Question on Backdoor Roth IRA

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Topic Author
saagar_is_cool
Posts: 269
Joined: Thu Jan 30, 2014 2:21 pm

Question on Backdoor Roth IRA

Post by saagar_is_cool »

I have funds in Traditional IRA and want to move that into current 401(k) and then do a contribution and transfer to Roth IRA. I have a couple of questions.

1. Since tax deadline is May 17, do I need to do the rollover of funds into current 401(k) and then do the Trad IRA contribution of $6k, both steps by May 17.
2. Transfer to Roth IRA, can I do that any time after contribution is in place or do I have to do it AFTER May 17th.
3. Are there any implications to how this is reported in tax filing.
4. If I take extension for tax filing from May 17 and file it, lets say on June 15th, do I have time till June 15th to move funds out of Trad IRA to current 401(k) and transfer from Trad IRA to Roth IRA or do these 2 steps need to happen before May 17?
tashnewbie
Posts: 1556
Joined: Thu Apr 23, 2020 12:44 pm

Re: Question on Backdoor Roth IRA

Post by tashnewbie »

Deadline to make 2020 CONTRIBUTION to IRA is May 17, 2021.

There is no deadline to do the second step of the backdoor Roth (i.e., Roth conversion).

If you make a 2020 non-deductible Traditional IRA contribution (by 5/17/21), you will need to complete a 2020 Form 8606. You can file this form as a standalone form, and you won't need to amend your Form 1040. You have until October 15, 2021 to file this form.

The pro rata rule only comes into play if you do a Roth conversion in a given year and also have pretax money in any form of non-Roth IRA. You have until December 31 of the year in which you make the conversion to get the pretax IRA balance out of the IRA (and into the 401k, in your case) to avoid the pro rata rule.

So if you want to complete the backdoor Roth for your 2020 IRA contribution by doing a Roth conversion in 2021, you will need to move your pretax IRA balance to 401k by 12/31/21.

You will have to document the Roth conversion on 2021 Form 8606.

Definitely check out how to fill out the Form 8606. LOTS of people get tripped up over this. White Coat Investor's tutorial might be helpful: https://www.whitecoatinvestor.com/backd ... -tutorial/
Topic Author
saagar_is_cool
Posts: 269
Joined: Thu Jan 30, 2014 2:21 pm

Re: Question on Backdoor Roth IRA

Post by saagar_is_cool »

tashnewbie wrote: Mon May 03, 2021 12:12 pm Deadline to make 2020 CONTRIBUTION to IRA is May 17, 2021.

There is no deadline to do the second step of the backdoor Roth (i.e., Roth conversion).

If you make a 2020 non-deductible Traditional IRA contribution (by 5/17/21), you will need to complete a 2020 Form 8606. You can file this form as a standalone form, and you won't need to amend your Form 1040. You have until October 15, 2021 to file this form.

The pro rata rule only comes into play if you do a Roth conversion in a given year and also have pretax money in any form of non-Roth IRA. You have until December 31 of the year in which you make the conversion to get the pretax IRA balance out of the IRA (and into the 401k, in your case) to avoid the pro rata rule.

So if you want to complete the backdoor Roth for your 2020 IRA contribution by doing a Roth conversion in 2021, you will need to move your pretax IRA balance to 401k by 12/31/21.

You will have to document the Roth conversion on 2021 Form 8606.

Definitely check out how to fill out the Form 8606. LOTS of people get tripped up over this. White Coat Investor's tutorial might be helpful: https://www.whitecoatinvestor.com/backd ... -tutorial/
Thanks a lot. This was helpful. I called my 401(k) provider Fidelity and they have a very slow process - get the check from Vanguard and then deposit it in Fidelity etc. So I don't think I will complete it by May 17. I will just do the Backdoor Roth next year.
tashnewbie
Posts: 1556
Joined: Thu Apr 23, 2020 12:44 pm

Re: Question on Backdoor Roth IRA

Post by tashnewbie »

saagar_is_cool wrote: Thu May 06, 2021 9:55 am
tashnewbie wrote: Mon May 03, 2021 12:12 pm Deadline to make 2020 CONTRIBUTION to IRA is May 17, 2021.

There is no deadline to do the second step of the backdoor Roth (i.e., Roth conversion).

If you make a 2020 non-deductible Traditional IRA contribution (by 5/17/21), you will need to complete a 2020 Form 8606. You can file this form as a standalone form, and you won't need to amend your Form 1040. You have until October 15, 2021 to file this form.

