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Backdoor Roth: A Complete How-To

by Harry Sit in Taxes, The Best Of Collection
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Although I believe a traditional deductible IRA is often better than a Roth IRA, a Roth IRA is still better than a taxable account if you aren’t eligible for a deductible contribution to a traditional IRA. When you aren’t allowed to contribute to a Roth IRA because your income is too high, there’s still a backdoor. It takes some effort but it’s worth it.

So here it goes: a complete how-to for the Backdoor Roth.

What is the Backdoor Roth?

The Backdoor Roth is an indirect way to contribute to a Roth IRA when you are not eligible to contribute directly due to high income.

Who should consider the Backdoor Roth?

If your income is “too high” for contributing to a Roth IRA, you should consider the Backdoor Roth. The IRS publishes the income limit for contributing to a Roth IRA every year.

If your income isn’t above the thresholds, stop reading — this article doesn’t apply to you. Instead, consider a deductible contribution to a traditional IRA if you qualify for one or contribute to a Roth IRA directly.

Why should someone consider doing the backdoor Roth IRA?

When you have money in a taxable account, you pay taxes on interest and dividends. When you eventually sell the assets, you also pay taxes on the capital gains. If you put money in a Roth IRA, you don’t pay those taxes.

Ready? Here it goes:

Step 1 – “Hide” other IRAs

If you don’t have any traditional IRA (say as the result of a rollover from a previous 401k or 403b), SEP-IRA, or SIMPLE IRA, you are in good shape. Skip to step 2. If you are married, please note IRAs are owned by one and only one person. Each spouse should look at his or her IRAs separately. If you don’t have any traditional IRA, SEP-IRA, or SIMPLE IRA but your spouse does, you are not affected but your spouse is affected.

If you have a traditional IRA, SEP-IRA or SIMPLE IRA, and you don’t mind paying taxes to convert all of them to a Roth IRA now, also skip to step 2. When your balances in those IRAs are small, the taxes you will have to pay when you convert them are also small.

If you have a traditional IRA, SEP-IRA or SIMPLE IRA, but you don’t want to convert them and pay taxes at a high rate just yet, rollover almost all the pre-tax money to an employer sponsored retirement plan: 401k, 403b or 457. Most employer-based plans accept incoming rollovers.

An inherited IRA doesn’t count if you keep it separate as an inherited IRA (see Inherited IRA and Roth Conversion Pro-Rata Rule).

Everything in the traditional IRA, SEP-IRA, and SIMPLE IRA, except any non-deductible contributions you made in the past, is pre-tax money. For example if your traditional IRA has $34,000 in it and you made $10,000 non-deductible contributions in the past, $24,000 is pre-tax money. Move $24,000 to an employer sponsored plan. If you never made any non-deductible contributions in the past, all $34,000 is pre-tax money.

If you’ve made non-deductible contributions to your traditional IRA in the past, a key requirement is that you leave enough money behind in the traditional IRA — at least equal to your past non-deductible contributions. Don’t cut it too close. Consider market fluctuations and leave yourself a small cushion to show that on the day the money goes from your IRAs to your employer plan you still have slightly more money in the IRAs than your past non-deductible contributions.

You are allowed to rollover only pre-tax money from a traditional IRA to an employer plan because of a special rule. Read more about this special rule in IRS Publication 590A. Look for “Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA” near the end of page 22.

If your plan doesn’t accept incoming rollovers or if you don’t like your plan, create some self-employment income and set up a solo 401k plan, also known as a self-employed 401k plan or individual 401k plan.

House-sitting, dog-walking, tutoring, helping neighbors set up computer equipment, etc. are all good ways to earn self-employment income. Remember you don’t have to make a living on it. You just need a little self-employment income in order to qualify for setting up a solo 401k plan. See Solo 401k When You Have Self-Employment Income.

Step 2 – Make a non-deductible contribution to a traditional IRA

After Step 1, you either don’t have any traditional IRA, SEP-IRA, or SIMPLE IRA, or you only have a traditional IRA with non-deductible contributions in it (maybe plus a bit of earnings). You make a non-deductible contribution to a traditional IRA. As long as you have earned income, even if your income is “too high,” you can still make a non-deductible contribution to a traditional IRA.

The IRS publishes the contribution limit ever year. Look it up.

Step 3 – Wait

The law does not impose any waiting period between a contribution and a conversion (step 4). However, some are concerned that if you convert too soon, it can be seen as an abuse.

There is no official guideline for how long you should wait. Some say a few days; some say 30 days; some say 6 months; some say wait until the end of the year. Pick a time you feel comfortable with.

Having the money sit in a traditional IRA for a short period of time is not going to kill you. The tax on the earnings won’t be much because you won’t have a lot of earnings.

Step 4 – Convert the traditional IRA to Roth IRA

Ask your IRA provider how to do this. Some can do it online. Some will want a signed form. There is no income limit for the conversion. Because your Roth IRA conversion comes primarily from your non-deductible contributions, there will be very little taxes on the conversion.

Be sure to specify you want to *convert* money in your traditional IRA to a Roth IRA, not *recharacterize* your contribution. The two are not the same. Using the wrong term can lead to bad consequences. See Traditional and Roth IRA: Recharacterize vs Convert.

Also be sure to choose “no tax withholding” for your conversion. This way 100% of the money goes into your Roth account.

Step 1 is necessary because if you didn’t do it, your conversion will be taxed by the percentage of pretax money in all IRAs (the “pro-rata rule”). Money in employer sponsored plans doesn’t count in the pro-rata rule.

Step 5 – Report on your tax return

Since you made a non-deductible contribution to a traditional IRA in Step 2, you will need to include Form 8606 when you file your taxes. It’s a very simple form. If you use tax software, it will be included automatically if you answer the questions correctly.

Contributions to an IRA can be tagged for the current year or the previous year (if done before April 15 in the following year). Conversions are always tracked to the calendar year in which it actually happened. You report on the tax return your non-deductible contribution to a traditional IRA *for* that year and your converting to Roth *in* that year. If you contribute for the previous year and then convert, you will have to report in two separate years. It’s much simpler if you contribute for the current year and then convert before December 31. See Make Backdoor Roth Easy On Your Tax Return.

If you use TurboTax, see How To Report Backdoor Roth In TurboTax for a step-by-step guide. If you use H&R Block software, see How To Report Backdoor Roth In H&R Block Software. If you use TaxACT, see How To Report Backdoor Roth In TaxACT. If you use FreeTaxUSA, see
How to Report Backdoor Roth In FreeTaxUSA.

Here’s an filled-out example of Form 8606 produced by TaxACT software. I’m assuming by the time you converted, you had $50 worth of earnings.

Step 6 – Repeat Steps 2 to 5 next year

Step 1 is a one-time task. After it’s completed, you just repeat Steps 2-5 every year.

Most IRA custodians will keep an account open for a year even after the balance goes to zero. In such case next year you just contribute to the same empty traditional IRA and convert into your existing Roth IRA. It’s not necessary to open new accounts.

No Rollover to Traditional IRA

When you are repeating steps 2 to 5 every year, remember not to roll over from an employer-sponsored plan to a traditional IRA in the same year, either before or after you do the Roth conversion. You can leave the money in the original plan, roll over from one plan to another plan, or roll over to your own solo 401k, just not roll over to a traditional IRA. If you must roll over to a traditional IRA, you will have to “hide” it again using Step 1.

Reverse the Order?

Some readers asked about reversing the order: do Step 1 after Step 4 but before December 31 in the same year. I don’t recommend it, even though it works the same on the tax form.

When you roll over from your traditional, SEP or SIMPLE IRA to a qualified plan, you are explicitly allowed to pick pre-tax money only. Not so when you do the conversion; you are not supposed to pick only after-tax money. The tax forms don’t show exact dates. If you reverse the order, you can probably get away with it if you are not audited, but I think it’ll be messier if you must explain to an IRS agent.

It’s too much trouble. Why don’t they just open the front door and let everyone contribute directly to a Roth IRA?

If the front door is wide open and everyone can contribute directly to a Roth IRA, the government will lose too much revenue. The income limit is imposed to reduce the revenue impact. Only those who know about the backdoor and are willing to perform the necessary steps can take advantage of the backdoor Roth IRA. Diligence brings rewards.

Will they close the backdoor?

It’s possible the backdoor will be closed. The President already included in his budget proposal to close it although it’s hard to get it passed by Congress. If you are afraid the backdoor will be closed, you should do it now when the backdoor is still open.

***

Comments are closed because questions are becoming repetitive. Be sure to read existing comments for answers to questions similar to yours.

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Reader Interactions

Comments

  2. Enonymous says

    Hmm
    I have been doing this so far
    But in 2011 doesn’t the income limit on Roths disappear…?

  3. Enonymous says

    Sorry!
    I meant for conversions but this is exactly how effectively anyone can contribute to a Roth

    Thanks for your guide. I decided to just convert all Iras in 2010 spread taxes over 11-12 and then every year doing the nondeductible to Roth conversion

  5. sc1 says

    If I skipped step 1, but already did Step 2 & 3, is it too late? Can I go back and do Step 1 if I do it before December 31?

  6. Harry Sit says

    @sc1 – In theory you should do Step 1 before you do Steps 2 and 3. In practice, I think you will be fine if you complete Step 1 before Dec. 31. Hurry up.

  7. zany says

    Thanks for explaining this so well – while I have been doing this already, I am sure a lot of people will get help from the well written article.

    Another relevant question – Roth is strictly better than a brokerage. Still any suggestions to what are the best assets to keep in that? I know you are a vanguard fan (like me) so it would be great to hear exact funds and ETFs.

    And that said, ever thought about making your asset allocation public (sans the actual numbers)? It may help a lot of folks get some ideas.

  8. CTG says

    In Step 1, please explain why the pro-rata rules don’t apply to the rollover. So if you rollover $24K to the employer sponsored plan, why is all $24K deemed pre-tax and not 24/34ths?

    Also, I assume there is no need to make a non-deductible contribution in Step 2. You could simply rollover the after-tax amount left after Step 1 to the Roth, correct?

  9. Harry Sit says

    @CTG – Because the tax law says so. In IRS Publication 590 (p. 23 in the 2009 version), the IRS writes:

    “Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible. ”

    In Step 2, although it’s not required that you make a non-deductible contribution, if you have earned income and you have the money, it’s better to do it before converting the traditional IRA to Roth. You will have more money in the Roth IRA that way.

  10. Harry Sit says

    @KD – Graphics? I will have to charge you extra for that. 🙂 Thank you for the suggestion. I added some graphics plus a sample filled-out Form 8606. How do they look?

  12. KD says

    TFB, I think you have made quite a bit of money through my clicks on the amazon referral links. Graphics help understand this so much more quickly. Thanks!

  14. nbollin says

    My wife has a SIMPLE IRA at work that she is currently contributing to; its value is about $10k. We are converting $8k from non-deductible iras ($4k each); and $3k from an old 401k (Trad IRA rollover) to roth IRAs this year. My question is the amount of tax due. Is the $10k from her simple ira factored in? Or do we just owe taxes on the $3k from the old 401k?
    thanks

  15. Harry Sit says

    @nbollin – It depends on who owns the $3k rollover IRA. IRAs are owned by one and only one person. Each spouse should look at his or her IRAs separately. If you own it, you will pay tax on that $3k. If she owns it, her SIMPLE IRA is factored in. The $7k conversion will have (3 + 10) / (4 + 3 + 10) = 76.5% as taxable. She will pay tax on $7k * 76.5% = $5,353 instead of $3,000. But then she will owe less tax from the SIMPLE IRA when she eventually takes money out of that or converts it to Roth.

  16. Eric Forest says

    I still have a question regarding the solo 401k. can I set up a solo 401k purely to move IRA? I don’t think I will have any income from the self-employed category

  17. Eric Forest says

    another question. I understand for 2010 the income limit for rollover to Roth is removed. But for 2011, is there an income limit for rollover to Roth?

    Thanks
    Eric

  18. Harry Sit says

    @Eric – No, to both questions. You must create some self-employment income or move the pre-tax money in the IRAs to an employer plan. The income limit for Roth conversion is permanently removed, unless they reinstate it again in a new law.

  19. Eric Forest says

    Thanks. I can not move the IRA to employer plan as I am currently unemployed. I guess my only options for converting IRA to Roth are 1) pay tax for the pre-tax money in IRA, or 2) find some self-employed income to create a solo 401k

    If you have other ways, please let me know

    Thanks
    Eric

  21. Eric Forest says

    sorry for the spam, but I have another question regarding the solo 401k. I decide to find some income from SE next year to do the IRA conversion. However, last night when I review the application forms for the solo 401k (from fidelity), I didn’t see there is a requirement to have some SE income to open such account. There is no mentioning of things like checking “pay check” for opening account (analogous to apply mortgage loan). I also can not find (although with quite minimum searching) any IRS restrictions regarding the need of SE income for solo 401k. can you point me to some links for those info?

    Thanks again
    Eric

  22. Harry Sit says

    @Eric – Everything you read about 401k plans, including IRS publication 560, talks about an employer. A solo 401k plan is still a 401k plan. It just has only owners and their spouses as participants. Only an employer can set up a 401k plan, solo 401k included. The Fidelity solo 401k plan page says at the beginning:

    “Self-Employed individuals and owner-only (and the owner’s spouse) businesses and partnerships can save more for retirement through a 401(k) plan.”

    It doesn’t ask for proof but you have to put down an Employer on the adoption agreement. If you don’t have self-employment income, who’s the employer? How can you be an employer without income?

    You don’t have to make a net profit but you must generate some income, at least in the year when you set up your plan. You can idle your business later and keep your plan but that’s another story. You want to be legit when you set up these things.

  24. JDB says

    The first step involves rolling over existing traditional IRA, SEP IRA or SIMPLE IRA but what if I already have a Roth IRA? I guess I don’t understand how I won’t avoid paying taxes twice if I convert my Roth IRA (which was funded using after tax money) to a 401K (which will be taxed when I make withdrawls later in life)? Thanks.

  25. Harry Sit says

    @JDB – Your Roth IRA is not an “existing traditional IRA, SEP IRA or SIMPLE IRA.” You do nothing to it in Step 1, as shown in the chart.

    Wait until Step 3, when you convert the new/remaining traditional IRA with non-deductible contributions to the same Roth IRA account.

  26. JDB says

    I see, so in my situation all I would need to do is open a traditional IRA, make a contribution, and then convert it to a Roth? Then repeat because next year I wouldn’t have a traditional IRA since I converted it to a Roth. Thanks.

  28. AB says

    My 8606 is identical to yours! (Except my investment gain is $100 rather than $20 🙂 I guess we did the same thing: opened traditional IRAs ahead of 2010 and funded them to the max with non-deductible contributions. (No other IRAs of any kind.) Net result: a good Roth balance able to grow tax-free forever. Looking forward to the 2011 conversion.

  30. Harry Sit says

    @dP – In general, no. The IRS says if you provide substantial services to your renters, you can count rental income as self-employment income, but that also means you have to pay Social Security and Medicare taxes on your rental income. It’s not the best way to create self-employment income for this purpose.

  31. anita says

    For step 1, I thought you had to have a ‘conduit ira’ to move money back into an employer plan. I.e. regular iras to which you made direct (pretax) contributions aren’t allowed for these kind of rollovers, right?

  33. Jay says

    TFB –

    Great Post! Recently started reading your blog and found it to be very informative. No recycled posts and mostly original articles. Good Job!

    I was regretting not contributing to Roth IRA when I started my career and the income was well below the limits. This post is a great solution.

    I don’t have an IRA. Only 401(k). You dont have any timings in your post. Can you do this at any time of the year? Is there a limit on how long you need to have the IRA open before you can convert it? So for 2010, I can open an IRA, put $ 5000 in cash or money market and next day convert it? Are there generally any fees associated with it? Can I still do this for 2010 year?

    I opened a deductible IRA for my wife couple of years back when I could. Now i am not able to contribute to that due to income limitations. Unfortunately I cant roll over to anything since we dont have any self income yet. But If I am willing to pay tax on the deductible IRA, can I still do this for my wife as well?

    Last question. After conversion, the Roth IRA is the same as a “normal” Roth IRA?

    Thanks
    Jay

  34. Harry Sit says

    @Jay – You asked great questions. Use this as the FAQ for this article.

    > Can you do this at any time of the year?

    Yes. Step 2, making a contribution has to be done April 15 of the following year, as usual.

    > Is there a limit on how long you need to have the IRA open before you can convert it?

    No. I converted mine the next day.

    > Are there generally any fees associated with it?

    Depends on the provider of course. In general, no. Many places don’t charge annual custodial fees either.

    > Can I still do this for 2010 year?

    Yes. You have until April 15 (or actually April 18) next year to make contributions. Conversion in 2011 counts as a 2011 conversion but it doesn’t matter. You just report the conversion on 2011 tax forms, instead of 2010 tax forms (contributions for 2010 are still reported on 2010 tax forms).

    > If I am willing to pay tax on the deductible IRA, can I still do this for my wife as well?

    Yes. After you pay the tax once, you get to do this for her every year thereafter.

  35. Jay says

    Thanks for the quick answers….So if I understood you correctly, I can contribute say 5k in Jan for the 2010 year and 5K in Feb for the 2011 year, then convert the total 10K and claim the conversion in the 2011 tax form 8606. the 2010 tax form 8606 will only show contribution and no conversion…there is no limit on conversion so you can do that whenever you want (though you would not want to take the risk in case they change the rules on conversion)

    Thanks

  36. Harry Sit says

    @Jay – That’s correct. If you have the money, you can also contribute $5k for 2010 and $5k for 2011 on the same day in Jan. 2011, and then convert that $10k the next day. I forgot to answer your final question in the previous comment.

    > After conversion, the Roth IRA is the same as a “normal” Roth IRA?

    You can use the same account. The converted money has its own 5-year holding period. For normal contributions, the 5-year holding period starts when the very first contribution was made. For converted money, the clock follows each conversion. If you are investing for long term, this 5-year thing doesn’t matter.

  37. Brian says

    TFB, great article. I’ve already kicked off the process for step one to move my IRA money into my employer 401(k). Question about the Step 5….seems like if I did this for 10 years I’d end up with 10 Roth and have to open a new IRA each year or can I just roll-over the IRA funds I contribute for that tax year into the same Roth account I opened in year 1 and not close out the IRA account?

  38. Lucy says

    Regarding hiding roll-over IRA’s before doing the backdoor Roth conversion–Must this be done if you just open a new non-deductible IRA account? I was thinking I could leave my roll-over IRA alone, open a new IRA account, fund that for 2011 and then convert just that account to the Roth. Would this work or would I still be taxed on every non-Roth IRA account I have?

    Thanks for your excellent site!

  39. Harry Sit says

    @Brian – You can use the same traditional and Roth IRA accounts. Every year you add money to the traditional IRA you used last year and you convert it into the same Roth IRA you already have.

    @Lucy – Step 1 must be done if you already have a traditional (including rollover) IRA and you want to minimize taxes. Otherwise your conversion will trigger the pro-rata rule and you will pay taxes.

  40. Allen Anderson says

    I would like clarification on this subject. If a person makes a non-deductible contribution to his traditional IRA on January 18, 2011 (for tax year 2011), can he convert it to a ROTH IRA on January 19, 2011. In other words does the money need to stay in the traditional account for a specified time period before it can be converted?

  41. Matt says

    Thank you for the informative article as always. I want to perform your steps now but I have a question about the timing of Step 1. If I rollover my pretax IRA money to my current employer 401k, I need to understand the timing. If I plan to make a $5k T-IRA contribution in Feb. 2011 (to count for 2010), what are the dates I need to commit the pretax IRA money rollback? If I understand correctly, Dec. 31st 2010 is the only date the IRS is concerned about so I could rollback to my 401k Dec. 30th and roll-in to my T-IRA Jan. 1st. If this right, did I miss the opportunity?

  42. Harry Sit says

    @Matt – No you didn’t miss the opportunity. You can rollover the pretax portion of the IRA to your 401k at any time, whether before or after you make the traditional IRA contribution. The only requirement is that you rollover (step 1) before you do the conversion to Roth (step 3). Between steps 1 and 2, it doesn’t matter. Doing it as outlined here, step 1 before step 2, makes it more streamlined. It’s also easier to understand because step 1 is one-time and steps 2 to 4 are repeated annually.

  43. Matt says

    Thanks for the info. Step 6 on Form 8606 is confusing then. Step 6 reads:
    Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2010, plus any outstanding rollovers (see instructions)

    That statement would make it sound like Dec. 31st 2010 is the only date that matters. When I read the instructions for Form 8606, this is the only comment I could find that might explain why I can roll my pre-tax IRA money back to my 401k at any time. Is that right?

