for you. My wife is a just finished with all her schooling doctor and finally earning an income. She has limited financial knowledge and has delegated all those duties to me. Her employer right now does not offer a 401k until she has been there for a longer period of time. I suggested that we get her into an IRA so that she is making some tax beneficial investments.

    My plan is to do the backdoor method. We are over the income limits for funding directly into a Roth IRA. We use Schwab, not Vangaard, but I have $500 monthly deposits (max out $6k annual total) from her account going into a traditional IRA. I have also set up a separate Roth IRA. My plan is to “convert” or transfer that $500 each month from the traditional IRA into the Roth IRA. At that point those dollars will have only been sitting in the traditional IRA for a couple days, so there will be no capital gains or interest, etc. I don’t plan to invest any funds in the traditional IRA itself. Once I convert those funds into the Roth IRA, I then will make the investments within the Roth IRA.

    Is there anything I am missing here? It seems so simple. Is there a tax event when I “convert” / transfer the funds from the traditional IRA to the Roth IRA? These will be “after tax” paycheck dollars, so I want to make sure I am not causing a tax event that in essence would create us paying taxes on the same dollars 2x.

    Thank you so much for your guidance.

    • We communicated offline, but for the benefit of others, I would recommend saving up the $6,000 first and making the non-deductible contribution and subsequent conversion all at once.

      Less paperwork, less to account for. If you want to be invested over the time it takes to accumulate $6,000 (which should be much less than 12 months), you can invest in a taxable brokerage account. With no other available space as far as I can see, you’ll need to invest in taxable, anyway.

      Look into the possibility of an HSA, as well.

      Cheers!
      -My News List

  • Sindy

    Thanks for a great article MyNewsList. However, I am not very sure if I can attempt this in my current situation.
    In Vangaurd, I have a rollover IRA account with my previous employer 401k money in it. Can i open a traditional IRA which will start with 0 balance, fund it with my post taxed dollars and then attempt a backdoor Roth ? Will the pro tax rule apply in this case? I am not sure if Roll over IRA and IRA accounts will be seen separately or not really . Whats the best way to use backdoor in this scenario if at all there is a way to do so. Your response is much appreciated. Thank You !!

  • Colin S

    This is a wonderful article. I just completed my reverse rollover to take a traditional IRA from Vanguard into my 401k. I will be hoping to make my first back door conversion in Jan 2020.

  • sarah

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  • AJS

    Hello,
    Thanks for useful step-by step information that helps newbies like me take the first step confidently towards the backdoor IRA.

    Can you please clarify how a correct form 1099-R should look like?
    Is Box 2a correct??

    Gross
    distribution -Taxable amount- Taxable Amt not determined- Total distribution
    (Box 1) (Box 2a) —— (Box 2b)—— (Box 4) 5,501.72 5,501.72 X X 0.00

    Thanks for your feedback.

  • David

    Hello,

    Hoping someone can help me with this question: how does Vanguard know if my initial $5,500 contribution is non-deductible or deductible?

    For 2018, I might be in the middle of the limit for Roth IRA contribution. To avoid any potential mess altogether, I’d like to designate my entire $5,500 initial contribution as a NON-deductible contribution (even though my income limit may allow for the contribution to be deductible!). How do I tell Vanguard that I want the entire initial contribution to be non-deductible?

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  • Joe

    Thank you for the post, this has been really helpful. I like many others am trying to contribute for both 2018 and 2019. Have a small problem though, I already filed my taxes for 2018. Would I have to amend my 2018 return due to the 2018 conversion, or am I free to report both years’ conversion for my 2019 taxes? Thank you in advance.

    • You’ll want to file Form 8606 with your 2018 1040. Whether or not that requires an amended return, I cannot say.

      The good news is that there won’t be any change in what you owe, since this is a tax-neutral move.

      Best,
      -My News List

  • Jennifer K

    Can you explain this for me?

    “if you’ve never done the Backdoor Roth, and you’re financially able, now is a great time to make one contribution for 2018 and another for 2019. If you’ve got an eligible spouse (and by eligible I’m referring to backdoor Roth eligibility), the two of you can sneak $23,000 into Roth accounts this year as long as you complete the 2018 contribution by mid-April, 2019”

    Which year would I be deducting on this years taxes, 2018 right. 5500? Why would I want to “sneak” it in rather than just doing the process again next year for 2019?

    • There is no tax deduction. The benefit is investing in a Roth IRA rather than in a taxable brokerage account, shielding the investment from future tax drag.

      Each year on January 1st, a 15.5 month window opens for you to make an IRA contribution. You’re at the tail end of the 2018 window with just over a month to go.

      The 2019 window is just 2.5 months old.

      There’s no reason you can’t do both now.

