You’re never going to be taxed for contributing to an IRA. One thing I wasn’t super clear on was how to roll a Simple IRA into a Roth. Agreed. – Contribute 5,500 each to a traditional IRA (which should decrease your takes by 24% of 11,000) I always have problems converting the traditional IRA balance to the Roth IRA. Do I need to focus on paying off student loans before increasing contributions to my 401K? Congress recently blessed the Backdoor steps as perfectly legit. If you have been grandfathered in with a mutual fund account and have resisted the many popups encouraging you to transition your IRA to a brokerage account, I commend you. I’m not a fan of purchase fees (aka front-end loads), personally. Note that this rule does not prevent you from contributing to your nondeductible IRA – you can do this at any time and for as many years as you want w/o paying taxes. So, if we already paid taxes on it at our higher tax rate, the bonus of putting it into an IRA and then coverting it is what? 1. And +1 for the solo 401k. This is my first year contributing to IRA. – Invest the rest in VTSAX in a Taxable brokerage account at Vanguard, pay your mortgage principal or do a combination of these 2. Is there a limit of how many times i can convert? I have yet to contribute for 2018. With my salary cut in half I now fall comfortably back under the Roth salary limit. If not, I am assuming the process to do backdoor roth conversion will be the same for TDAmeritrade as described above for vanguard. The first two options are cheaper if available to you. I work for a large pharma company and they allow me to defer my bonus tax deferred. I still have the chance to recharacterize the 10/30/2017 conversion as well, if that is an easier route. I tried to do that last year, but Vanguard told me there was no direct conversion method available at that time, and I would have to open a whole new Roth account, then move the funds. #1 and #2 should decrease your adjusted gross income well below the income limit for a Roth IRA plus will decrease your taxes significantly. If you have other IRA the Pro Rata will apply and I’d wait to Roth convert to close to RMD time. If I had lousy options, a rollover might not have been worthwhile. Loss of re-characterization makes the Roth far less enticing. Im assuming so, but I thought the funds had to come from the MM fund IN the non-deductible IRA account that I’m funding. Hey Smart Money MD. As in, does it become characterized as a Roth conversion and will I be able to access/withdraw tax-free/penalty-free for this conversion after the 5 year waiting period ? Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. We are in a high tax-bracket. I have a Rollover IRA that was set up a couple of years ago from funds received from an old 401(k) plan. I select 2021 since I made my 2020 contribution a year ago. You’re going to have some earnings from both the pre-tax and non-deductible contributions, and I believe you’ll have to convert and pay tax on the earnings from the non-deductible contributions. Hi POF, I suppose I’ll later have to move it into the funds I want in my pre-existing Roth. It’s post-tax money, and the point of putting it in a Roth account is to prevent taxes on the growth. I did still have it on 12/31/2017 (moved to the 401k this January), so I just wanted to make sure that that wouldn’t matter if I now convert my traditional IRAs. Is there a tax event when I “convert” / transfer the funds from the traditional IRA to the Roth IRA? For an overview of the different account types, please see this two part series. I contributed to a Traditional IRA in 2016, 2017 and 2018. Notify me of followup comments via e-mail. I will use this one. I made my contribution to Vanguard traditional IRA at the end of December 2019 but the funds didn’t clear until early January so I didn’t do my backdoor Roth conversion (using the 2019 traditional IRA contribution) until Jan 2020. Thanks in advance. This year, to be safe, I funded from a money market fund in taxable. Right — it only makes sense to do Roth instead of tax-deferred contributions if, and only if, you anticipate being in a higher tax bracket as a retiree. You get to choose when you take long term cap gains. Backdoor Roth Tutorial Steps. https://keenpocock.com/isolating-ira-basis-for-tax-free-distributions-and-roth-conversions/. I think Vanguard recently started wanting people to convert from traditional mutual fund accounts over to what they call “brokerage accounts.” And AFAIK these brokerage accounts have the 7day wait? The step transaction thing is what’s always slightly concerned me. I don’t think it will “just know.” What happens when you click that button? Should I first transfer out the pretax money in my IRA into work 401k and then convert the 30k basis into Roth IRa. My question: is there a limit on how much can I convert to Roth IRA using the backdoor approach? - Financial Panther, https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions, Funding a Fidelity Backdoor Roth IRA - a Step by Step Guide - Dads Dollars Debts, congress recently “blessed” the backdoor Roth as perfectly legit, 5 FREE Things You Must Do to Ensure Your Financial Future – Birds of a FIRE, Impacts of the 2018 Tax Reform Law | The Financial Journeyman. I spoke to my accountant once again. I think you skipped the step where we put the $6000 into the traditional IRA brokerage account in the first place. One way employees without a business of their own create one is by obtaining an EIN for a survey-answering business. Thank you. Great blog and thank you for all the effort and expertise in putting this together. Replies to my comments You may not want to transfer to Vanguard once you’re aware of your options with a different individual 401(k) provider. Both have tax-free growth, unlike a taxable brokerage account where you pay capital gains taxes and taxes on dividends. Go for it. I think this error occurs from people trying to automate their financial life a la The Automatic Millionaire. I have some money left over in an old IRA from 2017, that has appreciated some over that time. I have a question – I waited about 2 weeks before I made the conversion and now I have $6,005 