2023 Backdoor Roth IRA Home Base

[jacoavlu]

I need some help.

I logged on to my wife's vanguard account today (1-2-21) to make the 2021 contribution to her TRADITIONAL IRA for the 2021 back door, and noticed that there was $0.51 in her Traditional IRA account.

I have done the back door roth for her account the past 4 years and always thought I had emptied out the traditional IRA but when I look back at the transactions, last year on 1-13-20, there was dividend paid out of $0.51 after I already did the conversion and I never logged back into the account to see it.

That means that there was NOT a zero balance in all her other IRA accounts and I guess Im subject to the Pro Rata Rule. Other than filling out the 8606 correctly, is there anything else I need to do?

Can I convert it today for the year 2020 since it has been holidays or weekend since Thursday the 31st?

What are the actual reprecussions of this?

I am also frustrated by the fact that Vanguard wont let me choose to direct any future dividends from this account to a bank account because im under 59.5.

So this could happen again next year unless I go back in and convert the dividends at a later date?

Even with a 12/31 $1 balance in tIRA for a typical $6k backdoor Roth, the pro rata tax will round down to zero. You can fill in form 8606 and confirm this. So, don’t worry about it.

simply convert this to Roth with your 2021 conversion

and next time, CONVERT ALL / CONVERT 100%. Do not convert “$6000”. Problem will be solved

and Vanguard is doing you a favor in not letting you direct dividends out to your bank account. That would be an early IRA distribution.

[artemis]

Yes

In that case, I propose this board should pay you 0,000,000.00 per year! The cost is worth it if it makes you happy!

[Tangler]

Awesomeness! thanks Peds!

[jsklein77]

I have a question that I think I know the answer to but would appreciate confirming. I completed a 403b to traditional IRA rollover after reaching age 59 1/2 about 2 years ago in an effort to save management fees and have more control over my investment options. Prior to this the IRA had only nondeductible funds as I had done a Roth conversion of the pretax contributions when it became an option in 2011. I presume that since the traditional IRA now contains pretax funds, an attempt at a backdoor Roth contribution now would be subject to the pro rata rule and thus would be a taxable event. Since the majority of the funds in the IRA are pretax, the taxes due on any attempted backdoor Roth contribution would be high. Is this correct? Thanks.

[Peds]

I have a question that I think I know the answer to but would appreciate confirming. I completed a 403b to traditional IRA rollover after reaching age 59 1/2 about 2 years ago in an effort to save management fees and have more control over my investment options. Prior to this the IRA had only nondeductible funds as I had done a Roth conversion of the pretax contributions when it became an option in 2011. I presume that since the traditional IRA now contains pretax funds, an attempt at a backdoor Roth contribution now would be subject to the pro rata rule and thus would be a taxable event. Since the majority of the funds in the IRA are pretax, the taxes due on any attempted backdoor Roth contribution would be high. Is this correct? Thanks.

Yes.

[VagabondMD]

This sticky ain't sticking.

[Peds]

This sticky ain't sticking.

?

[Paradox]

Am I too late?

On 12/31/2020, I had a pre-tax tIRA (Fidelity) with a large amount. I eventually did a rollover into my 401k (Vanguard) on 1/8/2021. So no taxes incurred.

I want to contribute 6k to tIRA and then backdoor rIRA for 2020. I believe I will incur pro-rata rule. So am I too late for 2020?

If I am too late for 2020, when can I contribute 6k for 2021? Do I wait after tax day in April 2021 to avoid pro-rata rule?

When I do contribute 6k for 2021, can I use the same tIRA that I rolled into my 401k, even though 6k is post-tax? For some reason, the account is still opened even though the balance is zero.

Should I open a tIRA and do backdoor rIRA with Vanguard, since my 401k is there? Are there any advantages over going with Fidelity? Investment choices, less fees, etc?

[jfoxcpacfp]

Am I too late?

On 12/31/2020, I had a pre-tax tIRA (Fidelity) with a large amount. I eventually did a rollover into my 401k (Vanguard) on 1/8/2021. So no taxes incurred.

I want to contribute 6k to tIRA and then backdoor rIRA for 2020. I believe I will incur pro-rata rule. So am I too late for 2020?

If I am too late for 2020, when can I contribute 6k for 2021? Do I wait after tax day in April 2021 to avoid pro-rata rule?

When I do contribute 6k for 2021, can I use the same tIRA that I rolled into my 401k, even though 6k is post-tax? For some reason, the account is still opened even though the balance is zero.

Should I open a tIRA and do backdoor rIRA with Vanguard, since my 401k is there? Are there any advantages over going with Fidelity? Investment choices, less fees, etc?

1. You are not too late. Your have until 4/15 to contribute $6k to your TIRA (non-deductible). You can convert at your leisure but recommend as soon as the funds clear.
   • As long as your pre-tax TIRA has a zero balance on 12/31/21, there w/b no pro-rata taxes.
2. Yes, use the same TIRA account. The custodian doesn’t care about the tax attributes; it is a TIRA either way, up to you to determine how to treat on your tax return.
3. Not a big VG cheerleader. If there is any chance you may want to do a Roth solo-k contribution or a Mega BD Roth, I’d recommend ET or TDA. Forget the investment choices, fees, etc. They are similar and irrelevant in the long term, which is really all that matters.

[jacoavlu]

Am I too late?

On 12/31/2020, I had a pre-tax tIRA (Fidelity) with a large amount. I eventually did a rollover into my 401k (Vanguard) on 1/8/2021. So no taxes incurred.

I want to contribute 6k to tIRA and then backdoor rIRA for 2020. I believe I will incur pro-rata rule. So am I too late for 2020?

If I am too late for 2020, when can I contribute 6k for 2021? Do I wait after tax day in April 2021 to avoid pro-rata rule?

