How to do a Backdoor Roth IRA

By Zack - February 20, 2020

  • To avoid the Pro-Rata Tax rule, roll any SEP-IRA, SIMPLE IRA, traditional IRA, or rollover IRA money into a 401K, 403B, or Individual 401K.  401Ks don’t count in the aforementioned pro-rata calculation. You might even be able to open an Individual 401K at Fidelity or eTrade (the Vanguard Individual 401K doesn’t accept IRA rollovers) in order to facilitate a Backdoor Roth IRA
    • The total sum of  the SEP-IRA, SIMPLE IRA,  and traditional IRA accounts on December 31st of the year should be $0.
  • If you don't have any of these accounts yet, great! 
  • Deposit the yearly Roth IRA limit into your traditional IRA
  • Convert the traditional IRA to a Roth IRA
  • Once tax time comes, fill out form 8606 (one form for each spouse)
    •  If you don’t do it right, you’ll pay taxes twice on your Backdoor Roth IRA contribution.
  • Repeat the following year
    • You do not have to wait any period of time between the contribution and conversion. Each year, I make my Traditional IRA contribution on January 2, then convert to a Roth IRA the next day. That gets my investment money working as soon as possible and simplifies the record keeping. Vanguard won’t let you do it the same day, so I have to wait one day anyway.
Page 1 (below) shows a “distribution” from your non-deductible IRA.  Since the money was already taxed, the taxable amount on your distribution is zero.  Line 1 is your non-deductible contribution.  On Line 2, your basis is zero because you had no money in a traditional IRA on December 31 of last year (if you’ve been carrying a non-deductible IRA for years this may not be zero.)  Line 6 is zero in a typical year. Note that Turbotax may fill this out a little differently (may leave lines 6-12 blank) but you end up with the same thing.  Line 13 is the same as line 3, so tax due is zero.

On page 2 (below), you are showing the Roth conversion.  I’m not really sure why you have to do this twice (since you’re just transferring the amounts from lines 8 and 11 and then subtracting them), but that’s what the form calls for.  As you can see, a Roth conversion of a non-deductible traditional IRA contribution without any gains is a taxable event, it’s just that the tax bill is zero for it.

When double-checking your tax-preparer’s work, you want to concentrate on lines 2, 14, 15c, and 18, and make sure they’re a very small amount, like zero, and not a very large amount, like $5500.

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