I’m thinking it makes sense to take the tax hit now for the around 60K I have in my 403 to have the taxes taken care of on the amount & allow it to grow tax-free? Do you have any experience with this kind of late contribution situation. Great walk through! Also, strong work on the asset location, putting the tax-inefficient (REIT) and high-volatility asset classes (EM, mid-cap, small-cap) in the Roth. Before you read any further, if you are not max funding your traditional 401k ($19,500 if you are under … This is where you do it through the 401(k). Again, Vanguard doesn’t know that. A modified adjusted gross income (MAGI) of $208,000 for a couple filing jointly, or $140,000 for an individual makes you ineligible to contribute to a Roth IRA in 2021. My wife is a just finished with all her schooling doctor and finally earning an income. Can I just leave it there and not worry about it? Is their a hierarchy of which types of retirement accounts to save in? Scratch that…..after further research ….. all IRAs are treated as one. Now that you understand more about the nuts and bolts of the account, let’s take a look at some of the top advantages of using a mega backdoor Roth. Look closely at the “of the shelf” versions of popular custodians and make sure they have the ability to do a Mega Backdoor Roth if you have a Solo 401k and enough business income. Because much of my income is commission, I don’t know exactly how much I will make this year. Is it too late to contribute to a backdoor Roth for 2019. Vanguard should be able to help if it’s not self-explanatory. The backdoor Roth doesn’t take the place of any tax deferred money. It’s not right for everyone, but knowing the pros and cons can help you decide whether it’s a good option for you. If fortune smiles on you, this strategy could allow you to stash an extra $37,500 into a Roth IRA or Roth 401(k) in 2020. I’m thinking I wouldn’t owe any taxes on this converstion because a) the original contribution is after tax & non deductible and b) i have not made any profit on the money I contributed. Also, I select the only fund we have in this Roth IRA, the REIT index fund, VGSLX. Question: Before the Tax Cuts and Jobs Act went into effect in 2018, some people worried about something called the “step doctrine” and that it may be best to wait a while before making the Roth IRA conversion. For rollover to the employer 401k, the process is easy. My sunday mornings start with your sunday best! MEGA BACKDOOR ROTH!!! The mega backdoor strategy is just one of a handful of ways to enjoy the beauty of the Roth treatment, where your money earns investment returns that you’ll never owe taxes on. In doing our taxes, we discovered we are over the income limit for contributing directly to our Roths and would now like to take advantage of the backdoor Roth IRA. I didn’t qualify for the Roth this year, and am a NP. However, I am not very sure if I can attempt this in my current situation. New do this and big procrastinator, but learning. We are considering doing this back door conversion through vanguard. We have a new rep — it might be worth asking again. No welcome bonus. If no, how do you avoid it? Trad IRA earlier this year then converted to SEP IRA, thinking I wanted to contribute more than $5500 as my 1099 income increased. If that’s the case, you might want to reconsider this strategy. In your case, I would convert the $3,000 before the end of the calendar year. Otherwise, it should not be an issue. It’s a great way for high-income professionals to contribute to a Roth IRA when earning “too much” to contribute directly to a Roth IRA. I am just trying to decide if it makes the most sense to contribute to the tax-deferred account vs Roth vs 50% of investments into each one. I don’t think it’s changed much or at all really in the five years I’ve been using the “backdoor.”. Is this article assuming you are a high income earner, unable to contribute to a Roth IRA, so you’re using the Backdoor Roth Contribution just to have the account? For an overview of the different account types, please see this two part series. It sounds like the answer is yes due to the tax form that needs to be filled out (other than filing a 1040X later on, which I don’ t want to do), but I just wanted to confirm. Interestingly, I have colleagues who believe that tax bracket rates will go even higher in the future so they opt to fund their Roth 401k and WL accounts more. In general, it makes sense to first max out a regular or Roth 401(k) and a Roth IRA, if you’re eligible. Thank you. But there’s a problem. You either receive a tax deduction for making a traditional, tax-deferred contribution or you make a non-deductible contribution, but there are no taxes for contributing. Since it’s a non-deductible contribution, we won’t owe any tax on the conversion, assuming you followed the directions and put your contribution into a money market fund and converted as soon as possible. Any ideas on how to proceed? Did I just do something bad? Just can’t take the dividends/capital gains (that has 10% penalty). I contributed to my (and spouse’s) Roth IRAs earlier in the year before knowing we’d be over the contribution limit (for the first time ever). Mega