      In subsequent years, you can get the money in as soon as it’s allowed in the first week of January. Next year, you’ll make your 2020 contribution in January. That makes 3 backdoor Roth contributions in 10 months (or 6 if you’re married).

      Best,
      -My News List

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  • Shesaves

    Hi.. Doing this for the first time and I guess I messed up a little. I contributed $5500 in July 2018 and after much thinking back and forth, converted it to Backdoor Roth in March 2019 for tax year 2018. The amount has increased to 5575. Now I am adding my 1099-R and have no clue. Will appreciate any help on the matter. I used the Finance Buff’s guide to enter 1099R but when it comes to what is your end of yr balance, he has 0 but I had 5555. Please help!!!

  • Mike

    I recently opened an account with Vanguard (looks like it’s a brokerage account) and followed the steps above (contribute 11,500 to traditional IRA, convert to Roth). However, due to the settlement delay there was some accrued interest on the settlement fund, so after converting 11,500 to Roth there is a leftover amount of just under 3 dollars in the traditional IRA. Is this gonna be an issue?

  • Rick

    Thank you MyNewsList. Great article. I was wondering for Mega backdoor (not regular backdoor), is it possible to use solo 401k to contribute after-tax money? my current employer 401k doesn’t allow after-tax contribution. but if the newly created solo 401k can do this, then it would be great. Thanks!

  • Kristina

    Hi! I’m so glad to have found this blog and community… Thank you MyNewsList! I’m not a doctor, but I’m in software sales… some pieces of our situations correlate.

    This year I can fully contribute to a Traditional IRA for 2018, which I will do, and then I will immediately roll it over to my employer’s 401K. When that’s done, I want to fully contribute to the IRA for 2019.

    My question is, my income will likely be at a level this year where some of that contribution will ultimately be tax deductible, but some may not be. Because much of my income is commission, I don’t know exactly how much I will make this year.

    How shall I make the contribution for 2019, so that when I do my taxes, the correct amount can be deductible and the rest can be rolled over into a Roth? (Avoiding any taxable events and/or the pro rata rule)

    • Honestly, if you’re in the phase out range for a traditional IRA (MAGI $64,000 to $74,000 for singles, $103,000 to $123,00 for MFJ in 2019), you’re in a low tax bracket already, and I’d be inclined to go 100% Roth with the IRA contributions.

      Best,
      -My News List

  • Johnathan

    MyNewsList

    I started out the year with the idea of DCA my contributions to my traditional IRA with the intent of converting to Roth at the end of the year. I changed my approach in late January and just decided to lump sum the remaining contribution to my tIRA. During that time the market has gone up and now I am at a point where I have converted $6000 to the roth but still have $200 available in tIra contributions. Is it advisable to contribute that $200 to the traditional and convert to the Roth so I take advantage of the total Traditional allowance? The way I calculate it on 8606 is that I will have to pay taxes on anything that I convert in excess of the $6000

    The reason I decided to lump sum going forward was that I waited till 12/30/18 to convert my DCA Traditional 2018 contributions and the value had gone down as had everyones due to the Christmas drop so now I have a basis on my 8606 of around 700.

    Thanks

    • As long as you can make it work on the 8606, you might as well take full advantage of the available space.

      It’s simpler to save up the $6,000 and make one non-deductible IRA contribution followed shortly thereafter by the Roth conversion. That’s what I recommend going forward, but you should do the best you can with what you’ve got from 2018. If you work with a CPA, I’d run it by him or her, also.

      Cheers!
      -My News List

  • Martin

    Hello MyNewsList.

    I contributed to my (and spouse’s) Roth IRAs earlier in the year before knowing we’d be over the contribution limit (for the first time ever). I think we’ll be over the contribution limit going forward as well. I need to either remove the contribution back to taxable account or perform a recharacterization to tIRA (which I’ll have to create; we don’t have them currently) then backdoor to Roth.

    After reading your Backdoor post, I’m just not sure it is worth the hassle. We aren’t super high earners now and won’t be spending a high amount in retirement, so I am very much on the fence of if we should bother doing the Backdoor this year, or at all in the future. What are your thoughts? We currently max 401Ks, have Roths, and fund taxable. Is it worth the paperwork and tracking and possible mistakes?

    Thank you for your time/info.

  • JS

    Hello MyNewsList,

    Thanks for your step by step guide. It was extremely helpful and exactly what I was looking for!

    Wondering if you or someone else on here could provide some timely insight to my specific situation as I need to get this corrected by April 15. My spouse and I both contributed $5,500 to our Roth IRA’s for 2018. In doing our taxes, we discovered we are over the income limit for contributing directly to our Roths and would now like to take advantage of the backdoor Roth IRA. My spouse’s situation should be pretty straight forward. She does NOT currently have an IRA so I believe all I need to do is recharacterize her Roth contributions to a newly created IRA, then convert that to the Roth IRA. Correct?

