Backdoor Roth IRA - The 0.1%'s favorite tax strategy

Dear Hit me taxes one more time,

‍We've been getting this question a lot lately, especially after news broke about Peter Thiel's fairly epic use of a Backdoor Roth in what was probably the most nerdily-titled article (video below) I've read this year: "Lord of the Roths" (ProPublica). I say this not with judgement, but with appreciation. Love me some Lord of the Rings!

Okay—inspired by Peter Thiel's outlandish tax savings using the Backdoor Roth strategy... let's figure out how to do this for you and yours! 

Let's start by (1) taking your questions on Backdoor Roth IRAs one by one, and (2) then diving into how you can take advantage with how-to guides and FAQs.  

Are Backdoor Roth IRAs useful? Yes. This unfortunately named, but sophisticated and legitimate strategy allows even high-income earners to use the Roth IRA. The Roth IRA does have income limits, but the Backdoor Roth is a "two-step" strategy that allows you to bypass these income restrictions. They offer a double tax benefit, and a third wealth transfer benefit if you'd like to leave a legacy for loved ones:

(1) Grows tax-free = serious tax savings if you let this compound for a couple decades and

(2) You aren't taxed when you withdraw the money, unlike a 401(k) retirement account where the government says "time to pay up on taxes" and you'll pay income tax as you withdraw.

(3) Great way to pass on wealth to children or other loved ones, without saddling them with taxes, if that’s of interest. In fact, the Wall Street Journal calls them “one of the more beneficial gifts that a person can pass onto the next generation."

When I heard about the Backdoor Roth, I honestly said “Oof, maybe another time.”  But it’s more bark than bite! Once I finally did this, I realized it’s incredibly easy. It’s such a great tax-saver. I just wish I’d started doing this sooner. It's a no-brainer.
‍- Allie, Cardiologist, Steward User since 2021

Are Backdoor Roth IRAs common? Yes. If this strategy sounds appealing to you, you have company. When the IRS removed the income limit on Roth Conversion in 2010, the number of conversions “increased over 800%, to $64.8 billion,” according to a January 2014 IRS report. It was the first time conversions exceeded contributions. And 57% of the conversions were from people with six-figure incomes. This is one of the first strategies white-glove wealth advisors implement with their clients, and at Steward, we're all about bringing these for-the-ultra-rich-only strategies to more people beyond the 1%! If this sounds appealing, you’re in good company.

Are Backdoor Roth IRAs sketchy? Nope. Fully legal. In 2018, Congress “blessed” this Backdoor Roth IRA approach. You can read the full article on Forbes here, the National Association of Plan Advisor’s case summary here for more info, and the Congressional blessing directly here (footnotes 268, 269, 276, 277). For the legal junkies—originally, people weren’t sure if the Roth IRA was allowed because of the step transaction doctrine, “an IRS doctrine that says if the sum of all the parts is illegal, the transaction is illegal even if all the individual steps are legal.” But this was clarified (see here and #9 on here).

But... we're in "last chance dance" territory. If legislation passes in its current form, the chance to do a Backdoor Roth could be coming to a close soon. A main focus of the legislation (which hasn't yet passed!) is reforming retirement plan rules to close perceived “loopholes” commonly used by wealthy individuals. All of which is to say...now is the time to get this done!

‍Ready to give this strategy a go?
‍In this next section, we share three levels of explanation, depending on how deep you’d like to go: 

(1) Curated youtube guides should get you off and to the races, but if you have more questions, you can go deeper with 

(2) Our focused set of FAQs, or even deeper with 

(3) a step-by-step written guide with screenshots.

‍Youtube guides

If you’re working with an accountant: The video below explains how to do a Backdoor Roth, without getting into the steps your accountant can do for you, specifically filing your Form 8606 in your 1040.

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If you’re doing your taxes DIY: A video that includes the step of filling out the required 8606 tax form in your 1040.

Backdoor Roth FAQs

What is this strategy?

A way to invest in a Roth IRA—a powerful vehicle that allows your money to grow tax free (i.e., no capital gains tax, as with a personal investing account) or without taxes when you withdraw (i.e., no income tax, as with a 401(k)). 

