Vanguard 1099-R Backdoor Roth

[scurry]

Hello,

I did a backdoor roth ira for myself in 2015. I received my 1099-R from Vanguard and it shows the following:

In box 1 (gross distribution), it lists 5,500.10

In box 2a (taxable amount), it lists 5,500.10

Box 2b (taxable amount not determined and total distribution) is marked with an X.

Box 4 (Federal income tax withheld) is 0.

Box 7 (distribution code) is 2.

IRA/SEP/SIMPLE is marked with an X.

I converted my previous SEP and rollover IRAs into my solo 401k, so I have no other IRA accounts. I do have other Roth IRA accounts, but I don't think these plays into the pro-rata calculation.

My question is, " Is my 1099-R is correct?"

If so, I am basically going to tell my accountant to copy form 8606, as it appears on the WCI backdoor Roth tutorial link:

https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

Thanks.

 

 

[jfoxcpacfp]

Yes, that is correct. I bet your accountant already knows how to file a form 8606 without resorting to a tutorial.

[scurry]

Thanks so much. I appreciate your help!

[scurry]

So, just to confirm, to account for the backdoor Roth, all that needs to be filled out is Form 8606? My accountant is confused by the 1099-R and I just want to make sure nothing else needs to be completed. Thanks.

[jfoxcpacfp]

Yes. His software should have an input code to handle it.

[childay]

My accountant was also somewhat confused and not familiar with the backdoor roth.  I plan to check the form after he fills it out..

[MochaDoc]

Reviving this thread because I'll be doing my backdoor Roth IRA contribution through Vanguard next week.

 

Just to make sure I'm clear on the steps.

 

1) Open traditional IRA account.

2) Deposit full amount ($5500 for 2016) at one time.

3) Then same day transfer that money over to my Roth IRA.

4) File a form 8606 with my taxes next year.

 

Does that sound about right? Are there any extra actions I need to take when doing a backdoor Roth IRA with Vanguard?

 

I have not made any IRA contributions to any accounts this year so the oft cited "pro-rata" issue is not a concern.

 

[pulmdoc]

Yes, except you need to wait for your contribution to the traditional IRA to clear before you can roll it into the ROTH. This usually takes a few days, so you need to remember to come back and do it.

The "pro-rata" rule does not just apply to contributions made earlier in the calender year that were profitable, but to profits from any non-Roth IRA accounts made at any time in the past. If you do not have a traditional IRA, SEP-IRA, SIMPLE IRA etc you are in the clear. Just open a traditional IRA with Vanguard, follow the steps above and you are good to go. Don't forget to do the same for your spouse if applicable.

[MochaDoc]

Thanks for your reply, PulmDoc.

All my prior retirement contributions were to my Roth IRA so I'm in the clear this time.

Regarding pro-rata and the likelihood that I'll have to do another backdoor contribution next year as well, what extra steps will I have to worry about next year after doing a backdoor contribution this year?  I like to plan ahead.

No spouse, (un)fortunately.

[nachos31]

You shouldn't have to worry about the pro-rata rule in future years as long as you do not have balances by year's end in any non-Roth IRA. Nothing should change. Since you are doing the backdoor contribution and conversion both in the same year (ie not making your 2016 contribution in 2017--between Jan 1 and April 17th, 2017), then your Form 8606 should be easy to fill out and you shouldn't have anything to account for from your 2016 backdoor on your 2017 Form 8606.

[jfoxcpacfp]

MochaDoc wrote:

 

1) Open traditional IRA account.

2) Deposit full amount ($5500 for 2016) at one time. Doesn't have to be all at once, but recommended. In the future, recommend you contribute in January, if possible.

3) Then same day transfer that money over to my Roth IRA. Need to wait a few days to prevent application of the "step transaction" which will supposedly separate the steps and prevent them from being compressed into one should the IRS challenge at some point in the future. Not a big worry, but no real reason not to.

4) File a form 8606 with my taxes next year.

Does that sound about right? Are there any extra actions I need to take when doing a backdoor Roth IRA with Vanguard? Keep your account open and use to cycle contributions through annually rather than opening a new account each year.

I have not made any IRA contributions to any accounts this year so the oft cited “pro-rata” issue is not a concern. Just because you haven't contributed to an IRA this year does not mean the pro-rata rule does not apply. Make sure you don't have any pre-tax IRA balances in your name (i.e. from ANY year).

Click to expand...

See above comments in bold.

[MochaDoc]

nachos31 wrote:

You shouldn’t have to worry about the pro-rata rule in future years as long as you do not have balances by year’s end in any non-Roth IRA. Nothing should change. Since you are doing the backdoor contribution and conversion both in the same year (ie not making your 2016 contribution in 2017–between Jan 1 and April 17th, 2017), then your Form 8606 should be easy to fill out and you shouldn’t have anything to account for from your 2016 backdoor on your 2017 Form 8606.

Click to expand...

Great. Thanks for the detailed answer, Nachos31.

[MochaDoc]

jfoxcpacfp wrote:

MochaDoc wrote:

 

1) Open traditional IRA account.

2) Deposit full amount ($5500 for 2016) at one time. Doesn’t have to be all at once, but recommended. In the future, recommend you contribute in January, if possible.

3) Then same day transfer that money over to my Roth IRA. Need to wait a few days to prevent application of the “step transaction” which will supposedly separate the steps and prevent them from being compressed into one should the IRS challenge at some point in the future. Not a big worry, but no real reason not to.

4) File a form 8606 with my taxes next year.

Does that sound about right? Are there any extra actions I need to take when doing a backdoor Roth IRA with Vanguard? Keep your account open and use to cycle contributions through annually rather than opening a new account each year.

I have not made any IRA contributions to any accounts this year so the oft cited “pro-rata” issue is not a concern. Just because you haven’t contributed to an IRA this year does not mean the pro-rata rule does not apply. Make sure you don’t have any pre-tax IRA balances in your name (i.e. from ANY year).

Click to expand…

See above comments in bold.

Click to expand...

Thanks for the clarifications and helpful recommendations, Jfox. I will do as you recommended.

One question about 3) and the "step transaction," doesn't waiting, even for a couple days, open me up to potential gains and extra paperwork/trouble? I'm guessing 2 days should be adequate?

I didn't know until this month that I would be ineligible for the Roth so I waited until I was certain. Next year, my plan is to contribute early January 2017. I'm guessing even if I don't qualify, contributing early beats waiting until late in the year.

[jfoxcpacfp]

MochaDoc wrote:

One question about 3) and the “step transaction,” doesn’t waiting, even for a couple days, open me up to potential gains and extra paperwork/trouble? I’m guessing 2 days should be adequate?

Click to expand...

Yes, it does open you up to potential gains or losses. In most cases, it is only a few dollars. That, imo, is much preferable than the appearance of one, even though convoluted, transaction. There is no definitive answer on the number of days, but you should wait at least 2, imo.

[DMFA]

If you're keeping the contribution in brokerage cash or money-market account, it shouldn't gain anything over the span of a few days...at least not enough for it to round up to the next dollar (which IRS forms are rounded to).