The pro rata rule only comes into play if you do a Roth conversion in a given year and also have pretax money in any form of non-Roth IRA. You have until December 31 of the year in which you make the conversion to get the pretax IRA balance out of the IRA (and into the 401k, in your case) to avoid the pro rata rule.

So if you want to complete the backdoor Roth for your 2020 IRA contribution by doing a Roth conversion in 2021, you will need to move your pretax IRA balance to 401k by 12/31/21.

You will have to document the Roth conversion on 2021 Form 8606.

Definitely check out how to fill out the Form 8606. LOTS of people get tripped up over this. White Coat Investor's tutorial might be helpful: https://www.whitecoatinvestor.com/backd ... -tutorial/
Thanks a lot. This was helpful. I called my 401(k) provider Fidelity and they have a very slow process - get the check from Vanguard and then deposit it in Fidelity etc. So I don't think I will complete it by May 17. I will just do the Backdoor Roth next year.
You don't need to move the Rollover IRA into your 401k by 5/17. You need to do that by 12/31/21.

If you want to do it this year, I would confirm with your 401k custodian that they will accept an incoming transfer of the IRA. If they will, you could go ahead and make the Traditional IRA contribution by 5/17/21. I wouldn't invest the TIRA money. I would just leave it in a settlement account/money market fund.

Then over the next few months, transfer the Rollover IRA into your 401k. Once the 401k has accepted that money (wait until the process is complete), then you can convert the TIRA into Roth IRA.
Topic Author
saagar_is_cool
Posts: 269
Joined: Thu Jan 30, 2014 2:21 pm

Re: Question on Backdoor Roth IRA

Post by saagar_is_cool »

tashnewbie wrote: Thu May 06, 2021 11:12 am
saagar_is_cool wrote: Thu May 06, 2021 9:55 am
tashnewbie wrote: Mon May 03, 2021 12:12 pm Deadline to make 2020 CONTRIBUTION to IRA is May 17, 2021.

There is no deadline to do the second step of the backdoor Roth (i.e., Roth conversion).

If you make a 2020 non-deductible Traditional IRA contribution (by 5/17/21), you will need to complete a 2020 Form 8606. You can file this form as a standalone form, and you won't need to amend your Form 1040. You have until October 15, 2021 to file this form.

The pro rata rule only comes into play if you do a Roth conversion in a given year and also have pretax money in any form of non-Roth IRA. You have until December 31 of the year in which you make the conversion to get the pretax IRA balance out of the IRA (and into the 401k, in your case) to avoid the pro rata rule.

So if you want to complete the backdoor Roth for your 2020 IRA contribution by doing a Roth conversion in 2021, you will need to move your pretax IRA balance to 401k by 12/31/21.

You will have to document the Roth conversion on 2021 Form 8606.

Definitely check out how to fill out the Form 8606. LOTS of people get tripped up over this. White Coat Investor's tutorial might be helpful: https://www.whitecoatinvestor.com/backd ... -tutorial/
Thanks a lot. This was helpful. I called my 401(k) provider Fidelity and they have a very slow process - get the check from Vanguard and then deposit it in Fidelity etc. So I don't think I will complete it by May 17. I will just do the Backdoor Roth next year.
You don't need to move the Rollover IRA into your 401k by 5/17. You need to do that by 12/31/21.

If you want to do it this year, I would confirm with your 401k custodian that they will accept an incoming transfer of the IRA. If they will, you could go ahead and make the Traditional IRA contribution by 5/17/21. I wouldn't invest the TIRA money. I would just leave it in a settlement account/money market fund.

Then over the next few months, transfer the Rollover IRA into your 401k. Once the 401k has accepted that money (wait until the process is complete), then you can convert the TIRA into Roth IRA.
Thank you @tashnewbie. I am a little lost here.

I have a single Traditional IRA and Roth IRA currently (Traditional / Rollover IRA - called Rollover as I rolled previous 401(k)s into this before) in Vanguard. All the money in it is in VBTLX (about $100k). So, if I am understanding you correctly, the steps are as below.

1. Contribute $6k into Traditional IRA to VMFXX (Money market fund) before May 17th. This will bring balance to $106k. $100k in VBTLX and $6k in VMFXX
2. Call Vanguard and request to sell-off the VBTLX (give or take $100k) and send me a check.
3. Deposit the check in Fidelity 401(k) account and buy available funds there.
4. By Dec 31, take the remaining $6k from VMFXX and transfer it into Vanguard Roth IRA

My questions are:

1. Does the above sound correct. Will Vanguard allow partial liquidation / check to be sent out from Traditional IRA account.
2. Do I need to fill and form while filing the taxes if I contribute before May 17 while filing the 2020 taxes by May 17. I will need to inform the CPA to do this along with my taxes.

