fbpx

Articles

How to make a $24,000 Backdoor Roth IRA Conversion In One Year!

By Jimmy Turner, MD
The Physician Philosopher

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 received in January of 2018.  Unfortunately, the date was 12/30/17 at the time I realized this.  This led me to find the answer to the following question: when is the latest that you can contribute to an IRA?

When I submitted my $5,500 to Vanguard to deposit into a traditional IRA (TIRA) for both my spouse and me (there was a limit of $5,500 per person in 2018 that has now increased to $6,000 in 2019), a pop-up came up from Vanguard that informed me that all transactions would post on 1/2/2018.

The thought then occurred to me that I’d missed my chance to do a Backdoor Roth IRA for 2017.  I started to scour the internet forums to find an answer to my question, which eventually 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.  If it’s your first time performing a Backdoor Roth IRA, you can even find out how to contribute $24,000 in a single calendar year.

Further Reading: For a full step by step tutorial on your first Backdoor Roth IRA click here.

Backdoor Roth IRA Basics

In order to get to a Backdoor Roth IRA from a traditional IRA you must first contribute to a traditional IRA and then convert to a Roth IRA.  This is the so called Backdoor Roth IRA.

You will notice then that contributions and conversions are not the same thing.

Anyone can contribute to a traditional IRA, regardless of their income.  However, only people who earn less than the $120,000 (single) or $189,000 (married) can contribute to a Roth IRA without their contributions being reduced.  Unfortunately, many doctors make more than this, which is what prompts the need for a Backdoor Roth IRA.

When is the Latest I Can Contribute to an IRA?

You can contribute to a traditional IRA anytime before you file your taxes (April of the next year; in this case, April of 2018 for a 2017 tax-year 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, you can make a Backdoor Roth IRA contribution for tax-year 2019 all the way up through April of 2020. The following, though written for tax year 2018, comes directly from the IRS website Publication 590-A.  [At the time of this writing, this publication had not been updated for 2019]

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 traditional 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).  What about the Backdoor Roth IRA conversion?

How much can I convert in a single year?

While we have answered the question of contributions to a traditional IRA, our eventual goal is to convert this money to a Backdoor Roth IRA. Are there limits on the conversions?

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.  This is because conversions are not considered a roll-over. So, this rule does not apply to “Trustee-trustee” 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. Further, the above says that you can make “as many rollovers from a traditional IRA to a Roth IRA.”  This is 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.

To answer the question more plainly.  There are limits on the amount that you can contribute to an IRA each year. However, there is no limit on the amount you can convert to a Roth IRA (from a traditional IRA).

A Caveat on Recharacterizations

An important caveat to this is that the tax-law changed in 2018 with the Tax Cuts and Jobs Act.  If you accidentally place money into one kind of IRA and then want to “recharacterize” the initial contribution into the other, this is no longer acceptable.

The following is directly from the IRS.

Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

For example, tax-payers who want to make an initial deductible Traditional IRA contribution used to be able to recharacterize this later as a Roth IRA contribution.

This can get complicated.  For the purposes of this post, however, all you need to know is that a recharacterizations are different than a conversion.  Traditional IRA to Roth IRA conversions are still acceptable under the new law.  So, don’t sweat it.

Take Home: Did I miss the backdoor Roth for the year?

If you made the mistake of attempting your first backdoor Roth and missed the December 31st date, don’t worry. You can still contribute to the previous year’s Traditional IRA. Then you can convert this money in the current calendar year.  Additionally, if you make another Traditional IRA contribution for the current calendar year, you can convert that as well.  Here is an 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.  [The contributions have now increased to $6,000 per person: $12,000 for two people in a marriage in 2019].

This was converted to a Backdoor Roth IRA later in January 2018.  I could have made an additional $5500 contribution for my spouse and me for tax year 2018.  Then, this could have been converted in 2018, too.  Therefore, I was able to make a $22,000 contribution during the 2018 calendar year (which is now $24,000 for 2019). The first contribution was for tax-year 2017.  The second contribution was for 2018.  I converted them both to the Backdoor Roth IRA.

Therefore, I converted $22,000 to Roth in the same calendar year.  In 2019, you can now convert as much as $24,000 into a Backdoor Roth IRA.  However, you must remember that you can only contribute $6,000 for each 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 IRA post. If you want to know more about that this is where I 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

19 Comments

  1. Dmitri De La Cruz

    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?

    Reply
    • ThePhysicianPhilosopher

      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.

      Reply
      • Alex

        I have made a TIRA contribution in Dec 2020 in cash, converted to RIRA in Jan 2021, but Merrill didnt produce a 1099-R for 2020. Now I wonder if/how to report this to IRA this tax cycle.

