Backdoor Roth conversion logistics

[OrthoInAL]

My apologies if this is a dumb question...I just want to be sure I'm prepared. I'm planning to fully fund a backdoor Roth this year, but it will be my first time doing so. I've read WCI's post going through the steps, but my main question involves what happens for the 2nd year you do the conversion.

 

As an example, I'm planning to open a traditional IRA with Vanguard one day with $5500, then opening a Roth account at Vanguard and converting it the next day. During the following year when I convert again, I understand that I will just add $5500 to the same traditional IRA account (which has been sitting with a balance of $0 for a year) and then convert the next day. How does the conversion work at that point since I will have a Roth account opened at that point? Does the money get converted into the same Roth account that's been growing for a year or does another Roth account have to be opened for each conversion? That doesn't seem to make sense because I can't imagine needing 30 different small Roth accounts over a 30 year period, but just want to know what to expect and how that conversion option appears on the site.

 

Thanks for any information!

[Faithful Steward]

You are correct. You do not need to keep opening new Roth IRAs.

[justlearning]

so just to clarify  if you never had Traditional IRA or Roth IRA account you perform this steps first time around correct?

First time:

1- Open a Traditional IRA Account (Fidelity, Vanguard, Schwab etc)

2- Transfer post tax money $5500 from your accounts (Checking, Savings etc.) to the new Traditional IRA account

3- Wait for a day

4- Open a ROTH Account

5- Transfer the all $5500 fund from the Traditional IRA account to the ROTH account

6- Leave the Traditional IRA Account balance of $0.00 for the year

 

Consecutive  years:

1- Transfer post tax money $5500 (or whatever the year limit is)  from your accounts (Checking, Savings etc.) to the Traditional IRA account

2- Wait for a day

3- Transfer the all $5500 (or whatever the year limit is) fund from Traditional IRA to the ROTH account

4- Leave the Traditional IRA Account balance of $0.00 for the year

 

Thank you.

 

[jfoxcpacfp]

justlearning wrote:

so just to clarify  if you never had Traditional IRA or Roth IRA account you perform this steps first time around correct?

First time:

1- Open a Traditional IRA Account (Fidelity, Vanguard, Schwab etc)

2- Transfer post tax money $5500 from your accounts (Checking, Savings etc.) to the new Traditional IRA account

3- Wait for a day

4- Open a ROTH Account

5- Transfer the all $5500 fund from the Traditional IRA account to the ROTH account

6- Leave the Traditional IRA Account balance of $0.00 for the year

Consecutive  years:

1- Transfer post tax money $5500 (or whatever the year limit is)  from your accounts (Checking, Savings etc.) to the Traditional IRA account

2- Wait for a day

3- Transfer the all $5500 (or whatever the year limit is) fund from Traditional IRA to the ROTH account

4- Leave the Traditional IRA Account balance of $0.00 for the year

Click to expand...

That is correct, nice list. You may find this helpful: Explaining Backdoor Roth IRAs.

[Wash]

This is a dumb question too -- I added $5500 to my new traditional IRA account at Vanguard, but it's not letting me convert it to a roth IRA and says I have "no holdings available to convert"

Do I need to buy Vanguard funds first with the $5500 before it will let me convert?

[DMFA]

Wash wrote:

This is a dumb question too — I added $5500 to my new traditional IRA account at Vanguard, but it’s not letting me convert it to a roth IRA and says I have “no holdings available to convert”

Do I need to buy Vanguard funds first with the $5500 before it will let me convert?

Click to expand...

It automatically goes in to a "sweep account" - either a money market account or an FDIC-insured deposit account.  It has to take time to "clear" to be added to the account to become "available," which can take a few days.  Once it's "cleared," you can convert/withdraw it.  They'll let you trade with money that hasn't completely cleared, but they won't let you withdraw it immediately.

[nachos31]

Wash, when you transfer money from your bank account, for example, to Vanguard they can take up to 7 days to process/clear/settle (not sure what the correct term is here). Until it has been formally settled (even if your bank account shows the money has been transacted) and is available in the settlement fund of your Trad IRA, you cannot convert to Roth. At least that's been my experience.

[jsr52]

If one wants to complete a backdoor ROTH for the 2017 tax season can the TIRA contribution occur after Jan 1 2018?

[jfoxcpacfp]

jsr52 wrote:

If one wants to complete a backdoor ROTH for the 2017 tax season can the TIRA contribution occur after Jan 1 2018?