How? The government created the Roth individual retirement account (IRA), as an incentive to get people to save more for the long-term, by rewarding them by letting your money grow tax-free and come out tax-free.

‍The catch? If you're higher income, i.e. earning >$214,000 as a married couple or >$144,000 as a single tax filer...the government says, no dice—you're ineligible to contribute directly to a Roth IRA or would only be able to make a portion of the full $6,000 contribution! That means many of our readers at Steward are excluded from making direct Roth IRA contributions. Enter the “Backdoor Roth IRA” = a Congress-blessed way people with high incomes (that’s likely you or soon to be you if you’ve made it with us this far) to side-step the Roth’s income limits, with a fancy "two-step": contributing to a traditional IRA and then converting to a Roth, in other words contributing money to a Roth through the "back door".

 Why go through the effort to do a Backdoor Roth? 

1. Lowering taxes in retirement: The Backdoor Roth is even more awesome than a 401(k) or traditional IRA, or a personal investment account, for a few reasons: 

(a) Should you need cash earlier, you can take back your original contributions at any time without paying taxes or penalties. After 59 ½ you can access all of it, including earnings, tax-free. 

(b) You don’t have to take money out each year starting after you reach age 70 ½ like you do with a traditional IRA or 401(k). In fact, among Roth IRA owners 70-plus, only 5.7% took distributions, according to the Investment Company Institute. What they understand is that with a Roth IRA, you can control your taxable income in retirement. 

(c) It’s like an insurance policy in case tax rates go up significantly in the future (which given we’re at historical lows...is certainly on the table!). It gives you the option to pull out tax-free dollars vs. paying long-term capital gains tax on a 20-30 year appreciating asset, as you would if you were purely putting these savings into a brokerage account. 

2. Tax-Efficient Gifting: These are a great way to pass on wealth to children or other loved ones, without saddling them with taxes, if that’s of interest. In fact, the Wall Street Journal calls them “one of the more beneficial gifts that a person can pass onto the next generation.” Why? 3 reasons.

(a) Unlike with traditional IRAsand many types of retirement plans (e.g. 401(k)), you don’t have to take any required distributions from a Roth IRA during your lifetime, so if you don’t need the money, you can just leave it in the account to keep growing tax-free until you pass it on to heirs.

(b) Your heirs will be able to make tax-free withdrawals over a five-year period from the Roth IRA. No income tax (as in the case of an inherited 401(k) or traditional IRA) and no capital gains tax (as in the case of an inherited personal investment account). A gift with no strings attached.

(c) Spouses who inherit Roth IRAs have even greater flexibility to make tax-free withdrawals.

What do I need to do?

A “two-step”. Indirectly contribute to a Roth IRA by (1) making a nondeductible (i.e. taxed and not deducted) contribution to a Traditional IRA and (2) then converting the Traditional IRA to a Roth IRA. Since there are no income limits for either of these steps, you can use this “Backdoor ” Roth technique to effectively contribute to a Roth IRA regardless of how high your income is. 

How much time will this take?

• If you work with an accountant: The first year you do this will take about an hour collectively to do your steps (i.e., your accountant can take care of one of the most cumbersome steps - filing Form 8606 in your 1040). 
• If you do your taxes DIY: The first year you do this will take about three hours collectively, since you’ll be filing Form 8606 in your 1040 on your own.

Once you get the set-up done...it’s a clockwork process year after year. Rinse and repeat in 10-30 minutes each year, since you’ll skip a bunch of “account opening” steps you’ll have to do year one. It may seem like a lot - but “retirement you” is going to really thank “today you” for doing this! This is an incredible investment vehicle where your money is going to grow tax-free and you’ll be able to pull it out tax-free!  We regret not doing this for ourselves earlier. You can’t make up for lost time if you kick the can down the road. 

Am I eligible for this strategy?

Go down this 5-minute checklist to double check you're eligible, before you "attempt this at home":

A. You do *NOT* have money that is tax-deferred (i.e., pre-tax) in any IRA. That includes: rollover IRA from a previous employer’s 401(k)/403(b), traditional IRA, SIMPLE IRA, or SEP IRA. 

