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:
- 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.
- 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?