Backdoor Roth Secret About the Webinar Join Liberty Group's Chairman & Founder, David Hollander, Esq. Thanks very much for the helpful info. In 2020, that means being able to save more than $25,500 (that’s $19,500 to a 401(k) plus $6,000 to a Roth IRA), or more than $33,000 if you’re 50 or older ($26,000 to a 401(k) and $7,000 to a Roth). Roth contributions are not tax-deductible when you contribute, and are not taxed when withdrawn. I have SEP IRA, roll over IRA, Roth IRA, traditional IRA and employer 403b all with VG. Click on this link to Join Curizon and you'll also be entered into a drawing for an additional $250 to be awarded to one new registrant referred by Physician on FIRE this month. Congress recently blessed the Backdoor steps as perfectly legit. I’m nervous about that account as I don’t really understand its tax implications. Both back door Roth and mega back door Roth contributions are “free” if this is money you would have put into taxable investments anyway. The rules, and even the availability, for these plans may vary considerably from one company to another. I am married and with our combined gross income we are currently not past that threshold but with our end of the year bonuses we might be (most likely somewhere between $193-$203k). the after-tax 401(k) ), since it is clearly worse than the other 2 options. If you use a CPA, I would share one of the links on this page with him or her. Later on, you can open up a solo 401(k). Instead I invested in VTSAX! I’m not sure why I didn’t run into this question last year (2020), but my traditional IRA is a mutual account and my Roth IRA is now a brokerage account holding VTI. Hello! I think my only other option is to remove the non-deductible funds with an excess contribution form and eat the 10% withdrawal penalty before October 15th, unless the Vanguard rep I spoke to is mistaken and they can un-comingle the money. I started Rent the Mortgage in 2019 to begin documenting my financial lessons with the intent of inspiring others to start their FIRE journey through real estate. I understand that if we wanted to do a backdoor Roth, all of the money would have to be emptied from the current IRAs. What do you think? I was contemplating whether to either roll this money into my Vanguard IRA and then move it to do my backdoor Roth for 2020 (I already did the backdoor Roth for 2019) vs. rolling the old 401K into my current employer based 401K I have with Fidelity. In that time it looks like it earned $1.13 in interest. Thanks for doing this every year! I am now looking into doing a backdoor conversion as I have a 403b I max out at work and also make too much to get a tax break on the traditional IRA contributions. Can anyone confirm? Just to clarify this statement. Thanks! A. gives you an immediate tax break on your contribution, your money grows tax-deferred and you pay income tax when you pull out your money in retirement. Need some advice. ... Plan on using all the Roth IRA money as a source of cash when I FIRE since you can pull out the principle without penalty. I've been doing it since 2014 and haven't been audited yet, despite having several things that add way more complication than the mega backdoor Roth. If I had left our 4th quarter dividend distributions from our taxable brokerage account in the settlement fund, I could have used those funds. If for some odd reason, you plan to leave the money in a money market fund, you can be done. I'm looking at options for covering expenses in the first 5 years of FIRE while getting a Roth conversion ladder going. And follow it with my regularly scheduled contribution to my non-deductible traditional IRA, which I would then do another backdoor Roth IRA, without being penalized?? Hi, little tinder, Can I continue to convert this $1.65 to IRA ? You will receive a notice if your numbers don’t agree with IRS expectations. WCI spells this out and has a recommendation for a 401(k) provider in this insightful post. I realize that could be stated a bit more clearly in the text. Also, regarding the $1000 in gains, I assume I convert them to Roth as well, and I will pay ordinary income tax on them when filing my 2018 tax return? We are over the income limits for funding directly into a Roth IRA. My understanding with the Roth conversion ladder is that you can only convert the maximum Roth limit each year so if I wait to contribute until I am closer to early retirement, I will only be moving roughly $6k or whatever the max is which will not do much for me after the 5-year waiting period. The rest of us won’t like the restrictions. Earn a few dollars from your site or mowing lawns or whatever, and open a Solo 401(k) at eTrade or any vendor that allows IRA rollovers. distribution -Taxable amount- Taxable Amt not determined- Total distribution I knew that Roth money was good money and I wanted more Roth money. Yes, you can convert a SEP IRA to Roth (I have) — you’ll owe taxes on the $5,500 as income, of course, unless you made a non-deductible contribution. I will break this down into two distinct tutorials: one for a brokerage IRA account (all newer accounts) and a second for older mutual fund accounts that have not transitioned. Yes, there’s