Once I get to the point I want to save amounts above that I will set up a defined benefit plan. Yes, you don’t pay taxes on basis, so money is only taxed once. Bank of America has really rolled out the carpet for rich guys.. their package if you keep good money with them is absolutely fantastic. It seems to me to be easier to just buy stocks/funds through an account like scottrade for accumulating retirement monies to be available if I want to retire early. Thank you. Is there a way to fix this other than taking a distribution of the 5,500 and getting hit with the penalty, plus filing an amended tax return for 2018? My IRA is over $500,000 with $86,000 non deductible (I been doing this awhile). I converted it 4/19. I can only contribute to a SEP or 401K in a single tax year. through the back door). Only you can decide how much money is significant to you. At least that’s what my CPA told me today. This must be what Schwab is doing because I convert the whole account. Accountants charge $500 a return. In your opinion, is it still worthwhile doing back door IRA, knowing that I’ll be paying tax on the majority of the amount (pro-rata rule).. considering that when I pull the money in retirement, the return will be not be taxed? Be sure to check that box that says you elect not to have taxes withheld. Can you please help me? What should I do? SIMPLE IRAs don’t mix well with the Backdoor Roth IRA process. I haven’t even filed 2019 taxes yet, but if you have then yes, you need to file a 1040X and an 8606. A mega backdoor Roth means making non-Roth after-tax contributions to a 401k-type plan and then taking the money out (with earnings) to a Roth IRA or moving it to the Roth account within the plan. There is no such thing as a SEP-401. This is the 2020 form but you will actually be filling out the 2021 form. made your 2020 contribution in 2021). What am I missing? As a consequence, they couldn’t complete the conversion from my Traditional IRA to my mutual fund Roth IRA. Thanks! Question: Do I need to go back and file an 8606 for 2012 taxes? $400 will do. Good luck with your decision. Yourself. b. I also did backdoor back in 2014, with the same issue on tax reporting (no 8606 form). Well. I just forgot to take the screenshot before I actually did it. First, thank you for all the info you share. Need more help with a Backdoor Roth IRA? your 2019 tax return due in April 2020. I utilized some IRS algorithm and it seemed to suggest that since the tax owed info itself was correct that an amended return may not be necessary. It’s the same as if you just contributed to the Roth in the first place. You can do a backdoor Roth with money in a traditional IRA & TurboTax needs to perform the proper calculation. I want more flexibility in buying/selling options, that are not available with Vanguard. So your #2 makes sense now. Technically, any money earned between the contribution and conversion step is fully taxable at ordinary income tax rates in the year of the conversion. I’m still getting frequent questions on how to do a Backdoor Roth IRA. That year. Your 401k likely doesn’t allow you to roll non-deductible money in. I incorrectly reported the backdoor Roth (I used TurboTax) and it didn’t generate 8606. This violates pro-rata rule, correct? Most fund companies, including Vanguard, don’t close the account just because there is nothing in it. Or does just the Pre-Tax IRA need emptying and the proceeds can be ‘in-transit’ to the 401k? The total traditional IRA is now 19k, 6k of which has already been taxed, and is now going to be taxed again? I do not own any business/corporation. Do you have a SEP or SIMPLE? If I decide to press forward and convert 50K (current balance, not balance by Dec 2018) to Roth, aside from just rolling the fund from IRA to Roth. If you did steps 1-5 right, this form probably doesn't belong in your tax return. I don’t really see an advantage to doing this. Is it correct that I should move the previous rollover money into the 401k but leave the 20 k of non deductible contributions in the IRA to convert? One must simply fill out a an 8606 form to prorate the amount money you must pay tax on. Whoever told you that is ignorant at best. I’m continually updating the data as readers tell me about it. My question is this: do I need to submit an amended return to correct just the basis discrepancy? Yes, you’re supposed to file an 8606 for each year if you’re trying to keep track of basis. I’m not too happy with the way things are set up – it seems unnecessarily complicated. First, pay your bills and your credit score will take care of itself. 