    Form 8606 Line 6 instructions (excerpt)
    Note. Do not include a rollover from a traditional, SEP, or SIMPLE IRA to a qualified retirement plan even if it was an outstanding rollover.

    As far as step 1 being one-time, this would mean I would have to stay with my 401k investment choices once the pre-tax money was rolled back in. I was hoping to roll it back to my T-IRA so that I can use the IRA investment choices. Of course, I would need to repeat this every year along with steps 2-4.

  44. Harry Sit says

    @Matt – When I wrote the article, it was still 2010. The sample filled out 8606 form I provided was for all steps completed before 12/31/2010. If you are filling out the form for 2010 now, not having done the Roth conversion in 2010, you would answer ‘No’ to the question after line 3 and skip the rest of part I as instructed. By the time you do the 8606 form for 2011, line 6 will change to December 31, 2011 and you answer will be zero because you cleared out your traditional IRAs already.

    Yes if you are going to do this, your pretax money will stay in your 401k. Rolling it out to an IRA will defeat the backdoor Roth. You will have to decide if you can live with the investment choices in your plan.

  45. Matt says

    I now see your point about skipping the rest of Part 1. Here is my tentative plan:
    -Contribute $10k Feb. 2011 ($5k towards 2010 and $5 towards 2011).
    -Anytime before Dec. 31st, 2011, roll all my pre-tax IRA money to my employer 401k
    -Anytime after Jan. 1st, 2012, roll my pre-tax IRA money back to a T-IRA
    -Repeat steps contributing $5k during the tax year for that tax year.

    This keeps the pre-tax money non-taxable for Form 8606 and allows you to use your IRA during the year. This is a hassle but allows me to contribute to the R-IRA while still utilizing my T-IRA for pre-tax money. Please correct me if I am missing something.

  46. Harry Sit says

    @Matt – Provided your 401k lets you roll out money you previously rolled in, your plan will work but I wouldn’t do it if I were you. Rolling into and out of a 401k plan has to be in cash. Every time you do it, you will have to sell the investment and redeploy the cash when the rollover is complete. I don’t think it’s worth doing it back and forth every year just for the investment options. If you don’t like the investment options in your 401k plan, take a serious look at creating some self employment income and setting up your own solo 401k plan, as I mentioned under step 1.

  47. Matt says

    @TFB – I am 27, in the 28% Fed. tax bracket and living in CA. Based on your articles and most of what I have read, I should contribute to a traditional retirement accounts rather than Roth. If I try to keep all my trad. assets in my current T-401k, my only IRA assets are R-IRA from the after-tax non-deductible contributions (including any previous Roth investments). This means most of my retirement portfolio will be utilizing whatever options I have in my T-401k through my employer. It doesn’t allow me to follow a ETF portfolio by Paul Merriman for example. I want to avoid opening up the solo 401k since I don’t currently generate side income. If I follow my method, I also have the possible ETF transaction fees twice/yr for moving to my T-401k and back. I’ll look more into the pros/cons of these various methods. Thanks again for your advice and educational articles!

  48. christy says

    Great article. I have slightly different twist to the question. I received from 1099-DIV for my taxable investment account which I would have to report as taxable income on my return. Now if I were to open a Roth IRA now and move my money from the investment account into the Roth IRA with the purpose to count as my 2010 contribution, could I technically avoid reporting the dividend as income on my 2010 tax return ? I don’t have IRA of any kind at all, just my 401k.

  50. Cheri says

    I am curious how an inherited IRA would factor into a conversion, if at all? I am considering this option for 2011, but if I need to include the value of the inherited IRA for conversion, It wouldn’t be viable option.

  51. Seth says

    TFB,

    Thank you for a GREAT article. I wanted to contribute to Roth but did not know how to handle my existing deductible contributions. Step 1 takes care of that.

    One question though:

    I checked Publication 590 on IRS website which talks about this special “pro rata” rule that you are taking advantage of BUT, this rule applies to –

    “Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA”

    and the definition of Eligible retirement plans is given as (listed below). It does NOT list 401K as an eligible retirement plan… so how can one hide their deductible IRA funds in 401K and still take advantage of this rule?

    The following are considered eligible retirement plans.
    -Individual retirement arrangements (IRAs).
    -Qualified trusts.
    -Qualified employee annuity plans under section 403(a).
    -Deferred compensation plans of state and local governments (section 457 plans).
    -Tax-sheltered annuities (section 403(b) annuities).

  54. Mike says

    Hi, quick question – why is step # 1 needed? Even if I have deductible contributions in my traditional IRA, if my preference is Roth over Traditional, why would I not want to convert all of my Traditional IRA to a Roth? I know this will result in paying taxes on that conversion for contributions (plus any returns) that were not previously taxed, but the benefit is that I won’t pay any taxes on the withdrawal (whereas if I left it in the traditional, I would need to pay taxes on the withdrawal). This is the same exact trade-off between roth vs. traditional in the first place, and if I prefer roth, I don’t understand why step # 1 would be recommended.

  55. Harry Sit says

    @Mike – Step 1 is needed for those who don’t prefer Roth over Traditional deductible contributions but prefer Roth over Traditional non-deductible contributions. If you prefer Roth regardless, you would’ve converted all your IRAs already and have no balance left when you come to this point. In such case, proceed to Step 2.

  56. Mike says

    Thanks! I don’t think it’s possible for anyone to prefer traditional non-deductible contributions over roth as that wouldn’t make any sense, right?

    This article is about getting around income restrictions for roth ira contributions. If so, most ppl would not have converted all IRAs and had no balance left at this point – your article very well explains how to do so for those ineligible to contribute directly to a roth, but you may want to list step # 1 as optional for those who prefer roth over traditional deductible.

  57. Harry Sit says

    @Mike – I added a paragraph under Step 1. By any chance have you read my article The Case Against Roth 401k? It gives reasons why you might not want to convert your traditional deductible balances now. Of course if you still prefer to convert, step 1 would be optional.

  58. David says

    Thanks for the great article. I started this process a few days ago with Fidelity and I’m now at the point where I’m doing the conversion. It’s all very simple as you suggest but I do have one question: during the conversion, Fidelity is asking me if I want to leave the new Traditional IRA open or close it (since I’m converting my entire balance). Since I plan on doing this in future years, I was inclined to leave the Traditional IRA open. However, if I think I may want to rollover a 401k in the future due to a possible employment change, wouldn’t it make sense to close the Traditional IRA now, presumably leaving open the option (if necessary) of doing a rollover from my current employer 401k to a Traditional IRA in the future? Is there any reason why I can’t open and close a Traditional IRA every year (which is easy enough to do with Fidelity)?

  59. Harry Sit says

    @David – Just leave it open with nothing in it. You will need it next year. Leaving it open won’t affect your potential rollovers in the future in any way. You can roll into the empty one if you want, but read the paragraph under step 5 again if you plan to do this backdoor Roth every year.

  60. David says

    I assume the language in step 5 you’re referring to is this: “Remember not to rollover from an employer sponsored plan to an IRA when you are doing the backdoor Roth IRA. You can rollover from one plan to another plan, or to your own solo 401k, just not to an IRA.” Just to make sure I understand, let’s assume I leave the IRA open with nothing in it and that I plan to do this backdoor Roth every year. Let’s also assume that I leave my current employment to start my own business and want to roll over my 401k upon my departure. Do I then understand that I would need to roll the old employer-sponsored 401k to a a new 401k (perhaps a solo 401k) but that I wouldn’t be able to roll over into my Traditional IRA? I assume that’s what your language in step 5 means but that seems to be a bit in conflict with your last comment that I “could roll into the empty one” if I want.

  61. Harry Sit says

    @David – Not that you wouldn’t be able to, but you probably don’t want to if you are still doing the backdoor Roth. Once you have 401k rollover money in a traditional IRA, you are back to step 1 again if you are still doing the backdoor Roth. If you are done with backdoor Roth, however, say because the income limit is raised and you can go through the front door, then it won’t be a problem rolling into the empty IRA.

  62. David says

    TFB: Thanks as always. By the way, for those looking to do this quickly for the 2010 tax year, I just did this online via Fidelity and the whole process could not have been simpler.

  63. Susan says

    TFB: I just opened a Trad IRA with Schwab today for tax year 2011. I funded it with $5000 immediately. Now the money is sitting in MMF. Shd I convert the MMF or buy stocks and convert?
    Thanks

  66. Craig says

    Great advice. My question is do you end up with several Roth IRA accounts if you take this approach? Once you convert the IRA to a Roth then repeat yearly, don’t you end up with a Roth IRA account for every year your convert? Seems like that would get complicated accounting-wise.

  67. Harry Sit says

    @Craig – When you convert, you convert into an existing Roth account. After you convert, you leave the empty traditional account open. Next year contribute and then convert. Just two accounts at all times.

  68. Eyebeem says

    Hi…I followed your process but screwed up on Step 1. I cut it a bit too close and did not leave enough in my traditional IRA. My total non-deductible contributions to my traditional IRA are $23,000. On the day I transferred all of my deductible contributions ($12,500) out of my traditional IRA into my employee sponsored 401k, my traditional IRA was only worth $22,869. I was short by $131.

    What will the impact of this be come tax time? Is there anything I can do to fix this at this point? I have already converted my traditional IRA to a Roth IRA (step 3).

  69. Harry Sit says

    @Eyebeem – Most 401k plans allow rolling out what you just rolled in. If that’s the case for your plan, you can pull the rollover out, do the correct math, roll a smaller amount back in, and convert the remainder.

  70. Eyebeem says

    Thanks for the reply TFB. I was hoping that the tax implication of being off by only $131 would be minimal so that I didn’t have to go through rolling it back and forth again. Any idea how I would figure out what the tax impact would be of just leaving it alone?

  71. Harry Sit says

    @Eyebeem – If you’d rather not do it over, I’d think you will have to forfeit $131 basis. In other words when you file Form 8606 for your Roth conversion, you claim only $22,869 in basis instead of $23,000. Essentially you pay tax twice on $131. I’m not sure how IRS will view that discrepancy.

  72. Eyebeem says

    Thanks…that makes sense. I am not going to sweat paying taxes twice on $131. Appreciate the advice!

  73. SK says

    Hi – The information is great !! two questions:
    1. I want to confirm that this backdoor option continues to be available for year 2011 i.e. I can non-deductible put $5000 in traditional IRA (I max out my 401k ) and then convert it to Roth IRA.
    2. Do I have to wait for some time before converting the 5K in traditional IRA to Roth or I can do so the next day itself ?

  74. Harry Sit says

    @SK – Yes, it’s still available in 2011 and every year thereafter unless the law changes. You can do it the next day.

  75. DG says

    Great info! I recently left a company and had my 401K with both deductible and non-deductible contributions included over the years. In doing a rollover after termination, the large 401K company rep specifically didn’t recommend moving the non-deductible contributions directly to a Roth IRA in light of the IRS being unclear in this regard on it being taxable or not, so I basically moved forward and converted both the deductible and non-deductible contributions to a traditional IRA figuring I still had the non-deductible contributions growing tax-deffered.

    In retrospect though, after reading various posted info on the web I believe I could have simply converted the non-deductible contributions directly to a Roth IRA and the pre-tax directly to the TIRA. In speaking with the 401K company two weeks after the conversion they indicated they cannot change it at this point. The non-deductible basis is only 3.5 percent of the total amount; however, the overall is too high so I surely don’t want to incur the pro-rata clause in any Roth IRA conversion but I am looking at my options as I do like the tax advantages of paying no taxes going forward on the earnings from the non-deductible contributions if in a Roth IRA.

    So bascially the only options I have at this point is to to look to go to a new company and roll over the pre-tax contributions to a company 401K leaving behind the non-deductible as outlined in Step 1 or get some self-employment income and set up an individual 401K?

  77. DG says

    Thanks TFB, just wanted to confirm that there was no other option at this point. Do you also think I could have went directly from the 401K plan with the non-deductible contributions to a Roth IRA with the before tax to a TIRA without any concern for pro-rata tax consequences? If that is the case, it is frustrating that they advised against it and I now have to jump through hoops to make this happen. Thoughts?

  78. Harry Sit says

    @DG – There’s a rule that says if you do two distributions from a 401k plan account (one to traditional, one to Roth), both are deemed as having a mix of pre-tax and after-tax contributions. A plan administrator that strictly follows this rule can’t just split off your after-tax contributions and roll it over to Roth, although I’ve heard some administrators would do it. If your plan administrator knows the rules and insists on tagging the dollars as part pre-tax part after-tax, I wouldn’t blame them — they are just following the rules.

  79. Andy K says

    So here’s my situation: I have a Solo 401k from Fidelity which I max out, wife has 403b – also maxed. We both have a ROTH IRA the we contribute to monthly and no traditional IRAs.

    As our incomes fluctuate by quite a bit, sometimes we hit the Roth IRA contribution threshold and sometimes we do not… often not knowing until the end of the year.

    So – we will hit it this year and each have $4k already in a ROTH. How do we work this? Do I convert the money from the ROTH this year into a traditional non-deductible IRA and then 8086 it back into a ROTH again?

    I’m not sure how to use your approach when we’ve already been contributing to this ROTH all year long? Either way, moving forward, I assume we ought to not dollar-cost-avg into these ROTHs from day one?

    Thanks,
    Andy

  80. Harry Sit says

    Andy – If you find yourself ineligible to contribute to a Roth IRA due to income but you already did, you will have to do something about it. The easiest way would be *recharacterize* your Roth contributions to a Traditional IRA. Contact your IRA custodian. They may do it for you over the phone or have you sign a form. After that, you can convert the Traditional IRA to Roth. In the future, it’s just easier to contribute to a Traditional IRA in one lump sum and then immediately convert it to Roth. That way you don’t have to worry about whether you exceed the income limit or not.

  81. SS says

    Great article. i do have a Traditional IRA with multiple Rollovers, deductible and non-deductible contributions and I have a question on Step 1.

    My employer’s 401K allows incoming rollovers but here is my dilemma. My non-deductible contributions (a total of $13K) for previous years are across 2 different Traditional IRAs with 2 different companies. For eg: IRA 1 – $5K and IRA 2 – $8K.

    But the current balance on IRA 2 account is only $5K due to losses over these years.

    So when i implement Step 1, can I rollover less amount from IRA 1 to my 401K plan, so that I can compensate for the $3K loss that i incurred in IRA2 and effectively still try to Convert $13K to a Roth IRA Account?

    Convert to Roth from IRA 1 – $8K ( Even though the non-deductible contrib is only $5K to this account)
    Convert to Roth from and IRA 2 – $5K

    I am trying to understand if there are any restrictions as to the amount that can be converted as Roth IRA specific to an account or as long as these were non-deductible contributions, we are okay?

    Thanks

  82. Harry Sit says

    @SS – The IRS considers all your IRAs, regardless of custodian, as one big pool. As long as you keep $13k in your IRAs after rolling over to your 401k, you are ready for the next step.

  83. David says

    TFB: I did the backdoor Roth in early April of 2011 for the first time, depositing 10k into a non-deductible IRA and then converting. Due to some bad timing with investing the ROTH in Vanguard’s international REIT ETF (VNQI), I now show a 19-20% loss in that account. Does that change my strategy at all for this year? Is there any way for me to deduct those losses?

  84. Harry Sit says

    @David – Sort of, but it may not be worth it. Assuming you did it by the book and completed Step 1 before you made the contribution and the conversion, you can undo the conversion by recharacterizing it back to a traditional IRA. After that, you can take a distribution of the entire amount. If the distribution is less than your basis, you can deduct the loss.

    However, the deduction is a miscellaneous deduction, subject to the 2% AGI floor when added to your other miscellaneous deductions. Unless you already have some other miscellaneous deductions, the loss is probably less than 2% of your AGI. That means you can’t deduct it after all. To me, it’s not worth it.

    See Recognizing Losses on Traditional IRA Investments in IRS publication 590.

  87. SS says

    I have an IRA which contains a mixture of non-deductible contributions, deductible contributions and rolled over 401K monies from my previous employer. My current employer does accept incoming rollovers, but the incoming rollover form has a section, to describe the source of the funds being rolled over. The choices are, and i can only choose one of these.

    1. Conduit IRA (Rollover IRA)
    2. Non-Conduit IRA (Traditional IRA, Simplified Employee Pension plans (SEP-IRA), or a “SIMPLE” IRA distribution made more than two years from the date you first participated in the SIMPLE IRA)

    I am not sure how to classify my IRA which is a mixture as. And dont want to do a rollover which will then be deemed illegal and have tax consequences.

    @David…Thanks.. read your article and now not sure if this Roth conversion is even worth the risk.

    • Harry Sit says

      @SS – That would be non-conduit. For existing non-deductible money, there is no risk. The concerns raised only talk about fresh contributions. There is an easy way out no matter whether the risk is real or not. Check back on Monday.

  88. JLW says

    I read through most of the comments, but may have missed it… let’s say I already have a Roth IRA (that’s the only IRA I have), but would like to DOUBLE my annual contributions using this method. Is that a possibility? It sounds like a great way to catch up a bit on missed years.

    Thanks for the great article.

    • Harry Sit says

      @JLW – No you can’t double your contributions because the annual contribution limit is shared between Traditional and Roth. That’s why the article said at the very beginning if you are able to contribute directly, this article does not apply to you.

  89. Andrew says

    TFB – Great how to guide. There are few guides like this out there and we all appreciate your patience with us mere mortals :-). Having said that, I have a few questions/comments after reading your article and having to search elsewhere for answers or confirmation of my understanding.

    There is no limit on how much one may convert from a traditional IRA to a Roth IRA, correct?

    The conversion only affects the tax return for the calendar year in which the conversion was performed, correct? In other words, If I made a 2011 traditional IRA contribution back in 2011, there is no real rush for me to do the conversion in the next week before I file my 2011 taxes since it is already 2012, correct?

    Along these lines, there is no pressing need to convert sooner than later, correct? The only downsides I see are paying taxes on growth of the IRA and the possibility that the IRS will close the backdoor. For example, if my IRA is filled entirely from non-deductible IRA contributions (say $11k, $10k of that being non-deductible contributions and $1k being growth in the fund), and if I am going to contribute another non-deductible $5k this year, there is no real downside to contributing $5k for this year during February and waiting to convert the whole deal (now around $16k) after a six months lapse of time (per step 3).

  90. Harry Sit says

    @Andrew – You understood it well. There is no limit on how much one may convert from a traditional IRA to a Roth IRA. The conversion only affects the tax return for the calendar year in which the conversion was performed. There is no pressing need to convert sooner than later, other than the factors you already noted. If you wait, and the $1,000 earnings grow to $1,100, you just have to pay tax on $1,100 instead of $1,000. You didn’t ask but there is no limit on the number of conversions in a calendar year either. So if you decide to convert your existing money now and do a second conversion later this year for your 2012 contribution, that’s fine too.

  91. Martha says

    TFB, I have a SEP IRA and a Roth. This year we will be over the income limit to contribute to the Roth. I was considering the solo 401k, but then thought about this. Can I contribute each year to the SEP (20% of income, approx 18,000) each year and then convert it all to a Roth each year?

  93. Martha says

    I was considering the Roth IRA instead of the 401k because in the case of emergency, the contributed portion of the Roth could be withdrawn without penalties. (I hope I never need that, but it is comforting to have it as an option). If I opened a solo 401k or a Roth solo 401k, that money couldn’t be touched until retirement, right? I am weighing my options on both- solo 401k (Roth or regular) vs convert all the SEP to a Roth IRA each year.

  94. Harry Sit says

    @Martha – If you want an emergency fund, set one up outside retirement accounts. Use retirement accounts for retirement. Paying tax on $18,000 every year in order to deal with an off-chance emergency doesn’t make sense. It won’t work anyway. Unlike direct contributions, taxable conversions are subject to early withdrawal penalty unless certain conditions are met. See Roth IRA Withdrawal Rules.

  95. Martha says

    Thanks for pointing that out, I didn’t know that. I’m going to go with the solo 401k, thanks!

  96. Jay says

    After the first conversion would i continue roll the new tradition IRAs into the same roth account every year?

  97. Harry Sit says

    @Jay – Yes, the same. When you convert, the money moves but the accounts stay the same. After you zero-out a traditional IRA, you can contribute to it again the next time, and convert again to the same destination. Just keep using the same accounts on both ends. Picture two jugs: you fill jug A, pour from jug A into jug B, fill jug A again, pour into jug B again, …

  98. JLynn says

    I’m wondering if I need to wait to do the back door Roth until 2012. I made a nondeductible traditional IRA contribution for 2011 this week but I should be able to change that contribution to 2012.