• Where to check: Check IRS Form 8606. 
• Why this is a non-starter: If you have money in these accounts, you’ll get hit with taxes that counteract all the neat tax benefits of this strategy. Not worth it!. 
• What if my spouse does and I don’t: This strategy is by individual, so if you don’t have money in these types of accounts, but your spouse does, you can still go ahead with this strategy for you (and vice versa).

B. You’re ready to do a little extra tax paperwork (or you have an accountant). Where to check: If you file individually, make sure you read the tax steps before getting started, to ensure you’re comfortable! If you work with an accountant, ask them if they’ve done a “ Roth” or “same-year Traditional IRA contribution and Roth conversion” before and feel comfortable with it.

C. You or your household is earning income. If you’re single, you have to have earnings (wages  or self-employment income) of at least $6,000 (or $7,000 if you’re above 50). If you’re married, you and your spouse between the two of you have to have earnings of $12,000 (or $14,000 if you’re both above 50) to make the contribution.

D. You are under age 69.5. Traditional IRAs required in this strategy are only for <69.5.

E. You are willing to keep the funds in the newly created Roth IRA for at least five years before withdrawing the money. If funds are withdrawn earlier, you may have to pay taxes on any earnings and potentially will incur a 10% penalty unless you are age 59 ½ or older.

I already have money in a traditional IRA or rollover IRA, but I really want to do the Backdoor Roth IRA - what are my options?

This IS a very valuable strategy, so worth some legwork! You can structure your pre-tax IRA accounts (a rollover IRA, SEP-IRA, SIMPLE-IRA, or traditional pre-tax IRA) so that you could do a Backdoor Roth contribution. That would mean consolidating some of your retirement accounts to transfer OUT any money that is pre-tax in your IRA.

You can get rid of these IRA accounts in two ways:

1) Convert the entire sum to a Roth IRA.  That means biting the bullet and paying the tax on the traditional IRA now, so it becomes a Roth IRA and can get withdrawn later tax-free.

2) Roll these IRAs into your current employer’s 401(k) plan (...IF they allow it, many plans unfortunately don’t allow this!).  Contact your 401(k) plan administrator and request a direct transfer, which moves the money from your IRA into your 401(k) without it ever touching your hands. This means you don’t have to sell any assets to pull this off, and prevents you from getting hit with taxes or penalties.

If you're trying to squeeze this in before the end of 2022, good news!  As long as your pre-tax IRA balances are 0 by 12/31/2022, you'll avoid triggering the "pro-rata" rule which would otherwise eliminate most of the benefits of a Backdoor Roth.

Since we're in "last chance dance" territory, let's talk timing and sequencing to get this done legally and tax-efficiently. Technically, as long as you get both done before 12/31/2022, you could parallel track (a) getting rid of your pre-tax IRA accounts and (b) doing the standard "two-step" of a Backdoor Roth (i.e., making a traditional post-tax IRA contribution, and then converting to a Roth). But to play it safe, I'd suggest converting your pre-tax IRA or rolling them into your current employers' 401(k) plan first, just to make sure you're definitely getting to a 0 balance on those accounts before attempting a Backdoor Roth. If you work with an accountant, definitely also run this by them so that they're accounting for this properly in your taxes! 

*Important note: the Build Back Better Bill could get passed at any time in 2022. The Backdoor Roth IRA is at risk in the bill’s current form, but everything is up in the air. This means that the Backdoor Roth IRA strategy could be eradicated or saved at any point in the year, so act while you can! See more in the next section.*

This article provides additional ideas on getting rid of traditional IRA accounts.

Is this strategy still on the table given Biden's New "American Families Plan" tax proposal and the "Build Back Better" act?

