Performing a “Backdoor Roth IRA Conversion” can sound intimidating. In actuality, it’s an incredibly simple thing that takes less than 5 minutes (really) at Vanguard. In this walkthrough, we’ll go through the entire process to do a Backdoor Roth IRA conversion. The broad steps for this are relatively simple:
- Open Vanguard IRA and Roth IRA Accounts
- Contribute $5,500 to your IRA Account
- Convert that $5,500 to your Roth IRA
The screenshots I’ll be using for this will be on Vanguard, but the process should be similar for Fidelity, Charles Schwab or whoever you use for your brokerage. Before jumping into these steps, let’s really quickly look at why you should do this.
Why Perform a Backdoor Roth IRA Conversion?
Last week I posted The 2018 Guide to Roth IRA vs IRA – Which Should You Use? which should help figure out which type of account you should be using. That post details the tax benefits for choosing a Roth IRA or an IRA. For a deeper understanding of this topic, you can check out that guide. Here’re the bullet points on why should perform a backdoor Roth:
- You make at above the phase-out limit for contributing to a Roth IRA directly ($120,000, or above $189,000 filing jointly in 2018).
- You do not have a lot of funds in an existing IRA – even one not at Vanguard. If you do this will be a taxable event.
- You want to contribute to a Roth IRA
If you meet these conditions then a Backdoor Roth IRA Contribution is a good fit for you! If you already have funds in an IRA, even if it’s not at Vanguard, then it’s important to be aware that by performing this conversion, you’ll be taxed based on the total amount of pre-tax funds in your IRA.
1. Open a Vanguard IRA and Roth IRA Account
In order to do a Backdoor Roth Conversion, you’ll need both a Traditional IRA account and a Roth IRA account. Having both these accounts at the same firm (Vanguard in my case) makes this easy. If your accounts are at different places, then this won’t be fun – you’ll probably have to do paperwork and wait long periods of time for it. It’s easier just to open another IRA at the same place as your Roth IRA.
Even if you already have an IRA somewhere else, it’s OK to open another one at Vanguard. You’ll be responsible for not exceeding the max each year across all of your accounts.
Within Vanguard, you can find the “Open an Account” button and walk through the guide to open up an IRA. Once that’s done, you can walk through the process again for a Roth IRA.
If this is your first time opening the account, you could also fund it during that “open an account” flow by setting up your bank. The screenshots below will be for the scenario where you choose to just open the account now, then fund it later.
Either works though, as long as you’re making your IRA contribution for 2017 (up until April 15, 2018) or 2018 (up until April 15, 2019).
2. Contribute $5,500 to Your IRA Account
After you have your IRA setup, the next step is to add some funds to it!
Once you select where your funds are coming from (by connecting a bank account), you’ll be able to fund your IRA! It’ll take a few days for the funds to be transferred in. If this is your first time using Vanguard, you’ll also need to go through the bank account verification step where they deposit a few cents in your account and you verify the transactions.
When choosing what fund to use in your IRA, it’s important to keep it all in money or cash. This is because any interest that accrues on the holdings will be taxed. It also slows down the process later. I tend to stick to only using cash for the conversion, then choosing investments once funds arrive in my Roth IRA account.
Contribution Holding Period
Once you contribute from your bank to your IRA account, there will be a holding period while Vanguard waits for your funds to arrive. After they arrive, Vanguard will hold onto them for a little while before they let you take funds out of that account as well (just in case the transfer in was in error I assume). This waiting period takes about a week. There is a way to bypass this though, but it takes some planning ahead.
It requires also opening up a Brokerage Account at Vanguard and funding it with $5,500 – but just leaving the money in a money market/cash fund. Like the IRA, it’ll have a holding period too. If you do this in early December, by January 1st, you’ll be able to immediately fund your IRA, and then jump to step 3 below — completing the entire conversion in minutes! Although it may be too late for that if you’re starting now, it could come in handy next time.