    You mentioned that you need to move your Traditional IRAs into your Single 401K. I did that last week. As of December 31, 2011 my balance in my Traditional IRA was 37,314.14. The form 8606 asks as of December 31, 2011.

    Other pertinent facts: Max out Single 401K, 2011 AGI $450K, MFJ

    Thanks,

  99. Harry Sit says

    @JLynn – Unlike contributions, which you can do *for* 2011 *in* 2012 before April 15, conversions go with the calendar year. If you convert in 2012, it will be a 2012 conversion, which you report on your 2012 tax return in 2013.

  100. Greg says

    Thanks for the article.

    I have a an IRA with pretax money currently. If I roll that over to my companies 401k plan right now, do I still have time to do this process with a 2011 contribution? Or did I need to get the rollover done prior to Dec 31st 2011 to ensure that IRA is “hidden”?

  101. Greg says

    Let me clarify my question a bit better…

    Currently I have a deducible (pretax) IRA, which was a rollover from a 401k at an old job.

    I already found out that my current companies 401k accepts rollover IRAs, so my plan was to initiate a rollover of this untaxed IRA account into that 401k. Ideally, I’d also like to then make maximum nondeductible IRA contributions for both 2011 and 2012, with the idea that they can both be converted to a roth with no tax consequences.

    Here’s my question:

    Is it too late for me to do this for a 2011 contribution? In other words, did I need to have my old IRA rolled over in 2011 for it to be “hidden” with respect to a recharacterization? Or do I just need to assure that it is hidden prior to doing the recharacterizations in 2012?

    Thanks!

  102. Harry Sit says

    @Greg – The contributions and the conversion are independent of each other. You can contribute now, regardless whether it’s for year 2011 or 2012, and convert later, after you move the pretax money to your 401k.

  103. newaustin says

    Excellent article.

    1. So, if our AGI is 167K (married-filing-jointly) 2011, can we just contribute directly to Roth IRA vs this back-door?

    2. I have a Rollover IRA (IRA from 401k rollover form previous employer) – so – if I do a direct Roth IRA – Will I still have to pay taxes in my Direct ROTH? or, Do I have to still do Step 1 “Hide other IRA”? How will Form 8086 Line 6 will change IRA basis?

    3. Do we need to file for 8086 for Roth IRAs also?

  104. Alex says

    Hi there, great article.

    One quick question. Do you know for Step 1, “hiding” my pre-tax IRAs, whether it is possible to do an in-kind rollover of the Conduit IRA to a Solo 401k? The reason is, I own a large number of stocks (bought under free commission promotion), which would be expensive to sell off.

    I guess it’s really a two-part question. One, is it legal. And two, which custodians (Etrade? Fidelity?) actually can carry it out without screwing up.

    Thanks

  105. Harry Sit says

    @Alex -Yes it’s legal. Fidelity did an in-kind rollover for me from IRA to Solo 401k. First you transfer your IRA in-kind to a Fidelity IRA if it’s not at Fidelity already. Then you write them a letter to transfer the holdings in-kind from the rollover IRA to the solo 401k account. Call their toll-free number for the solo 401k department for the required wording. You sign the letter twice: once as the IRA owner and the solo 401k participant saying you want to roll over; a second time as the solo 401k administrator saying you accept the rollover.

  106. Harry Sit says

    @newaustin – For 2011 the Roth phaseout starts at $169k for married filing jointly. If you are married filing jointly and your modified AGI is $167k, you are under the limit. You can contribute directly and not worry about anything in this article. Since contributions to a Roth IRA are made with after-tax money, yes you do pay taxes on the contributions but you don’t pay any more or any less whether you have a rollover IRA or not. You don’t need Form 8606 if you are contributing to a Roth IRA directly.

  107. Akshay Nagoree says

    @TFB, – To Greg’s question, you mentioned that “contributions and the conversion are independent”.
    Does this mean if you have deducible (Pre-Tax) IRA of 100,000 AS OF NOW.
    1. You can still contribute non-deducible (post-tax) IRA of 10,000 (5,000 for year 2011 and another 5,000 for year 2012) before April 15 2012.
    2. Later, convert deducible (Pre-Tax) IRA of 100,000 to 401k after April 15 2012.
    3. Move non-deducible (post-tax) IRA of 10,000 to ROTH IRA after April 15th 2012.

    If above is true, what will happen to “pro rata” rule?
    Because at step 2, one still has non-deducible (post-tax) IRA of 10,000 combine together with deducible (Pre-Tax) IRA of $100,000.

    For 2011 tax purpose, by when deducible (Pre-Tax) IRA should be rolled into 401k? Will it be by 31st Dec 2011 or 15th Apr 2012

    –Akshay

  108. Harry Sit says

    Akshay Nagoree – (1) Yes. You will get to the picture before you do Step 1 in the post. (2) Yes, it’s called a rollover, not “convert.” See picture in Step 1 in the post. (3) Yes. See picture in Step 4 in the post.

    The “pro-rata” rule comes in on December 31 in the year you convert to Roth, not at the time you contribute to a traditional IRA. In the scenarios you described, by December 31, you don’t have any pre-tax money in your traditional IRA any more. The deducible (Pre-Tax) IRA should be rolled into 401k before you convert the remainder to Roth.

  111. David says

    Thank you very much for reposting. I appreciate the help and the information your site has provided for me.

  112. Mike says

    Thanks for the article. I was under the impression that if my traditional, deductible IRA was under-water (hence, worth less than my contributions) then I could add $5k as non-deductible and convert ONLY that $5k to a Roth with no taxes. Based on what I’m reading, this is not the case. So if I have $50K in a deductible IRA and try to do all this, I’m going to have to pay some tax for this portion of the conversion.

    My dilemma is step 1. I like have my rollover IRA in a fund (not my new employer 401k) b/c I can trade stocks and have ultimate freedom. My 401k restricts me so much, esp. on trading frequency, that’s it’s not worth it.

    If I’m missing something, a reply would be awesome. Thanks.

  113. Dustin says

    Thanks for the great article. For clarification on basis calculation, in 2010 I opened a traditional IRA and funded it with a 5K non-deductible contribution and then converted it the next day into my roth IRA. However, the value had gone down $10 during that day and so only $4990 went into my roth. Because I used all the funds from the traditional account, on December 31, 2010 my traditional IRA account value was $0. I do not have a $10 basis to carryover into tax year 2011 because it is now as if that traditional IRA account no longer exists… correct? I ask because the 8606 form states that I would have a basis of $10 (but it’s my understanding that you can’t have a negative or carryover a basis from an account with a zero balance). So when I do the same backdoor plan for tax year 2011, it’s as if I’m starting over with opening a new traditional IRA account and that past $10 has no relevance… does that seem accurate? Thanks again!

  114. Harry Sit says

    Dustin – I would think you still have $10 basis left but if you are willing to give it up, it’s only $10. Not a big deal.

  115. RobertC says

    TFB, Sorry if you covered this above – if so I missed it:

    I have a rollover regular IRA, and so does my spouse. If I rollover my regular IRA into the Federal TSP, I can then do a backdoor Roth without worry of aggregation?

    Lets say I contribute $10K after I zero out my regular IRA by transferring to the TSP. My spouses IRA would not be aggregated and I would owe no tax if I immediately (after a few months) converted the $10K to my existing Roth?

    RC

  116. Harry Sit says

    RobertC – That’s correct. I wrote under Step 1 “If you are married, please note IRAs are owned by one and only one person. Each spouse should look at his or her IRAs separately.” I assume when you said you would contribute $10k you meant $5k for 2011 plus $5k for 2012, not $5k for yourself plus $5k for your spouse. If you only transferred your own rollover IRA to the TSP, you can do the backdoor Roth but she still can’t if she still has her rollover IRA.

  117. RobertC says

    TFB, Yes that woud be $5K 2011, $5K for 2012. Thanks for the response.

    In follow-up, can I later transfer a portion from my TSP, identified as ‘contributions’ with no earnings, back to a new regular IRA, which I could then rollover in total to my Roth with no tax consequence?

    Could this be done while leaving the earnings in the TSP?

  118. Harry Sit says

    RobertC – You can rollover from TSP directly to a Roth IRA without an interim stop at a traditional IRA. You can’t separate contributions and leave earnings behind but it’s also not necessary. All money in the TSP is pre-tax whether it’s from contributions or earnings, unless you are talking about contributions from non-taxable military combat pay or the yet to be implemented Roth TSP. If you rollover pre-tax money to a Roth IRA, you will pay tax. There is no advantage in separating earnings from contributions because they are both pre-tax.

  119. David C says

    It’s not definitive (in particular we don’t get a name for the IRS spokesperson)… but then again I don’t believe TFB was really worried about the legality of the “backdoor” anyway:

    “The Internal Revenue Service hasn’t raised any red flags on backdoor Roths that are properly reported on form 8606. According to a spokesman: ‘The law is pretty clear on this issue.’ ”

    See also http://online.wsj.com/article/SB10001424052702304072004577325551162426954.html and http://www.bogleheads.org/forum/viewtopic.php?f=10&t=94372

  120. John L. says

    I will be submitting an extension to file for my 2011 Federal income taxes, and expect to file in June of 2012. Am I allowed to do all of the necessary initial mechanics (roll my SEP-IRA into a 401(k), then set up and non-deductably fund the TIRA) between now (April 9, 2012) and when I actually file in June of 2012? And am I correct to assume that the conversion of the TIRA to the RIRA can happen more or less any time (with an appropriate delay) after the initial mechanics, regardless of when the tax return is filed?

  121. Harry Sit says

    John L. – If you are making an IRA contribution for 2011, you must do so before April 17, 2012. Otherwise everything can be done at any time in 2012, either before or after you file taxes for 2011.

  122. John L. says

    TFB – Thank you. I funded two nondeductable TIRAs today, one for me and one for my wife (2011 and 2012 contributions, into a money market fund), but it will take a week or two for me to complete the roll-in of the pre-existing SEP-IRA into my work 401(k). Per your replies above, I presume that once this roll-in is completed, we can subsequently convert each TIRA into a RIRA (say, a few months from now), but is there a deadline for this conversion (Dec. 31, 2012)?

  123. Harry Sit says

    John L – You are good to go. There is no deadline for the conversion. If you convert before 12/31/2012, you report the conversion on 2012 return in 2013. Or you can wait for a clean slate until 2013 if you’d like. Then you would report the conversion on 2013 return in 2014.

  124. John L. says

    One more question, please, about rolling-in my pre-existing SEP-IRA at Vanguard to my employer’s 401(k) at Fidelity. The Fidelity rep said this is acceptable to that 401(k) plan. In my SEP-IRA, the balance is of course comprised of the “basis” (contributions, made “pre-tax”) and there are tax-deferred earnings as well. This SEP-IRA began life in 1990, as a Keogh Profit sharing plan and a Keogh Pension plan at Merrill Lynch, both of which I then rolled over/converted in 2007 to the one SEP-IRA at Vanguard. I’ve contributed something every year since 1990 to these things, and only with a lot of work could I could figure out the basis. Can’t I just roll over the entire balance into my 401(k) at Fidelity?

  125. John L. says

    OK, so one more question, and this time I mean it. I also have a Vanguard 403(b) from my previous employer, to which I have not contributed anything since 2008. Can I just roll-in my Vanguard SEP-IRA into this Vanguard 403(b) plan and save the trouble dealing with sending it to the 401(k) plan at Fidelity ? (Plus the investment choices are better in the Vanguard 403(b) plan).

  126. Harry Sit says

    John L – You have basis only if you contributed after-tax money. If it was all pre-tax, your basis is zero. Some plans only allow incoming rollovers if you are still a current employee. If the 403(b) accepts it, sure.

  127. Paul G. says

    Awesome site! First, thank you! Second, is there a limit on conversions in 2012? I just opened a converted an IRA for the 2011 year, but the conversion will be taxed in 2012. I want to contribute another 5K for 2012. If I convert in 2012 (which I would plan to do), is that okay? I’ll have 10k of conversion in the same year. I think that’ll be fine, just wanted to check with the boss.

  129. Lisa says

    I opened a 2011 non deductable ira on 3/29/12 and was planning on doing a backdoor roth conversion early next year along with a 2012 non deductiable contribution to be deposit later this year as mention in your article. But because my company sold my part of the company to another company, this allow me to retire from my current company once I start working for the new company. Included in my penion is a lump sum along with a monthly payment. To avoid paying a penalty and taxes, I will have to roll the lump sum into an ira account. The question is – currently, I don’t have any ira. if I convert my 2011 non deductable ira to a roth before I roll my lump sum into an ira, will this be a clean conversion? If so, can I contribute my 2012 and convert both at the same time before I roll my pension into a new ira? Thanks!

  130. Harry Sit says

    Lisa – No it will not be a clean conversion because whether it’s clean is determined by the balance in the IRA at the end of the year, not at the time you converted. If you put additional pre-tax money into a traditional IRA in the same year, you will “taint” your conversion. That’s why I wrote under Step 6:

    “Remember not to rollover from an employer sponsored plan to an IRA when you are doing the backdoor Roth IRA. You can rollover from one plan to another plan, or to your own solo 401k, just not to an IRA.”

    Do you have to retire from your current company? Will you receive more if you wait? If not, see if you can rollover the lump sum into your new employer’s plan.

  131. Tapan Karwa says

    Consider that I contributed $5000 for 2011 as non-deductible IRA contribution in Jan 2011. The money contributed in 2011 was used to buy stocks. That $5000 has become $6500.

    In addition, consider that I contributed $5000 for 2012 as non-deductible IRA contribution in Jan 2012.
    So, the total in that account will now be $11500.

    Can I convert the entire $11500 if I am willing to pay tax on the $1500 that has been earned? Note that $10000 is non-deductible IRA contributions and so I would have already paid tax on it.

    Thanks.

  132. Harry Sit says

    Tapan Karwa – If this is your only traditional IRA (including SEP and SIMPLE) and you only made these two contributions, sure, just convert and pay tax on the $1,500.

  133. bytre says

    As I understand it, I can contribute $5k for 2011 and $5k for 2012 into a new non-deductible IRA, and then convert to a Roth IRA paying only minimal tax on any gain from the $10k basis, given that:

    1. our married joint income is above the roth limit
    2. I contribute to a 401k at work
    3. I do not have a traditional IRA in my name (although my wife has one)
    4. I declare the non deductible contribution on my 2011 tax return, form 8606

    Does that sound right?

  134. Harry Sit says

    bytre – That’s correct, although if you contribute for both 2011 and 2012, you only report the $5k contribution on your 2011 return. You report the other $5k contribution and the $10k conversion on your 2012 return. The $5k for 2011 must be done by April 17, 2012.

  136. Sam says

    Hi TFB, Great article!!! It looks like if someone’s filing status is ‘married filing separately’, they can still benefit from this technique even though their income is not ‘too high’? The AGI limit for Roth is just $10,000. Your thoughts please?

  137. Harry Sit says

    Sam – Yes, for married filing separately, an income above $10,000 is “too high.” I added it to the post.

  138. Dee says

    Thanks so much for writing the article. I already have a SEP IRA with Vanguard and I’m contributing to this account for current year of 2012. After reading your article I feel the need of setting up a solo 401k with Fidelity and then roll over the SEP to it (and then go with Step 2, 3…). My question is, would it be okay if I stop contributing to the SEP IRA and set up a solo 401K for the same business (and within the same year)? I talked with one of the representatives with Fidelity and she suggests to set up the solo 401k starting from next year. Can you please advise?

  139. bytre says

    Can a nondeductible contribution be made by a nonworking spouse towards an IRA that we then convert as well?

  140. Harry Sit says

    @Dee – It’s OK to have both in the same year although it’s cleaner to have just one type of plan in any given year. If you set up solo 401k this year, just make sure you don’t go over the limit on a combined basis.

    @bytre – Yes if the working spouse has enough earned income (> $12k) to make the nonworking spouse eligible for a contribution to a traditional IRA.

  141. Dee says

    Thank you so much TFB! Today I talked with Fidelity about my situation and setting up a solo 401k. They told me that I will have to set up the solo 401k next year since I already contributed to the SEP this year. So now I plan to open a solo 401k in Jan 2013 and then roll over the SEP from Vanguard. After that I will make nondeductible contribution to a traditional IRA and convert it to Roth IRA before April 15th. I’m thinking that this can still be counted as the 2012 Roth contribution since it’s before April 15th. Can you please let me know if this is practical?

  144. Thankful Questioner says

    TFB – Can I complete step 1 after step 3? On December 20, 2010 you said that theoretically step 1 should be done first, but practically it can be done afterwards, before the end of the year. But later (February 8, 2011) you mentioned that it is a requirement to do step 1 before step 3. Since I had not done step 1, and will do it now, after I had completed step 3 earlier this year, is this ok? Or do I need to undo step 3 by un-converting the Roth conversion, complete step 1, and re-do step 3? Thank you.

  146. Motts McGregor says

    TFB — great article and thread. I am Looking for reality check on how to do my slow-motion backdoor Roth IRA with no tax impact in 2012 with a focus on old IRA contributions, not 2012 contributions.

    Current holdings are as follows:

    Regular tIRAs: $130k ($25k basis in non-deductible contributions made from 2003-2008)
    Rollover tIRAs: $60k (all pre-tax / deductible contributions made as employee, and kept separate)
    Roth IRAs: current balance irrelevant to this case
    Solo 401(k): current balance irrelevant (I own my business so I control this 401(k) plan)

    Step 1 — move Rollover assets into 401(k) plan. Easy. Just like you wrote about — very impressed with Fidelity’s knowledge here.

    Step 2 — move deductible portion of Traditional accounts to 401(k) plan. Not easy. The assets have been mixed together so I need to determine how much I am allowed to move.

    Is this as simple as subtracting the basis ($25k) from the total tIRA account value ($130k — but as of what date is this measured?) and thus determining that $105k is the deductible amount which can also be moved into the 401(k)? This doesn’t seem to properly account for value changes. If this is the case I’d be left with $25k of value in the accounts, all of which is non-deductible. Then,

    Step 3 — Convert $25k of non-deductible contributions with no tax impact.

    Does this seem right? Thanks.

    -Motts

  147. Greg says

    Does the tsp plan for (former) military employees qualify as a substitute for the 401k to transfer existing tIRA into?

  148. Lisa says

    TFB – Is following the order of the steps important, or I complete step 1 after step 3, in case I have not done step 1 originally?

  149. bytre says

    TFB,

    Any guidance on whether the contributory IRA should be rolled into a standalone Roth IRA, or a new independent one?

    • Harry Sit says

      bytre – An existing Roth account will work just fine. Not necessary to create an independent one.

  150. Carol says

    TFB,

    If I already converted my post-tax traditional IRA to Roth IRA, can I still open a 401k to “hide” the pre-tax contributions? thank you.

  151. JP says

    Great article. Too bad did not see it when doing my conversion and tax return for 2011. I had my own 401k, but my husband had employer ret plan (at current work) and Rollover IRA from prev job (all deductible). I opened 2 Trad IRAs (non-deductible) and converted them to ROTH. The problem I did not mention other IRA on 8606 (his Rollover IRA). I have couple questions.
    1. As I understand i can recharacterize my husband’s conversion back from ROTH to T-IRA until Oct.15, 2012?
    2. Can leave my conversion intact because I did not have any IRAs except 401k?
    3. Also can I withdraw all contributions to his T-IRA, like it never happened before?

    If I do that I then need to file amended 2011 tax return. Should it be there any 8606 forms for his reharacterization? or because all his non-deductible contributions will be taken back, no 8606 is needed at all?

    Thank you very much.

  152. Tom in Fla says

    Great Post! Ive been unemployed for several years (no earned income) . I have a Roth IRA and a Trad-IRA. (I funded the Trad-IRA with aft-tax $) however when I was laid off 6 years ago, I rolled over my employer sponsored 401K into my Trad-IRA. Subsequently ~2% of my Trad-IRA are aft-tax $ (the remainder are pre-tax $ and gains) My sole interest in this is to get access to the after-tax $ in my Trad-IRA without penalty.

    Question: How much lack of effort can I apply to generating self employment income in order to be eligable to open a Solo-401K? For example, if I generated $20-30 in scrap metal submissions with receipts would that be acceptable?

    Once I completed such a Solo 401K conversion (which I only plan to do for a one-time reclaim of my Trad-IRA aft-tax contributions) Is there any restriction on converting the Solo-401K back to a Trad-IRA?