Still TBD! As of now, the strategy is still on the table, but this could change at any moment in 2022. Democrats on the House Ways and Means Committee released their tax proposals on September 13, 2021. It passed through the House in November 2021 with a narrow margin. A main focus of the bill (which hasn't yet passed the Senate!) is reforming retirement plan rules to close perceived “loopholes” commonly used by wealthy individuals. The bill (specifically, Section 138311 of the proposal) aims to eliminate the ‘Backdoor’ Roth strategy, prohibiting Roth conversions of after-tax funds in retirement accounts altogether. If the bill passes the Senate in its current form and is signed into legislation, then the Backdoor strategy will be off the table. This could happen anytime in 2022. There is also a chance that the bill is altered sometime in 2022 and the Backdoor strategy is saved, but we can’t rely on that. Read this article here from White Coat Investor to learn about the different potential outcomes regarding Backdoor Roth IRA and the Build Back Better Act.

While this bill is not yet in its final form...there's a good chance we're in "last chance dance" territory...meaning this is a great time to get this done! We'll be back in touch with updates as the legislation gets updated.

Can my employer manage this for me?

Sadly, no. You’ll need to do this individually (the “I” in IRA of Backdoor Roth IRA stands for individual), so unfortunately your employer won’t manage this for you or make a match. But the tax advantages make it well worth it to have on top of your employer provided retirement plan (e.g., 401(k)).

What company should I use to open my IRA and then convert it to a Roth?

You can use Vanguard, eTrade, Fidelity, Schwab, TD, Betterment and many other banks and brokerages etc. We personally use Vanguard, given their reputation, low-fees, and client-ownership structure. They also make the conversion step required for the Backdoor Roth IRA very easy and intuitive. But ultimately, you can select what is best for you based on your preferences. We have no dog in the hunt here, other than ensuring you're getting a low fee and good service.

Eek, will I need to open a new traditional IRA account every year?

Nope! Once you open a traditional IRA account, you can reuse this same traditional IRA account every year - it will just spend most of the time with $0 in it. Most fund companies, including Vanguard, don’t close the account just because there is nothing in it. You will, however, have to convert from traditional IRA to Roth IRA every year. 

When should I do this tax strategy?

Given that potential legislation might end your chance to do a Backdoor Roth anytime in 2022, we recommend being proactive and our answer is...now! 

If the legislation ends up not passing, you'll have a bit more breathing room and we'd  recommend doing this strategy in January of each year. For example, in January 2023 you will open a traditional IRA (if you don’t have one already), contribute to a traditional IRA, open a Roth IRA (if you don’t have one already), and convert the traditional IRA to a Roth IRA. February and March works too, you just want to get ahead of that April 15 contribution deadline!  You’ll then report it on the taxes you file by April 15, 2023.

Can I still do a Backdoor Roth IRA if I just inherited an IRA from Great Aunt Geraldine?

Yes. Typically having money in an IRA account means you’ll get hit with taxes that counteract all the neat tax benefits of this strategy, under what’s called the “pro rata” rule (more details on that here), but...given your IRA is inherited, you’re in luck. Your inherited IRA follows a separate set of rules for distribution, and won’t be included by the IRS when considering conversions and the pro-rata rule. Bottom line: you can still do this Backdoor Roth IRA strategy if the only existing IRA you have is an inherited IRA.

I'm working with an accountant. What do I need to tell them to make sure this gets done right and my taxes are filed correctly?

First the good news—this strategy will be a lot easier since your accountant can do the tax paperwork (Form 8606) for you. But your first year doing this with an accountant, it’s worth double-checking this is done right, especially if they don’t seem familiar with this strategy! If it’s not done right, you'll pay taxes twice on your Roth IRA contribution. I've included a sample note to send to your accountant below:

I’d like to utilize the Backdoor Roth IRA strategy, and I have a couple questions for you. (1) Are you familiar with the Backdoor Roth IRA strategy, and have you done it for other clients? (2) Is there any info you need from my side in order to translate that over to my taxes / Form 8606?” 

I’m filing my own taxes - how do I fill out Form 8606?

The IRS form can be found here: https://www.irs.gov/pub/irs-pdf/f8606.pdf (This is for 2021. The IRS hasn’t updated it for 2022 yet.)