When I do contribute 6k for 2021, can I use the same tIRA that I rolled into my 401k, even though 6k is post-tax? For some reason, the account is still opened even though the balance is zero.

Should I open a tIRA and do backdoor rIRA with Vanguard, since my 401k is there? Are there any advantages over going with Fidelity? Investment choices, less fees, etc?

working through form 8606 is always educational. Teach a man to fish type of thing. Come back with further questions

[Peds]

Am I too late?
- yes we all contributed for 2021 already......joke.

On 12/31/2020, I had a pre-tax tIRA (Fidelity) with a large amount. I eventually did a rollover into my 401k (Vanguard) on 1/8/2021. So no taxes incurred.
- ok

I want to contribute 6k to tIRA and then backdoor rIRA for 2020. I believe I will incur pro-rata rule. So am I too late for 2020?
- you need to understand both parts. first is the contribution. can be done up until tax time for the prior year.
- second is the conversion, which in the same calendar year all IRAs must be 0 by 12/31/XX
- so so far, ok

If I am too late for 2020, when can I contribute 6k for 2021? Do I wait after tax day in April 2021 to avoid pro-rata rule?
- this was literally answered above in my home base thread. there is no time lag.
- you should contribute 12K at once (2020 + 2021).

When I do contribute 6k for 2021, can I use the same tIRA that I rolled into my 401k, even though 6k is post-tax? For some reason, the account is still opened even though the balance is zero.
- yes you can use any open tIRA that you own.
- you will also need to open a rIRA if you dont have one already.

Should I open a tIRA and do backdoor rIRA with Vanguard, since my 401k is there? Are there any advantages over going with Fidelity? Investment choices, less fees, etc?
- pick your fav.

thats the long answer to jacoavlu post. but yes go poke around 8606.

[fisician]

Pro-rata rule question:

• Jan 6, 2020 contributed $6k to traditional IRA
• Jan 7, 2020 converted $6k to Roth IRA
• Dec 31, 2020 Noted a balance of $8k in traditional IRA balance (I was unaware)

Completing form 8606 for year 2020, I understand that 6k / (8k+14k) = 0.429. 6k * 0.429 = $2,574 is the non-taxable amount of the portion that was converted to Roth. The taxable portion of the conversion is 6,000 - $2,574 = $3,426

Question:

1. Will I pay taxes on $3,426 for tax year 2020?
2. For tax year 2021, in order to perform an uncomplicated backdoor contribution and conversion, how should I handle the $8k sitting the traditional IRA account?
   • Rollover the entire $8k amount into employer 401k to make the balance $0 by Dec 30, 2021?
   • OR
   • Rollover $8k - $3,426 (taxable amount) = $4,574 into 401k. And rollover the $3,426 into Roth IRA for 2021 in addition to the new 2021 contribution and conversion of $6k

Thanks!

[Peds]

Pro-rata rule question:

• Jan 6, 2020 contributed $6k to traditional IRA
• Jan 7, 2020 converted $6k to Roth IRA
• Dec 31, 2020 Noted a balance of $8k in traditional IRA balance (I was unaware)

Completing form 8606 for year 2020, I understand that 6k / (8k+14k) = 0.429. 6k * 0.429 = $2,574 is the non-taxable amount of the portion that was converted to Roth. The taxable portion of the conversion is 6,000 - $2,574 = $3,426

Question:

1. Will I pay taxes on $3,426 for tax year 2020?
2. For tax year 2021, in order to perform an uncomplicated backdoor contribution and conversion, how should I handle the $8k sitting the traditional IRA account?
   • Rollover the entire $8k amount into employer 401k to make the balance $0 by Dec 30, 2021?
   • OR
   • Rollover $8k - $3,426 (taxable amount) = $4,574 into 401k. And rollover the $3,426 into Roth IRA for 2021 in addition to the new 2021 contribution and conversion of $6k

Thanks!

How many years have you incurred pro-rata exactly?
The entire account should be converted but tax will only be due on what hasn't been taxes which is tracked on 8606.

[fisician]

How many years have you incurred pro-rata exactly?
The entire account should be converted but tax will only be due on what hasn't been taxes which is tracked on 8606.

This is the first time that I have incurred pro-rata. While I did the $6k contribution and conversion in Jan 2020, my traditional IRA balance was zero during and after the conversion. However, due to a rollover from my 401k (NOT CONTRIBUTION), my rollover IRA balance by Dec 31, 2020 was $8k (I wasn't aware that rollover IRA = traditional IRA). Because of this I believe I incur the pro-rata taxes.

Using the IRS instructions and filling out the 8606, I understand that I will pay taxes on $3,426. But I'm trying to figure out which bucket the $3,426 is coming from because I would like to zero out the traditional IRA/rollover IRA balance to zero by Dec 31, 2021. Hence, I need to know how much of the traditional IRA needs to be rolled over into employer 401k in order to make my traditional IRA balance to zero. Does that make sense?

[BruinBones]

I am of the opinion that clearing out your Traditional (and other non-Roth) IRAs should be the first step for anyone attempting this, especially first-timers, to avoid the pro-rata rule.
I think many high earners are aware of the IRA and probably have contributed to a Traditional earlier in their careers to get the deduction.
Later in their career as high earners, they then hear about this "Backdoor Roth" concept and want to take advantage of contributions that grow tax free rather than tax-deferred.
So their first step would/should be how to clear out their (non-Roth) IRAs in order to make this backdoor mechanism work smoothly. Honestly for me the first time, that was the most difficult step (in addition to separating out deductible from non-deductible tIRA contributions, which is a separate issue). Figuring out where and how to clear out my tIRA deductible contributions and tax-deferred growth took much more time than the other remaining steps outlined by WCI, PoF, TPP, and others.