Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
szhman
Posts: 22
Joined: Wed Sep 10, 2014 3:41 am

Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by szhman » Thu Jan 05, 2017 6:06 pm

The procedure (backdoor Roth conversion) for high income people that are precluded from contributing to the Roth IRA directly. So, they contribute to a traditional IRA (as a non-deductible amount), and then within few days convert that to Roth IRA.

My question is about menu options in Vanguard site. I am wondering if there is significant difference between

clicking 'Convert to Roth IRA' from the tIRA menu [AND] clicking 'Exchange' menu option in Buy/Sell

My 5.5K fund is available when I click 'Convert to Roth IRA' to Money Market Fund in my tIRA when I click 'Conver to Roth IRA' menu.

But at the same time, 'Exchange' menu still says the 5.5K fund is NOT available for Roth IRA exchange.

It's uncertain to me what the differences are between these actions (different ways of doing Rotha IRA conversion from tIRA).

And what's the best way to convert to Roth IRA out of these two menu options. Thanks for your insights.

boglephreak
Posts: 441
Joined: Fri Apr 22, 2016 5:16 pm

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by boglephreak » Thu Jan 05, 2017 8:28 pm

i thought exchange just means exchanging one fund for another within an account, whereas convert was what was required to convert funds from one account to another (i.e., IRA to Roth IRA). i just did this for my backdoor roth and used the convert button. hope that was correct. when i tax loss harvested last year, i used the exchange button to change my investment to a similar investment within my taxable account.

SnowSkier
Posts: 262
Joined: Fri Mar 16, 2012 12:21 pm
Location: Austin

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by SnowSkier » Thu Jan 05, 2017 10:58 pm

In prior years, before moving to the new consolidated Vanguard brokerage accounts, this (backdoor Roth every January) was very straightforward.

After moving money into non-deductible Traditional IRA settlement fund from online savings account...

We did one-step, an "exchange" from money market in Traditional IRA to desired Vanguard mutual fund in Roth IRA. Easy.

This year, it was different and a bit confusing, but after calling flagship rep, was able to do it online myself. It was 2 steps vs. 1 step in prior years.

1. did "convert to Roth IRA" to move $$ from settlement fund in Traditional IRA to settlement fund in Roth IRA.

then, on the same day, was able to

2. hit "buy" in the Roth IRA to buy desired Vanguard mutual fund in the Roth IRA using the pending settlement fund in Roth IRA

Hope that helps.

Vanguard rep said that next January he hoped Vanguard IT would have provided the ability be able to do the one-step "exchange" from Traditional IRA fund to Roth IRA fund.

szhman
Posts: 22
Joined: Wed Sep 10, 2014 3:41 am

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by szhman » Thu Jan 05, 2017 11:21 pm

SnowSkier wrote:In prior years, before moving to the new consolidated Vanguard brokerage accounts, this (backdoor Roth every January) was very straightforward.

After moving money into non-deductible Traditional IRA settlement fund from online savings account...

We did one-step, an "exchange" from money market in Traditional IRA to desired Vanguard mutual fund in Roth IRA. Easy.

This year, it was different and a bit confusing, but after calling flagship rep, was able to do it online myself. It was 2 steps vs. 1 step in prior years.

1. did "convert to Roth IRA" to move $$ from settlement fund in Traditional IRA to settlement fund in Roth IRA.

then, on the same day, was able to

2. hit "buy" in the Roth IRA to buy desired Vanguard mutual fund in the Roth IRA using the pending settlement fund in Roth IRA

Hope that helps.

Vanguard rep said that next January he hoped Vanguard IT would have provided the ability be able to do the one-step "exchange" from Traditional IRA fund to Roth IRA fund.


Thanks both of you for your quick detailed response. I'll proceed with the 'Convert to Roth IRA' menu option and once the funds are available in Roth IRA money market fund (settlement), I can choose the vanguard funds for Roth IRA. Much appreciated.

yolli71
Posts: 294
Joined: Fri May 20, 2011 9:53 am

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by yolli71 » Fri Jan 06, 2017 10:09 am

I have a question about this. I just transferred $5,500 from my BOA Checking account into my Vangaurd tIRA money market account on Wednesday. When I tried to do the Roth conversion yesterday, the Vanguard website said my tIRA account has "unavailable shares" and that electronic bank transfers are subject to a 7 day hold.

Do most of you have a regular (taxable) money market Vanguard account and transfer the $5500 from there into your tIRA?

ved
Posts: 653
Joined: Sat Jan 18, 2014 6:56 pm

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by ved » Fri Jan 06, 2017 10:26 am

yolli71 wrote:I have a question about this. I just transferred $5,500 from my BOA Checking account into my Vangaurd tIRA money market account on Wednesday. When I tried to do the Roth conversion yesterday, the Vanguard website said my tIRA account has "unavailable shares" and that electronic bank transfers are subject to a 7 day hold.