        Reply
        • raj

          I am also having the same issue. Alex, did you get your answer? I did the conversion in january 2021 and merrill will not give me tax documents till end of this year. I called them and spoke to someone and she confirmed with another person and claims the IRS tax rules DO NOT allow a roth conversion to be backdated to prior year but DO allow traditional IRA to be backdated to prior year. If I am understanding your article and assuming laws have not changed, what Merrill is telling me is incorrect but not sure what paperwork to submit if they won’t send me the correct tax paperwork and if they are not filing it as such on their side. Any advice? Thanks

          Reply
          • Jimmy Turner, MD

            You should both fill out an 8606 regardless. This is the tax form that reports your IRA contributions and conversions.

            Converting in a different year than you contributed does complicate things (in terms of how you fill out your 8606), but its not a big deal.

            Your CPA should be able to help with this.

  2. Dan

    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?

    Reply
    • ThePhysicianPhilosopher

      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.

      Reply
      • Dan

        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.

        Reply
        • ThePhysicianPhilosopher

          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.

          Reply
  3. Don

    Does the Roth 5 year rules for conversions apply to this backdoor Roth?

    Reply
  4. Nicole

    Thank you! I had figured that this was the case, but I’ve been looking for this answer in clear terms since I made the same mistake for 2019/20. I made a Traditional IRA contribution for 2019 and did the Roth conversion in 1/2020–oops. I save for my contribution throughout the year so it looks like I’ll just make my 2020 contribution and 2nd 2020 conversion EARLY in December this year. Much appreciated

    Reply
  5. Don

    Did you report your contributions and conversions for tax years 2017 and 2018 separately?

    Reply
  6. Jeff

    Thanks! I did the same – 2 IRA contributions and conversions in 2020 (January and March). With your example above, how do I report the 1st Roth conversion on my taxes (Turbo Tax) for year 2019? I don’t have a 1099-R for 2019 showing the “distribution” from the traditional IRA (to the Roth) because it was converted in 1/2020.

    Reply
  7. Stephanie M

    Do you have to do the two conversions for each of the tax years separately? $6,000 for 2019 and then $6,000 for 2020? Or can I do one conversion of $12,000 for the two tax years? (I’m not married).

    Reply
  8. JP

    Thank you very much for the detailed post! My wife and I are finally able to fund our Roths for this year. If I’m understanding it correctly, I can still fund my TIRA for 2020 $6000 and another $6000 for 2021 (for which I only did 2 days ago and still waiting for the funds to transfer) and once it is cleared, I can transfer a total of $12000 for this year (one for 2020 and another for my 2021). And after that, I can also do it for my wife! Am I understanding it correctly? Thank you.

    Reply
    • Jimmy Turner, MD

      You’ve got it!

      Reply
  9. Krish

    Great article. though the deadline for contributing to non-deductible ira for 2020 is through May 17, 2021, I found that had an old IRA with $6k balance. I rolled it into my 401k last week, however, it seems like since it had a $6k balance on 12/31/2020, I cannot do this whole thing for 2020. As the pro-rate rule seems to look at total of all my ira balances as of 12/31/2020 which in my case would be $6k as I didnt roll till last week. I guess I can only do this going forward for 2021. Do you agree @Jimmy?

    Reply
  10. Krish

    Actually I was wrong, the IRA accounts should be $0 by 12/31/21, the year in which you convert to the ROTH IRA, not the year for which your contribution was for. So I can move everything our of my old IRA to 401k first and then contribute to 2020 before 5/17/21 and then convert to roth. They look at the IRA balance as of 12/31/21 (year of conversion) so my 12/31 will be empty as I moved my old IRA balance to 401k.

    Reply

Submit a Comment

Your email address will not be published. Required fields are marked *

You might also be interested in…

Should I Invest in My 457 Plan?

Should I Invest in My 457 Plan?

Investing in your 401K/403B is a straight-forward decision, even if you are loaded up with debt. A much more complicated question to answer is whether you should contribute to your company’s deferred compensation 457 plan. Today’s post will answer the question, “Should I invest in my 457?” The What, when, and why.

The Dave Ramsey Asset Allocation

The Dave Ramsey Asset Allocation

Should you follow Dave Ramsey’s recommended asset allocation for your portfolio? Come read how the WCI thinks you should decipher if this is right for physicians.

Can I trust PSLF?  The PSLF Side Fund

Can I trust PSLF? The PSLF Side Fund

A recent area in physician personal finance that has the same dilemma, which requires the Trust, But Verify method is PSLF (Public Service Loan Forgiveness).  People often ask, “Can I trust PSLF?”  My answer?  Have a back-up plan.
And trust, but verify.  Let’s dig in.

Are you ready to live a life you love?