Are there any additional fees for having a traditional IRA account open in case I am over the limit one of these years? Now I am wondering if I can recharacterize that as a Traditional IRA contribution and then follow the back door steps to get it into the Roth IRA. For instance, if I roll my private IRA into a company 401K today 1/11/2018, will I be able to star the back door roth strategy once that roll over is done…guessing around 1/18/2018? Do I need to convert the interest to Roth IRA as well or it’s fine to leave it in the traditional IRA? I make 100k a year. Should I go ahead and convert this $2.64 over to the Roth IRA as well? I think you meant I need to transition my Roth account to a “brokerage” account. Just the $2? Thanks for sharing your excellent, detailed how-to guide. I like to keep things simple. Ideally, executing the mega backdoor Roth means throwing all of your after-tax savings into your after-tax bucket (once you’ve maxed out your $19,500 regular 401(k) contribution limit). Cash has probably not grown so the tax hit will be essentially zero. The income limit on conversions was lifted back in 2010. I keep it open with a zero balance and use the same account every year. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. For some reason there is $1.45 in my tIRA and the full 6k in my rIRA. The White Coat Investor covers some of the advantages in this article. To convert all the pre-tax assets to Roth but in this case I have to pay the taxes based on my Marginal Tax Rate. I opened my Vanguard Roth when I was a resident <15 years ago, had let it sit untouched for a while, and then started doing back door Roths a few years ago. The advantage over a taxable account is that the growth is not taxed along the way (dividends) or when you sell (capital gains). Cheers, 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? This is the first time I am doing it and when I select the convert to Convert to Roth IRA, it is prompting me to open a Roth IRA account first. I have SEP IRA, roll over IRA, Roth IRA, traditional IRA and employer 403b all with VG. Otherwise, a 2020 backdoor Roth will have issues with the pro rata rule. Read up on the pro-rata rule for more details. I am a long time reader of both your blog and WCI. Is there a limit of how many times i can convert? Are you sure he’s a “pro”? My understanding is that the calendar year in which you do the conversion is what matters. I assume I will receive 5498 form in May but not 1099-R before filing the tax. If you work with a CPA, I’d run it by him or her, also. I still do a tax year 2019 8806 form? That includes traditional IRA, SEP IRA, and SIMPLE IRA, but does not include 401(k), 403(b) or similar acounts. Great post, will definately be sharing with some of my friends who I’ve explained the concept to (Thank You, you just did the work with an excellent explanation, saves me having to write a post on the same topic….I’ll just share yours!). A Customized Mega Backdoor Roth IRA Plan with Mysolo401k.net. Dear PoF, Money contributed to Roth accounts does not result in a tax deduction, unlike contributions to tax-deferred accounts. I just finished reading your post and The Finance Buff’s posts about backdoor Roth’s. If you earn too much to contribute directly, this is something that should have been picked up years ago. As long as it doesn’t have IRA in the name (IRA, SEP IRA, Simple IRA), there should be no issue with taxation due to the pro rata rule. On a separate note, why on earth does the government find in their infinite wisdom that Roth IRA’s should not be accessible by high-income individuals? I have $50k of post tax dollars(salary) in a checking account. Thanks a lot…sorry for the question but I don’t want to mess it up. I did write the post (I just couldn’t let all my screenshots go to waste). Congress recently blessed the Backdoor steps as perfectly legit. Go ahead and do the backdoor Roth. If you’re in a lower bracket while working compared to retirement, making Roth contributions makes more sense. I already did it – which now makes me panic. For more background on solo 401k, please read Solo 401k When You Have Self-Employment Income.. As I mentioned in the previous article The Elusive Mega Backdoor Roth, mutual fund and brokerage companies who provide solo 401k plans, such as Vanguard, Fidelity, Schwab, TD … What should I deal with this $1.65? As a single mom and self-employed physician, your website has opened up a new world for me. That we don’t pay taxes on the growth of that account later on? Hello, However, I am not very sure if I can attempt this in my current situation. I am