Click to expand...

A backdoor Roth is a 2-step process. You have until 4/15/18 to make the TIRA contribution for the 2017 tax year. The conversion (step 2) is done on a calendar year basis so you would convert for calendar year 2018. However, the most important part is step 1. A missed year of TIRA contributions is one you can never recover.

You may find this post helpful: Explaining Backdoor Roth IRAs

[Peds]

Wash wrote:

This is a dumb question too — I added $5500 to my new traditional IRA account at Vanguard, but it’s not letting me convert it to a roth IRA and says I have “no holdings available to convert”

Do I need to buy Vanguard funds first with the $5500 before it will let me convert?

Click to expand...

you see the little info circle next to the unavailable shares? that will show you the date they become available. then you click buy/sell -> and move everything to your rIRA. easy!

[rtsmith4]

I have a ROTH IRA that I started prior to finishing residency. I now have a Roth deferred 401K (post tax dollars) as my main retirement account. Is there any benefit to doing the backdoor conversion??

[jfoxcpacfp]

rtsmith4 wrote:

I have a ROTH IRA that I started prior to finishing residency. I now have a Roth deferred 401K (post tax dollars) as my main retirement account. Is there any benefit to doing the backdoor conversion??

Click to expand...

Sure - 100% tax-free growth, same as you're getting in your 401k. If you don't want to make 100% Roth contributions in both work and personal accounts, though, do the backdoor and change your 401k to part traditional (pre-tax). Now that you're an attending, the deduction will make a lot more sense.

[DMFA]

rtsmith4 wrote:

I have a ROTH IRA that I started prior to finishing residency. I now have a Roth deferred 401K (post tax dollars) as my main retirement account. Is there any benefit to doing the backdoor conversion??

Click to expand...

In what context are you asking?  IRA contributions are another $5,500 of tax-advantaged retirement savings each year which just about everyone should do *in addition to* employer qualified plans like 401(k), 403(b), etc.

• If you have an employer qualified plan like 401(k) or 403(b) (which you do) and make over $99,000 if married (or $62,000 if single), you can't fully deduct traditional IRA contributions (or at all if married over $119k or single over $72k)


• If you make over $186,000 married (or $118,000 single), you can't make a full Roth IRA contribution (or none at all if slightly over that)


• Everyone can contribute to a traditional IRA (just not necessarily deduct it)


• Everyone can convert traditional IRA to Roth IRA (just have to pay taxes on anything not yet taxed)

So, the only way to get a tax advantage on IRA contributions for high earners with employer qualified plans is to do the backdoor Roth (non-deducted Traditional IRA contribution converted to Roth prior to gain).

Assuming you're leaving it for retirement, which you definitely should, Roth is superior to standard "taxable" brokerage account: once the money is in the account, it's completely tax-free, including all dividends and growth.

If you're making hundreds of thousands of dollars, you might not think getting a tax advantage on $5,500 per year is a big deal, but tax-free gains and withdrawals over several decades can make a pretty big impact.

[Thedoc2049]

If you are married and have stay at home spouse, can you contribute 5,500 x 2 to traditional IRA and then do a roll over on 11,000 into rollover/back door Roth IRA?

 

Or is the back door IRA limited to 5,500 per year even if married and spouse non-working?

 

Finally, if 11,000 is allowed, do you need separate accounts for you and your spouse? Or can you just designate the 2nd contribution for the spouse in the same account?

[DMFA]

Thedoc2049 wrote:

If you are married and have stay at home spouse, can you contribute 5,500 x 2 to traditional IRA and then do a roll over on 11,000 into rollover/back door Roth IRA?

 

Or is the back door IRA limited to 5,500 per year even if married and spouse non-working?

 

Finally, if 11,000 is allowed, do you need separate accounts for you and your spouse? Or can you just designate the 2nd contribution for the spouse in the same account?

Click to expand...

Yes. This is called the Kay Bailey Hutchison Spousal IRA rule. If you have the $5,500 in earned income and are married filing jointly, she can make the IRA contribution.

They're *Individual* Retirement Arrangements. Yours and your spouse's are separate.

Don't use the term "rollover." It only applies to pretax to pretax or Roth to Roth. This is a conversion; however, it's not taxed because it wasn't deducted...assuming the person whose account it is has no other pretax IRAs (Traditional, SEP, or SIMPLE).

Cheers and welcome :-)