Author Topic: Backdoor Roth with Vanguard  (Read 480 times)

Harper

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Backdoor Roth with Vanguard
« on: April 04, 2021, 04:21:53 PM »
Hi!

I poked around looking for this on the site but couldn't find anything.  If there is a post already, please just point me towards it.

We typically do a yearly IRA for me and my spouse (on top of maxing out our 401Ks).  Our tax guy suggested doing a backdoor Roth this time.  I like using Vanguard but I'm not sure how to do this.  Is it really as simple as opening an IRA, putting the cash in it and immediately moving it to a Roth?  Can it be done completely online?

Thanks for any help you can provide!
Harper

erutio

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Re: Backdoor Roth with Vanguard
« Reply #1 on: April 04, 2021, 06:30:28 PM »
A few points:

#1.
  Is it really as simple as opening an IRA, putting the cash in it and immediately moving it to a Roth?  Can it be done completely online?
Yes, and Yes. Though there is typically a 7 day period for the money to clear if you are transferring the money in from an outside institution. 
So, a couple clicks to transfer the money into an IRA. Wait 7 days for money to clear.  A few more clicks to move it all into a Roth.

#2
If you have any IRA balance with pre-tax money, you will have a huge headache with this.  You cannot do a last-in, first-out type IRA contribution and then backdoor it into a Roth.  Any conversion to a Roth will have to be done Pro-rata.

#3
Do you even need to backdoor roth?  Can you do a normal roth?  In most situations, if your income level allows you to deduct your contributions to an IRA, it's also low enough to directly contribute to a Roth IRA.  Of course, special situations may apply.

#4
If your tax guy doesn't know this basic info, what else is he missing?

Telecaster

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Re: Backdoor Roth with Vanguard
« Reply #2 on: April 04, 2021, 09:11:12 PM »
Hi!

I poked around looking for this on the site but couldn't find anything.  If there is a post already, please just point me towards it.

We typically do a yearly IRA for me and my spouse (on top of maxing out our 401Ks).  Our tax guy suggested doing a backdoor Roth this time.  I like using Vanguard but I'm not sure how to do this.  Is it really as simple as opening an IRA, putting the cash in it and immediately moving it to a Roth?  Can it be done completely online?

Thanks for any help you can provide!
Harper

Yes, yes, and yes.  But if you can do an traditional IRA that's usually the better choice.  The backdoor is an option if you can't do an tIRA.  So I'm confused why the accountant is recommending a backdoor.  Because, if you can do a tIRA you could simply do a regular Roth contribution instead.  Again, in that situation that's not typically the better options.

If you can't do a regular IRA, then by all means do the backdoor--as long as you don't have an existing tIRA.  If that's the case, things get complicated.

Google White Coat Investor for step by step instructions how to do this at Vanguard. 




terran

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Re: Backdoor Roth with Vanguard
« Reply #3 on: April 04, 2021, 11:04:45 PM »
Here's a step by step guide for completing a backdoor Roth with Vanguard: https://www.physicianonfire.com/backdoor/

Harper

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Re: Backdoor Roth with Vanguard
« Reply #4 on: April 05, 2021, 04:25:07 AM »
Thanks all!

We are above the income level to deduct tIRA or Roth IRA.  Tax guy explained it to us but said he didn't know the specifics of Vanguard as he's never used them.

Appreciate the link.  Have a great day!

MDM

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Re: Backdoor Roth with Vanguard
« Reply #5 on: April 05, 2021, 10:02:19 PM »
We typically do a yearly IRA for me and my spouse (on top of maxing out our 401Ks).
We are above the income level to deduct tIRA or Roth IRA.
Based on those two posts, you may need to check into "pro-rata taxation" when using the Backdoor Roth process.

Filling out draft Forms 8606 for each of you before starting the process can be a good way to check your understanding.