in my traditional IRA. My spouse is unemployed. You’ll end up paying $250 in taxes in this. I choose my REIT index fund on the left with my settlement fund (money market) being used to fund the purchase. Did I violate the pro-rata rule? Love your step by step- I used it last year but it did not help me as well this year (2019) as the screen appearance and links have changed somewhat. I have the following plan: 2) In order to avoid the pro rata rule on the balance of $75k left, then roll the remaining assets into my 401k. That button is replaced with “Convert to Roth IRA” instead of “Retirement Contributions and Distributions.” It too, does not allow me to select a tax year and I am trying to do a 2018 and 2019 for me and my spouse this month for our first ever conversion. Also , I have $5500 ready now. For whatever reason I have an immediate need for $15,000. Minafi's finances are an open book. My wife does not work. Now I’m also wondering if I could do a back-door roth contribution this same year. Would this be seen as sufficient time? Invest in your acre of crop-producing farmland today! Now, I like to consolidate my accounts by rolling IRA from Schwab to IRA at TD Ameritrade, but I want to roll over the after-tax money in Schwab account into a ROTH IRA (which I’ll open at TD Ameritrade). On 04/25/2016, I converted $7400 into my Roth IRA, which was the sum of my 2015 SEP Employer (deducted contribution of $1900)+ 2015 Personal (non-deducted contrib. This, of course, assumes you are in a position to make after tax contributions and have maxed out all your pretax options. I did this brokerage conversion couple of years ago. I will not have any tax-deferred money in an IRA going forward. Because of the above, the IRA information got duplicated and I was being taxed on the 5,500 Roth distribution. You never know…I can be pretty careless, and many addresses over the past 20 years can be as concealing as couch cushions. - Physician on FIRE, https://www.irs.gov/pub/irs-pdf/i8606.pdf, How to Save for Retirement Without a 401(k), https://www.whitecoatinvestor.com/17-ways-to-screw-up-a-backdoor-roth-ira/, You can’t buy avocado toast with VTSAX (Why cash flow is king) | The Darwinian Doctor, Optimize Your Investments (Tax-advantaged Accounts) - fiwithme, Classes Discovered at a Doctor’s Retirement Planning Workshop | More Income Opportunities, Investing for Beginners With Little Money (The Complete Guide), Sarah Catherine Gutierrez of Aptus Financial, How to Retire Early in 4 Steps - Just Start Investing, Back Door Roth IRA - The Debt Free Dentist, You've Paid Off Your Debt, Now How Do You Invest? Now I just have to figure out the tax on the extra $0.50! if you have any self-employment income). That’s between you and the IRS, but it will not be deducted as it is an after-tax contribution, and it will be reported on Form 8606. 3. So, over the last couple of years I have been contributing after tax (non deductible) dollars to my Traditional IRA account. 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. I read through them all and I didnt see an explicit note. Unless my blog income takes off of course but since it hasn’t made anything yet I don’t see that happening . My wifes is making me wait the full 7 days. I would think so. My question is, can I start an SEP IRA if I already have money sitting in a Roth IRA. I wish they would have left things alone — it gets confusing when we’re looking at different screens in trying to accomplish the same thing. Here’s a thread on several options and pros and cons. It’s too late for 2018, but you can go ahead and take care of 2019 anytime as long as the IRA balance iz zero by the end of the year. Now I am adding my 1099-R and have no clue. In the next step, we’ll invest that money. We have the brokerage accounts. Best, After I made the conversion, I was unable to place an order for mutual funds. 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. I would consult with a CPA. This waiting period takes about a week. I would disagree with the assertion that the Roth v. traditional is the same in the end. Best of luck on your FIRE journey! I have a traditional IRA and Roth IRA through vanguard and would like to to roll them over into my employer 401k. Welcome to the big leagues, Investing Doc! I have $0 in my account, so mthe first screen of “Where is the money going?” won’t let me do anything because the balance is $0. Even if you do have to pay tax on it, it’s pennies. Is this what you are doing? The 2019 backdoor Roth is only at risk of being mostly taxed if the money you rolled out of the 401(k) hit the IRA in 2019. Steps below work? Is it correct that we are forced to do a backdoor Roth since we file MFS? Hi Adam, thanks for writing up this great guide to converting an IRA to Roth. Note that inherited IRAs are a non-issue. The S&P 500 fund (FXAIX) is a great option — you’re lucky to have it in the 401(k). For details, see “Recharacterizations” in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs). All very helpful. I just posted about the same thing without seeing your post first, so i decided to delete my post and piggyback onto your post. Please advise on the simplest way to do back door Roth for my spouse.Thank you. Is there anything I am missing here? After reading your Backdoor post, I’m just not sure it is worth the hassle. From what I hear, there’s no easy workaround if you’ve been subject to that waiting period. My 401 K allows in-service withdrawal. Thank You !! I make 100k a year. Hi! Uh-oh, I think I’m in trouble. An IRA is an Individual Retirement Arrangement, so yours won’t affect her. 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). The problem is, and maybe it is how I did it, but I received a 1099-R from Vanguard that shows $5500 in box 2a. I’m falling in the same boat as poster John and want to make sure I’m understanding correctly. Trust me – it can be a real bummer when you don’t live up to the IRS’ expectations . This is exactly what I need to do. I know that some people have mutual fund accounts and the new accounts are brokerage accounts. Then I can fund a new IRA and transfer to a Roth. Thanks. 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