A guide for how to fill out Form 8606 can be found here (see Step 4 - Fill out the IRS Form 8606 Correctly) and you can also check out this video here: https://youtu.be/w244kccgl84. A comprehensive guide for how to report the Backdoor Roth IRA in some of the most common personal tax software are linked here: TurboTax, H&R Block Software, TaxACT.

Avoiding common mistakes: If you forget to do this, there is a $50 penalty. Remember that you need one form for each spouse (in case you are also doing this for a spouse/partner) since these are a type of IRA (i.e., INDIVIDUAL Retirement Arrangements).

How should I invest my Roth IRA?  

Your investments should match the goals that you’re using this vehicle for, in this case: long-term financial freedom. So you should use the “long-term” investment allocation Steward can recommend to you in your plan. You should invest using the same or similar vehicles you’re using for your long-term goals in your personal investing account, your employer-sponsored retirement plan (e.g., 401(k), and your HSA (if applicable). 

Should I do dollar-cost averaging? 

Finance-talk: dollar-cost averaging is when you break up your total investment into chunks that you invest over ~6-12 months. For the Roth IRA, this isn’t worth the administrative hassle. If you’re lucky enough to need to do a Backdoor Roth IRA in the first place (because your income is high), it’s not worth spending your time trying to spread out the $6,000 into $500 a month over 12 months. It’ll be a lot of extra work and increase your chances of messing up. Just put all $6,000 in at once.

‍Can I do a Backdoor Roth IRA for my spouse?

Yes, absolutely! If you have a spouse, you can also repeat all of the steps for your spouse, as long as they individually don’t have funds in a traditional IRA, SEP IRA, or SIMPLE IRA, or rollover IRA. Note that your spouse does not necessarily have to have earned income—between the two of you, you just have to have $12,000 combined (or $14,000 if you’re both above 50) to contribute the maximum through the Roth IRA. Note that if you’re doing a Roth IRA for your spouse, you will each need to fill out Form 8606.

Step-By-Step Guide to DIY

1. Confirm you’re eligible for this strategy by going down this 5-part checklist (~5 minutes)

A. You do *NOT* have money that is tax-deferred (i.e., pre-tax) in any IRA. That includes: rollover IRA from a previous employer’s 401(k)/403(b), traditional IRA, SIMPLE IRA, or SEP IRA. 

• Where to check: Check IRS Form 8606 
• Why this is a non-starter: If you have money in these accounts, you’ll get hit with taxes that counteract all the neat tax benefits of this strategy. Not worth it!
• What if my spouse does and I don’t: This strategy is by individual, so if you don’t have money in these types of accounts, but your spouse does, you can still go ahead with this strategy for you (and vice versa).

B. You’re ready to do a little extra tax paperwork (or you have an accountant). Where to check:  If you file individually, make sure you read the tax steps before getting started, to ensure you’re comfortable! If you work with an accountant, ask them if they’ve done a “ Roth” or “same-year Traditional IRA contribution and Roth conversion” before and feel comfortable with it.

C. You or your household is earning income. If you’re single, you have to have earnings (wages or self-employment income) of at least $6,000(or $7,000 if you’re above 50). If you’re married, you and your spouse between the two of you have to have earnings of $12,000 (or $14,000 if you’re both above 50) to make the contribution.

D. You are under age 69.5. Traditional IRAs required in this strategy are only for <69.5

E. You are willing to keep the funds in the newly created Roth IRA for at least five years before withdrawing the money. If funds are withdrawn earlier, you may have to pay taxes on any earnings and potentially will incur a 10% penalty unless you are age 59 ½ or older.

2. Open a Traditional IRA (~3 minutes)‍

We recommend using Vanguard, given their reputation, low-fees, and client-ownership structure, and we’ve outlined the steps for Vanguard below. They also make the conversion process required for the Backdoor Roth IRA very easy and intuitive. Ultimately, you can select what is best for you based on your preferences.  If you're with Fidelity (another popular choice with our readers), check out this step-by-step guide for Fidelity: https://www.whitecoatinvestor.com/how-to-do-a-Backdoor-roth-ira-at-fidelity/

Go to: https://investor.vanguard.com/ira/how-to-open-an-ira and click “Open your IRA” today.

