How to make a $22,000 Backdoor Roth Conversion In One Year!

While starting to make financial plans for my upcoming year and taking an overview of my family’s financial state, it became apparent to me that we could afford to take part in a Backdoor Roth in 2017 for the first time after a bonus I was now going to receive in January of 2018.  Unfortunately, the date was 12/30/17 at the time I realized this.

When I submitted my $5500 to Vanguard to deposit into a traditional IRA (TIRA) for both my spouse and me (total $11,000), a pop-up then came up from Vanguard that informed me that all transactions would post on 1/2/2018.

I thought my 2017 Backdoor Roth was as isolated as Alcatraz. No way out of the situation, or was there?

The thought then occurred to me that I’d missed my chance to do a backdoor Roth for 2017.  I started to scour the internet forums to find an answer to my question, which left me reassured.  However, I am an anesthesiologist and we live by the “Trust, but verify” mindset, which has saved many a patients’ lives.  Below you’ll find the definitive answer on contributions and conversions of Backdoor Roth in the next calendar year.

When must you contribute to the Traditional IRA?

You can contribute to a traditional IRA anytime before the point you file your taxes (April of the next year, in this case April of 2018 for a 2017 contribution).  This was reassuring to me and was confirmed by the fact that Vanguard lets you choose the prior tax year as an option for placement of your IRA contribution even if you are no longer in that calendar year.  For example, I could make a contribution to the 2017 tax year even though I was now in the 2018 calendar year.  The following, though written for tax year 2017, comes directly from the IRS website Publication 590-A.  [At the time of this writing, this publication had not been updated for 2018]

Contributions must be made by due date. Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2016 must be made by April 18, 2017. -IRS Publication 590-A

They also add the following clarification in the same document:

Designating year for which contribution is made. If an amount is contributed to your traditional IRA between January 1 and April 18 [for 2017], you should tell the sponsor which year (the current year or the previous year) the contribution is for. If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it).

Therefore, it is clear from the IRS that a contribution to a taxable IRA for a previous tax year can be made following the start of the next calendar year as long as it occurs prior to the tax filing deadline (April each year).

Great, I can contribute.  How much can I convert in a single year?

So, the IRS has definitively answered the question about whether you can contribute to a taxable IRA, but we haven’t answered the question of how much we can convert to Roth in a single year?  Well, fortunately the IRS has something to say on this as well:

You can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regardless of the number of IRAs you own. However, you can continue to make unlimited trustee-to-trustee transfers between IRAs because it is not considered a rollover. Furthermore, you can also make as many rollovers from a traditional IRA to a Roth IRA (also known as “conversions”).

The quote above has two important pieces of information:

  1. The “only one rollover” rule for IRA’s does not apply to conversions as conversions are not considered a roll-over. So, this rule does not apply to “Trustee-trusee” roth conversions.  Trustee-trustee conversions simply means that you are making a transfer within the same financial institution.  For example, if you buy a taxable IRA at Vanguard and then convert that to a Roth IRA at Vanguard, that would be deemed a “Trustee-Trustee” transfer.
  2. Furhter, the above says that you can make “as many rollovers from a traditional IRA to a Roth IRA.”  This is really the answer we are looking for with our question.  We know that we can contribute to the current and previous tax year as explained above, but how much can we convert from traditional to Roth?  As many as we want.

Take Home Points

If you, like me, made the mistake of attempting your first backdoor Roth (or the first in several years) and missed the December 31st date, you can still contribute to the previous year’s taxable IRA and then convert this money in the current calender year.  Additionally, if you make another Roth IRA contribution for the current calendar year, you can convert that as well.  So, for example:

On 1/2/18, I made a $5500 contribution for both my spouse and me (total of $11,000) for the 2017 tax year.  This was converted after much thought and consideration to a Roth IRA later in January 2018.  I could also (and may) make an additional $5500 contribution for my spouse and me (Again, totaling $11,000) for a 2018 contribution, and then convert that later in 2018.  Therefore, I will be able to make a $22,000 contribution during the 2018 calendar year (though tax-wise considered two separate tax year contributions) and converted $22,000 to Roth in the same calendar year.

Too good to be true?  You can go read the IRS document linked above for yourself.  For me, I was very glad to find out that I hadn’t missed out! And I didn’t even talk about the step-transaction in a Backdoor Roth post (unlike this one, where I do talk about the step-transaction).

Have you made a backdoor Roth contribution and conversion yet? Have you made the same  (almost) mistake as me?  What is your take?

TPP

6 thoughts on “How to make a $22,000 Backdoor Roth Conversion In One Year!

  1. That’s for the 2017 year. Rules about IRA’s have changed for 2018. What I’d like to know is whether I can still do the backdoor 5500$ Ira to Roth IRA conversion in 2018 for 2018 tax year?

    • Yes conversions and recharacterizations are different things. No changes to conversions in the new tax bill.

      Until mid April you can make a 2017 or 2018 backdoor Roth conversion, assuming you haven’t made one yet.

  2. What if I didn’t zero out my existing Simple/Traditional IRA balances before 12/31/17? Can I still make a traditional IRA contribution and back door it for 2017?

    • It is the number you had as of December 31, 2017. This is shown on form 8606 on line 6. You can find the 2017 8606 form by here.

      I would start doing the backdoor Roth for 2018 after you have gotten rid of the Simple/Tradtional IRA by rolling that money over into your 401K. If your employer won’t let you do that, then get some side income via 1099 and set up a solo 401K. Then, you can roll that money over into that 401K to avoid this problem going forward. Michael Kites writes about that here, if you’d like to read more.

      • My problem is I have a recurring Simple IRA that contributes with each monthly paycheck. Do I need to wait until the end of the year and zero it out and then do the backdoor conversion? or can I zero it out, make the backdoor conversion and then continue to make Simple contributions? I’m confused.

        • Got it. If you have a recurring simple IRA through your employer, I would not do a backdoor Roth. I would put additional money for you into a taxable account (beyond whatever you can fund into available retirement accounts). If you ever leave your employer, you can roll that Simple IRA into a 401K/403B at your next employer and then start doing the backdoor Roth.

          That said, if you are married and your spouse does not have a SIMPLE or SEP IRA then you can contribute 5500 per year for them through a backdoor roth conversion. Your simple IRA would not impact their ability to perform a backdoor Roth IRA conversion.

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