3. Convert to a Roth IRA
Vanguard makes converting an IRA to a Roth IRA comically simple. On your Account Overview page, click on “Convert to Roth IRA”. This will kick off the conversion process. This is the same process whether you’re converting from an IRA to a Roth IRA or performing a Backdoor Roth IRA Conversion.
The conversion from your IRA to your Roth IRA will be instant – if you’re transferring from a money market/cash fund in your IRA to the same fund in your Roth IRA. If you’re just transferring funds into your settlement fund it’ll happen immediately.
You’re done… at least until next year! Mrs. Minafi and I start saving for our Roth IRA for 2019 on January 1st, 2018. We use Simple for our bank and love their Goals feature. This allows you to set an amount and a date, and Simple will slowly move those funds into your goal over time.
What I really like about Simple’s Goals is that the money isn’t in a separate account. The total amount in your account will still be shown and available, but you can see the total in your account minus the goals. Simple calls this total your “Safe-to-Spend” amount. You can spend over this and chip into your goals if needed and Simple won’t charge you an insufficient funds fee, as it’s all still in the same account.
If you’re curious to try Simple, you can use my affiliate link and get $20 free for signing up ($20 for both of us!). They’ll deposit that as soon as you use the visa debit card they provide (which is actually one of the most pretty cards I have).
At the end of the year when you make your Vanguard contribution you can use that money to fund your Roth IRA!
Do you have any concerns or issues with using a Backdoor Roth IRA?
34 CommentsWhy not add to the conversation below? Your voice is welcome!
February 9, 2018
Thank you for the detailed explanation! A few follow-up questions. I contributed $5,500 for the 2016 Tax Year and another $5,500 for the 2017 Tax Year in March 2017. Is it too late to do a ROTH conversion for the 2016 Tax Year? Could I repeat the backdoor conversion every year to the same ROTH IRA account?
February 11, 2018
Hey Kirk! Yes, you can repeat it every year. Since the conversion isn’t of pre-tax funds into after-tax funds, this conversion has no tax implications. So if all of your contributions to your IRA are after-tax, converting 2 years at once to your Roth IRA won’t have any tax implications (meaning $0 tax paid). You could convert your 2016 IRA to a Roth and pay $0 taxes – but only because you already made that deposit for the 2016 year.
Sounds like if both of these IRA contributions were after-tax, and there are no gains on that account, you’d be able to do an $11,000 Roth IRA conversion paying $0 taxes. If there are some gains on it, you’ll pay a little tax, but still less than the gains.
February 22, 2018
Could you please elaborate on the second bullet point of the requirements? I have an two separate IRAs. Collectively they total only 10k. If I open a new IRA and follow this, I would also have to pay taxes on the 10k?
February 23, 2018
Partially. If you opened a new IRA and did this, you could think of all of your 3 IRAs (at that point) as just one IRA with $15,500 in it for tax purposes. If you converted $5,500 to a Roth IRA, then you’re effectively converting 5500/15500 of it, or 35% of it. You’d pay taxes on converting 35% of your initial 10k balance. If you’re in the 25% tax bracket, that’s potentially $3,500*0.25 = $875 to do a Backdoor Roth IRA conversion.
If you converted the entire $15,500, then you’d pay taxes on all of the $10k.
March 12, 2018
Hi Adam, thanks for writing up this great guide to converting an IRA to Roth. I do have one outstanding question though, do you need to have contributed the max in your Traditional IRA to convert it to a Roth IRA or can it be whatever you contributed? Sorry for the silly question, but I ask because you specify that exact amount in step 3. Cheers
March 13, 2018
Nope! You can convert any amount from an IRA to a Roth IRA. You can convert any amount. You’ll still pay taxes if any amount that you’re converting is considered a “pre-tax” contribution though.
March 23, 2018
Hi, how to bypass this stupid one week ban on all website functions ? I just opened an account. Thanks
March 23, 2018
Unfortunately I don’t think there’s a way. :/ Are you able to connect to your bank account during that time at least?