trying to follow the logic when doing a Roth conversion when you have a Simple IRA; I am a small business owner and we have a Simple IRA in place of a 401K due to the cost of 401K management and the fact that we have employees so an Individual 401K is not permitted. Can perform a backdoor from the IRA to the Roth without tax consequences since there have been no contributions? I am able to contribute the full 6k each year into my ROTH IRA. The steps are the same no matter what kind of account you have and with which broker. Then when the conversion to Roth IRA is done, it goes into another Vanguard fund. Sorry if this is a dumb question, but if we are doing this for the first time do we have to open a Roth IRA account first before doing the conversion. The answer for this is the Mega Backdoor Roth. If you’re a high-income earner and already maxing out a 401k or other tax deferred plan through an employer, a backdoor roth is a good way to get more tax free growth. Or because I had a private IRA for the calendar year of 2017, I am not eligible for a back door Roth? I still have a mutual fund account and I’ve never had an issue with the next-day conversion. My employer 401k has relatively limited options for funds, but includes a total stock index fund at 0.06% ER which I’m happy with, so rolling over to the employer 401k seems like the easiest option. Three, you will pay no capital gains taxes when you sell to spend that money, which could be decades later. Not hosed (in most cases). It’s the timing and screens that will vary. Thank you for the lightbulb moment! I’ve heard of backdoor Roths but never understood the mechanisms of them, so I thank you, sir! The step transaction thing is what’s always slightly concerned me. It’s in a money market now. HI, Great step by step guide! This reduces the net buy amount to $5,458.75. Correct? Do you recommend doing a little each year, how much? The advantage of the mutual fund account is the lack of a settlement fund and no unnecessary delays. pof at physicianonfire dot com. What do you think? Which year would I be deducting on this years taxes, 2018 right. 401(k), 403(b), etc.) She has an old account rolled into a traditional IRA worth $15k. I would pull at least $10,000 from the Roth to avoid going into the next tax bracket. A backdoor Roth is a strategy for people whose income is too high to be eligible for regular Roth IRA contributions. Thanks for another great article. Couple questions, I have a SEP IRA for my independent contracting work. Personally, I have no plans to touch Roth money unless the taxable account runs dry and tax-deferred withdrawals are not enough. Now, when I’m ready to convert the traditional IRA ($6500) to Roth, do I list it as 2017 if I do between 1/1/2018 and 4/17/2018 since the money was originally a 2017 Roth contribution? 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. In order to start doing the back-door Roth conversions, I first need to convert $36k I have sitting in my traditional IRA today of which all the contributions were non-deductible but has about $8k in gains. How can a couple contribute $22,000 for 2017? Yes, sounds reasonable. I’m getting the “The amount you entered exceeds this fund’s balance.” error too. The confirmation screen will look much like the last one. So in December 2019 I rolled the balance of an existing rollover IRA (all pre-tax money) into our current 401k. I also found some other walk-throughs for online tax preparation programs to help with this exact problem. Not all plans accept rollovers, but mine does, and this was the route I chose with my SEP-IRA a few years ago. 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. I thought I tried this one year and it didn’t work. What do you suggest people do if they are in the cut off range (married filing jointly) of 189,000 to 199,000? Just what I was looking for PoF, thanks for this. 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. In the next step, we’ll invest that money. The Mega Backdoor Roth method is usable even if you don’t meet the income threshold for a Backdoor Roth. what do you think. Great questions for a CPA experienced in this arena. Can anyone confirm? We’re just going to concentrate on folks who are under 50 for this example. Good article. it is too late to do a 2019 conversion. Trad IRA earlier this year then converted to SEP IRA, thinking I wanted to contribute more than $5500 as my 1099 income increased. Just happened to have legacy accounts prior to discovering Vanguard. #2 may be unnecessary. What options do I have? Going back to Balances & Holdings on the next business day, we can see that our Traditional IRA has a balance of $6,000 in the money market fund. A modified adjusted gross income (MAGI) of $208,000 for a couple filing jointly, or $140,000 for an individual makes you ineligible to contribute to a Roth IRA in 2021. If you don’t want to do that, she’ll need to have some kind of business in order to legitimately open a solo 401(k). I thought I was the only one not doing my own taxes. Can I convert back to 401k? The pre-tax gains went to an IRA and was added to existing pre-tax assets in that IRA; I do not understand how the pro-rata rule will apply; please, clarify. Click on “Buy and Sell” and then “Buy Vanguard funds.”