    Hopefully Vanguard will change their policies, I have 2 Trad IRAs, the largest one is wtih Vanguard, the other with TD, the Vanguard Trad-IRA contains a high yield CD that doesnt mature until late 2013, I wouldnt sell it before maturity just for the sake of completing this excercise, so Id have to wait next year to execute if I went with the Fidelity .

    Many thanks for your efforts!

  153. Harry says

    Tom – If it’s only 2% of your traditional IRA, I don’t know if it’s worth the effort. This article is really about clearing the deck for ongoing contributions every year thereafter. I don’t recommend that you do a one-off self-employment. The income from self-employment doesn’t have to be high but it should be an ongoing effort.

  154. Tom in Fla says

    Thanks Harry for the speedy response.

    I can see why you would wave off executing these tax acrobatics for 2%. However it is ~$14K of my own aft-tax money. Its not urgent, but Ive got ~5years till Im 59.5 and then can take penalty free withdrawls from my IRA, I will probably have a use for the money before then. It irks me that I cant access this money (esp since I already paid taxes on it) . I could report a annual small amount (<$100) of self employment income. I obviously want to avoid the frown of the IRS, and as you imply , its probably not worth it for 2%.

    I wish I had known this prediciment existed back when I rolled over my employer sponsored 401K. (a good advisory for those in the market today for a 401K roll-over)

    Thanks again for sheding some light on this complex subject.

  156. bytre says

    FinaceBuff,

    If I have a loss on my traditional nondeductible IRA set up for this purpose (I couldn’t stand to let cash sit there, and made a sub-optimal investment), does it matter if I sell the security (to “realize” the loss) or not, and just transfer it to the Roth IRA? I am assuming it does not matter as unless it is a gain, and that I can’t get any credit for the loss.

  157. Harry says

    bytre – No it doesn’t matter whether you sell to realize the loss. The loss (excess basis) can be carried forward in case next time you get a gain when do the same thing.

    • Hastibe says

      I also was wondering about this, and have a few questions, if you don’t mind! Is the loss (excess basis) carried forward indefinitely until it is used? Or is it lost if I don’t need to use it in the following years or at the next time I make a conversion and use Form 8606? …And how do I use the loss (i.e. when I use Form 8606, where do I indicate the amount of excess basis that has carried over)?

    • Harry Sit says

      On careful reading of the tax forms and instructions I see you don’t carry forward the loss on the tax form but you can just wait it out and not convert until you are back even. If you are still down by the time you make your next year’s contribution, any gains on the new money will fill the hole.

    • Hastibe says

      Wait, really!? Could you explain this, Harry? I also ran through Form 8606 and its instructions, and it does seem like excess basis carries forward via line 14 and then line 2 on the forms. Below are links to a 2012 Form 8606 and a 2013 Form 8606, which I filled in, that shows how (I thought?) excess basis is carried forward, given the following example situation:

      TAX YEAR 2012
      1. Nondeductible contribution of $5,000 is made to empty Traditional IRA (first time using Form 8606).
      2. TIRA losses $500 in value.
      3. Whole TIRA (i.e. $4,500) is converted to a Roth IRA.
      2012 Form 8606 (https://docs.google.com/file/d/0B4Hgp_Ln1RjVUVU4MGhSVmF4TkE)

      TAX YEAR 2013
      1. Nondeductible contribution of $5,000 is made to empty Traditional IRA.
      2. TIRA gains $500 in value.
      3. Whole TIRA (i.e. $5,500) is converted to Roth IRA.
      2013 Form 8606 (https://docs.google.com/file/d/0B4Hgp_Ln1RjVdF9kdkZhdzBmaUk)

      …Am I doing something wrong with how I’ve filled out these forms? I feel like I must be missing something, but I can’t figure out what what–I’d really appreciate any clarification that you could provide, Harry!

    • Harry Sit says

      The third bullet under Part I says to complete Part I only if you converted part, but not all, of your traditional IRA. If you converted all, there is nothing on line 14 to hold the basis. If you want to preserve the loss you have to leave some money in the traditional IRA. That would be another way to carry over the loss.

      I know the first bullet says to complete Part I if you contributed non-deductible in the year period, but if you read the first bullet and the third bullet together you will see the intent is clear; otherwise the third bullet is redundant.

    • Hastibe says

      Hmm, okay, I see what you’re saying, but on Form 8606 it says to complete Part I (my emphasis in caps) “only if ONE or more of the following apply,” and then lists the three bullets you mention. Since the first bullet says “you made nondeductible contributions to a traditional IRA [for the tax year],” don’t the instructions explicitly direct that Part I should be filled out? After all, regardless of what the third bullet says, since “one or more” of the bullets do in fact apply, the instructions say I should complete Part I. …Right?

    • Hastibe says

      Also, and it took awhile of staring at the form, but I don’t think the third bullet makes the first bullet redundant, because the third bullet of Form 8606 (again, my emphasis in caps) says “…nondeductible contributions to a traditional IRA in [the current year] OR AN EARLIER YEAR.”

      In other words, for example, if I converted part, but NOT all, of my traditional IRA to a Roth IRA in 2013 and I had made nondeductible contributions to my traditional IRA in some previous year, but NOT in 2013, the third bullet would apply (and thus I would fill out Part I), but the first bullet would NOT apply.

      I’d be curious to know what you think about this!

    • Harry Sit says

      I tried to explain in my second paragraph above. A literal reading would have you complete Part I as long as you contributed in the year. I read it as saying if you contributed and didn’t do anything else. The 3rd bullet deals with conversion. Your basis has to attach to some assets.

    • Hastibe says

      Ah, I see–okay, hmh! Well, thank you so much again for your time and responses here (and bearing with me belaboring this), Harry–I really appreciate it (also your blog has been great–thank you! I’m learning a ton from it). After reviewing what you wrote here and what others wrote in threads on the Bogleheads forum (further discussion of this issue is here, if you or anyone else is interested:
      http://www.bogleheads.org/forum/viewtopic.php?f=1&t=130369#p2143265), it seems like the simplest solution to make it unambiguously clear that basis does carry forward in such situations as the example I provided above is to just leave at least $1 in the Traditional IRA account, like you wrote, instead of converting all of the Traditional IRA to a Roth IRA.

  158. Gene says

    First, great article! Sorry if I have asked a question already mentioned above (a lot to read), but in Step 2, you say to contribute to the traditional IRA (limit of $5k if under 50). But why would there be a limit? I thought the $5k limit is only to deductible traditional IRAs. If I understand correctly, isn’t there no contribution limit to non-deductible traditional IRAs? So could I contribute a higher amount, say $25k, and then convert to a preexisting Roth IRA I had created when I first started out?

    Also, my wife does not have an IRA account, but she also has an old Roth IRA account. Via the backdoor, can I contribute some from my “IRA” account to my wife’s Roth IRA, or does it have to be from her IRA account? Many thanks for your help.

  159. Harry says

    Gene – For someone under 50, the limit is $5,000 in 2012 whether it’s deductible or not (going up to $5,500 in 2013). She will have to do it from her own traditional IRA, not yours. Open one if necessary. Keep it open with $0 balance for the next year after you are done with the conversion.

  160. Gene says

    @ Harry – Thanks. Also, I am trying to do Step 1, but have run into a snag. I have a rollover IRA (from 2 previous employers’ 401k plans) worth about $45k. Based on discussions here, I should rollver that over to my current employer’s 401k. But they do not take incoming rollover. So sounds like next step is to open a solo 401k plan. I do have side income but not much (under $400 for current year, so no SE tax). But I’ve already contributed $17k in 2012 to my current employer’s SEP 401k, so I don’t think I can make anymore 401k contributions this year. Then can I still open a solo 401k with no money and rollover the IRA? Will they allow a rollover if I haven’t even contributed? Or should I wait till 2012, make a 401k contribution into solo plan, then rollover IRA?

  161. Harry says

    Gene – Although you can’t contribute as an employee, you can still contribute as an *employer*. See previous post Solo 401k For Part-Time Self-Employment. Rollover before making a contribution is fine. Employers have until tax time next year to make the employer contribution for this year.

  162. Mike says

    Is there a limit on the number of times I can “open” a non-deductable IRA? I open the account, fund it, wait x amount of time, convert it to my roth ira account. Does this effectivly close the traditional ira account or is it still “open” with a $0 balance? DO I have to open a new account the following year? If so does Fidelity and such companies eventually cut you off from opening and closing so many accounts?

  164. Ryan says

    Great article I appreciate your time on this I’m hoping you can clear one thing up for me. I currently have a sep-ira with ~$150k in it and a traditional ira with~$10k in it. The t-ira has been funded completely with non deductible contributions. So I transfer my sep to a solo 401k plan (im self employed). Then you say however much non deductible contributions are in my t-ira to leave that same amount behind in my t-ira when i do the conversion. I dont have any deductible contributions in my t-ira so should I leave behind ~$10k in my sep-ira? When I make my non deductible contribution for 2012 that will give me around ~$15k in my t-ira account. So when I do the conversion to the backdoor roth do I get to convert all ~$15k? When I do this process all over again each year do I still fund my sep-ira and then immediately transfer it to the solo 401k plan? Sorry if this has been covered I read through most of it and still haven’t seen an answer to my specific need. Thank you again.

  165. Harry says

    Ryan – You see in the graph the Traditional, SEP and SIMPLE IRAs are all in one pile. You would leave behind the $10k in your traditional IRA and transfer 100% of your SEP-IRA. After you create your solo 401k, you no longer fund your SEP-IRA. Fund your solo 401k instead.

  166. Don says

    I am 68 and retired in December 2010. My joint AGI with my spouse in 2011 was $228K and will be roughly the same for the 2012 tax year. I don’t see a decline in my AGI for the foreseeable future. In October 2012, I opened a rollover IRA at E*Trade and transfered $100K from my Federal 401(k) to this IRA (all funds as yet untaxed). In November 2012, I opened a Roth IRA with the same broker and rolled over all funds in the traditional IRA (now increased to $101K) into the Roth. I expect to pay taxes on all of these funds.

    Have I broken any IRS rules for the 2012 tax year? Will I need to recharacterize any of these funds?

  167. Harry says

    Don – It looks like you just did a regular Roth conversion. It has nothing to do with what’s discussed in this post. No you didn’t break any IRS rules. No need to recharacterize.

  170. Sara says

    Thank you so much for this incredibly helpful article! Since I just initiated opening a traditional IRA today (December 29) with a 2012 contribution that I will then back-door into a Roth IRA in early 2013, I was going to ask about which year’s taxes would include the traditional IRA earnings. However, I just finished reading the earlier comments, so have learned that the tax on earnings goes by calendar year, not contribution year. But the Form 8606 still goes with 2012 taxes, right? Thanks!!!

  172. indexfundfan says

    Those planning to do backdoor Roth should wait until the fiscal cliff deal is finalized. Apparently, the senate bill has some language, which at this point is not clear, that could potentially eliminate the backdoor Roth.

  173. Harry says

    As I read it, the Senate bill as it’s written now does not affect IRAs. It only affects qualified plans, allowing more people to convert a balance currently in traditional 401k to Roth 401k within the same plan. The plan has to offer the Roth 401k option and probably must be amended to allow such conversion. Of course because everything is still in flux, it doesn’t hurt to hold off for a short while and see what comes along.

  174. David says

    Harry, if I am 49 years old now but turning 50 during 2013, am I correct that I can fund my IRA with $6500 and then convert to Roth at any time this year (even before turning 50)? And am I also correct that for each year hereafter I will be able to fund it at this higher amount, or does my “catchup” end at some point?

  175. Harry says

    David – Yes, if you are talking about funding the IRA for 2013 (not in 2013 before 4/15 for 2012 tax year). The catchup to a traditional IRA ends after you reach 70-1/2 together with your regular contributions to a traditional IRA. You can still catch up to Roth IRA directly after that if your income allows it.

  176. William says

    Hi Harry,
    Thanks for the great article. I funded a IRA for $5000 and then converted it last month. However, between the time of funding the IRA and converting it to a Roth I obtained some capital gains. The bank converted these funds into Roth also, making my total conversion over $5000. My question then, is do I need to get with the bank and withdraw this overage before tax cutoff time, or is it okay that I rolled over more than $5K since it was gains for the IRA. Thanks for your help!

  178. Derek says

    Hi Harry. Great article. Question for you. In step 1 you say “If you’ve made non-deductible contributions to your traditional IRA in the past, a key requirement is that you leave enough money behind in the traditional IRA…” If I have ONLY made non deductible contributions can’t I convert the entire amount to a Roth and pay taxes only on the gains (opened in 2008 so not a lot of gains)? If this is the case should I contribute $5000 for 2012 to the existing account and then convert it all at once or convert the existing and then open a new traditional, add the $5000 and then convert? Thanks

  179. Harry says

    Derek – Yes you can convert the whole thing if you have negligible amount of pretax money in it. You can just do one conversion for everything: old money plus 2012 contribution plus 2013 contribution (see picture in Step 4).

  180. Misreporter says

    3 days ago I realised there is such a thing as backdoor Roth conversion from bogleheads forum and immediately opened one for my wife and myself. Then yesterday while simulating a 8606 filing I was making a very silly mistake which kept on bugging me till I landed on your website and voila! the filled in 8606 above was God sent. Thanks a lot for the article and everyone who has contributed to this forum.

    On a separate note, I have a problem for which I seek some guidance – I just discovered that my Turbotax screwed up and instead of 20k reported 0 as my total basis in the 2011 tax return. I wish I knew abt significance of this form before. I have been filing 8606 in all my prev tax returns but the total basis in line 2 has not been correct/consistent. I have tax statements from my broker to prove what the correct total basis should be. As I want to do a backdoor Roth in 2013, what are my options? I havent yet filed the 2012 return obviously. All contributions in my tIRA are post tax (non deductible)..thankfully a plain vanilla situation.

  181. Harry says

    Misreporter – If your previous 8606s were wrong, obviously you need to correct them. Because numbers carry forward from year to year, you want to trace back to the first year that was wrong and correct from there. After you have all the years sorted out, call the IRS and ask them how to send in the correct 8606s.

  183. Sunil says

    TFB/others – Happy New Year ! Any word on changes in Backdoor ROTH as mentioned above due to the new tax law’s/changes announced on Dec 31st ?

    Can we continue to put $5000 post tax funds in Traditional IRA and convert to ROTH (even for upper bracket income where ROTH is not available) ?

  185. Victor says

    I have a little dilemma that I would appreciate your feedback on:

    I have 1 active 401k plan that I contribute to from work and also 1 active SIMPLE from consulting work aside that I also contribute. I have 1 old SEP IRA plan that sits idle from prior job. I also have some nondeductible IRAs.

    I don’t want to convert ALL pretax $ to ROTH but maybe around half of it.

    These are my thoughts:

    1. Find out if I can rollover my SEP IRA into current active 401k plan. If not possible, am I allowed or does it make sense that I stop contributing this year to my currently active SIMPLE IRA; open a new solo-401k for this consulting job on the side; THEN rollover both old SEP IRA + SIMPLE IRA moneys into it (effectively “hiding” my pre-tax $ in a new active solo-401k plan? The idea is to isolate my nondeductible IRAs and do the backdoor ROTH conversion.

    2. Not sure if this is allowed, but another thought would be to somehow “change” (or convert/recharacterize…..not certain of the right term) current active SIMPLE IRA into a new solo-401k; then rollover the balance of this old SEP IRA; effectively “hiding” pretax $ but still have an open active pre-tax account that I can continue to contribute to for my consulting job. Then, backdoor convert to ROTH my nondeductible IRAs. Can this be done…?

    Thank you for your suggestions in advance!

    Victor

  186. Harry says

    Victor – You have to stay in the SIMPLE IRA for two years (measured from the date you first made a contribution to the SIMPLE IRA). After that you can rollover the SIMPLE IRA to a solo 401k. See IRS Publication 590 Chapter 3 about rollover/transfer out of SIMPLE IRA. If it hasn’t be two years yet, just leave the traditional IRA contribution as non-deductible and wait it out.

  187. Janet says

    Hi Harry:

    On February 2012, I made a contribution into a Traditional IRA in the amount of $5K for tax year 2011. When I filed my taxes in 2011, I filed the Form 8606 for this $5K. In June 2012, I transferred the $5K to a Roth IRA. Now, I received a 1099-R for the transfer amount from the Traditional to Roth IRA. How do I handle this? DId I do something wrong? Please advise. Thanks so much.

    Janet

  188. Harry says

    Janet – Nothing wrong. Just fill out 8606 again for 2012 referring to your basis from your 8606 for 2011.

  189. DC says

    Harry,

    I have an old 403b and an old SEP IRA, as well as an active Roth(which I can’t directly do anymore due to income) and lastly a 401k at work. I would like to get set up to start a back door Roth. I want to roll my SEP into my 401k. Due I also need to roll my 403b over as well?

    Also, I want to move my profit sharing aspects of my 401k into a different account/better account(with lower fees than offered by my employer plan), can I move the roll over portions that came from my SEP and 403b from my current 401k(if I roll those over to the 401k plan) to an outside account?

  190. DC says

    Harry,

    If I move the profit sharing aspects from my employer out of the 401k or “redirect” them elsewhere,
    what kind of an account do they need to go? What is the account called, say if I move it to Fidelity or Vanguard?
    Thanks.

  191. Harry says

    DC – No your old 403b can stay if you like it better than your active 401k. Whether you can roll profit sharing out of your 401k depends on your employer’s plan. The law allows it; your employer doesn’t have to allow it. Same thing to the money rolled into your 401k, although more employers allow rolling out money that originally rolled in than rolling out profit sharing money. However, if you roll out to a traditional IRA, it would defeat your backdoor Roth. So maybe do it only when you don’t need backdoor Roth any more. You can also potentially roll the SEP and the profit sharing money from your 401k into your old 403b. Again, the law allows it; your previous employer doesn’t have to allow it.

  192. Gene says

    Harry,
    In Dec 2012, I contributed $5k (non-deductible – total of $10k) to both my and my wife’s traditional IRA. The next day (still in Dec 2012), I had them converted into our respective existing Roth IRAs. So far, seems like no problem. Now I am doing my taxes for the year 2012. We received the Form 1099-R from our broker. As I enter the information into the tax software, it seems to want to charge taxes on the “distribution” from the traditional IRA. Then later in the program, it mentions that I should have a Form 8606. But I did not have any traditional IRAs at 12/31/2011, so I entered 0. If I do this, it wants to tax me on the conversions. But if I put $5k, then it doesn’t.

    I’m confused. Should I have physically done the conversion the following year (2013) to avoid taxation on the conversion then? I thought it did not matter when it was converted (i.e. next day). Thanks for your comments.

  193. Harry says

    Gene – See if this article helps you: How To Report Backdoor Roth In TurboTax. If you use a different software, the principle is the same. You have to enter in two places: one place for the conversion (1099-R), another place for the contribution. Zero for the basis on 12/31/2011 is correct. You just have to wait until you enter your contribution in a different section later in the program. Software typically have you enter your income first, deductions second. When you only have the 1099-R part, it appears you are being taxed. The number will change after you enter your contribution. In my article I have you enter the contribution first, conversion second, which follows the natural sequence of events, but the software doesn’t do it that way if you only follow the software’s screen sequence.

  194. Sally says

    Harry –

    Thanks for the very helpful guide. This year we discovered that we have been doing the backdoor roth incorrectly for the past 7 years. (Our accountant never considered the value of our rollover IRAs on 8606) and we continued this pattern after we started doing our taxes ourselves. In essence, we have skipped step 1, but acted as if we did it, only using the basis as our non-deductible contributions. How do you advise we proceed now? Do we file amended returns for 7 years? Do we file things correctly this year? Do we continue our error (be consistent) one more time and then stop? Appreciate your advice if you are able to provide any.

    • Lourdes says

      Hi, I didn’t see a reply to your query posted. I am in a similar situation and not sure what to do.

      Any info you can share would be appreciated.

      thank you.

    • Harry Sit says

      I’m not a tax professional. If I were in this situation I would amend my returns for all years.

  195. Hieu says

    Hi, I would like to do a backdoor Roth for 2012 going forward. Here is my situation. I have a traditional IRA with Vanguard as well as a rollover IRA. The traditional IRA contains all post-tax contributions. The Rollover IRA contains pre-tax, deductible contributions as well as earnings and a small amount of post-tax, non-deductible contributions (I can’t recall how much post-tax money I contributed since it was done 2-3 employers ago and Vanguard doesn’t show it on my account). Can I do Step 1 by just moving the deductible contributions from my Rollover IRA to my current 401k plan (would I also have to include earnings?) and do nothing with my Traditional IRA or would I have to do something with my Traditional IRA as well? I don’t want to pay taxes on earnings from my Traditional IRA at this time. Thanks!