March 31, 2018
yes , it worked now, thanks for that.
March 31, 2018
i have a question. I contributed 5500 to trad IRA in Vanguard and kept it in money market fund. I plan to convert it to Roth once the initial hold of 7 days is taken off my account. now the problem is that i got a dividend of $1.15, making the total trad IRA balance to be $5501.15. So my question is when i convert to Roth IRA, will this be a problem that my balance is more than 5500 ? What do i do about this ? leave the 1.15 in trad ira or convert the entire amount.
thanks for the help !
April 1, 2018
Hey Rahul! Technically this means you’ll need to pay tax on that $1.15. You can still convert all $5,501.15 to your Roth, but the end of the year, you’ll receive some paperwork to file with your tax preparer. It’ll mention that you converted $5,501.15 on a $5,500 cost basis — effectively meaning you’ll pay something tiny like 25% (or whatever your tax rate is) of $1.15 – so a little over a quarter in taxes.
Nothing to worry about! Just remember to file those taxes on it.
April 2, 2018
do you mean end of year as in apr 16 2018 or end of year as in dec/jan 2018, because this contribution was for 2017 ( see my follow up comments below also). My tax guy just told me to do all at once and not to worry because it wont be an issue with the tax.
March 31, 2018
So I have successfully converted to Roth IRA. I just have to choose funds ( right now they are in money market). I plan to go ahead with the “3 funds strategy” – US stock index, International stock index and a few bonds, at Vanguard. Any thoughts ?
My next question is re: 2018, Since I have some time from this april to next march, I was wondering how to contribute the $5500 into my traditional IRA at Vanguard, Should i do it in a lump sum manner , $5500 at once in traditional and then convert to Roth and then invest right away or should i do a monthly / bimonthly contribution to that IRA and convert as I go along ? I am asking this because of the ‘dollar cost averaging’ theory. What is the recommendation ( or the general consensus in the finance world ) Any tax implications of either methods ? I understand that in doing lumpsum , my entire money will be put to work right away in my Roth funds.
Thanks in advance !
April 1, 2018
Congrats on converting and using a 3-fund portfolio! That’s an awesome position to be in.
Hmm, that’s a good question Rahul. I think if I were in your shoes, I’d either :
1) Add it to my savings account, then do the IRA conversion + Roth IRA rollover all within a few days.
2) Add it to my IRA in a cash account, and just hold it in that for the year. You’ll probably end up paying a few taxes on the little bit of interest that’s made there when you roll it over to a Roth, but it’ll be relatively small.
I prefer this as opposed to investing in the IRA because you might be in for a larger tax bill. For example, if you invest $5,500 in your IRA, then it goes up 20%, you’ll have maybe $6,500. You’ll end up paying $250 in taxes in this. Alternatively, you could lose money and then move things over, which is effectively the same whether it happens in an IRA or Roth.
April 2, 2018
Hi. Thanks for the advice. I was trying to do a 3 fund portfolio for my $5500 in Roth IRA. But i cant do it, as the minimum investment needed for any one fund is 3000. so if i do US stock index for 3000, I fall short of the 3000 needed for international stock index or bond index.
I have a few follow up questions.
so what can i do ? should i do all stock index ? or should i do target 2050 ? Or my 3rd option is should i just put in another 5500 for 2018 , the same way as before ( bank—> trad IRA (money market fund) —– > backdoor roth IRA ( money market fund) —— > invest in roth ira ( target fund or 3 fund portfolio because now i will have $11000) ?
Also , I did not understand your explanation for 2018. do you mean to say that if I keep money in trad IRA, it will be taxed , even though this is from after tax money ?
Also , I have $5500 ready now. What do you mean by adding it to my savings account ?