. Keep Roth money as long as you can! seems like i first open a traditional ira account for each of us and contribute there first then do back door roth conversion for both, is this correct? The representative said that the button is only available on brokerage accounts. Is there a limit you can convert per year? The after-tax contributions effectively become Roth IRA contributions. Pingback: The Ultimate Student Loan Hack for High Income Professionals | Passive Income M.D. Thanks for doing this every year! I was actually doing my taxes last night (still pending some 1099-M forms) and went through the IRA conversion. Here is my orginal post: “PoF, it appears you can no longer convert the next day with Vanguard. I’ve got about twice as much in a taxable account as I do Roth, so I don’t mind shifting as much from taxable to Roth as the government will allow. eventually the funds became available and I was able to complete the “convert to Roth IRA” transaction. The I is for Individual and what he has doesn’t affect what you can do and vice versa. What would be the implications? If you have a zero balance in the SEP IRA on that day each year, you should be OK. Here are the 2018 income limits for obtaining Traditional IRA tax deductions: IRA deductions for people covered by a retirement plan at work (e.g. It appears that I am able to fill out a late 8606 for him for the year 2017. You can always file an amended return (1040X and whatever the form is for your state) if you’re within the SOL (Statute of Limitations). The benefits of earning less. Initially, I receive a confirmation that the transfer went through. Had pretty terrible customer service experiences with Vanguard recently after using them for years. With a traditional IRA existing, you cannot do the backdoor Roth without incurring taxes according to the pro rata rule. After 2025, the Trump tax cuts expire so no one know what the brackets will be. Hi.. Once I convert those funds into the Roth IRA, I then will make the investments within the Roth IRA. It sounds like the answer is yes due to the tax form that needs to be filled out (other than filing a 1040X later on, which I don’ t want to do), but I just wanted to confirm. Did I do it incorrectly and just have to eat paying Uncle Sam? Then, you’re almost immediately getting your money out of that bucket and into either a Roth IRA or Roth 401(k) before it starts accruing investment earnings. As long as you can make it work on the 8606, you might as well take full advantage of the available space. Nice summary PoF. The new tax law doesn’t change much. Meaning after my initial conversion of the $36k, i then contribute another $7k non-deductible to that same IRA and convert it to the IRA the next day. In general, your own ROth IRA will have lower fees, a wider variety of fund options, and you can access the contributions at any age without penalty. You will receive a 1099-R in January 2019 to report on your 2018 income tax return and the $1,000 will be ordinary taxable income. Or is there a work-around? Thanks a ton, PAF!! 1b. The SVPs know all about it though. My CPA was worthless, my advice to all is know your tax codes and what you are doing, just like in Medicine you are ultimately responsible for you return (before the asinine comments commence, I did not have a SEP in the year of this audit). Whatever percent the amount of the conversion is as opposed to the total IRA balance is the amount that wouldn’t be taxed. And I hope the transition is for the best. (I asked but no answer yet on why the difference.). It looks like I’ll need to report on my 8606 I’ll need to report $5501 on line 8/9/16, and $1 on line 18 and pay the few cents in taxes on that extra $1? Can I open a new Traditional IRA and second Roth IRA at Vanguard and contribute $5500 for 2017 and $5500 for 2018, then transfer the entire $11k to the newly opened Roth at Vanguard? I just joined amazon and want to max out my 401k and take advantage of the Mega Backdoor Roth IRA. I started Rent the Mortgage in 2019 to begin documenting my financial lessons with the intent of inspiring others to start their FIRE journey through real estate. I only have one Roth IRA and I roll more money into it each and every year. My work situation will change next year and I anticipate starting an SEP IRA. Timely for us indeed! 