Do most of you have a regular (taxable) money market Vanguard account and transfer the $5500 from there into your tIRA?


I had a similar thing - I transferred from an outside bank to my tIRA on Jan 3. On Jan 4, I was hoping to convert it to Roth, but it said that the funds were unavailable until Jan 10th. However, on Jan 5, I was able to do the conversion. So, it took 2 days (rather than 1, but far less then 10 days that they were saying it would be).

Here's a thread from a couple days ago that other folks had the same issue: Backdoor Roth issue using Federal MMF

User avatar
White Coat Investor
Posts: 12924
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by White Coat Investor » Fri Jan 06, 2017 10:27 am

I did one of each this year- exchanged one and "converted to Roth" the other. Both worked fine.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

boglephreak
Posts: 441
Joined: Fri Apr 22, 2016 5:16 pm

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by boglephreak » Fri Jan 06, 2017 1:42 pm

ved wrote:
yolli71 wrote:I have a question about this. I just transferred $5,500 from my BOA Checking account into my Vangaurd tIRA money market account on Wednesday. When I tried to do the Roth conversion yesterday, the Vanguard website said my tIRA account has "unavailable shares" and that electronic bank transfers are subject to a 7 day hold.

Do most of you have a regular (taxable) money market Vanguard account and transfer the $5500 from there into your tIRA?


I had a similar thing - I transferred from an outside bank to my tIRA on Jan 3. On Jan 4, I was hoping to convert it to Roth, but it said that the funds were unavailable until Jan 10th. However, on Jan 5, I was able to do the conversion. So, it took 2 days (rather than 1, but far less then 10 days that they were saying it would be).

Here's a thread from a couple days ago that other folks had the same issue: Backdoor Roth issue using Federal MMF

same thing happened to me. i thought i would have to wait seven days, but it allowed me to do it the next day (i.e., yesterday). the conversion has not taken place yet though, will check in later today.

szhman
Posts: 22
Joined: Wed Sep 10, 2014 3:41 am

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by szhman » Fri Jan 06, 2017 7:22 pm

Thank you all. I did proceed with 'Convert to Roth IRA' menu options and the request went fine.

Compound
Posts: 442
Joined: Mon May 26, 2014 1:32 pm

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by Compound » Fri Jan 06, 2017 7:35 pm

I'm still waiting to convert (because the website won't let me). Called vanguard and they said nothing I can do but wait until the funds become available.

Alfonsia
Posts: 14
Joined: Thu Mar 23, 2017 1:47 pm

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by Alfonsia » Thu Apr 20, 2017 4:38 pm

I seem to be having a problem and it is very likely me LOL. SO the TIRA brokerage I managed to do is now is set up as a mutual fund target retirement date (I think that was my mistake? To do that from the MM account rather than the roth conversion then?), I am trying to do the conversion and I am not sure what the steps are, it says no available accounts are available, i can click on my mutual fun only IRA option to sell, am I just doing all this wrong?

Money Market
Posts: 45
Joined: Thu Mar 16, 2017 10:36 am

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by Money Market » Sun Jul 23, 2017 4:59 am

White Coat Investor wrote:I did one of each this year- exchanged one and "converted to Roth" the other. Both worked fine.
Hey WCI,

If I open a new tIRA and contribute $5,500, and then select "convert to Roth" next week the entire $5,500, does the tIRA still exist in my Vanguard account with a $0 balance? Or do I have to open a new tIRA to do this every year for a backdoor Roth?

I'm also assuming that when you select the "exchange" button, that the tIRA is definitely still there, except with a $0 balance since we're not converting any account.

User avatar
neurosphere
Posts: 2609
Joined: Sun Jan 17, 2010 1:55 pm
Location: NYC

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by neurosphere » Sun Jul 23, 2017 6:12 am

This reminds me of one potential "gotcha" in the process for the inexperienced to watch out for, regarding taxes.

At some point you will be asked about withholding. On two occasions now I've seen people who neglect to uncheck the box which asks to withhold some amount (I think it's 10%) from the conversion. This withholding essentially becomes an early IRA withdrawal subject to penalty if not corrected.

Perhaps a 10% withholding was always the default? I don't recall. But I assume that the menus/options are presented differently depending on whether it's a brokerage or mutual fund account, and/or whether one selects a conversion vs an exchange between accounts.