1. The conversion is fully taxable. In fact, you have until tax day, usually April 15th unless you get an extension of up to six months. Backdoor Roth - logistics Hello, I am a third year resident completely new to investing and interested in starting to do backdoor IRAs for me and my husband after maxing out our respective 401k/403b. See a local broker. Unfortunately I’m too late to make the conversion for 2017 tax year. I just went back and looked at my 2019 taxes and realized my MAGI is actually just under the limits allowed to contribute directly to a Roth IRA (under any phase out amount). I tell all my coworkers. Assuming I already hold a combination of traditional IRA’s and Roth IRA’s, could the pro-rata rule be avoided in retirement if I deplete the the traditional IRA’s before touching the Roth IRA’s ? Third, the prorata calculation only has to do with dollars in IRAs, not the number of accounts. It’s pretty tough to pass up on that tax break, even with the credit risk. What they understand is that with a Roth … This was pre-Roth, but by the time the Roth option came along, I still didn’t have any significant income so I was able to convert it without paying any taxes. c. Assume above issues are taken care off and I make sure IRA balance for 2019 is $0 for back door Roth this year, do I put $0 in basis for 8606? HSAs are not employer based. Hello and thank you for all the resources on the conversion process. Not all plans allow non-Roth after-tax contributions but … The $86,000 come from filling out form 8606 every year and keeping track. However, the last conversion out of that account was in June 2012 (for some reason we did it mid-year then), 18 months and 12 days earlier and the traditional IRA was missing, so we had to go through the trouble of reopening. Any input is greatly appreciated, and I can clarify if any of this doesn’t make sense. I did not forget about the account, but I didn’t completely understand the method, so it appears a mistake was made. Second, investment accounts have no bearing on credit scores. No taxes should be owed. Thanks for your quick reply. And no, you need to get rid of all traditional, SEP, and SIMPLE IRAs in order to avoid the pro-rata issue. However, an old SEP IRA from a different bank was not yet 0–in process now. I fear I have really screwed up my attempt at the backdoor Roth conversion. Fidelity told me rollover all three and open a solo 401K . The video takes you step-by-step through the details of making a backdoor Roth IRA contribution using Vanguard. Box 2: 0 Maybe. It seems like I have activated the PRO RATA Rule. Sorry, im still a bit confused with the concept of a backdoor roth despite reading the blog and comments. I didn’t remember that I have balance in TDAmeritrade IRA (rollover from previous employer 401k). I don’t think Vanguard phone reps are authorized to provide guarantees about tax advice such as this rep did. Contributed $1,000 to my Roth IRA back at the beginning of the year, thinking there was no way I was going to make enough in 5 months of attending salary to put me over the limit. I don’t think there is any fee. My Mega Roth Conversion: A $212,000 Mistake? I have not yet deposited any money into the IRA this year. Tax preparers seem to struggle with this form for some reason. Over the years I created guides for how to report the Backdoor Roth in TurboTax, H&R Block, and TaxACT. Please help me understand the timing of this. I mean why isnt it a ‘no brainer’ ? I have a situation. IRA stands for individual retirement arrangement, and doesn’t come through an employer. Every one takes cash and since it is all qualifed money, it will not be a problem (with taxes). 3) HSA I edited your three comments to put them all into one. Sure, that’s a great way to isolate the basis. It was free. There are 401(k)s and there are SEP-IRAs. Will that change anything? ), The Backdoor Roth IRA Made Easy - Podcast #194, Understanding the Mega Backdoor Roth IRA - Podcast #127. Your “stupid tax” this time comes in the form of opportunity cost. Look it over, then hit submit and you'll go to the standard Vanguard confirmation screen which looks like this: On Day 3, you can finally choose the investment you want in the Roth IRA. Finished Residency in 6/2018, now 1099 independent contractor. It can be very tax-efficient if you do it correctly. Worst case, if the fund is still not liquid until the following year again, can I contribute to max amount for 3 years, then convert all to Roth on the year I can have IRA $0? Paying tax on $2700 hurts (especially the fact that I’m paying twice! Do a Roth conversion of the whole thing. “The total sum of these