    My situation differs slightly. Toward the end of 2018, I did a direct rollover of $70K from a previous employer 401(k) into an IRA to take advantage of better fund options. It’s my understanding that in doing the rollover to an IRA, I’m now not able to recharacterize my 2018 Roth IRA contributions so I can take advantage of the backdoor Roth for 2018. Is that correct? What options do I have? Simply withdraw the Roth contributions to fix the situation for 2018? Going forward, what are my best options? Roll the $70K IRA into my current employer 401(k) so I can then take advantage of the backdoor Roth? Any help on this is greatly appreciated!

  • Leti

    Hello
    – In order to be able to do a late BACK DOOR IRA for 2018, last month I did a Roth conversion of an old t-IRA which had mingled money (so could not roll it to 401k)
    – I then since opened a t-IRA in Vanguard, contributed the 5500 which has hit the account, and was about to do the Roth conversion but since my accountant says I should not have done the contribution for 2018…
    It seems he is not correct, would you agree? or the fact that I did the roth conversion of the old IRA in March ( so by balance was not Zero in 12/31/2018) does not let me to contribute for a back door in 2018
    thanks
    New do this and big procrastinator, but learning

  • LJC

    First, thank you MyNewsList for all that you do! I have been referencing your article year after year for the last three years.

    So I made a mistake in that I forgot to fill out form 8606 for my husband for 2017. Both my husband and I contributed through a backdoor Roth IRA for 2017, but I realized while filing my taxes this year when determining the basis from previous years that we somehow left out form 8606 for him while one was filled out for me. It appears that I am able to fill out a late 8606 for him for the year 2017. I believe there will be a late filing fee of $50 which I don’t mind paying. I am just wondering if this would be necessary given we leave no money in the traditional IRA as everything is converted into the Roth. Will the IRS actually help keep track of the basis through our 8606? Is it something I need to keep track of year after year? Since distribution from my Roth IRA in retirement will be tax free, I just don’t see how tracking the basis will be relevant. Would you go through the trouble of filling out a late 8606?

    Thanks for any insight you might have!

  • Li

    hi MyNewsList,

    Thank you for the guide. I just opened a traditional IRA for 2018 meant for conversion and was told by Vanguard that the contribution part needs to be reported for 2018. However the conversion will only be reported on 2019 tax return since it is converted in the year of 2019. I had thought I had to report both on 2018’s 8606 form. Do you have any experience with this kind of late contribution situation. Thanks.

  • Hello MyNewsList,

    Thank you for all the information on the site and this great article.

    I am still unclear if I can do a backdoor conversion.

    Here’s are the accounts I currently have:

    Company 401k I max out
    Traditional IRA that has been used as a rollover account for previous 401k’s – no pretax or post tax contributions ever
    Roth IRA I maxed out last year and had previous contributions
    Brokerage Account
    Solo 401k for my business – 0 balance and I reported 2300 in income for 2018

    Can perform a backdoor from the IRA to the Roth without tax consequences since there have been no contributions? If so is the max allowed $6000 for tax year 2019?

    Or should I transfer the funds from the IRA to the Solo 401k and make the Roth Conversion from that account? If so is the max allowed $6000 for tax year 2019?

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  • Mindy

    Hi MyNewsList, I read through the comments but sorry if I’m repeating a question. I tried to do a backdoor ROTH for 2019. I contributed $6000 from my bank account to a Traditional Vanguard IRA. After a few days, I rolled over $6000 from IRA to a Roth-IRA at Vanguard.
    Unfortunately, I now have $5 in the IRA account (from interest) and $6000 in the Roth-IRA in the prime money market fund.

    1. What can I do with the $5 of interest that remains in the Traditional IRA since we have to zero it by 12/31/2019? Can I roll that small amount into my 403b, 457, or DCP plan to zero out my IRA?

    Or do you recommend leaving it in the IRA, or convert the 5 extra bucks to the Roth-IRA (overcontribute)?
    Thanks!

  • Great post, as always! I will soon describe Backdoor Roth and especially Mega Backdoor Roth as well on my website, http://www.firetobiz.com , as it took me a while to figure them out myself.

  • Tom Miller

    Question, to do the maximum backdoor Roth IRA for TY 2019, can I do the conversion in two equal halves, say $3500 in February 2019 and $3500 in August 2019? If so, does it require one or two Form 8606s? Thanks.

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  • Xavier

    Thank you for this information. I have been interested in doing the backdoor roth conversion for a while now, but didn’t know how to. Do you have to convert the entire $6000 from traditional to the roth IRA one time, or can you do multiple conversions? For example, lets say each month I only can afford to put $800 in the traditional roth IRA. Can i convert that $800 each time from the traditional to the Roth IRA up to the yearly limit (which would mean multiple backdoor conversions within the year) or do I have to wait until i get to the maximum of limit within the traditional IRA then convert to roth once a year?