If you already have an account, you can click “yes” on the prompt below, otherwise click “no” and you can get set up with Vanguard through this process as well (one-two punch!) Click Continue.

Click Continue again.

You’ll then be taken to five different tabs:

• On the “Tell us about you” tab, for Why are you investing? Click “Retirement”. Select your account type. Click ‘Traditional IRA”

Click continue, and share your goals for the money (see example responses below)

Confirm your owner information, and your address/ phone number for your traditional IRA account, and details on your employment status / financial profile.

Select beneficiaries for your traditional IRA account (e.g.,100% to your spouse/partner, with a secondary of your descendants who survive me, per stirpes)

3. Contribute to your Traditional IRA - making a non-deductible contribution (~3 minutes)
Deadline: The tax deadline (typically April 15th), for a “prior year” contribution. For example, a 2021 *contribution* may be made as late as 2021’s April 18, 2022 tax filing date for a *prior year* contribution for 2021. If you miss the contribution deadline, it’s a lost opportunity!

On Vanguard, you will have a few options to fund your account (you’ll see we chose below the “electronic bank transfer” - which is the most common option).

Then choose the initial contribution amount. If you’re under 50, choose $6,000, and if you’re over 50 choose $7,000. That’s based on the maximum you can contribute per year. Select “No” for is this a rollover from an employer-sponsored plan or IRA.

When asked for where you want the money to go, and what you’d like to do with your dividends and capital gains, select “Transfer to your Federal money market (settlement fund)”. You’ll see here that we’ve chosen to leave the money in cash, specifically a Federal money market fund - while it is in the traditional IRA to keep the math simple. The money will only be in this account for a few business days, and you don't want any gains or losses between the contribution and conversion step since they could slightly complicate your taxes. Then click continue.

After that it will bring you to this third tab where you can review and submit your application. Make sure that the account type here is Traditional IRA and that you’ve funded it with $6,000.

The good news - you can use this same traditional IRA account every year - it will just spend most of the time with $0 in it. Most fund companies, including Vanguard, don’t close the account just because there is nothing in it. You’ll do Step 2 again every January 2nd. This contribution is “non-deductible” = you do not deduct the IRA contribution on your 1040 tax form. 

4.  Open a Roth IRA (if you don’t already have one) (~5 minutes)

‍If you don’t already have a Roth IRA there, you’ll need to open one. This can be done in a minute or two online at Vanguard and is essentially the same process as opening the traditional IRA in Step 2. 

5. ~3 days - 1 week: Convert the Traditional IRA to a Roth IRA

This is where the magic happens - the actual conversion process where you convert the Traditional IRA into the Roth IRA. This is why we call it the “Back Door” Roth IRA. 

Why a few days later? You’ll have to do Step 5 about a week after Step 3, since most platforms (a) won’t allow you to do it on the same day (b) may need a few days for the money you contributed to your traditional IRA in step 3, to be available in the account.

You’ll receive an email from Vanguard saying “Your brokerage transaction confirmation is ready”, and that means you’re ready to do this step!

 It’s important to not wait much more than a week, because you don’t want to deal with any gains/losses, since those will complicate taxes for you! That’s why we recommend putting it in the “Federal Money Market (Settlement Fund)” and converting it as soon as you’re allowed to. 

How to do it: Log into your Vanguard account, and then visit: https://personal.vanguard.com/us/ConvertToRoth  

‍

Select “Convert All of the account” under the question “Convert all or part of this account?”, even if the balance is higher or lower than the amount that was contributed. You pay tax only on the growth, if any, above the amount contributed. If you held the nondeductible contributions in the Traditional IRA for only a few days, the tax should be minimal.

What about the big yellow print that warns you it’s a taxable event? No worries for you! While it is a taxable event, you have already paid taxes on the $6,000 that you have contributed, therefore the tax bill is just $0. 

For their Step 3—make sure that the Roth IRA it’s converting to is set to your Roth IRA Brokerage account. Make sure you double check your work here so you have everything correct.

