Backdoor Roth IRA with Vanguard Howto Step-by-step FAQ

There are so many reasons to choose a Roth IRA over a tradition IRA account. In my mind, when I retire, I want to be free of taxes for the most part. Think of how freeing that would be! Every month taking money out of your accounts without owing the government a dime. In that future day, I’m willing to bet that taxes will be higher than they are today. This article describes how to do a Roth IRA conversion.

What if you make too much money to fund a Roth IRA? The income limit for contributing the maximum to a Roth IRA will go up by $2,000 for singles from $122,000 in 2019 to $124,000 in 2020. It will go up by $3,000 for married filing jointly from $193,000 in 2019 to $196,000 in 2020.

The backdoor Roth IRA is the best workaround. It’s still perfectly legal, so why not use it?

Here’s the way I see it, the government wants as much of your money as soon as possible, so it offers people an option to convert IRA money into a Roth IRA at any time. This creates a tax bill. You can take advantage of this by converting your old traditional 401K or IRA to a Roth. You can also put fresh money into a traditional IRA and then convert it. If you’re under 50 it’s a $6,000 limit. Anyone 50 and over can put in $7,000.

Here’s what I do: Every paycheck I put 15% of my income into my retirement. Once my Roth 401K is maxed out, I then contribute the 15% to my Tradition IRA and immediately convert it to a Roth IRA. I use Vanguard. Here’s how you do it:

Step 1: Open a Tradition IRA account with Vanguard then click “Contribute to IRA”

Step 2: For “Is this a rollover from an employer-sponsored plan or IRA” click no. Then make sure the money is going into the “Federal Money Market Account”. Then place your contribution. As you can see I still have about $4,500 left I can contribute this year. It’s nice that they keep track. When I was with TD Ameritrade years ago, they didn’t.

Step 3: Select your bank account:

Then just review and submit. Easy. It usually takes about 3 business days to get in there. I wish it was faster.

Step 4: After you wait for the money to clear into your account, go to your traditional IRA screen and click “Transfer money” then “Move money between accounts”.

Step 5: Click “sell all shares”.

Step 6: Press “Click here to complete a Roth conversion”.

Step 7: Click “Convert all of the account”

Step 8: Make sure to click “I elect not to have federal and state income taxes withheld from this distribution”.

That’s it. It takes another business day or two to do the conversion.

Once it’s converted I move everything in to VTSAX. I do this for every paycheck until I hit $6,000. I know that sounds annoying, but if you keep it in a traditional IRA account all year and just do one conversion, you may have to pay additional taxes on your earnings. It’s just cleaner to do it for each paycheck for me.

How do you do your conversion? Once per year? Do you prefer to keep things traditional? Let me know in the comments below.

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