Backdoor ROTH IRA Questions

[MrFire22]

All:

Just wanted to make sure I understand how to do this. I make $300K (income + bonus) each year. I'm married but single filer. My job offers a 401K plan which I max out each year. I plan to open a traditional IRA account, place $6,500 in it, and then immediatley convert that to a ROTH IRA. I'll pay taxes on anything accrued during that conversion, but then can let it grow and take out tax free once I am 59 1/2, correct?

1) Is my understanding correct?
2)  what platform do you recommned to use in order to complete the conversion? I was thinking Vanguard.

[MDM]

1. Yes.  See Backdoor Roth - Bogleheads for details.
2. Any of the usual suspects (Fidelity, Schwab, Vanguard) would be fine.

[sparkytheop]

Yes, that is correct.  Remember to file form 8606 when you file your taxes.

I use Vanguard for my IRA.  After the funds settle in the tIRA, an option to "convert to Roth" pops up, so the process is incredibly easy.  If you don't invest until it's converted, and convert within a couple days of the contribution, the taxable earnings will be limited to a few cents, and those round off when you file.

https://www.physicianonfire.com/backdoor/

There are also a few step-by-step sources for filling out form 8606 with various software, if you do your own taxes.

ETA: I'm assuming you have no existing pre-tax/tax-deducted tIRA funds.  If you do, you'll need to deal with those (pro-rata rule).  Easiest way to do that is to roll those funds into your 401k before 12/31.  You could convert those funds fully as well, but the taxes may hurt.

[MrFire22]

I have a traditional IRA with SoFI. I would not touch that IRA. Essentially, I'd open a brand new IRA with vanguard and then immediately convert the vanguard traditional IRA to a ROTH IRA. If I do it this way, would I trigger the pro rata rule?

[MDM]

I have a traditional IRA with SoFI. I would not touch that IRA. Essentially, I'd open a brand new IRA with vanguard and then immediately convert the vanguard traditional IRA to a ROTH IRA. If I do it this way, would I trigger the pro rata rule?

Yes.

Fill out a draft of Form 8606 to see how it would work.  Pay particular attention to line 6.

[MrFire22]

Thank you for the responses. So, just to make sure I understand how to do this:

1.  I havea traditional IRA with SOFI. Approx $50K
2. I roll that over to my 401K at work before the end of the year
3. I can then create a traditional IRA with Vanguard, contributute the $6,500 limit
4. Then immediatley convert that to a ROTH IRA.

Boom! Backdoor ROTH IRA achievement obtained?

Thank you all again!

[EvenSteven]

Thank you for the responses. So, just to make sure I understand how to do this:

1.  I havea traditional IRA with SOFI. Approx $50K
2. I roll that over to my 401K at work before the end of the year
3. I can then create a traditional IRA with Vanguard, contributute the $6,500 limit
4. Then immediatley convert that to a ROTH IRA.

Boom! Backdoor ROTH IRA achievement obtained?

Thank you all again!

Yeah, just make sure with #2 that your employer 401k plan at work will accept the rollover. By law they are allowed to, but are not required to.

[MrFire22]

They do! I checked with them

[sparkytheop]

Thank you for the responses. So, just to make sure I understand how to do this:

1.  I havea traditional IRA with SOFI. Approx $50K
2. I roll that over to my 401K at work before the end of the year
3. I can then create a traditional IRA with Vanguard, contributute the $6,500 limit
4. Then immediatley convert that to a ROTH IRA.

Boom! Backdoor ROTH IRA achievement obtained?

Thank you all again!

Yes.

Final step is making sure to file form 8606 at tax time.  Keep good documentation for each conversion as well.

[MrFire22]

All, I have a follow up question. My traditional IRA has been zeroed out and the check was sent to my 401K plan at work. I am STILL waiting for the check to be accepeted by my 401k plan. However, I have NOTHING in my Traditional IRA right now. $0. Can I now set up the traditional IRA and immediatley convert it to a ROTH IRA and avoid any tax penalities since my former traditional IRA has no funds in it. Its zeroed out.

[MDM]

All, I have a follow up question. My traditional IRA has been zeroed out and the check was sent to my 401K plan at work. I am STILL waiting for the check to be accepeted by my 401k plan. However, I have NOTHING in my Traditional IRA right now. $0. Can I now set up the traditional IRA and immediatley convert it to a ROTH IRA and avoid any tax penalities since my former traditional IRA has no funds in it. Its zeroed out.

If the 401k does eventually accept it, you will be OK.  If not, you won't.  Depends on how much you trust the 401k plan....