  196. Dave says

    Assuming that you are able to contribute to a Roth IRA, is there any reason that you couldn’t also contribute to a non deductible IRA too? And then later roll the non deductible into the Roth. Thanks

  197. Harry says

    Dave – The annual limit for IRA contribution is shared between Roth and Traditional. If you already contribute the maximum to Roth, you can’t contribute to Traditional (whether deductible or non-deductible).

  198. BD says

    I’ve used the so-called backdoor Roth approach for two years and it was straight forward because I didn’t have any other IRAs to “hide”. However, I will be soon be the owner of a Beneficiary IRA and I don’t know how this may impact my ability or approach toward contributing to my Roth through the backdoor technique. Opinions/comments? Thanks.

  200. JW says

    I am interested in doing a Backdoor Roth IRA, but am a bit confused. I exceeded the income limits in 2008 and 2009. Those years, I had contributed $4995 and $4995 respectively to a Roth IRA for my wife, but recharacterized them to a Traditional IRA (as a non-deductible contribution, I presume) each since I exceeded the income limits unexpectedly each year to late year bonuses. While the original contributions were those amounts, the actual recharacterization amounts to the Traditional IRA account was $3825.48 (2008) and $3175.70 (2009) due to losses those years. The current value of the Trad IRA is $10,825 (with the only money being the above as I described).

    Q1: If I execute the recharacterization of this (back) to a Roth IRA, would tax be due and how would that all work? Would that be on the growth from $7001->$10,825 or the original invested amount of $9990->$10,825?

    Q2: I exceeded the income limit in 2012 and will again for 2013, so I am interested in doing a backdoor for 2012 for $5000 and 2013 for $5500. Is it best to wait to do this after I clear up the above and do this in a second phase?

  201. JW says

    Thank you Harry/TFB for the answers to my question above. That is awesome. That scenario was for my wife’s recharacterization to a Roth IRA. I have a question about mine also if you would be so kind as to advise.

    My Trad IRA contains a mix of a 401k that was transferred in from an old job in 2004 as well as the same two years where I exceeded the income limits in 2008 and 2009 and also 2012 (until I realized early on that I would exceed income limits). Those years, I contributed $4995, $4995 and $416.67 respectively to a Roth IRA, but recharacterized them to a Traditional IRA (since I exceeded the income limits unexpectedly each year due to bonuses), for a total of $10,406 in non-deductible contributions.

    The current value of the Trad IRA is $24,700. I am not certain of the amount of the 401k transfer in or the cost basis of the 401k that was transferred. My best guess is that the value of the 401k transfer was ~ $9975 and the cost basis of the 401k that was transferred was ~ $6000 but it is just that, a guess.

    Q1: Any advice on how to handle this one?
    Q2: What do you do when you don’t have perfect cost basis records?
    Q3: The tax rate on any gains would the the 15% capital gains tax rate, correct?
    Q4: All of this is treated in separate buckets (wife and mine recharacterization), correct?

  202. Harry says

    JW – If your 401k from the old job was pretax money as most 401k’s are, you have zero basis in that money. So you have a $24,700 IRA with $10,406 in non-deductible contributions. If you have a place to “hide” the $14k difference, just follow the steps in the main article. Otherwise if you want to convert the whole thing you will pay tax on the $14k, as ordinary income, not capital gains. Yes yours and your wife’s are completely separate.

  203. Bebe says

    This is great! I did not realize we could do this. Here is my situation:

    I have a pre-tax IRA account with $9,000, I also have 2 non-deductible IRAs, one has $14,500 (with 12,000 basic) and the other has $12,000( with $11,000 basic).

    I screwed up; I forgot that I had a pre-tax IRA, so I converted part of the deductible IRA to Roth last month before transfer my deductible IRA to 401K

    Question #1 : Could I just go a head and transfer my deductible IRA to 401K now without re-characterize the Roth Account back to traditional? and hopefully, everything will resolve by the end of the year since I have done all of these this year.

    Question #2: Here is what my friend and I have argued over (without looking at IRS rules). My friend thinks I could also transfer the earning of my non deductible IRA ($2,500 + $1,000) to my 401K and defer the tax liability; is he right? I am doubtful.

  204. Ash says

    Hi Harry/TFB,

    Me and my spouse are not eligible to make a direct contribution to ROTH IRA this year as our AGI is more than permissible limit. We decided to contribute to traditional IRA and convert it into ROTH IRA immediately within few days. How do we declare this on 1040 and 8606 form ? This is the first time we would be making any contribution to IRA and we both are not covered by any retirement plan by our employer

    Assuming our total wages is $200,000 and each of us contribute $5000 to IRA and convert it immediately to ROTH with $0 earnings on it.

    1. Form 1040: line 7 $200,000
    1. Form 1040: Should we declare $10000 as deductible IRA on line 32 (As we are first making a contribution to IRA)
    2. form 1040: Line 36 $10000
    3. Form 8606 part 2, for conversion for each of us. Each form would like below ?
    line 16: $5000
    line 17: $0
    line 18: $5000 (which would mean we need to declare this on form 1040 line 15b)
    4. Form 1040: Line 15b $10000 for both of us. (Because of Line 18 on Form 8606)
    5. Form 1040: Line 22 $210,000
    6. Form 1040: Line 37 would be $200,000 (as $10000 is cancelled by line 36)

    Is that correct ? Do we need to fill part1 also ? if yes for each of us
    7. Form 8606: Line 1 $5000
    8. Form 8606: Line 2 $0 (Since we are filling it for first time)
    9. Form 8606: Line 3 $5000
    10. Form 8606: Line 14 $5000
    Line3: In 2012, did you take a distribution from traditional, SEP, or SIMPLE IRAs, or make a Roth IRA ?
    conversion?
    Would answer be no to this ?

    Your help would be greatly appreciated.

    Thanks,
    Ash

  205. Harry says

    Ash – If both of you are not covered by a retirement plan at work, your contribution to a traditional IRA is fully deductible. At a high income level, I would just leave it like that and not convert to Roth. If you still want to convert to Roth, then your #1 – #6 are correct. The tax on the conversion washes out the deduction. Part I of Form 8606 would be blank.

  206. Ash says

    Thanks Harry for getting back.

    Why did you say this ? At a high income level, I would just leave it like that and not convert to Roth. any specific reason why we shouldn’t convert to Roth ?

  207. Harry says

    Ash – Because you lose the deduction when you convert. People do the backdoor because they don’t get a deduction anyway when they are covered by a retirement plan at work. A deduction is very valuable at high income levels. See previous article The Forgotten Deductible IRA.

  208. doug says

    Harry, I have tried to get an answer to this and haven’t been able to. I followed your steps last year for the first time, and I think everything went perfectly. This year, however, I am unsure my form 8606 is being filled out correctly. I have never owned a traditional ira before doing these backdoor conversions. Should my form 8606 look the same year after year? I thought that form 8606 was used to track contributions, but this year after filling out the form it looks exactly like last year, with no running tally. Is that correct?

    Love the blog by the way!

  209. Harry says

    Doug – It would look the same if you contribute for the current year and then convert in the same year. If you contributed in 2011 for 2011 (not contributing in 2011 before April 15 for 2010) and you converted in 2011, and if you did the same again — contributed in 2012 for 2012, converted in 2012 — then you 8606 would look the same year after year, except the annual contribution limit going up from $5,000 to $5,500 in 2013 (add another $1,000 if you are over 50). This is the cleanest way.

  210. doug says

    That is my situation. Thanks a lot!! I spent hours trying to find that out on google. There is a lot of info out there on how/why to do a backdoor roth, but little on the actually filling out of the 8606 form.

  211. Jon says

    I’ve read some speculation that Congress will close the backdoor Roth option soon to generate more tax revenue. I’d like to contribute now but don’t want to have to undo my contribution later this year. Anyone willing to speculate whether the backdoor option might go away?

  212. Harry says

    Jon – Anything can happen when it comes to Congress, but if we are just speculating I would say any change will be effective in a future year, not retroactive for the current year.

  213. James says

    Hi Harry/TFB,

    I could not find the answer to my situation after searching for severl hours. Your help is greatly appreciated.

    I filed my 2012 Tax in march and also received my refund. Only later after filing my 2012 tax, I came to know about back door roth IRA ( my income limits are high for direct IRA ) . So, I then contributed non-deductible $5000 in TIRA for year 2012 ( few days ago on April 1st ) .

    As a result , my 2012 tax return does not reflect my TIRA contribution for $5000

    What do I need to do correct this?

    a. Should I report this by separately mailing 8606 form to IRS?
    or
    b. Should I amend my 2012 tax return with 1040X ( I used turbo tax ) and add this 8606 form in turbo tax?
    or
    c. Should I do something else ( if not a or b )

    note: If the choice is between a and b, I prefer b since I can e-file instead of mail.

    Thank you in advance,
    James

  214. Harry says

    James – Either (a) or (b) works. Because the contribution is non-deductible it doesn’t change anything else except the 8606. If you convert in 2013, the conversion will go on 2013 return you file in 2014.

  216. Tina says

    Hi TFB,

    I’ve done backdoor IRA in year 2010, 2011, and 2012. $5000 each year. What should my 8606 look like? e.g. should the field 2 be 10,000 and field 13 and 14 both be 15,000? In your filled-out example why is field 14 zero? Does this year’s field 14 number goes to next year’s field 2?

    Thanks very much!!!

    Tina

  217. Curious_George says

    Thanks for the thorough and thoughtful explanation.

    My wife rolled-over all of her tax-deferred accounts to an individual 401k she set up for her small self employed business. Her income for her self employed business will be below the maximum 401k contribution limit. So she is thinking about contributin 100% of her income to her 401k. From what I read in the IRS publications, this should be OK. Does doing this arouse unecessary attention from the IRS?

  218. Harry says

    Curious_George – I don’t see why it would but of course I don’t work for the IRS.

  219. Sunshine98 says

    I have a question. I opened a IRA through vanguard because I was not eligible for a ROTH a few years back and have been contributing the max ever since. It is up 12K. I would like to do a back door Roth and contribute the max to it. Will I owe any taxes?

    And if I continue to do the max on the Roth each year do I just have to make sure what was gained in the IRA stays there?

  220. Mike says

    Is there a limit on the number of times that I can convert the traditional IRA to the Roth? So I opned the account, I only funded say $1k. Can I convert that $1k and then have a $0 balance until i have another $1k to deposit and then convert for a 2nd, 3rd, 4th, 5th time in a given tax year? Or is it cleaner and make more sense just not to open the account until you have the full $5500 and only do 1 conversion?

    • mongo says

      Harry, no problem to convert multiple times. It does not have to be all at once. I always contribute to my Vanguard money market, wait a few days for everything to clear, then convert. By doing so, I make it cleaner for me so I never show any profit or loss during the conversion. I put $2000 into a T-IRA and converted to a R-IRA, and two months later $3000 and then converted. These were my 2012 contributions that were actually contributed prior to 15Apr13.

  221. avanvliet says

    Thank you for a very informative how-to article. I am very interested in doing the Backdoor Roth before the end of the year and spoke with a CFP earlier today about it. However I am now confused about something he said – that I will be taxed prorata on the deductible and nondeductible contribution earnings.

    Here are the details as I explained them:

    $300K in T-IRA which is a mix of previous employer 401(k), deductible and nondeductible contributions.

    Last filed 8606 states $40K basis (nondeductible contributions).

    I planned on transferring $260 T-IRA to accepting 401(k), and converting $40K T-IRA to Roth IRA. (Amounts to be altered slightly to adjust for market fluctuations, as your article advises)

    Does one have to figure out what % of earnings are tied to each the deductible and nondeductible contributions before doing the Backdoor Roth, as I was told by the CFP? Doesn’t the $260 T-IRA transferred to the 401(k), which includes earnings from deductible and nondeductible contributions, get taxed later when distributed as an RMD? In doing the Backdoor Roth, shouldn’t only the nondeductible T-IRA contributions (NO EARNINGS) be converted?

    Your article explained it so clearly and makes sense, so I don’t understand where the CFP’s prorata comment applies. I want to complete the Backdoor Roth but don’t want any tax surprises. I would appreciate if you could clarify this. Thank you!

    • Harry says

      If you are paying the CFP you should ask him to clarify if you have questions.

      > Does one have to figure out what % of earnings are tied to each the deductible and nondeductible contributions?

      No. Everything above your nondeductible contributions are pre-tax, whether they are earnings or pre-tax contributions. All pre-tax money can be rolled into a 401k (if your plan accepts). You will still leave a small amount of pre-tax money behind as a buffer for market fluctuations. When you convert you will be taxed prorata, based on the small amount of pre-tax money left behind and the nondeductible contributions. Just convert the whole thing and pay tax on the small amount of pre-tax money left behind.

    • Harry says

      Yes you can. Pension plans usually don’t accept incoming rollovers. You still need a 401k-type plan for step 1 if you need to “hide” pre-tax money in an IRA.

  223. Chris says

    Okay so I have no current traditional IRA. I will open a non-deductible tradition IRA for $6500.00 (over 50) on 12-30-2013. On 01-03-2014 I will covert this non-deductible traditional IRA to a Roth IRA. My 2013 – 8606 should have $6500.00 on lines 1,3,5,8,9,11,13,16,17? And 0 0n line 10? Assuming that I have no increases over the 5 day period. Sound right?

    • Harry says

      No. Line 8 is zero if you wait until 01-03-2014 to convert. Read the instructions:

      “8. Enter the net amount you converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2013. …”

      It’s easier if you contribute and convert in the same year.

  225. H says

    I have a Vanguard rollover IRA and have access to a Fidelity 401k account. I contacted Fidelity about rolling the IRA into the 401k and they cannot do the transfer electronically. I am currently waiting on Fidelity to get me the paperwork while holding the Vanguard IRA check made out to Fidelity.

    When can I make the $5500 IRA contribution to Vanguard and reclassify the contribution into a Roth? Can I do it now or should I wait until Fidelity has credited the rollover IRA funds into my Fidelity 401k?

    • Harry says

      I think you are OK with contributing now. Instructions for Form 8606, line 6, say

      “Note. Do not include a rollover from a traditional, SEP, or SIMPLE IRA to a qualified retirement plan even if it was an outstanding rollover.”

      That means that line would be zero, which means no prorating on your conversion.

      Be sure to use the right terminology when you speak to someone at Vanguard or Fidelity or when you are dealing with a CPA or tax software. It’s not reclassify, or recharacterize. It’s convert. See previous article Traditional and Roth IRA: Recharacterize vs Convert. At Vanguard (mutual fund side), converting is done simply by “exchanging” one fund in the traditional IRA to another fund or the same fund in the Roth IRA.

  227. H says

    Thanks for the reply. Went ahead and funded my IRA and plan to covert the IRA to a Roth before Jan 1st 2014.

    In regards to step 6 for repeating the steps in the future can it be any time in 2014 or should I wait until after April 15 when Federal income taxes are filed?

    • Harry says

      Any time. When you make the contribution you get to designate which year the contribution is for. Just choose 2014.

  228. H says

    Well it was incredibly easy contributing the $5500 into an IRA and then exchanging it into a Roth account through Vanguard. Took about a day and a half and I did everything online without speaking to a single CS rep. The hardest part was moving my old IRA rollover from Vanguard to my Fidelity 401k prior to contributing to the IRA because of the need for snail mail paperwork by Fidelity.

    Wish I learned about this 2-3 years ago. I asked a couple of co-workers who could benefit from doing this and none had ever heard of it. Some have financial planners and accountants who never mentioned it including my own accountant. What’s up with that?

    • H says

      The logic is to avoid the appearance of “gaming the system”.

      Considering that people have been doing this for 3-4 years and the IRS has not sought to clarify if there is an “appropriate” waiting time or not I don’t think it’s worth worrying about.

    • Harry says

      On the other hand, waiting a short period is pretty harmless. Considering that you are getting tax free earnings for many years, it’s really not necessary to convert exactly on the next day. You don’t have to wring every last drop out of this.

  230. Chris says

    Okay so I had a zero balance in my traditional IRA account. I made a $6500.00 2014 contribution to that tradition IRA account. A dividend of 21 cents posted to the balance a week later. Should I convert $ 6500.21 or $6500.00 to a Roth IRA?

    • Jason says

      Convert the full amount to keep it clean. you’ll just pay taxes on the $0.21

      I think you mean $5,500 since that is the max for 2014, right?

  232. charles says

    Thanks for the comments on the waiting period. I agree and will probably wait until at least the following month, so they are not on the same brokerage statement.

  233. Gene says

    I did the backdoor the last 2 years based on this discussion (thanks Harry!). Just this past week, I contributed $5,500 to my traditional IRA acct and converted the next day into my Roth. I use TD Ameritrade. They said it is done this way all the time. So I don’t think it matters whether you convert the next day or the next month, or to another broker or within the same one. It’s easier and faster if same broker. And like Harry says, if the IRS hasn’t defined the proper holding period, then you should have nothing to worry about. Probably better to convert the next day so you can put your money to work immediately than earning nothing for 1 month. That’s my opinion.

  234. Adrianne says

    When you contribute to the Non deductible IRA, do you invest it in a fund BEFORE converting to a Roth? Or do you just convert the cash?

    • Harry says

      It doesn’t matter either way. I invest it in a fund before converting. Some prefer to convert the cash and then invest in Roth because it makes the math a little easier. I use tax software. Computer can do the math either way.

  235. Adrianne says

    Thanks Harry! One more question, virtually every resource I have found online advises to convert money to a roth SLOWLY, little by little, over time. Why is this lump sum conversion better?

    • Harry says

      Assuming you are following all the steps here, by the time you convert, the bulk of the money is non-deductible. You only pay taxes on the small amount of earnings. The other articles you read are talking about converting pre-tax money. You pay taxes on 100% of the money you convert. Converting the whole thing will add a lot to your income and give you a big tax bill.

  236. Jason B. says

    Hi Harry,
    I have a traditional IRA I setup with $3,000 worth of pre-tax money a couple of years ago. It’s now at about $3,500 due to growth and dividends. Due to a high AGI, I’d like to do the backdoor Roth. Would you suggest I move the entire $3,500 to my 401k (if that’s possible) so I can start funding the T-IRA with non-deductible money? What if my 401k plan doesn’t allow that to happen?

    • Harry says

      That’ll work if your 401k accepts incoming rollovers and you don’t mind doing the paperwork. Otherwise you can just convert the whole thing after you make your non-deductible contribution. You will pay tax on the $3,500 if you don’t move it to a 401k.

  237. Venkat says

    Harry, if I contribute to my IRA (not opened yet) for 2013, and do Roth conversion before April 15th, am I supposed to file 8606 along with my 2013 tax returns or 2014 tax returns? Also, if I make a contribution to IRA for both 2013 and 2014 say today, and convert all the money (11k) to Roth before April 15th of this year, will this create any reporting issues when filing 8606?
    Thank you in advance!

    • Harry says

      Both years. You file 8606 for the year for which you make a contribution and again for the year in which you convert. If you contribute for both 2013 and 2014 in 2014 and you convert in 2014, your 2013 8606 only has the contribution for 2013, while your 2014 8606 has the contribution for 2014 and the conversion in 2014.

  238. Donald Fischer says

    Thanks to your excellent advice, I successfully moved more than a year ago some  401(k) funds to a deductible IRA and then, after paying the taxes, through a backdoor into a Roth.  Now I will soon come into additional funds from an inheritence which are totally tax-free.  Into what type of IRA should I place these funds before transferring them through the backdoor into my existing Roth IRA?

  239. venkat says

    Thanks, Harry. If I understand you correctly, I complete only part 1 of 8606 with 2013 contributions and file this with 2013 returns, but both parts of 8606 for 2014 contributions and conversions (for both years), which I would file with 2014 tax returns..

  240. dave says

    Harry – enjoy the blog a lot.

    How does the pro rata rule work for backdoor Roth IRAs formed by 4/15/14 for tax year 2013?

    Example: On 12/31/13, I had investments in a traditional IRA consisting entirely of deductible contributions. I roll over the entire traditional IRA balance into a 401(k) on 1/1/14. Then I do a backdoor Roth IRA for tax year 2013. For purposes of the pro rata rule, does the IRS look at my total IRA balances on 12/31/13 or 12/31/14?

  241. dave says

    How does the pro rata rule apply for backdoor Roths converted in 2014 for tax year 2013?

    Example:
    On 12/31/13, I have assets in a traditional IRA, consisting entirely of deductible IRA contributions.
    On 1/1/14, I roll over the entire balance of all traditional IRAs into a 401(k).
    On 1/2/14, I contribute $11,000 into a nondeductible traditional IRA ($5500 for 2013 and $5500 for 2014).
    On 1/3/14, I convert the $11,000 into a Roth IRA.
    On 12/31/14, I still have $0 balance in all traditional IRAs.