Essentially my confusion is about capturing the 2020 contribution (to Trad IRA and rollover to Roth IRA) accurately for IRS, so that there are no future issues.
tashnewbie
Posts: 1556
Joined: Thu Apr 23, 2020 12:44 pm

Re: Question on Backdoor Roth IRA

Post by tashnewbie »

saagar_is_cool wrote: Thu May 06, 2021 12:36 pm Thank you @tashnewbie. I am a little lost here.

I have a single Traditional IRA and Roth IRA currently (Traditional / Rollover IRA - called Rollover as I rolled previous 401(k)s into this before) in Vanguard. All the money in it is in VBTLX (about $100k). So, if I am understanding you correctly, the steps are as below.

1. Contribute $6k into Traditional IRA to VMFXX (Money market fund) before May 17th. This will bring balance to $106k. $100k in VBTLX and $6k in VMFXX
2. Call Vanguard and request to sell-off the VBTLX (give or take $100k) and send me a check.
3. Deposit the check in Fidelity 401(k) account and buy available funds there.
4. By Dec 31, take the remaining $6k from VMFXX and transfer it into Vanguard Roth IRA

My questions are:

1. Does the above sound correct. Will Vanguard allow partial liquidation / check to be sent out from Traditional IRA account.
2. Do I need to fill and form while filing the taxes if I contribute before May 17 while filing the 2020 taxes by May 17. I will need to inform the CPA to do this along with my taxes.

Essentially my confusion is about capturing the 2020 contribution (to Trad IRA and rollover to Roth IRA) accurately for IRS, so that there are no future issues.
It might be easier for you to just start doing backdoor Roth for 2021, when the Rollover IRA is gone and moved into the 401k. Once the Rollover IRA is in the 401k, you can make a non-deductible TIRA contribution and once the money is available to trade in the account (usually takes a couple days), then convert to Roth IRA and invest in whatever you want there. You'll need to complete and file a 2021 Form 8606 with your 2021 taxes next year.

But, if you want to make a 2020 IRA contribution, you can do it. Personally, if I were going to do it, I would open a separate TIRA at Vanguard; I wouldn't mix the after-tax money with the pretax money in the Rollover IRA. That way, it'd be easier to request a distribution of the Rollover IRA so that you can transfer into the 401k.

I would make the 2020 non-deductible TIRA contribution into a separate, new TIRA by 5/17. Then I would get to work transferring the Rollover IRA to the 401k (or you can go ahead and do that today). Once the Rollover IRA is in the 401k, then I would convert the new TIRA to Roth IRA. There is a slight risk that the 401k may not accept the Rollover IRA, which means you would have to deal with the non-deductible TIRA contribution (you could withdraw it and there wouldn't be much tax consequence, because the money wouldn't be invested in anything other than a money market fund).

If you decide to do the 2020 contribution, you'd have to file a 2020 Form 8606 (completing only Part I) to document the non-deductible contribution. This form can be filed as a standalone form without the need to amend your 1040. You can file the form by 10/15.

Again, I think I'd recommend you not worry about making a 2020 IRA contribution. Just do it for 2021 after the Rollover IRA balance is in the 401k. That should be easier to handle.
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David Jay
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Location: Michigan

Re: Question on Backdoor Roth IRA

Post by David Jay »

tashnewbie wrote: Thu May 06, 2021 1:17 pm.I would make the 2020 non-deductible TIRA contribution into a separate, new TIRA by 5/17. Then I would get to work transferring the Rollover IRA to the 401k (or you can go ahead and do that today). Once the Rollover IRA is in the 401k, then I would convert the new TIRA to Roth IRA. There is a slight risk that the 401k may not accept the Rollover IRA, which means you would have to deal with the non-deductible TIRA contribution (you could withdraw it and there wouldn't be much tax consequence, because the money wouldn't be invested in anything other than a money market fund).
If you decide to make a non-deductible contribution for 2020, I would strongly recommend this - open a new tIRA so funds are not co-mingled with the rollover funds. It keeps everything much cleaner.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
saagar_is_cool
Posts: 269
Joined: Thu Jan 30, 2014 2:21 pm

Re: Question on Backdoor Roth IRA

Post by saagar_is_cool »

tashnewbie wrote: Thu May 06, 2021 1:17 pm
saagar_is_cool wrote: Thu May 06, 2021 12:36 pm Thank you @tashnewbie. I am a little lost here.