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. Should I back door the $3000 then repeat with remaining $3000 leaving any gains in money market account there? I opened a SEP IRA with Fidelity in October 2019, when I was self-employed in 2019. And there are no dumb questions. Also, can he participate in my solo 401K as a spouse even though it’s my LLC ? Quick question. Meaning I reported nondeductible contributions automatically? Confidently select the checkbox that states you will not elect to withhold federal and state income taxes. However, I have an old Simple IRA from a previous employer that’s currently in my Fidelity account. If you wouldn’t mind helping with a couple of issues-. A Roth IRA is a good place to hold assets that are tax-inefficient (have high dividend yields) or would be expected to appreciate in value substantially. Unfortunately I have not taken advantage of the backdoor Roth conversion in the past and have been putting in money for awhile into a traditional IRA. For some reason, the money market fund we’ve used before is closed to new purchases, so we’ll select a different money market fund. I think this issue is related to the two different account types in use (brokerage vs. mutual fund). This article has been extremely helpful! (Avoiding any taxable events and/or the pro rata rule). My understanding is that the IRS only cares about what you have in an IRA on 12/31. Gross Now that you understand more about the nuts and bolts of the account, let’s take a look at some of the top advantages of using a mega backdoor Roth. I have a question regarding my 2020 tax. Thank you for such an informative post. Will I be subject to the pro rata rule on the 2018 funds if I actually do that contribution and conversion now (in 2019) and if my SEP balance is zero (rolled into the solo 401K) by 12/31/19? What do you do with the SEP IRA before December 31? I too have been curious about whether doing the additional $5500 non-deductible IRA contribution and subsequent rollover into my Roth IRA during the same year was allowed or not. Get a 1% yield bump on your first investment in commercial real estate, Earn easy 1099 income with quick surveys for healthcare professionals with InCrowd. Note that the only thing that makes your traditional IRA contribution non-deductible is what you report to the IRS. I make less than most doctors so I do a front door (regular) Roth. Dear PoF. Do I claim the estimated 24% to be withheld when making the Roth conversion? The good news is that there won’t be any change in what you owe, since this is a tax-neutral move. Our partners cannot pay us to guarantee favorable reviews of their products or services. I did the roth conversion successfully. Any help would be appreciated. Can I continue to convert this $1.65 to IRA ? Any ideas on how to proceed? I will break this down into two distinct tutorials: one for a brokerage IRA account (all newer accounts) and a second for older mutual fund accounts that have not transitioned. I haven’t run into that issue. So you’d be looking at paying ~$16k in taxes on the conversion. Can you please clarify how a correct form 1099-R should look like? I am 59 so I can contribute 18 plus 6500 catch up to a 401 or roth 401 .My spouse is ver 50 so we can contribute 6500 to a roth in his name. What is a Backdoor Roth IRA? ie Am I limited to only contribute $6K of post tax dollars to my TIRA? If it does, here’s how to figure out the maximum amount you’re allowed to put into the after-tax portion of the plan: The maximum that you and your employer combined can put into your 401(k) plan is $57,000, or $63,500 if you’re age 50 or older, in 2020. You can, but you’ll have to file Form 8606. The Backdoor Roth relies on a NON-deductible IRA contribution. You’ll want to file Form 8606 with your 2018 1040. Thanks again! Hi there, thanks so much for taking the time to write this post with all the screenshots included – super helpful!! It’s good to have this to look back on each year. Thank you. While doing the Step 2: when I click on “Where’s the money going?”. Congress appears to love messing with Roths. Mr. BITA is now going to have a regular and a mega backdoor (that just sounds kinky). 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