    I know that the 2014 backdoor Roth is entirely nontaxable because on 12/31/14 I have $0 assets in traditional IRAs.

    What happens to the 2013 backdoor Roth? Does the pro rata rule look at the balances from 12/31/13 or 12/31/14?

    • Harry says

      @dave – The pro rata rule only applies in the year you convert. You didn’t convert in 2013; no pro rata rule for 2013.

  242. Janet says

    Hi Harry:

    I made a nondeductible $5,000 contribution to my traditional IRA last year for Tax Year 2012. I forgot to do Step 4 – Convert the traditional IRA to Roth IRA by yearend 2013. What do I do? Can I move the $5,000 to my Roth and also make a contribution for 2013 by April 15? Thanks

    • charles says

      Yes. You can convert a regular IRA to a Roth IRA anytime you want as there is no time restriction for doing such.

      An this decision is independent from funding 2013.

  243. Janet says

    I just converted the contribution from Traditional IRA to Roth IRA. The person at Etrade said that it will be effective 2014. Now, will it matter if I do a nondeductible Traditional IRA contribution by April 15 for tax year 2013 and convert it in 2014. That means I’ll have two conversions in 2014. Or, should I wait for 2015 to do one of the conversions? Thanks for your help.

  244. Tom says

    Harry,

    Thanks for the comprehensive write-up on the topic.. One ? regarding solo 401k based on your comments

    “House-sitting, dog-walking, tutoring, helping neighbors set up computer equipment, etc. are all good ways to earn self-employment income. Remember you don’t have to make a living on it. You just need a little self-employment income in order to qualify for setting up a solo 401k plan”

    How do you prove the self employment income for solo 401k plan qualification if it’s small cash income generated from tasks like computer set up? Would reporting that on Schedule C of the tax return alone qualify for the same? Do you need to be registered as an S-Corp or so else to qualify for this..

    • Harry says

      Tom – You don’t have to register an S-Corp or LLC unless you want to do it for other reasons such as limiting liability. It’s perfectly legit to do business as a sole proprietor. Having your customers sign your work orders will document when and what you did for how much money. And of course report the income on Schedule C and Schedule SE. Also see Solo 401k When You Have Self-Employment Income.

  245. funda says

    Very interesting stuff and I’m going to try to take advantage of it once I can establish that I will be able in fact to roll-in my TIRAs into my current 401K plan.

    I do have one simple and other potentially tricky question.

    If I then create a TIRA for the sole purpose of using it as the backdoor to a Roth, does the TIRA close because it now has no funds? Do I open a new TIRA every year?

    My wife makes about 12K per year but cannot open a conventional Roth IRA because of our joint AGI (at least that is how I understand the rules). This year, her employer introduced a 401K plan. Can her combined contributions to the 401K plan and the Roth via the backdoor exceed her gross W-2 income?

    Thanks.

    • Harry says

      Typically the account remains open even after the balance drops to zero. Next year you just contribute to the same account again.

      Her 401k contribution obviously can’t exceed her gross income from the employer but her IRA contribution can come from your earned income.

  246. funda says

    Thanks, Harry.

    Just got off the phone with Fidelity and learned that my employer does allow roll-ins but they have to be in cash. Since one of my TIRAs is invested in a diverse portfolio of individual stocks acquired over a long period of time, re-creating it within the 401K will be painful and expensive in commissions 🙁

    The others only have a couple of mutual funds each and should be easier.

  247. Jimmy says

    Hi Harry,
    Thank you very much for very informative and very helpful article.
    I do have a bit of tricky situation which i will really appreciate your help on.
    this is for my wife(doesn’t have work status so no 401k or any other option where i can transfer that money except roth), i put let’s say 5000$ in her Traditional (fully deductible) IRA account last year. now this year due to high income i only can do non-deductible IRA but i am not sure i want to convert that old TIRA money to roth just now due to high tax bracket without checking options. so i wanted to on what amount i would have to pay tax if i just contribute to non-deductible this year and convert everything next year may be. logically all my non-deductible contributions should be tax free assuming i am transferring everything at once, but i have read at some place that that’s not the case and actually a big misconcetption. i wanted to see if you can clarify a bit more on this and explain how the tax will be calculated if i were to convert all money 12000 = 5500(decutible IRA + gain) and 6500(nondeductible IRA(5500)+ gain 500) to roth next year.

  248. Jason says

    Hi Harry,

    My wife and myself both (over 50) contributed $6500 in 2013 and $6000 in 2012 into our Roth IRA. We just realized that our income is too high for contributing to Roth IRA. What should we do to do a backdoor Roth? We can open a traditional IRA. But do we have to withdraw the previous Roth contributions and pay the penalty first? Greatly appreciate your opinions.

    • Harry says

      Jason – Too high for both years? Did you contribute in 2013 and 2012 for those same two years or for 2012 and 2011 respectively?

      If you contributed in 2013 for 2013, you can recharacterize from Roth to traditional now before tax filing deadline in 2014 and then convert to Roth in 2014 by following the steps in this article.

      The 2012 contribution is too late to recharacterize. If it was for 2012, you owe 6% penalty each year for 2012 and 2013. Withdraw it in 2014 so you can stop the penalty for 2014. See Correcting an Excess Roth IRA Contribution.

    • Jason says

      Harry, thank you so much for your advice. We contributed in 2013 for 2013, and contributed in 2012 for 2012 as well. Our incomes were too high for both years.

      Just want to clarify: if we characterize form 2013 Roth to tradition IRA, and convert to Roth before 4/15/2014, can the Roth count as 2013 Roth?

      Can our 2012 Roth contribution be converted to non-deductible IRA because of no income limitation? If not, do we have to pay 10% early withdraw penalty?

    • Harry says

      Jason – You recharacterize your 2013 Roth *contribution* to a 2013 traditional IRA *contribution*. You then convert a said amount from a traditional IRA to a Roth IRA, which you can do at any time, not just before April 15. As an account, a Roth is a Roth; there’s no 2013 Roth or 2014 Roth. As a contribution, you don’t want a 2013 Roth, because you are not eligible.

      A contribution can’t be converted. It can only be recharacterized, within a time limit. That time limit already passed for your 2012 contribution. You can only withdraw it now. You won’t owe 10% penalty when you withdraw only the Roth contribution.

      For the 6% tax penalty on your 2012 excess contribution to the Roth IRA, look for IRS Form 5329 and its instructions for 2012 and 2013.

  249. Patsy says

    I have a question about your example 8606. You had $20 interest that tax would be due on. My question is when multiplying .999 x 15020 for step 11 it equals $15005. Why do you put$15000?

    • Harry says

      Because your non-taxable portion is not supposed to exceed your total basis on line 5. Instruction for line 10 says round to at least 3 decimal places. Make it 0.9987 or 0.99867 then.

  250. Patsy says

    I am just confused by lines 11 and 18. I have a basis of $15775 in my nondeductible IRA. When I converted it to a Roth the balance had grown to $16075. The following does not seem right.
    Line 10 15775/16075=.981
    Line 11 $16075 x .981= $15770
    Line 12 $0
    Line 13 $15770
    Line 14 $15775-15770= $5
    Line 18 $305
    But I know that Line 14 should be 0 and Line 18 should be $300. Please help explain.

  251. angel says

    I have a question regarding form 8606 and its my first roth IRA
    Im contibuting 5500 now for the 2013 year and havent done my taxes yet. Do I need to fill the above form now (part 1) or next year for 2014 taxes?
    If I do it now, I may be having mistakes on part 1 of the form. I have 5500 on lines 1,3,4. the rest of the lines i have 0.
    what am I doing wrong?

    • Harry says

      Now, because you report your contribution *for* that year and your conversion *in* that year. Instruction says copy line 3 to line 14 if you answer “No” to the question there. So do that.

      You will do yourself a big favor if you start contributing for and converting in the same year. Contribute for 2014 in 2014 and convert in 2014. Much less confusion that way.

    • angel says

      Thank you so much for the explanation. I guess I will do part 2 & 3 next year.
      Due to my fluctuanting income I didnt know whether I was gonna be able to qualify for a regular roth, that’s why I didn’t contibute last year.
      I will plan to contribute for 2014 this year as well cause now I know I won’t qualify for a regular roth from now on.

  252. Anthony C says

    Great article ..I just opened my TIRA and Roth IRA this past week because I realized our AGI was over the limit . I get the 8606 form which I will file with my 2013 taxes and since I have no other TIRA accounts it’s a 0 tax implication so should be easy . but to clarify is the 1099-r form something I would do for my 2014 tax return ?

  253. James says

    Best Article on Back door ROTH-IRA.

    Harry,

    1. I contributed non-deductible $5000 in TIRA for year 2012 in April 1st of last year 2013.
    2. I then converted the TIRA contribution to ROTH IRA within a few days.

    Can you please guide me how I should report the above 2 transactions in my 2013 tax return which I plan to file soon ?

    Note: I also plan to contribute $5500 in TIRA for year 2013, before the april 15th dead line.

    Thank you for the great service.

    James

    • Harry says

      James – You report on the tax return your contribution to a traditional IRA *for* that year and your converting to Roth *in* that year. See How To Report Backdoor Roth In TurboTax if you use TurboTax. Other software follows a similar process.

      It sounds like you didn’t report your contribution for 2012 on your 2012 return. You should fix that.

  254. TheGooch says

    I have a TIRA that I started last year, and it’s $5500 were fully deductible in 2013. I put $1000 in it so far for 2014. Now, I’m getting access to a 401(k) in a month or so ( new job) , and the plan does allow IRA rollovers.
    It’s obvious that I can roll the 2013 contributions into the 401(k), but what about this year’s contributions?
    Since I don’t know my income for 2014 yet , do I have to wait until the end of the year to determine if I should do a Roth conversion?

    Odd are, that the TIRA will not be tax deductible, and that I will not be eligible to contribute to a Roth directly, given my hourly wages and regular work schedule.

    • Harry says

      TheGooch – You can wait until later in the year if you’d like. Doing it through the backdoor method after you put in the maximum for 2014 would be fine too. The money ends up at the same place.

    • TheGooch says

      Ok. I was confused as to whether or not I could roll it into my 401k as soon as it was available. It makes more sense to wait until I see what my income for the year is and then choose to roll it into the 401(k)( not likely) , convert to Roth(very likely) , or do absolutely nothing (not likely ).

      One question, what happens to the shares in the TIRA when I convert to Roth? If have 10 shares of Fund A, will I still have those 10 shares , or go they get sold and then I have to buy shares of the same fund in the Roth account if I want to keep my investment in that fund?

    • Harry says

      Usually they just move the shares from one account to another, no selling or re-buying.

  255. OB says

    Is Step 1 required before the rest of the steps? IRS form 8606, step 6 indicates that you only compute the value of all of the traditional IRA, Simple IRA and SEP IRAs as of 12/31 of the year of the conversion. Can I then do the Backdoor Roth conversion first, then do step 1 (Hiding the ‘other’ IRAs) later as long as it is completed before 12/31 of that year? Example: Do Backdoor Roth conversion in June, and hide the other IRAs in November?

    • Harry says

      OB – I don’t recommend it, although it works the same on the tax form. When you rollover from your traditional, SEP or SIMPLE IRA to a qualified plan, you are explicitly allowed to pick pre-tax money only. Not so when you do the conversion; you are not supposed to pick only after-tax money.

      The tax forms don’t show exact dates. If you reverse the order, you can probably get away with it if you are not audited, but I think it’ll be messier if you must explain to an auditor.

  256. Robert says

    Hi – thank you for all the good work you do. Your articles are fantastic – keep up the good work.

    I’ve been doing backdoor Roth IRAs for a couple of years now and to keep things simple, I open a new tIRA, contribute to it, wait a week or two, and then roll it into an existing Roth IRA. My question is this: Is it necessary to open a new tIRA each year I make by tIRA contribution? Or can I make the contribution into an already existing (empty) tIRA account?

    Thanks!
    -Robert

    • Harry says

      Robert – It’s not necessary. You can contribute to an existing (empty) account.

  257. Johnny says

    Hi Harry,
    In 2012, I converted my wife and my non-deductible TIRA’s into a Roth.
    We converted the entire amount in 2012 ($77,000) and had to pay taxes on about $37,000.
    In 2013, we each contributed $5500 into a non-deductible TIRA and within days converted to a Roth.
    Today, I received my tax return from my accountant….and saw that we owed taxes on $30,000!
    After looking over form 8606, it appears that the $30k is from $88,000 (the original conversion amount of $77,000 plus $11,000) and subtracting the cost basis of our TIRA (basically the cost basis from 2012 plus the $11,000 that was added in 2013)…by the way, we currently have nothing in the TIRA since it was all converted to a Roth in 2012…
    Does this make any sense.
    Thanks

    • Johnny says

      Sorry, one mistake…I looked at my statements and it appears that in 2012- the Roth conversion took place in 2013 (and not 2012 as I initially thought)

  258. John says

    Thanks for a great explanation of converting to Roths.
    I have a 403b, a tIRA with ded and non-ded contributions, and a roth.
    I made pre-2013, 2013, and 2014 non-ded contribution to the tIRA.
    The non-ded contributions prior to 2014 are on the 8606.
    I want to convert the non-ded contributions to the Roth.
    Your article says to 1st transfer the ded contributions to the employer plan.
    Wouldn’t it be cleaner to transfer the non-ded contributions (the 8606 amount + the 2014 contribution) to the Roth so all that’s left in the tIRA are the ded contributions and the earnings? Then, the tIRA can be rolled over to the employer plan. Fidelity says this has to go to a rollover IRA 1st then to the 403b. I’ve been told that a long as everything is done by the end of the year there are no pro-rata issues.
    Is this the correct way to do this?
    Thank you.

    • John says

      Thanks for the heads up. If the deductible monies and earnings are rolled over from the tira to the 403b 1st then the non-ded (8606 basis) is converted from the tira to the roth there will probably be a little left over in the tira, maybe only a $1 or 2 if I do it right. Would I just take this as a distribution? Would this necessitate a pro-rata calculation at tax time?
      Thanks.

    • Harry says

      Just convert the whole thing including the small amount of pre-tax money left. No pro-rata when the ending balance on 12/31 is zero.

  259. David says

    New to this with unexpected income in the past two years…so THANKS much for your help.

    I’m doing taxes now for 2013 and, if I understand this correctly, I can now (in 2014) make contributions to a 2013 non-deductable IRA but I cannot, in the 2013 tax year forms, convert these to a Roth. Correct?

    THen it follows, if I make contributions now to a 2013 non-deductable IRA and convert them in 2014 to a ROTH IRA…and in 2014 make contributions to a non-deductable IRA and convert those also in 2014…then both of these converstions will be entered in my 2014 tax forms…correct?

    • Harry says

      @David – Correct, as explained in the 2nd paragraph under Step 5. Read the follow-up article linked there. The contribution for 2013 still goes on the 2013 return.

  260. RG says

    I have a substantial balance in tIRA, and I don’t want to liquidate (say I am waiting for my positions to gain a substantial amount in the next 12-18 months). Here’s what I am thinking of doing — Just open a separate deductible IRA account now, keep depositing money into it (say $5.5k each year) until I think I am ready to liquidate the tIRA and then rollover the tIRA into my 401k? Then rollover entire non-deductible IRA balance into ROTH. Is there any downside to this approach?

    • Harry says

      @RG – That’s fine. You just pay tax on the earnings in the interim years in your second IRA when you convert. Or if the earnings are substantial, you can roll the earnings into your 401k as well.

  261. RG says

    Thanks Harry! Actually I meant to say open a separate *NON*deductible IRA now instead of “deductible” as I already contribute to 401K and do not qualify for a ROTH due to income limits. I suppose your answer will remain the same, correct? Theoretically, as long as this backdoor stays open, I could accumulate funds in this separate IRA (post tax of course), invest it (or keep it in cash) and convert the entire balance to ROTH (just pay taxes on the earnings or roll-over earnings into 401k) some time down the road (probably 18 months from now) after rolling over tIRA into 401k. Would I be missing any gotchas if I do this? Thanks for your help again! And an excellent article!!

  262. Pat says

    Most informative information I have found on this subject, Thanks.

    I had no current traditional IRA when I contributed $5,000 to a non-deductible IRA and converted the same funds in the 2013 tax year. There were no gains or losses in the value before conversion. I assume I need to complete Form 8606 Part I & Part II. The attached Form 8606 example above only has Part II completed. On my Part I, I have entered $5,000 on lines 1, 3, 4, 8, 9, and 0 on all other lines. On Part II, I entered $5,000 on lines 16 & 17, and 0 on line 18.

    Did I do this right?

    • Harry says

      @Pat – My tax software only filled out Part II because it read the third bullet under Part I as saying if you converted all your IRAs you don’t need to fill out Part I.

  263. unmesh says

    So I opened a TIRA with $5500 and opened a Roth IRA to do the backdoor transfer. Because i expect to execute this maneuver in future years, the custodian wants me to leave $10 in the TIRA otherwise they will close the zero balance account in a few months.

    Will this convenience for them cause problems for me in terms of tracking/reporting to the IRS?

    Thanks.

    • Harry says

      @unmesh – If you understand how to do it, it’s just entering different numbers into the tax software (if you use tax software). Otherwise you can get yourself confused unnecessarily over measly $10. Read the linked articles under Step 5 and do some dry-runs. If you think it’s too confusing, just open a new account every year or find a custodian that doesn’t close a zero-balance account so soon.

  265. vabird says

    I’m a fan of dolloar-cos-averaging approach.I am considering makng non-deductible IRA incementally rather than lump sum as I have been doing (Exp: $550/mo for 10 month in a year). Will there be any tax implications? And should I do Roth conversion each month after ira contribution or wait to do once before year ends?

    • Harry says

      vabird – You can contribute cash, convert cash, and then dollar-cost-average inside the Roth account. Converting every month may bring excessive paperwork.

  266. karaj says

    I have a rollover IRA from multiple former 401Ks. If I chose to move this IRA to my current 401K then I move everything (contributions and earnings) right?

  267. sm says

    Hi,

    Thanks for the article. I contributed to a Roth IRA back in April of 2013 (for 2103). Some cap gains made my income too high so these contributions are ineligible. I am going to transfer them (with pro rated gains) to a regular IRA. Can I then convert that to a Roth (back door style) in 2014 as described in the article?

    • Harry says

      @sm – Yes you can. Follow the same steps and consider your other traditional, SEP, and SIMPLE IRAs if any.

  268. Clara says

    Great articles! Really appreciate all the well done steps. One question, in form 1099-R, 2a, should the taxable amount be $20 instead of $5520? Thanks!

    • Harry says

      The IRA custodian doesn’t know whether you took a deduction or not. They put the converted amount as the taxable amount in 2a. Then they check box 2b to say the amount in 2a isn’t necessarily correct.

  269. sm says

    Just to follow up on this:
    “Hi,

    Thanks for the article. I contributed to a Roth IRA back in April of 2013 (for 2103). Some cap gains made my income too high so these contributions are ineligible. I am going to transfer them (with pro rated gains) to a regular IRA. Can I then convert that to a Roth (back door style) in 2014 as described in the article?”

    I have 2 additional questions:
    I contributed the max $5500 to the Roth before I realized I was not allowed to make any contribution. I now have to convert that amount plus gains to the traditional IRA. Do I then need to pay taxes on those gains when I roll back to the Roth back door style?
    I was considering starting a SEP this year and I do not have a 401k. It seems like I should not do that as it would interfere with my ability to do the back door Roth. Is that right?

    • Harry says

      @sm – You need to pay taxes on those gains unless you follow Step 1 to move the gains to a qualified plan. It’s correct a SEP will interfere. Do a solo 401k instead. See link to article at the end of Step 1.

  270. SCS says

    Thanks for the very helpful articles. When you updated the article in March 2014 to note the higher contribution caps, it looks like the “filled-out” 8606 became a blank 8606… Any chance of seeing a filled-out form again? I’ve done the backdoor conversion for the past three tax years but think I may have been filling out my 8606s incorrectly each year (because I both contributed and converted for the first time in 2012 and counted them both towards the 2011 tax year instead of only the contribution… as you have warned is a confusion) and should refile them… Would love to see a correct sample form! Thanks.

    • Harry says

      @SCS – It’s still filled out, on page 2. When you contribute for the current year and convert the entire balance in the same year, you get to skip Part I. The form becomes really simple. The 2010 form shows what it looks like when you have basis carried over from the previous year.