In any case, I've begun to remind people that no taxes (typically) are due with a backdoor Roth and to make sure NOT to have any taxes withheld upon the conversion.
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

User avatar
neurosphere
Posts: 2609
Joined: Sun Jan 17, 2010 1:55 pm
Location: NYC

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by neurosphere » Sun Jul 23, 2017 6:13 am

Money Market wrote: If I open a new tIRA and contribute $5,500, and then select "convert to Roth" next week the entire $5,500, does the tIRA still exist in my Vanguard account with a $0 balance? Or do I have to open a new tIRA to do this every year for a backdoor Roth?
The TIRA will not disappear. It will remain with a zero balance for a quite a while (years?), and be available for annual contributions.
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

User avatar
Kevin M
Posts: 8884
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by Kevin M » Sun Jul 23, 2017 11:19 am

szhman wrote:<snip>
My 5.5K fund is available when I click 'Convert to Roth IRA' to Money Market Fund in my tIRA when I click 'Conver to Roth IRA' menu.

But at the same time, 'Exchange' menu still says the 5.5K fund is NOT available for Roth IRA exchange.
This is because you cannot exchange from the settlement fund. If you first used the $ in the settlement fund to buy shares of a mutual fund, you could then do the conversion by exchanging from the fund in the tIRA to the same or different fund in the Roth.
And what's the best way to convert to Roth IRA out of these two menu options. Thanks for your insights.
The way you did it and the way I described above accomplish the same thing. Either way, it takes an extra day to get the money from the settlement fund (whether in the tIRA or the Roth) into the mutual fund of choice.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
celia
Posts: 7176
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by celia » Sun Jul 23, 2017 1:47 pm

And another suggestion is to always convert into a new (empty) Roth. This is so recharacterizations can be done simply should the stock market take a dive later in the year. If you put the money into a Roth that already holds assets, all the money will be considered co-mingled and a recharacterization may "put back" not only the new money going in but also some of the money that is already there.

After October 15 of the following year, you can move the new Roth assets to your old Roth and re-use the new (empty) Roth for another conversion.

Money Market
Posts: 45
Joined: Thu Mar 16, 2017 10:36 am

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by Money Market » Sun Jul 23, 2017 1:50 pm

celia wrote:And another suggestion is to always convert into a new (empty) Roth. This is so recharacterizations can be done simply should the stock market take a dive later in the year. If you put the money into a Roth that already holds assets, all the money will be considered co-mingled and a recharacterization may "put back" not only the new money going in but also some of the money that is already there.

After October 15 of the following year, you can move the new Roth assets to your old Roth and re-use the new (empty) Roth for another conversion.
Why would a re-characterization occur if the backdoor Roth was done properly? I can't imagine many people would be in this situation unless they had a creditor of whatever sort coming after their IRA, and that's assuming they live in a state where there's limited protection.

User avatar
celia
Posts: 7176
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by celia » Sun Jul 23, 2017 2:19 pm

Money Market wrote:
celia wrote:And another suggestion is to always convert into a new (empty) Roth. This is so recharacterizations can be done simply should the stock market take a dive later in the year. If you put the money into a Roth that already holds assets, all the money will be considered co-mingled and a recharacterization may "put back" not only the new money going in but also some of the money that is already there.

After October 15 of the following year, you can move the new Roth assets to your old Roth and re-use the new (empty) Roth for another conversion.
Why would a re-characterization occur if the backdoor Roth was done properly? I can't imagine many people would be in this situation unless they had a creditor of whatever sort coming after their IRA, and that's assuming they live in a state where there's limited protection.
If you convert $5,500 and the markets drop such that those shares are then worth $3,000, would you still want to pay taxes on the $5,500? If it was a non-deductible contribution, taxes were already paid and it may not matter since the "loss" would be considered small for some people. But if the contribution was deductible, they might want to consider contributing to a tIRA at another custodian (since they have maxed out the year's contribution at the current one) then doing a new conversion while the market is still down. Of course, they would have to unwind the original contribution and conversion.

It's probably not worth the effort for most people, but it is a good practice for Roth conversions in general.

User avatar
White Coat Investor
Posts: 12924
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Vanguard backdoor ROTH - Exchange vs Convert to Roth options

Post by White Coat Investor » Sun Jul 23, 2017 4:00 pm

Money Market wrote:
White Coat Investor wrote:I did one of each this year- exchanged one and "converted to Roth" the other. Both worked fine.
Hey WCI,

If I open a new tIRA and contribute $5,500, and then select "convert to Roth" next week the entire $5,500, does the tIRA still exist in my Vanguard account with a $0 balance? Or do I have to open a new tIRA to do this every year for a backdoor Roth?

I'm also assuming that when you select the "exchange" button, that the tIRA is definitely still there, except with a $0 balance since we're not converting any account.
Yes. It just sits there empty all year. I think it'll sit there for 2-3 years as I recall.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Post Reply