accounts on December 31st of the year in which you do Step 3 must be zero to avoid a “pro-rata” calculation that can eliminate most of the benefit of a Backdoor Roth IRA.” And if I chose the maximum and I just started a new job in November, will the amount be deducted from 2 months only or throughout the year. Thanks. The 1099 just says what conversions you did in 2019. Yea, but only by $1 or so. And I’m glad I posted here because I’ve already screwed this up. It’s how much already taxed money you had in the IRA at the beginning of the year, not the end. Just need to contact vanguard where the IRA is and figure out logistics of rolling over all money minus the non deductible portion, Fidelity or whoever is getting the money will let you know what can be tranferred into the 401K. Leave it in cash (i.e. My CPA said to transfer my 3 workplace accounts into Roth, then do backdoor. Hi! You can’t put $19,500 into an IRA, that’s a 401(k). Hope this question makes sense, thanks for everything you do. The book summarizes the most important information on the blog and contains material not found on the site at all. Merrill Edge? Was “shortly after” also in December 2013? © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. If it is wrong, you should probably resubmit it with a 1040X. The most frustrating part is that my tax return reflects the right approach and what I wanted to do all along. … Thank you so much for all you do here and your inputs! IRA stands for INDIVIDUAL Retirement Arrangement. Thanks! If you understand the rules of both of these steps, putting them together is no problem. Remember that for a high earner with a retirement plan at work, a traditional IRA contribution is NOT deductible. I mean, what is an auditor going to say? Don’t worry about recharaterizing then if you are going to convert the SEP to Roth in 2014. So add one year to anything you see here. However, people still manage to screw up on EACH of those six steps. You can also subscribe without commenting. Are you doing Backdoor Roth IRAs? However, that rule was only for recharacterizations of conversions, not contributions. It’s just going to make your 2013 taxes more complicated. You put contributions to a 457b ahead of a backdoor roth IRA, and this is something I just started to think about. I can attest that even CPAs aren’t always aware of how to handle the backdoor Roth IRA. I don’t know if he was using $400 as a specific number, or just saying you need very little income to justify a Solo 401K. and then I’d have to go through the hassle of setting up a new account again if I wanted to do this the next year. Since I am new to this, I was expecting 2 1099 documents referencing the appropriate tax year. January 2019: Successfully (or so I thought) executed my first backdoor Roth for the 2018 tax year in the amount of $5,500.00. 6) Moderate interest debt The deadline for contributions is April 15th of the following year. EM doc. Thinking to open IRA at Merrill, since i do most of my banking at BoFa, anyone has encounter difficulties doing the Back Roth IRA with them?, if so I might just go with Vanguard to avoid the hassle. This year I made the traditional IRA contribution very late and the fund wasn’t available to convert to a Roth IRA until today which is the first of the new year. Step #3: Move money from traditional IRA to Roth IRA (i.e. a money market fund or settlement fund) while it is in the traditional IRA to keep the math simple. I’m not sure how to fix this.. Any questions about it? The White Coat Investor is a reasonably useful book that delves into financial topics that are unique to physicians, such as savings rates, student loans, and the critical first year as an attending. Sometimes the form was filled out wrong, but mostly this is just a lot of anxiety. Something is screwy here. I rolled over and old 401k, and I also did a backdoor this year. As you can see, I am waiting for an opportune time to convert and I was wondering your thoughts on the matter. Ok, so when you contribute 5500 on Jan 2nd of a given year, then convert the next day is it for that given year or for the previous? How To Get Your Tax-Exempt TSP Money In To A Roth IRA. So they had me transfer $6000 into the new Traditional IRA and convert $5990 to my Roth IRA, leaving $10 in the Traditional IRA. Now you need someone for coding and billing, claim disputes, file management. On a different note, if I am saving aggressively, and have maxed out by 401k, 403b, college savings, etc – what are the other options? Since it is all cream, I pay no taxes. Jim – How long do you keep the money in the converted Roth in Prime