  271. RB6P says

    Harry – Thanks for this enormously helpful post.

    I made an error in setting up my backdoor roth and contributed $5500 directly to a roth IRA by accident (I am above income limits). I called Vanguard and arranged a recharacterization to turn it into a traditional IRA, and a few days later, I went forward with the conversion to a roth IRA.

    Now I’m wondering if I made another error –
    According to this IRS link (below), there are required waiting periods for doing a RECONVERSION following a RECHARACTERIZATION (see 4th question in below IRS link) .

    … but is it still okay to do a CONVERSION (not REconversion) following a recharacterization whenever (i.e. after only a couple days)?

    http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Recharacterization-of-Roth-Rollovers-and-Conversions

    • Harry says

      @RB6P – Recharacterize can mean recharacterizing a contribution or recharacterizing a conversion. You did the former. The IRS mandatory waiting period is on conversion after recharacterizing a previous conversion, not after recharacterizing a contribution.

  272. sm says

    I just got off the phone with Vanguard and they said that it would not be possible for me to get rid of only pretax money with a rollover to a 401k. They said that every pile of money would have an equal split of pretax and non deductible moneys.
    So for instance if I had a traditional IRA with 80 percent ND and 20 percent pretax and I put 20 percent of the entire account into a 401k, that portion of money would still be 80 percent ND and 20 percent pretax (leaving the same ratio behind in the IRA).

    • Harry Sit says

      sm – Read IRS Publication 590. Look for “Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA” near the end of page 23.

      Then call Vanguard again and ask for a customer service manager. Tell the manager that the previous rep gave you bad information. They can look up who that was and give additional training. You are not causing someone trouble. You are helping Vanguard give better service to all customers.

  273. sm says

    Excellent info, thanks. I will call them back when I have time and report here.
    On the document you mentioned, 401ks are not listed as eligible retirement plans under the paragraph about the special rule. How do you interpret that?

    • Harry Sit says

      sm – It’s covered under the second bullet “Qualified trusts.” Look at the table on page 23, footnote 1.

  274. Clara says

    I made IRA contribution in March for both 2013 and 2014 ( did not know this strategy before), and requested to convert both to Roth IRA. THe financial company is really slow on it, THey only converted $5500 for me. I called them to get the form 8606 and was told I won’t get it until the end of May. They also told me not to worry about the conversion and I should report the 2013 conversion to Roth IRA in 2013 tax filing which will be done in 2014. The only thing I need to do is to report the non-deductable IRA for 2012 tax filing. I wonder if this is true? Thanks for your advise!

    • Harry Sit says

      Clara – I’m sorry your years are really confusing. Not sure how 2012 comes in. Form 8606 is a form you file. Not a form you receive. Please read the linked articles under Step 5. If you converted in 2014, you report the conversion on 2014 return, to be done in 2015. You report the contribution for 2013 on 2013 return, to be done now in 2014.

  275. Epicurean62 says

    Harry, I’m new to your blog – very informative and helpful.

    I have a similar issue to some of the recent posts, and could use some clarification.

    My Roth IRA contributions in 2010 were made before I realized I was going to be over my income limit. Once that was discovered I recharacterized my contributions + earnings to a traditional IRA. Last year (2013) I complete a Trustee-to-Trustee conversion of the Traditional IRA back to a Roth IRA (didn’t know about the Back-door Roth Conversion).

    Most of what I read says I have to pay taxes on the total amount converted. The account has appreciated some, but I never contributed directly to the Traditional IRA. So my questions (just two) are:

    Do I have to pay taxes on the whole amount ($6K) or only on the gain (income ($800))? and
    Should I have received a 1099-R for the conversion?

    Thanks again for all!

    • Epicurean62 says

      Harry,

      I made one small error the income should be $1,400, not $800. Original amount was $4,600.

      Thanks again, sorry for the mistake.

    • Harry Sit says

      Epicurean62 – Only the gain, assuming that you don’t have other traditional, SEP or SIMPLE IRAs. You should’ve filed a Form 8606 for 2010. If not, you can still file it now. You can find tax form for previous years on IRS website. You carry that $4,600 to 2013, which becomes an offset to your $6k conversion. Yes you should’ve received a 1099-R for the conversion.

  276. epicurean62 says

    Thanks Harry! I did do the 8606 in 2010.

    I followed up with my old bank, and they told me, since this was a Trustee to Trustee conversion I won’t see a 1099-R (it’s treated as a transfer). I’m a little confused but I have already figured the gain.

    The person I spoke with was confused a bit also, because she said, all proceeds from a T-IRA, when converted to a R-IRA are taxable (that would be the whole $6K).

    I prefer your comment above.

    • Harry Sit says

      epicurean62 – Unfortunately customer service people often give wrong answers because they aren’t trained well. Somehow they’d rather give wrong information than saying they don’t know. Look at the IRS 1099-R instructions: “Roth Conversions. You must report a traditional, SEP, or SIMPLE IRA distribution that you know is converted this year to a Roth IRA …” (page 3, left hand side).

      Giving wrong information to customers imposes a cost on the customers. It doesn’t show up on the fee schedule, but it can be worse than a fee.

  277. Clara says

    Thanks a lot Mr. Sit! I did make a mistake about the year, it should be 2013. But you clearly answered my questions. Thanks again! Clara

  278. Clara says

    Mr. Sit, I went through your post again when I am finalizing my tax return. Just realized I forgot about my husband’s roll over IRA. He requested IRA conversion to ROth IRA a couple of weeks ago. Will we have any problem when we file tax return for 2014 reporting this conversion of $5500? I mean will that impact the amount how much we could convert nondeductable IRA to ROth? He is allowed to move the Rollover IRA to his employer’s 403 plan any time. But we neglected your step one. Thanks a lot for your help! Clara

  279. AL says

    Hi Harry,
    If I current have a 401k(Job1), 401K(Job2), IRA-CDs, Spousal IRA-Scottrade. The 2 IRAs was opened before I started working, no longer contribute them since I started working. Do I just close it and roll over to my current 401k(job2)? Then open a Vangard Trad IRA & Roth IRA, then contibute $5500 to Vangard Trad IRA , and roll over to Vangard Roth IRA immediately? That should avoid any re-char if I complete all task within 2014, right?

  280. Newboy says

    I may have made the wrong move to avoid being taxed or just so confused?
    In feb 2014 i moved almost all of my 403b acct to an older tira acct. the tira acct was a 403b, but was inactive, so changed the plan type. The old acct pays 4% interest and has no fees attached, the contract is so old.

    Down the road i would love to roll it all to a roth and not pay taxes on it.
    The 403b that the money came from is active and I can still roll the money back to it when I want to.

    In simple terms, am I going to be able to roll the money (all pretax dollars) into a roth and not pay taxes on it. Please give the steps necessary.

    Thanks I am a newby to the game. I just couldnt resist the security of a fixed acct and 4% interest with no fees. The markets are quite high and volitile.

    • Harry Sit says

      Newboy – In simple terms no. Pre-tax money will stay pre-tax whether it’s in a 403b or Traditional IRA. Eventually you will have to pay tax on it when you take the money out, although if you do it after you retire you may be in a lower tax bracket. This article is on a different topic.

  281. Nicklao says

    I have a question: my wife had a traditional IRA with Fidelity that I want to convert to Roth so that we can contribute again (surpass limits to do so directly). I think I screwed it up: called fidelity and converted the amount in tIRA to roth and they did so and said that the taxes owed could be handled by us at tax-time. Can I now add $5500 to the old traditional account which is empty and then convert it over to the new Roth account I created? Or was I supposed to add the $5500 first and then convert the whole thing?

    What has me confused is the tax part of it. Will i fill out a 8606 for the taxes owed on the conversion as well as another 8606 for the $5500 non-deductible contribution which was then converted?

    Please help.

    • Harry Sit says

      You can convert multiple times in a year. You fill out one 8606 per individual for all the non-deductible contributions for and conversions in the same year.

  282. Kevin says

    My wife’s 401k and Traditional IRA are both at Vanguard. Vanguard told her she couldn’t roll funds from the traditional IRA into the 401k because the IRA contained rollover funds from a previous 401k AND the IRA contained after-tax contributions. They said this was an IRS regulation, not a plan rule. Does that sound right?

    • Harry Sit says

      It doesn’t. Don’t ask a customer service rep tax questions. That’s not their role. They don’t speak for the IRS. You can ask them for the form and instructions for doing an incoming rollover. The necessary information will be on the form and instructions.

  283. JR says

    Just want to confirm that all of the steps can be done in the same year. It doesn’t matter that at some point earlier in the year you had deductible funds in a traditional IRA. You just have to do the Roth conversion AFTER you have rolled over the traditional IRA to a 401k. Is that correct?

    Thanks for the great information.

  284. Helen says

    Hi Harris,

    Great article! I am glad I found your website!
    You mentioned in the article that “If you are married, please note IRAs are owned by one and only one person. Each spouse should look at his or her IRAs separately”. Your comment just give me some idea… I currently have 55,000 traditional IRA converted from 401k. My husband does not have any IRA. Our income is over the limit to contribute to deductible IRA. So I can have him contribute to a non-deductible IRA and then convert it to Roth IRA later without paying tax since he does not own any IRA?

    Thank you so much in advance for your advice. Helen

  285. Scott says

    Hi Harry,

    Thank you for such a great resource! I have a follow up question (I tried to find the answer in previous comments. If I missed it, I apologize) about something you wrote in the piece.

    You wrote, “No Rollover to Traditional IRA: When you are doing the backdoor Roth IRA, remember not to rollover from an employer-sponsored plan to a traditional IRA in the same year, either before or after you do the Roth conversion. You can rollover from one plan to another plan, or to your own solo 401k, just not to a traditional IRA.”

    When doing the backdoor Roth IRA conversion, why can’t one make a rollover from an employer-sponsored plan (e.g. a 401(k) from a previous employer) to a traditional IRA in the same year? What are the negative consequences?

    Thanks!
    Scott

    • Harry Sit says

      In Step 1 you “hid” pretax money to avoid the pro-rata rule which causes you to pay tax on a large portion of your conversion. The pro-rata rule is applied to the balance on Dec. 31. Rolling over from an employer-sponsored plan to a traditional IRA and leaving the money there through Dec. 31 will trigger the pro-rata rule again.

    • Scott says

      Thanks Harry!

      I see what you mean. The reason why I ask is because I have a very small balance in an old 401(k), so I’m ok with paying tax on it.

      My plan is to:

      1)Rollover the small 401(k) balance into my traditional IRA that previously had a $0 balance (this rollover amount would be the only amount of pre-tax dollars in any IRA)
      2)In 2014, immediately convert the entire amount to my Roth IRA (because this conversion is 100% taxable, no need to wait or be concerned with the step transaction doctrine)
      3) Once that conversion is complete, I’d contribute in 2014 my nondeductible $5,500 for 2014 into the traditional IRA
      4)Wait a few months
      5)Near the end of 2014, convert the entire balance of the traditional IRA, paying tax on whatever small amount of gains occurred since the $5,500 contribution.

      Does this sound like a good plan? Are there any considerations I’m missing?

      Thanks!
      Scott

    • Harry Sit says

      If you are OK with paying taxes on the small 401(k) balance, you can rollover from the 401(k) directly to the Roth IRA. It will save you some paperwork.

  286. Steve says

    Harry,

    I have a small non-deductible IRA (approx. $5k) and am over the income limit. Already max out my 401k and now make supplemental monthly contributions to the non-deductible IRA. My plan is to convert majority of the balance to a Roth IRA, likely at end of 2014. From an ongoing perspective, do you think it is better, due to the IRS or otherwise, that I would only convert funds to the Roth on an annual basis, or would converting funds a couple of times a year (or more) be of no harm. Trying to pin down the mechanics of this going forward, not just the one time conversion.

    Thanks,

    Steve

  287. Tom in Fla says

    Hi- This may be repetitive, but I’ll ask it anyway. I havent done the back-door as described, but over the years I have done partial transfers from a traditional IRA (which was transferred from a ex-employer’s 401K plan) to a Roth IRA (as contributions) and then had tax/penalty free access to those contributions after 5 years (with no problem from our friends @ the IRS)

    Im about to advise a friend to do the same thing (except all transfers during tax year 2014). In re-reading your original page, you state to not convert to a 401K to Traditional IRA to Roth in the same year. I would like my friend to do it this way so they have the option to do partial conversions in subsequent years. I dont see any prohibition to doing a 401K to Trad IRA to Roth IRA transfer (check being made out to receiving institution not to account holder) in this manner. Why does your page advise against it?

    Thanks!

  288. Rebecca says

    Hi, I read it somewhere that the amount of money you transfer from your rollover IRA or SEP IRA to your 401K should be under the limit of $17,500 or $23,000 for the year combining with your regular annual 401K contribution. Is that right?

    Thanks!

  289. Anne says

    Thanks, TFB, for your great posts! Love reading them. I have almost completed the backdoor Roth for my husband: employer 401K (at Vanguard) accepted pre-tax T-IRA contributions, and we will plan on converting the non-deductible T-IRA to his R-IRA before year’s end. Thanks for the excellent guidance! Now on to mine, for which I have 2 questions. My employer’s 403B now accepts incoming IRAs (didn’t last year), and has an assortment of high expense funds as well as low-cost Vanguard Index and Target Retirement funds. The brokerage house charges a 0.24% annual service fee quarterly on the growing asset balance. I contribute the max of $23K (over 50 y.o.) to a Target Retirement fund, and last qtr paid $50/qtr for the service fee. This is also the first year that I have had a small amount ($320) of self-employed income, though this is not a regular endeavor, so I may not have self-employed income every year. Questions #1&1A: Do I roll my pre-tax IRA into the employer 403B, paying for an increasing service fee, or open up a Fidelity Solo 401K since I do have SE income this year to qualify? It seems the fees at Fidelity will be less/none. Must I have SE income every year in a solo 401K? Question #2: If I do open up the Fidelity Solo 401K (roll-in the pre-tax T-IRA b/c that’s the primary purpose) and contribute $292 of SE income to 401K (figure per Fidelity calculator), am I causing IRS problems because I will have contributed the max of $23K to a employer 403B? Thanks in advance.

  290. Lisa says

    In your Form 8606 example, why isn’t Part I filled out? Didn’t you make a non-deductible contribution in 2013?

  291. edward says

    Excellent article, you really did a good job with this article. I have a quick question. I have a decent sum in a rollover IRA with Fidelity from a previous employer 401K as well as a Roth IRA I started several years ago. I currently don’t meet the income requirement to be able to contribute directly to the Roth IRA. I am interested in a backdoor Roth for the Rollover IRA. I don’t want to roll it to my current employer’s 401K because they have very limited mutual funds; no index funds. I don’t have the money to pay the taxes on the Rollover IRA either, nor am I self employed. What are my options? Can i transfer the Rollover IRA into my current employers 401K, then roll it back out after? Thanks

    • Harry Sit says

      If you move your IRA money to your employer’s plan, most plans allow you to roll it back out. However, in order to avoid the tax on conversion, the money has to stay there through December 31. Then you face the same issue next year unless your income is going to fall below the limit. If the investment options are bad, it may not be worth it. Other than creating some self-employed income or waiting until you have a better plan, there are no other ways around it.

  292. RobRob says

    Hi Harry, great article. I have a problem where I opened a Roth IRA directly, funded it with $5,500 and invested in it. However, it turns out that my wife and I will be making too much this year to qualify for a Roth IRA. So what is the best way to handle this. Can I make my Roth IRA a Traditional IRA and then convert it back to a Roth IRA? It seems crazy that would be allowed, because it doesn’t seem any different then my current situation in my Roth IRA. But if it’s possible, how does that end up being reported at tax time. Does it seem like the original Roth IRA never existed? Also, would I need to open a new Roth IRA account so it’s not the same account that I’m converting to? Also, since I have the money invested, do I need to sell everything back to cash before moving back to traditional IRA? Sorry for so many questions. Thank you for any advice you have.

    • Harry Sit says

      You recharacterize your contribution to a traditional IRA. See previous comment. They will move the shares. You don’t have to sell. Then you follow all the steps in this article (except step 2, which you already did) to convert it, including “hiding” any pre-tax traditional, SEP or SIMPLE IRA. It can be converted into the same Roth IRA. You pay tax on the earnings.

  293. RobRob says

    Hi Harry, thank you for the information. I got the necessary forms to follow that process. I was hoping you could settle a debate between a co-worker and me. He has been doing this conversion from trad to roth for a couple years and he is adamant that he can withdraw the principle anytime he wants like a bank account. But I found the following information on the IRS website that seems to state that following this conversion process will lock up each year’s contribution for 5 tax years. How do you interpret this?

    “Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the recapture amount, if any.
    The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions , earlier. ”

    http://www.irs.gov/publications/p590/ch02.html#en_US_2013_publink1000231030

    • Harry Sit says

      The best way is to treat an IRA as an IRA, for retirement. Don’t withdraw until you retire, which I assume is way beyond 5 years. Then you don’t have to worry about complex rules.

      If you really want to know, 10% penalty is only on the amount “you had to include in income.” If he only had to include $10 in income because that was how much the money earned before it was converted, then the penalty is 10% on $10. Finally there are those ordering rules (“See Ordering Rules for Distributions , later”). If by the ordering rules his withdrawal doesn’t touch the $10, then the penalty is 10% on nothing.

      Still, pretending it’s all locked up until retirement is the best.

  294. RobRob says

    I agree that pretending it’s locked up is the best. But was exploring emergency situations where access to the money was needed. But I’m still confused by “had to include in income”. When I put $5,500 in a traditional IRA from my bank account, this is from my income. When I convert it to a Roth IRA, that $5,500 is money I am reporting as income on my W-2. So doesn’t that make the entire amount subject to the 5 year 10% penalty rule?

    • Harry Sit says

      W-2 is issued by your employer. You get it whether you convert or not. It’s not something “you had to include in income” triggered by the conversion. If your $5,500 earned $10 before you converted, or in your case when you recharacterize it already earned something, you include the earnings in income when you convert.

  295. Lucas says

    Another couple of questions along the lines or RobRob. I have already completed the recharacterization back to Traditional IRA, but now have about $6500 sitting in the Traditional IRA (due to Roth IRA growth throughout the year). Can I convert the full amount back to the Roth IRA or only $5500 (I am under the catch-up age)? If I can convert the entire amount, I assume I would have to pay taxes on the other $1,000? If I can’t convert is there any harm in letting it sit in the Traditional IRA for next year’s contribution?

    • Harry Sit says

      You can convert $6,500. You pay taxes on $1,000, but you have to make sure to clear your other traditional, SEP, or SIMPLE IRAs if you have any.

  296. Dave Peterson says

    Good evening,

    I’m doing my end of year planning….and my Edward Jones person was not sure of the answer.

    I did a backdoor Roth this spring (before the April deadline) for tax year 2013 and thus did the conversion in 2014. Am I allowed to do a second conversion in 2014 for my 2014 tax year so I can get these rollover conversions into the same year. OR…do I wait again until the spring of 2015 to do this rollover for 2014 taxes…and then remain on this “offyear” type of doing this? Please note that I’m forgetting the technical terms that I need to relearn…but hope you understnad my question!!

    THANKS….

    • Harry Sit says

      Yes you can contribute for 2014 in 2014 and convert in 2014 again. It’s better this way. See the linked article “Make Backdoor Roth Easy On Your Tax Return” under Step 5.

  297. Elizabeth Dean says

    Harry–this is a great explanation of this approach. Here is my question:
    Facts:
    1. Until October 2014 was in job with salary of 50,000 and no retirement plan. Have not made any 2014 Roth contributions although intend to max out by April deadline.
    2. In October moved to another job with salary of $105,000 and bonus plan (but don’t expect bonus in 2014). This job has a 401 k which I will join in 2015.
    3. Question: If Traditional IRA contribution is NON deductible, does there have to be any concern with the rule about reducing contribution depending on filing status, income, or whether there is retirement plan with employer?
    4. Question: What if I am making Roth contributions in 2014 and 2015 for 2014 tax year, and suppose the bonus kicks me above the $114,000 limit. Since it is for tax year 2014 and income for calendar year 2014 is below 114,000 does that hold for the Roth contributions? Or would I need to do some sort of recharacterization to a Traditional IRA? The bonus would be at year end I would think and I would have already filed 2014 tax return…

    I appreciate any thoughts you have on this!

    • Harry Sit says

      The eligibility is calculated by your income in every calendar year. It looks like you will be under the limit for direct Roth contributions for 2014. For 2015, you will have the expected bonus plus the higher salary. If you max out your pre-tax 401k contributions at $18,000 there is still a chance for you for fall below the income limit for a direct Roth contribution. If you’d rather not wait and see, you don’t have to worry about income limit if you make a non-deductible contribution to a traditional IRA. Converting it tax-free will require that you clear out any other traditional, SEP, or SIMPLE IRAs as outlined in this article.