For their Step 4—you’re going to check the box that says “I elect not to have federal and income state taxes withheld…” because again, this is not a taxable event for you.

Once you’ve checked your work, you can click submit. You’ve converted your traditional IRA to the Roth IRA! 

6. Invest your Roth IRA
Go into your Roth IRA Brokerage account and click on the drop down menu on “Transact” and you will see a number of options, including the option to “Buy Vanguard funds”, “Trade Vanguard ETFs (and non Vanguard ETFs)” or “Trade stocks and listed securities.” Choose the investments outlined in your personalized long-term investment allocation.

7. Fill out Form 8606 in your 1040, or have your accountant do this for you.

The next part of the  Roth IRA is done months later when you (or your accountant) fill out your IRS Form 8606 on your taxes. 

• If you make a 2022 contribution (i.e., contribute by the April 15th, 2023 tax deadline for 2022 taxes), you (or your accountant) will file a 2022 8606. 
• The conversion will be recorded in the year in which the actual conversion takes place. So if you make a 2022 non-deductible contribution and make the conversion in January 2023, it will show up on your 2023 tax return. 

If you’re working with an accountant: 

- Send them a note letting them know you executed a Backdoor Roth IRA for the year XXXX and confirming with them that you didn’t have any money in your traditional IRA prior to starting this process (which you shouldn’t have!). They’ll likely ask you for tax forms from Vanguard for these transactions - specifically, Form 5498. Vanguard doesn’t typically send them but they make them available on their website in the section “Tax Center”. They may not be available until 6/30 so you may want to check after that date.   

- Your first year doing this with an accountant, it’s worth double-checking this is done right, especially if they didn’t seem as familiar with this strategy! If it’s not done right, you'll pay taxes twice on your Roth IRA contribution. Remember that you need one form for each spouse (in case you are also doing this for a spouse/partner) since these are a type of IRA (i.e., INDIVIDUAL Retirement Arrangements). ‍

‍

What Form 8606 looks like:

We’ve included an example set of images for a correctly filled out 8606 below.

A guide for how to fill out Form 8606 can be found here (skip ahead to Step 4 in the video - Fill out the IRS Form 8606 Correctly) and you can also check out this video here: https://youtu.be/w244kccgl84. A comprehensive guide for how to report the Backdoor Roth IRA in some of the most common personal tax software are linked here: TurboTax, H&R Block Software, TaxACT. 
‍‍
8. Repeat steps 1-7 with your spouse, if applicable.
Even if they have no earned income, they can have a Roth IRA, because the rule is that as long as you have combined $12,000 of earned income, you can each have a Roth IRA. So if you’re married—go ahead and repeat that process for your spouse.

9. Rinse and repeat each year.
The first time you do this, you’ll have to go through all of the steps, but from the second year, you can skip Steps 1, 2, and 4 since your Traditional IRA and Roth IRA will already be opened. This is an incredible investment vehicle where your money is going to grow tax-free and you’ll be able to pull it out tax-free!

Get started with your Backdoor Roth IRA today! It may seem like a lot, but “retirement you” is going to really thank you for doing this. I only started doing this at age 30, and wish I had started sooner.

More Resources

For more information, be sure to check out additional articles on the Backdoor Roth:

• Vanguard Backdoor Roth: a Step by Step Guide
• The White Coat Investor Backdoor Roth Tutorial
• The Marginal Value of the Backdoor Roth. Is it Worth the Trouble?
• Calculating the Value of Your Backdoor Roth Contributions
• The Backdoor Roth Point / Counterpoint: A Must-Do or Meh?
• The 2021 Backdoor Roth FAQ

Interested to find other ways to save on taxes and invest smarter?

Steward ‘s mission is opening up the 1%’s wealth strategies to America’s up-and-coming families with a combination of 21st century tech and trusted advisors. We help families determine how, where, and when to invest and save on taxes in plain-English, with minimal time and effort. Steward can help you determine if a Backdoor Roth makes sense for you, how much to contribute, how to invest, and integrate this tax strategy with your broader financial picture. Give it a try here.