Re: your comment about investing in the IRA, I was thinking of investing only when the money is in roth ira, i will keep it in money market fund while it is in trad IRA.
my real question was should i make a monthly contribution to trad IRA and backdoor it and invest it, i.e. repeat this 12 times a year ( I can imagine how tedious this will be) or just do it lumpsum $5500 at once ?
Thanks in advance and sorry for all the confusing questions !
April 2, 2018
Regarding the minimum investment amounts, it sounds like you’re looking at mutual funds. Vanguard has an ETF version of all those funds you’re talking about with no minimum other than the share price. Try looking up VTI, VEA, and BND
July 7, 2018
Hi Adam… just did the conversion! Thanks for the info. I would like to know besides bond index, do you recommend other bond funds?
July 7, 2018
I haven’t tried many, but Vanguard has 3 Bond funds I’ve used in different situations – Total Bond (my go to for tax-advantages accounts), international bond (I think it’s still good – so long as it hasn’t added a purchase/redemption fee) and intermediate term tax-exempt – which is my go to bond fund for taxable accounts (lower dividends). I haven’t been in a state which has a municipal bond fund, but that’d be another one to think about.
December 10, 2018
If you are using after tax to deposit in the traditional IRA do you have to do something with your taxes at the end of the year? I heard something about making sure the funds are labeled as a “non-deductible contribution.”
Also, is this considered a roll over where you have to wait at least 1 year from the date you do it to be able to do it again?
December 12, 2018
Form 8606 is used to report both your nondeductible IRA contributions as well as your conversions from a traditional IRA to a Roth IRA.
An IRA conversion is not considered a rollover.
February 25, 2019
Hey Adam, I really appreciate you putting this article together. One thing I wasn’t super clear on was how to roll a Simple IRA into a Roth. I am using Vanguard, if it makes a difference. Whenever I choose the “convert to Roth IRA option,” I keep getting a message that says “Exchanging funds between these accounts not permitted,” or something to that effect. Am I missing something really obvious? Thank you!
March 1, 2019
Hey Jeremy! Hmm, that’s a weird one. I get that option when I go to Vanguard today. I think in your shoes I’d reach out to Vanguard to talk them about it. Their phone support is pretty great – they helped me with a weird Roth reclassification when I contributed to a roth then went over the income limit that year and I had to switch it to an IRA -> Roth conversion instead. They did it all over the phone. I have a feeling they’ll know what up!
My only guess would be if there’s a difference in how the accounts are setup. Maybe if they don’t have matching SSN’s or some other metadata that links them together is missing. Might be a first place to check before giving them a call. Good luck – and I’d be curious to hear what you find!
March 16, 2019
Thanks for the great article on IRA conversion. Previously you had mentioned that if someone had money in another Vanguard T-IRA account, they could potentially owe taxes when converting to Roth, if the money was tax deferred in T-IRA. What if I just have a Rollover IRA and not a T-IRA? Can I just open a new T-IRA account and do the Roth conversion without owing any taxes? Is the Rollover IRA considered the same as T-IRA?
March 17, 2019
Hey Nate! If the money is in any kind of tax-deferred account and is moved into a Roth (immediately, or through another tax-deferred account), then at some point you’re going to need to pay taxes on it.
If you have a rollover IRA, I’m assuming that’s a 401k that was rolled over? In that case, it’s still a tax-deferred account, unfortunately, and would be subject to taxes if you do a Backdoor Roth IRA.
I wrote up another article that might help shed light on this a bit more too. Hope it helps! https://minafi.com/401k-ira-rollover
March 17, 2019
Hello Adam – thanks a lot for your reply and the useful article. It was very helpful.
April 9, 2019
I have yet to contribute for 2018. I have transferred in $5,500 for 2018 and also $6,000 for 2019 for a total of $11,500 sitting in my T-IRA. However, the new format on Vanguard does not allow me to differentiate which contribution applies to which year. For example, when I go through the steps to convert, I want to do $5,500 first for 2018. Then in another transaction, do the $6,000 for 2019. How should I go about this? It does not seem clear cut. Am I missing something?