  298. Ros says

    Hello and thanks for the great article!

    I’ve funded my TIRA (with non-deductible funds) for the last 4 years (did 2014 and 2013 this past spring April 2014 and 2012 and 2011 in spring 2012) with the intention of the back door ROTH. Never followed through, partly because I didn’t actually know the step by step process, so again Thank You for great article!!

    Questions:
    1) I never filed form 8606 for any the TIRA contributions, didn’t realize I had to (I never informed my accountant of the TIRA). Do I need to go back and amend all my returns with form 8606?

    2) Since I contributed for the last 4 years, it now has $22K ($1K of which is capital gains) – any conversion amount limits per year? Can I convert the full $22K (all non-deductible) in one shot and how does that impact the 8606 form/tax returns?

    Thank again. Really appreciate the article and any insights you can offer for my situation!!

  299. George says

    Greetings,

    About 3 months ago I did a backdoor Roth for $6500 (over 65).

    Due to changes in my tax brackets it would be beneficial if I did a 2014 Roth conversion for $25,000 sourced from my Rollover IRA. All of the conversion amount will be taxable.

    Will doing this second Roth conversion affect the zero tax on the first conversion?

    • Harry Sit says

      The first conversion isn’t zero tax when you have a rollover IRA because you didn’t do Step 1. If you don’t do Step 1 on the remainder of your rollover IRA (and your other traditional, SEP, or SIMPLE IRAs if any), it still won’t be zero tax.

    • George says

      I plan to transfer all the assets of my rollover IRA into my 401k before the end of the year. It is my understanding that it is the amounts in your IRAs on 12/31 that determine the tax consequences. Sorry I forgot to mention this.

      So will doing this second Roth conversion affect the zero tax on the first conversion?

      Thanks.

    • Harry Sit says

      I wouldn’t do it that way, but if you want to take the [small?] risk, it’s your call. See the paragraphs under the heading “Reverse the Order?” The tax return doesn’t show first or second conversion. It’s all added together. You show you contributed $6,500 non-deductible, converted $31,500, and therefore you pay tax on $25,000. You can say your first conversion was zero tax and your second was fully taxable. Or you can say both were partially taxable. It ends up the same.

  300. Barry Barnitz says

    What effect would being the beneficial “owner” of an inherited traditional IRA have on the pro-rata rules?

  301. Brian says

    Hi Harry – what is meant by the paragraph:

    When you are doing the backdoor Roth IRA, remember not to rollover from an employer-sponsored plan to a traditional IRA in the same year, either before or after you do the Roth conversion. You can rollover from one plan to another plan, or to your own solo 401k, just not to a traditional IRA.

    If I did a backdoor Roth earlier in the year, can I rollover my 403b to a traditional IRA and convert it this year?

    • Harry Sit says

      If you rollover 403b to traditional IRA and leave it as traditional IRA until the end of the year, then your Roth conversion done earlier in the year will be taxable subject to the pro-rata rules. What do you mean by “and convert it this year”? If you want your 403b turned into Roth, and pay taxes on it, you can rollover directly to a Roth IRA.

  302. SSG says

    I have made non deductible contributions to Trad IRA for the last 3 years. The total is approx $15k. There are no gains in that Trad IRA.

    I plan to convert that into a Roth.
    As I understand, I first need to roll over my old IRAs into my 401k.
    I have losses of $10k in the old IRA.
    Is there anyway to harvest those losses?
    Should I wait till I have some gains in the Trad IRA that I plan to convert to Roth?

    • Harry Sit says

      Assuming the old IRA is pre-tax money, you have zero basis in it. There isn’t any way to harvest the loss. It will grow in the 401k instead of in the IRA. It’s not necessary to wait until you have some gains in the Trad IRA that you plan to convert to Roth.

  303. Tom Smith says

    Harry,

    I would like to create a backdoor Roth and move all my non-deductible IRA contributions (aka basis) to the Roth without incurring a tax liability.

    I have:

    o a traditional IRAs containing tax-deductible contributions
    o a SEP-IRA
    o an IRA containing non-deductible contributions
    o an IRA containing both deductible and non-deductible contributions
    o a rollover IRA from a previous employer’s 401k which may (inadvertently) also contain non-deductible contributions
    o a solo 401k (which allows rollins)
    o a Roth IRA

    Can I use the following steps:

    1) rollover the entirety of the SEP-IRA and traditional IRA to the solo 401k.
    2) rollover only the deductible contributions and any earnings from the IRA containing both deductible and non-deductible contributions to the solo 401k, leaving only the non-deductible contributions.
    3) rollover only the deductible contributions and any earnings from the rollover IRA to the solo 401k, leaving only the non-deductible contributions (if any).
    4) roll the total of the non-deductible contributions left in the IRAs to the Roth IRA.
    5) make a current non-deductible contribution to a traditional IRA, and immeiately rollover to the Roth.

    The purpose of the above steps is first to move all deductible contributions to the 401k, leaving only nondeductible contributions behind in each of the accounts; then to move this basis to the Roth; and finally to continue the process of annually Roth rollover contributions. I will need to dig a little to determine the precise amount of non-deductible contributions in each applicable account, so I’m hoping the financial institutions holding the accounts may be able to help me with this. As a check, the total amount I’m able to roll into the Roth should be equal to what was reported in my tax return’s 8606.

    Will this plan work?

    • Harry Sit says

      They look like the same steps outlined in the article. Make sure you use the verb “convert” when you talk about going from traditional IRA to Roth IRA. Financial institutions don’t know whether your contributions were deductible or not. If you haven’t tracked your nondeductible contributions on Form 8606 correctly, catch up on those first. Finally, it’s not necessary to push to the exact penny. Having a small amount of pre-tax money in the traditional IRA and converting it together with the nondeductible contributions would be just fine.

  304. Tom Smith says

    Thank you, Harry. Reason I may have seemed to redundantly lay out the steps is that I’ve spoken to so-called “tax consultants” — CPAs, mostly — at some at cost (up to $300/hr), and all were ignorant about what you laid out in a rather straightforward manner. I was certainly willing to pay for correct advice, but after reading your blog I should ask for my money back and forward it to you.
    Aside from what you laid out in your original piece, are there any timing considerations? e.g., do the conversions from all the IRAs need to occur on the same day? Also, Is the use of the term “convert” distinct from the word “rollover?” If so, what is the difference?

    • Harry Sit says

      A complete how-to means just that. After over 400 comments, it’s indeed complete. Nothing else. The conversions don’t need to occur on the same day.

      In the context of IRAs “convert” means going from one type to another type (traditional to Roth). “Rollover” means going from one place to another, keeping the same type. Between an employer plan and an IRA, it’s all “rollover.” Going from a plan to an IRA is a rollover, whether it’s pre-tax to traditional, pre-tax to Roth, or Roth to Roth. Going from an IRA to a plan is also a rollover.

  305. Edward says

    Hi Harry,
    Im new to investing and had 3 quick questions regarding the back door roth ira. I just opened up a t-ira with vanguard and deposited $5500 into it from my bank ( I didn’t buy any stocks or bonds in it yet). Then a few days later, I called up vanguard and transferred the $5500 from my t-ira to a roth via back door. The only other retirement account I have is an employee sponsored 401k plan and it’s not with Vanguard.

    1.) Do I have to worry about the pro rata rule? I’m thinking I will but like you said, it will be minimal.
    2.) Will I need to continue transferring from my t-ira to my roth via back door every year or can I just deposit into my roth from my bank, now that my roth is opened…via back door that is.
    3.) Why do I need to keep my t-ira at a $0 balance if I did the back door roth? Is there no way I can buy funds for both ira’s at the same time?

    Thanks Harry.

    • Edward says

      ok, I just figured out my third question…I forgot the TOTAL contribution for ira’s (traditional + ROTH) is $5500. So since I transferred all the $5500 to my roth, that’s why I need to have my t-ira at zero….thanks.

  306. Mike says

    Harry,

    As of Dec 31, 2014 I contributed $4600 of the allowable $5500 into my non-deductible ira. I made the remaining $900 contribution in January 2015 (allowed before April 15 2015) and had it characterized as a 2014 contribution, thus making my total 2014 contribution now maxed out at $5500.

    I converted all of the previous $4600 into my roth ira before Dec 31, 2014 (the year ended) I now plan on converting the remaining $900 in 2014 contributions in Jan of 2015. On tax form 8606 line 1 it asks to enter all contributions for 2014 even ones made between Jan 15-april 15th 2015. So I put $5500. But line 4 it wants me to enter the $900 in contributions I made between jan and april 15th 2015. And then line 5 wants me to subtract out that $900 contribution and that leaves me with the $4600.

    My question is, I categorized those $900 in contributions made in jan 2015 as 2014 and will convert those 2014 contributions in 2015. DO I have to pay take on that $900? Would I be better of changing the $900 back to 2015 and just not max out my 2014 contributions and move on learning a valuable lesson to make sure I max out and convert by dec 31?

    Any help would be appreciated

    • Harry Sit says

      It works. Just follow the line-by-line instructions. You will carry the $900 to 2015. Remember to enter it on line 2 next year. The valuable lesson still stays true. Don’t make it more complicated than necessary.

  308. Alex says

    tl;dr: If I recharacterized undesired Roth conversion done in 2014 back into traditional IRA in Feb 2015, do I still have any tax consequences for 2014 from the previous undesirable Roth conversion?

    Detailed steps:

    0a. I already had a old pre-tax traditional IRA with Fidelity as a result of rolling over 401(k) from a previous job. I also had an old Roth IRA with Fidelity from the previous job, but that wasn’t touched here, so I don’t think it matters. Neither of these two IRAs had seen any contribution in the last few years.
    0b. I exceed the income limits for making a direct contribution to a Roth IRA and for making a tax deductible contribution to a traditional IRA.

    1. In December 2014, I made a non-tax-deductible contribution to a new traditional IRA at Vanguard.

    2. I then converted the $5500 from this traditional IRA it into a new Roth IRA at Vanguard (the so-called backdoor Roth conversion)

    At this point, I unwittingly made some parts of my pre-existing tax deductible traditional IRA taxable. I think this means that I will have to pay tax on some part of it in the tax year 2014 (?), so I took the following steps to avoid that.

    3. In Feb 2015, I recharacterized the entirety of my new Vanguard Roth IRA (original + gains) back into the non-deductible traditional IRA at Vanguard.

    4. In Feb 2015. I rolled over the entirety of my pre-tax traditional IRA from Fidelity into my current 401(k) at Vanguard. (I think this will allow me to later convert the non-tax-deductible traditional IRA at Vanguard into Roth IRA without any tax consequences).

    5. I think this is unrelated, but for the sake of completeness, I also moved my old Roth IRA from Fidelity over to a new Roth IRA at Vanguard.

    At this point, I have an empty Roth IRA at Vanguard, a new Roth IRA at Vanguard transferred from Fidelity, a non-tax-deductible traditional IRA at Vanguard (with $5500 + change), and my current 401(k) at Vanguard.

    Am I correct in assuming that since I managed to recharacterize the undesirable Roth conversion (in step 3) back to traditional IRA, my old traditional IRA is still fully pre-tax and I don’t have any tax consequences for that action in the tax year 2014? Does Turbotax understand this?

    I could not find a good answer for this while searching the interwebs, so any help is deeply appreciated.

    • Harry Sit says

      Recharacterizing the conversion made it as if it never happened. However, you still have to account for on your tax return your non-deductible contribution for 2014. You also need to “explain away” the 1099-R you received for your conversion in 2014. If you answer the question correctly TurboTax will have you attach a statement to say the 1099-R for the conversion shouldn’t count because you recharacterized it before the deadline.

  309. Jim McGrath says

    I am considering a backdoor roth conversion in 2015. I have an employer sponsored 401K with flexible investment options, and a single traditional IRA. I plan to move the pre-tax $$ to the 401K. Page 24 of 2014 590a indicates (2nd to last paragraph) states that if I rollover from an IRA to a qualified plan, I need to attach an explanation to my return. What is the best way to do this? I usually efile. Either I can send a paper return, or efile and later file an amended return, or not report at all? I did not see the anything about how to report outside of computing the non-deductible amounts. Thank you.

    • Harry Sit says

      When you enter the rollover in tax software, some software will generate a statement that will go with e-file. Some other software will have you print and mail when you are attaching a statement.

  310. Sidney Lin says

    Good info. I always wonder what happens when you lose your job or change jobs.. and you have to move your 401k into a Rollover IRA.

    How does this effect the whole process now that you have a IRA and were not able to roll it into a different 401k.

    • Harry Sit says

      You don’t have to move your 401k into a Rollover IRA. You can just keep it there until you have a new 401k that you want to roll into.

  311. Vic says

    Harry, I’ll apologize in advance. This whole Roth IRA conversion has been the toughest part for me ever since I started using this backdoor method. I was able to follow your instructions last year and was successful. This year we have some “hair” and and I’m lost.

    My wife and I are filing jointly/married. Our MAGI prevents us from contributing to a traditional IRA. I want to contribute $5,500 to a traditional IRA and then convert to Roth IRA for each of us as we’ve done in the past.

    My situation hasn’t changed, but my wife’s has. She lost her job in September of 2014 and we rolled over her prior 401K’s into one traditional IRA account, out of which I’ve been making some investments. She also has that old Roth IRA account with some balance.

    2 (stupid) questions –

    1. IRA being personal (yet us filing jointly), I can still use the backdoor conversion strategy for me, correct?
    2. What can I do with my wife’s existing accounts/funds (following your advice above to “hide” in step 1), so that I:
    a) don’t create a tax liability and
    b) backdoor convert the full $5,500 contribution to her Roth IRA

    Thank you in advance.

    Vic

    • Harry Sit says

      Both are addressed in the article already. 1) “If you are married, please note IRAs are owned by one and only one person. Each spouse should look at his or her IRAs separately.” 2) She should’ve left her money in her employer’s plan. The article said “No Rollover to Traditional IRA.” The two ways to “hide” it are already listed in Part 1. Wait until she has another employer plan or let her start a business and set up a solo 401k.

  312. Stephanie says

    Hi Harry,

    First the first time, we have exceeded the MAGI limits for Roth contributions. I have been doing a lot of research to figure out what to do with the now “excess contributions” to both mine and my husbands Roth IRA’s ($4500 each for 2014).

    From what I understand in your article, we should convert or re-characterize (are these the same thing?) our ROTH IRA contributions and earnings into a Traditional IRA then convert them back to the ROTH after a few weeks. Do we then close that Traditional IRA? And is this something we can do every year? So we just continue to contribute to the Roth in 2015, 2016, etc., and then do this same back door thing each tax season?

    Thanks for your help! Stephanie

    • Stephanie says

      Thank you so much!! I think I got it 🙂 Could I ask you another question?

      What are your thoughts on a TSP or a Roth TSP? My husband is in the Air National Guard part-time. Since we have reached the income level cap for contributing to a Roth IRA would it make more sense for us (from this point forward) to contribute to a TSP or Roth TSP instead of contributing to a traditional IRA and then converting those contributions to a Roth IRA? The TSP has a much higher contribution cap and no income level cap.

    • Harry Sit says

      Yes definitely contribute to the TSP up to the maximum he’s allowed. If you don’t expect a meaningful pension, maybe just the regular TSP.

  313. Brian says

    Good morning! First of all, great article and nice comments. Had a question myself about the pro rata rule. When reading the pro rata rules, I see that employer sponsored plans are not included. Would this also include an employer sponsored SIMPLE IRA?

    For example, say I am a greater than 2% shareholder (own 50%) in an S Corp. My S Corp has a SIMPLE IRA that I contribute to. My S Corp matches 3%. I don’t have any other IRA’s other than the SIMPLE IRA through my S Corp/employer. Does this account need to be considered for the pro rata rule if I want to setup a traditional IRA, contribute to it, and then convert to a Roth IRA?

    • Harry Sit says

      The SIMPLE IRA is included in the pro-rata rule. See paragraphs and the chart under Step 1.

    • Brian says

      I didn’t think employer sponsored plans counted? If my SIMPLE is with my employer, why would this be included in the pro rata rule? Do you have a source?

    • Harry Sit says

      Brian – The pro rata calculation is done on Form 8606. You can take a look at the form and its instructions. The 3rd bullet under Part I of Form 8606 says “You converted part, but not all, of your traditional, SEP, and SIMPLE IRAs to Roth IRAs …” If you converted your traditional IRA while having a SIMPLE IRA, you fit that description.

    • Brian says

      Harry – I’ve thoroughly reviewed f.8606 and see that one needs to aggregate all IRA’s (trad, SEPs and Simples), however I know there is a rule that says “employer sponsored plans are not included.” If my Simple is with my employer, it leads me to believe that I might not have to include it in the pro rata calc.

      Please don’t take this as arguing, rather I’m trying to figure out the correct answer. At face value, I would say to include all trad/simples/sep’s in the pro rata calc, however the “employer sponsored” rule is throwing me off.

    • Harry Sit says

      Brian – All SIMPLE and SEP IRAs have an associated employer. Just having an associated employer isn’t enough. Being an IRA kills the deal. Here’s what the IRS says about SIMPLE IRA:

      “A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees.”

      There, a SIMPLE IRA is defined as a special type of traditional IRA. Same thing for SEP:

      “A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees.”

      They are inherently traditional IRAs. That’s why they are aggregated with other traditional IRAs. They don’t belong to the more narrowly defined employer sponsored [non-IRA] plans.

  314. Bob says

    I am currently 75 and am receiving RMDs from my IRA. I would like to perform a backdoor Roth this year after I take my RMD, since I have a large after-tax balance included in my traditional IRA. I can’t make any further IRA annual contributions, but that is okay. Other than that, is there any limitation or restriction on a backdoor Roth due to my age?

    • Harry Sit says

      Bob – Backdoor Roth in this article refers to getting new money into Roth IRA when the income is too high for a direct contribution to Roth IRA. You are referring to moving existing after-tax money in a traditional IRA to Roth through a conversion. There’s no age limit. You will be doing steps 1, 4, and 5, skipping steps 2 and 3.

    • Bob says

      Thanks, Harry. Thanks for clarifying the distinction when skipping steps 2 & 3. Will still be a worthwhile move for me.

  315. Remuel says

    in roth conversions, do we pay taxes only for earnings [capital gains, dividends]?

    How about market appreciation or unrealized gains?

    • Remuel says

      Thanks Harry,

      if i placed non deductible 6500 on traditional IRA last year, and now its worth 7500 mostly from unrealized gains, would I be taxed for the 1000 dollars?

    • Harry Sit says

      Remuel – Yes, if you convert the $7,500 now. And you will be taxed on more than the 1000 dollars if you have other traditional, SEP, or SIMPLE IRAs and you don’t follow the steps in this article.

    • Bob says

      I don’t fully understand. If the original contribution was used to buy securities for $6500, and they are worth $7500 now, wouldn’t the securities need to be sold within the IRA before performing Step 1? Other than that I don’t see how only the unrealized gains could be transferred into a Qualified Retirement Plan.

    • Harry Sit says

      Bob – I think Remuel was talking about just doing a straight conversion. For only $1,000 it’s probably not worth separating it out and transferring to a qualified plan.

    • Bob says

      Thanks, now I understand. Does that mean that when a Traditional IRA holding securities is converted to Roth the value is the conversion is the fair market value of the securities on the date of conversion? Would this then be the value to be entered on form 8606 line 16?

  316. Remuel says

    Harry, I dont have other IRA’s. Would you recommend converting it now? Is there a strategy to minimize tax hit for roth conversions? Shall I wait for market depreciation?

    • Harry Sit says

      No idea. If you wait the $7,500 may become $8,500 or $9,500. If the market crashes soon after you convert, there is a window during which you can “undo” the conversion with a recharacterization, but then you are restricted from reconverting it until a blackout period passes. Besides more paperwork, by the time the blackout clears, the value may recover back to $7,500 or even higher again. So don’t count on the “undo” as the magic bullet.

  317. Remuel says

    Harry,

    I’m thinking of doing partial conversions throughout the year timing it with pullbacks considering the volatility of the markets.

    Any thoughts about this?

    Or would you rather make a one time conversion and get it over with?

    Also, I’m planning to make monthly conversions for 2015, can I also make monthly ROTH conversions?

    • Harry Sit says

      Remuel – That’s completely your call. You can convert monthly if you don’t mind doing it. No idea whether it will result in more taxes or less taxes in the end.