no issue in starting a SEP IRA with a ROth IRA in place. Another good article on the same topic; it clearly states that it works! All – Get rid of PMI My intention was to open a Traditional IRA in Vanguard and then convert the contribution into my current Roth IRA in Vanguard. I normally file in early February but was going to wait until March or April to fund for 2017. Next year, you’ll make your 2020 contribution in January. At the end of the Turbotax Roth IRA tutorial, they showed how to check the actual 1040, which is how I found the mistake. I have used it for the past few years. Thanks for the tutorial and I just did my first backdoor Roth IRA via vanguard as an attending physician this year with income jumping quite a bit since residency days. However, the IRS said that backdoor Roth is okay. I’ve got about twice as much in a taxable account as I do Roth, so I don’t mind shifting as much from taxable to Roth as the government will allow. I just got back from giving my tax forms to my accountant (judge me for paying 240.00 a year for accounting help if you must!) This is one of many ways the rich get richer and stay sooper richey rich! (except Roth) should be rolled over to the pre-tax portion of the 401K to avoid the pro rata rule when converting the non-deductible contribution to Roth. or will we need to do the backdoor? I’m falling in the same boat as poster John and want to make sure I’m understanding correctly. Rounds off without consequence. In the next screen, we choose in which tax year we want our contribution to be applied. What exactly is different with the late conversion vs one in which the tax year and calendar year are the same? That $6000 basis will be “credited” on your 2020 return next year for the Roth conversion made in 2020. What do I do? What do you do with the SEP IRA before December 31? You did not make any new contributions into an IRA. I was always under the impression that if you had an IRA with money in it, you basically were screwed unless you wanted to take the tax hit and convert it to a Roth. (I asked but no answer yet on why the difference.). My understanding is this money is non-deductible so I just need to treat it as my backdoor Roth for this year and convert $5,500 of it this year, and the balance next year toward my backdoor Roth contributions. A taxable account appears to make more sense, at least to middle or late stage investors. On Monday, 1/4/2021, I logged in to see if I could convert my non-deductible IRA contribution to my Roth IRA. I’ve got a great overview of a handful of survey companies here. Do I need to keep track (save my 8606 forms) of contributions (I don’t always max my back door contributions)? eventually the funds became available and I was able to complete the “convert to Roth IRA” transaction. In that case, your options are to roll it over into a current employer’s 401(k), your own solo / individual 401(k) or bite the bullet and pay the tax at your marginal tax rate on a Roth conversion. 1. I’ve heard about this button, but never have seen it. 1) I have a Rollover IRA at TD Ameritrade with all pre-tax contributions 2) What happens if I decide to leave my current employer in the near future and convert my 401k to a Vanguard Rollover IRA? Hopefully that makes sense. It's just one extra line filled in on your 1040, there aren't any extra forms to file. Also, what line on the 1040 does this get reported on? My current traditional IRA balance is higher than this basis due to capital gains etc. For the great post and informative replies. Thanks! He said in the example described on marketwatch, all the transactions were done within the same IRA account. "Bridge the Gap" and Access Your Retirement Accounts Early - Semi-Retire Plan, Recommended Resources – No Frills Financial, https://www.fidelity.com/retirement-ira/roth-conversion-checklists, https://finance.zacks.com/can-roth-conversion-applied-previous-tax-year-2134.html, Back door Roth IRA for high earners like physicians – Investing MD, What's a ROTH Account and Why Does it Matter? PoF, If we can keep up this rate of discovery, we won’t need to make new backdoor Roth contributions. If you do the backdoor Roth IRA can you then only have that investment? You may be aware that if you exceed certain income limits, you will be unable to contribute to a Roth IRA account directly . What this does eliminate is the Roth “horse race” in which people would convert a certain amount of money (say $10,000 each) in a variety of asset classes, and “undo” or recharacterize all but one at the end of the year, leaving the conversion on the asset the had the best return alone. 3. open solo 401k w VG for future side hussle income With this strategy, the basis in the IRA can be isolated which will pave the road for Roth conversion. “The income limits for a traditional tax deferred IRA contribution are even lower than the Roth contribution limits. I maximize this contribution every year and have looked into converting the all funds into a 401k for the sole purpose of doing a backdoor Roth, but my accountant and I are unclear how future sep-ira contributions (only employer option) would be viewed. 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