April 13, 2019
Hrm, that’s a good question. The IRA timing is by tax-day – meaning you can do an IRA contribution for 2018 as late as April 15, 2019 – so you’re in good shape there for your $11,500.
The Roth IRA conversion, however, is a taxable event at the time it’s done. What’s nice though, is that you don’t need to match Roth IRA conversions with Roth Contributions. The conversion isn’t a contribution – so it can be done at any time for any amount.
That means you should be able to convert all $11,500 from your IRA to your Roth IRA. If you did that today, you’d pay taxes on your 2019 taxes (since today is April 13) based on the cost-basis of your IRA account. If your entire T-IRA account is already after-tax contributions, then you’d end up paying no taxes on that contribution. Hope that helps Jon!
April 13, 2019
Also, the zero-tax 2019 implies that you have no other IRAs anywhere else. Good to clarify that one.
February 16, 2020
I contributed the max amount ($6000) to my 2019 non-deductible tradition IRA in the year 2020 and then converted it to a Roth IRA via backdoor. In the past, when I did this, I did not incur any taxable amount since the funds were immediately converted and was always with after tax funds. For this year’s Form 8606, because the maximum contribution has increased from $5500 to $6000, line 18 computes to a taxable income of $500. I feel as if I must be doing something wrong since 100% of my contribution is non-deductible. What am I doing or understanding wrong?
January 4, 2021
I’m married and earn about 230K yearly. My spouse is unemployed. I’ve been doing a backdoor Roth for him and myself for the last 2 years. Now I’m wondering if I should just be doing the backdoor roth for myself? Can I put money (even though it’s coming from my income/our combined savings) directly into a roth for him without doing the backdoor conversion since he’s unemployed? I wasn’t sure since we’re married and file our taxes jointly if we have to use our combined MAGI to decide if he can contribute to a Roth directly? He’s also over 50 so I’m putting in the larger amount. Thanks!
January 4, 2021
You should definitely look into doing a backdoor Roth for yourself! It’ll only be tax-free if you have no IRAs anywhere. If you do ANY IRAs, then the conversion to Roth would be a taxable event – just like if you rolled it over.
As a simple example: Assume you have $54,000 in an IRA today, all from 401(k) rollovers. This $54k is all pre-tax. You could make an additional $6k after-tax deposit into your IRA and then do a $6k rollover to your Roth IRA. The problem is that the $6k you rollover would now consist of 90% pre-tax and 10% post-tax money – so you’d be rolling over $5,400 in pre-tax money and $600 in after-tax money. This would mean paying taxes on the $5,400 as a Roth IRA conversion – which would be taxed at your $230k tax bracket (or higher if you’re filing jointly).
In other words – I’d recommend trying a Roth IRA if either of these are true:
You don’t have much (if any) in any IRA today.
You’re able to move all of your IRA to a 401k, eliminating an IRA altogether.
In either case, you can get around the conversion tax and do a backdoor Roth tax-free!
January 12, 2021
Dumb tax question… my state doesn’t tax IRA Conversions. Can I contribute $6,000 to a traditional IRA AND take the tax deduction (on Federal and State), and then pay the taxes on the conversion (Federal Only)? Not sure if you can take an IRA tax deduction and then also do a conversion in the same year on the federal level.
January 13, 2021
Hey Thomas! That’s a really good question.
There is a problem with that setup though: when you’re converting a post-tax IRA to a Roth, it’s an after-tax to after-tax conversion, so you pay no taxes.
If you’re converting a pre-tax account – in your example an IRA – to a Roth, you’ll need to pay taxes on the conversion. You CAN take a deduction and convert it, but you’d pay taxes on the conversion for the same amount you’d pay if you put the money straight into the Roth IRA (assuming it happens in the same year).
Good thinking, but it would offset the work you’re trying to do. 🙂
February 18, 2022
Thank you for the detailed explanation!