I have a single Traditional IRA and Roth IRA currently (Traditional / Rollover IRA - called Rollover as I rolled previous 401(k)s into this before) in Vanguard. All the money in it is in VBTLX (about $100k). So, if I am understanding you correctly, the steps are as below.

1. Contribute $6k into Traditional IRA to VMFXX (Money market fund) before May 17th. This will bring balance to $106k. $100k in VBTLX and $6k in VMFXX
2. Call Vanguard and request to sell-off the VBTLX (give or take $100k) and send me a check.
3. Deposit the check in Fidelity 401(k) account and buy available funds there.
4. By Dec 31, take the remaining $6k from VMFXX and transfer it into Vanguard Roth IRA

My questions are:

1. Does the above sound correct. Will Vanguard allow partial liquidation / check to be sent out from Traditional IRA account.
2. Do I need to fill and form while filing the taxes if I contribute before May 17 while filing the 2020 taxes by May 17. I will need to inform the CPA to do this along with my taxes.

Essentially my confusion is about capturing the 2020 contribution (to Trad IRA and rollover to Roth IRA) accurately for IRS, so that there are no future issues.
It might be easier for you to just start doing backdoor Roth for 2021, when the Rollover IRA is gone and moved into the 401k. Once the Rollover IRA is in the 401k, you can make a non-deductible TIRA contribution and once the money is available to trade in the account (usually takes a couple days), then convert to Roth IRA and invest in whatever you want there. You'll need to complete and file a 2021 Form 8606 with your 2021 taxes next year.

But, if you want to make a 2020 IRA contribution, you can do it. Personally, if I were going to do it, I would open a separate TIRA at Vanguard; I wouldn't mix the after-tax money with the pretax money in the Rollover IRA. That way, it'd be easier to request a distribution of the Rollover IRA so that you can transfer into the 401k.

I would make the 2020 non-deductible TIRA contribution into a separate, new TIRA by 5/17. Then I would get to work transferring the Rollover IRA to the 401k (or you can go ahead and do that today). Once the Rollover IRA is in the 401k, then I would convert the new TIRA to Roth IRA. There is a slight risk that the 401k may not accept the Rollover IRA, which means you would have to deal with the non-deductible TIRA contribution (you could withdraw it and there wouldn't be much tax consequence, because the money wouldn't be invested in anything other than a money market fund).

If you decide to do the 2020 contribution, you'd have to file a 2020 Form 8606 (completing only Part I) to document the non-deductible contribution. This form can be filed as a standalone form without the need to amend your 1040. You can file the form by 10/15.

Again, I think I'd recommend you not worry about making a 2020 IRA contribution. Just do it for 2021 after the Rollover IRA balance is in the 401k. That should be easier to handle.
Thank you, that is why I was planning to forego 2020 and start it clean from 2021.

I already have a Roth IRA, so I cannot convert existing Trad/Rollover IRA into a Roth IRA account. So, if I were to do it for 2020, I will open another TIRA and end up having two Trad IRAs with zero balance and might end up needing to close one next year.
Topic Author
saagar_is_cool
Posts: 269
Joined: Thu Jan 30, 2014 2:21 pm

Re: Question on Backdoor Roth IRA

Post by saagar_is_cool »

David Jay wrote: Thu May 06, 2021 1:25 pm
tashnewbie wrote: Thu May 06, 2021 1:17 pm.I would make the 2020 non-deductible TIRA contribution into a separate, new TIRA by 5/17. Then I would get to work transferring the Rollover IRA to the 401k (or you can go ahead and do that today). Once the Rollover IRA is in the 401k, then I would convert the new TIRA to Roth IRA. There is a slight risk that the 401k may not accept the Rollover IRA, which means you would have to deal with the non-deductible TIRA contribution (you could withdraw it and there wouldn't be much tax consequence, because the money wouldn't be invested in anything other than a money market fund).
If you decide to make a non-deductible contribution for 2020, I would strongly recommend this - open a new tIRA so funds are not co-mingled with the rollover funds. It keeps everything much cleaner.
Thanks David, if I choose to go for 2020, I will open another TIRA and do it like you suggested. I am seriously considering doing Backdoor Roth from 2021 and not worrying about 2020 to keep it simple.
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