money market funds? Sometimes you have to fill out paperwork for both, but having done a dozen rollovers, it’s almost always better to “pull” the money. So you’re not choosing between tax-deferred and tax-free. Apart from having to pay what I’m guessing is a small tax, is there a problem with having $10 in my Traditional IRA on December 31st year after year and am I violating the pro rata rule? Since you made a contribution for 2020 but didn't do a conversion during 2020, your basis is $6,000. no to mention if you have the aforementioned 100K you get the keys to the best cash back credit card in the industry.. not to mention a ton of flexibility with your money. Step #4: Invest in your preferred investment (typically a stock, bond, or balanced. Every year or two, Vanguard changes their process slightly. I don’t know of an individual 401(k) provider that doesn’t require an EIN. I am also investing in Real Estate, paying off significant student loans etc, saving etc…. It’s a 1 2 3 card in those categories with a 75 percent bonus if you are platinum plus privalege. Who knew the minimum to open a solo 401k was so small?! So I can contribute 5500/ yr? free and so I can get any Vanguard ETF or iShares or anyone 100% free.. no trading costs, no maintenance fees, no fees of any kind ever. For a process that seems so incredibly simple to me, it can be amazing all the different ways to screw it up. 1. As you can see, I forgot to take this screenshot before I actually did it, so I don't actually have any funds available to trade and I have a -$6,000 credit. So even  if the pro-rata rule (discussed below) keeps you from doing the Backdoor Roth IRA, it doesn't necessarily keep your spouse from doing so. I filed my taxes for 2018 and filled out an 8606 reporting the 5,500 as though it was a backdoor Roth (because that is what I thought I had done), so I paid taxes on the contribution. Is the Backdoor Roth one of those moves that every high-income earner should be making? If you’re reading this deeply into the blog you should have a pretty good understanding on the investment process and likely do better than the vast majority of Merrill advisors. Or reverse it/not do it. You could put it into Prime, but I don’t see any reason to. Can I open an individual 401k with say Fidelity. It is very straightforward. Why isn’t Line 4 5500? So, they had me transfer $6000 into the new Traditional IRA and convert $5990 to my Roth IRA, leaving $10 in the Traditional IRA. Agreed. You could do it all in 2018. Sorry for the confusion. 1) 5500 Honestly my earlier USAA investments were pre-residency and I always thought in my mind they were only brokerage accounts. Yes. The “basis” I’ve been referring to as incorrect has been line 14 of the 8606, since as of 12/31 of 2018 there was 0 dollars in the tIRA. Can I do it through turbotax ? I have a timing question on emptying out a pre-tax IRA by rolling the pre-tax proceeds to a 401k before 12/31/19 and thus avoiding the Pro-Rata Rule and calculation. (My auto investment is $5500 on December 6 each year). Or do only traditional IRAs, Sep IRAs, and Simple IRAs count toward pro rata, and not Roth IRAs? If you don’t already have a Roth IRA there, you’ll need to open one. Happens all the time, you’re hardly alone. I did this the first time this year and it didn’t take more than 15 mins. While I agree that keeping investing simple is a good thing, leaving significant money on the table is not. My tax accountant felt it was OK to go ahead and do it – she does not understand the pro rata rule (which I have read extensively about this week!) No big deal. That’s what I would do if I could afford it. So I thought I’d put together a basic step-by-step tutorial people can refer to when they do this. No, but why not move to someplace like Vanguard, Fidelity etc that doesn’t require that sort of thing like everyone else? I have brokerage, IRA and roth IRA accounts with schwab. Perhaps the best explanation is the cream in the coffee example. The market drops considerably so my ‘cost basis’ would (hopefully) be close to zero when I convert (rather than about 15K as it is now) such that my tax liability would also be near zero. Then they told me they would need to leave a small amount of money in the new Traditional IRA account to keep it open, otherwise I’d be charged fees each year for closing down the account. Why is Vanguard adding the $5,508.00 to my 2019 tax year? No, you aren’t subject to a penalty for opening a Roth IRA just because your employer has a 403(b). 