    • You don’t have to do it all at once, but I imagine the paperwork becomes more complex at tax time. Plus you’ll have to pay tax on earnings converted.

      WCI lists this as the #1 way to screw up the backdoor Roth in this post: http://www.whitecoatinvestor.com/17-ways-to-screw-up-a-backdoor-roth-ira/

      # 1 Trickling In Contributions

      To be fair, this isn’t technically an error. I mean, you can do this if you really want to make your financial life more complicated. I think this error occurs from people trying to automate their financial life a la The Automatic Millionaire. They divide up their $5,500 contribution into 26 biweekly periods and every time they get paid, they put a little money into the IRA. If married, they do it for their spouse too. Maybe it makes their budgeting easier, I don’t know. Perhaps they learned about the benefits of periodic investing/dollar cost averaging and want to try to do that. Some of these people even do the conversion step each time they make a contribution. But by the end of the year, they’ve made over 100 transactions when they could have done four (halve those numbers if you’re single.) I don’t know about you, but I’ve got better things to do with my time than do an extra 100 transactions that I didn’t have to do. Even if you put the contributions on auto-pilot and only do the conversion at the end of the year, you’re still overcomplicating things (not to mention creating some tax drag.) Don’t do this. If you make enough money that you have to contribute to a Roth IRA through the backdoor, you make enough to make the contribution all in one lump sum. Do your Roth IRA in January, your spouse’s in February, and then move on to the 401(k) or 529s or whatever in later months.”

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  • Eric

    Thanks so much for this great post!

    Question ACA subsidies:
    If I contribute all my income to a mega backdoor roth, does that reduce my MAGI?
    I know contributing to a 401k will reduce my MAGI (as the money doesn’t even show up on a w-2), but I imagine my MAGI is not lowered by any mega backdoor contributions. Can anyone confirm?

  • KQ

    Thank you so much for this post. I just started this process and have noticed that when I get to step 2, when I am about to make the conversion, the option for “retirement contributions and distributions” exists as an option in the task bar of my preexisting Roth IRA, but the option in the task bar of my new traditional IRA in it’s place already says “convert to roth IRA.” Did they just cut out some of the steps? Seemingly this would be what I click on, but I wanted to make sure I didn’t miss something. If someone has already asked about this I apolgize- I did search and not find anything. Thanks in advance!

  • KQ

    Thank you so much for this post. I just started this process and have noticed that when I get to step 2, when I am about to make the conversion, the option for “retirement contributions and distributions” exists as an option in the task bar of my preexisting Roth IRA, but the option in the task bar of my new traditional IRA in it’s place already says “convert to roth IRA.” Did they just cut out some of the steps? Seemingly this would be what I click on, but I wanted to make sure I didn’t miss something. If someone has already asked about this I apologize- I did search and not find anything. Thanks in advance!

  • Adam

    In your post you say “You cannot have money in a tax deferred IRA in your name.” Does that mean I have to close my Traditional IRA account after converting the funds into a Roth IRA? Or does the Traditional IRA just have to have a zero balance at the end of the year

  • Adam

    I currently have a rollover traditional IRA with mostly pre-tax money. However, I made more than expected last year due to overtime and had to recharacterize my Roth IRA contribution into part Roth, part traditional. Now, I have around 2500 in non-deductible funds in my rollover traditional IRA, with the rest (25k) being pre-tax.

    Vanguard has informed me there is no way to roll over only the pre-tax money to an employer 401k even though I am tracking my non-deductible contributions on form 8606. However, as per the linked article – http://www.kitces.com/blog/the-impact-of-the-ira-aggregation-rule-on-after-tax-distributions-roth-conversions-60-day-rollovers-rmds-and-72t-payments/ – I was hoping to roll out the pre-tax funds into my employer 401k and then convert the remaining non-deductible funds (as well as my 2019 contribution).

    Am I out of luck? I think my only other option is to remove the non-deductible funds with an excess contribution form and eat the 10% withdrawal penalty before October 15th, unless the Vanguard rep I spoke to is mistaken and they can un-comingle the money. Any thoughts?

    Thanks.

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  • Christina Gato

    If my spouse and I make over the limit to contribute to the Roth are we still able to contribute directly to the Roth through his employer? or will we need to do the backdoor?

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  • Is a person only limited to only one IRA account whereas they can place $10,000 into the account and let it sit for 20 years and become and automatic millionaire? Or is a person allowed to have multiple IRA accounts to become a millionaire on virtual autopilot tax-free? Your thoughts on this?

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