4) Tax-deferred accounts of any type (401K, 403B, 457, DBP etc) I bet you gave the government an extra $2K that year and you probably can’t get it back now. In fact I done 2X $5,500 backdoor Roth IRA conversion for myself and my wife and reported it correctly on the form 8606. Are you going to convert it? Hope that makes sense and I appreciate any clarification you can provide. Things to think about…. However, by Tuesday morning (January 5th) I was able to do the conversion step. What’s the implication on this mistake? I want to do my first backdoor Roth conversion but need to empty out my IRA into 401k which I am beginning to do. Seems sort of logical but maybe it doesn’t upon further thought. Step #5: Ensure you have no money in a traditional IRA, SEP-IRA, or SIMPLE IRA on December 31st of the year you do the CONVERSION step. I’d call HR and ask exactly what will be taken out under your current settings. When double-checking your tax preparer's work, you want to concentrate on lines 2, 14, 15c, and 18, and make sure they're a very small amount, like zero, and not a very large amount, like $6,000. If you still haven’t converted it then it just gets carried forward as basis. So make sure to check the work of your tax preparer! But consider $5500 per year contributed to a Roth IRA for 30 years vs $5500 per year invested in a taxable account. Yup. Was I supposed to get a separate 1099-R for my 2018 conversion and 2019 conversion? The total sum of these accounts on December 31st of the year in which you do the conversion step (Step 2) must be zero to avoid a “pro-rata” calculation (see line 6 on Form 8606) that can eliminate most of the benefit of a Backdoor Roth IRA. 2) High interest debt Do I have to get rid of inherited IRAs (ie convert to 401k’s) to avoid the pro-Rata rule to fund a Backdoor IRA? B. You’re not paying twice on that $2700. I didn’t follow everything you wrote, but basis is all the money you put into it that you didn’t get a deduction for. Look for the little buttons on the lower right corner of each post. Before I get into it, realize that if you are a low earner you can just contribute DIRECTLY to a Roth IRA and skip this Backdoor Roth IRA process. So if you did an IRA contribution in January of 2018 for the 2018 tax year, you have until October 15, 2019 to do a recharacterization. In 2019, I noticed a couple of trends in the questions I was getting that probably deserve some time on the blog. solo 401(k) for the business. Won’t that defeat the whole idea? So now in 2019, I’m having to fill out the form with line 2 as 10,999. I retire in 2 years so hope to get done before then. I assumed we couldn’t hide the SEP-IRAs in a individual 401k since we have employees and I hadn’t thought of the new EIN. Work through Form 8606 and you’ll see why. Then I convert it. Any idea where I might find an answer to this question? Submit both for 2018 yr. Thanks, your website is awesome–you helped me find a solution to something that’s been bugging me for a couple of years! I didn’t realize until afterwards that it would complicate tax matters for backdoor roth conversions going forward. Did you do a Roth conversion in 2019? When they work their way through their IRS Form 8606, they discover they have basis left over that they can then carry forward indefinitely for years! 17 Ways to Screw up Your Backdoor Roth IRA. As she does not work currently, I cannot set up an individual 401K with Fidelity to accept rollovers for her deductible IRAs. This means, I have to submit 8606 & 1040X for 2018 to document all this, correct? Imports Last Year's Tax Return. If I prefer to invest my SEP with vanguard funds I don’t want to place my money with a different firm. The next part of the Backdoor Roth IRA is done months later when you (or your accountant) fill out your IRS Form 8606 on your taxes. I see how that worked out. Then they told me they would need to leave a small amount of money in the new Traditional IRA account to keep it open, otherwise I’d be charged fees each year for closing down the account. You have until the due date of your tax return to do this (including extensions). Even though you made a 2020 contribution, you did so AFTER December 31st, so this line would still be zero if you filled it out for 2020, which you didn't because you didn't do a conversion in 2020 and got to skip lines 4-13. It’s quite possible in a few more years you could owe a lot more on a conversion. Just an hour ago, I called Fidelity and they will take the Vanguard TIRA back into my ex-Rollover account – will initiate the move after this long weekend is over. You’re right that if the market drops before you convert that you’ll save taxes. 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