Vanguard Backdoor Roth IRA 2022 | Step By Step Guide

in the year 2022 if your combined family income is above 214 thousand dollars i have some bad news for you you no longer can contribute to a roth ira hi if you're new to the channel my name is tay from financial tortoise where we learn to grow our wealth slow and steady yes i know this is definitely a first world problem a problem making too much money that you can't take advantage of tax advantage accounts like a roth ira in 2022 it modified a just gross income of 214 thousand dollars for a couple 444 thousand 000 for an individual make sure and eligible to contribute to a roth ira phase out ranges where you can make smaller roth contributions less than six thousand dollars start at 204 000 for married filing jointly and 129 000 for single filers if there's a chance that your income might be in these phase out ranges i highly recommend using a backdoor roth ira a completely legal way to continue to fund your roth ira regardless of your income level i've broken this video into three sections so feel free to skip around first we'll deep dive into roth ira and backdoor roth ira specifically what it is and why you should consider doing it second i'll walk you step by step on how to do this correctly i'm going to show it through vanguard since this is where i hold my rota ira but the steps are pretty much the same with any other firm and following the steps are very important so you are in accordance with internal revenue services requirements around the process and third i want to share with you a few of the most common backdoor roth ira errors to avoid so you don't make them yourself first let's talk about the roth ira a roth ira allows individuals to set aside several thousand dollars from their earnings every year in a retirement savings account for 2022 the max is six thousand dollars per individual and unlike the traditional ira the money contributed into a roth ira is after tax dollars with traditional ira the earner receives immediate deduction for their contribution but pays tax when the money is withdrawn on dollars invested and their earnings with roth ira the earner pays taxes upfront but taxes are not owed on the earnings or dollars invested during withdrawal for those who don't want to worry about taxes in later years roth iras are a great way to do that however a problem occurs for high income earners when they start earning above a certain threshold they can't open or fund roth iras if a couple filing jointly has a modified adjusted gross income of 214 000 or 144 000 for an individual traditional ira on the other hand does not have income sealing for participation and the internal revenue service also doesn't have income limits that restrict who can convert a traditional ira to a roth ira as a result this back to roth ira has become a tax planning opportunity for many high income earners who previously couldn't contribute to a roth ira now the question you might be asking is is this worth the trouble it feels like a lot of work for six thousand dollars and i would definitely say yes with just few steps you could have six thousand dollars to twelve thousand dollars invested in a tax sheltered account versus a taxable account you've already paid taxes on it so why not shelter it with a few additional minutes of work if you were to invest six thousand dollars in a taxable account as the account appreciates you'll have gains that you'll need to eventually pay taxes on six thousand dollars may not seem like a lot now but if you had that invested for thirty years at eight percent it could grow to ten times that sixty thousand dollars and you'll need to pay taxes on all that gain of fifty four thousand dollars if you take few minutes to invest that money into a roth ira account using the backdoor roth ira method you're saving thousands of dollars into paying taxes down the line all right now that you're convinced that you should take the time to do a backdoor roth ira let me walk you through the steps of vanguard there are five essential steps you need to follow and i'll walk you through them in detail feel free to pause at any time in the video step one is to open a traditional ira account you need a traditional ira account before you can roll over the fund to a roth ira in order to do this first when you get to the vanguard website click open an account at the top of the page from here you'll select start your new account i'll assume you're using your bank to make your initial investment if you're not already a vanguard client select no i am new here here's a look at the process and the things you need to get started the process will take about five to ten minutes once your money reaches your new account you can start investing it you will begin by selecting your goal and a related account type your account will act as a container for investment you'll choose later such as an index fund or etfs we'll select retirement account for one person next you'll provide your personal information review your details for accuracy you'll then create a username and password in addition you'll agree to web terms and paperless documents you'll also set up your security questions next you'll add the bank account you'll use for the transactions all new accounts require a bank on file select your bank from a list of popular banks or search for it manually by name after logging into your bank account select which checking or savings account you'd like to use next choose if you want to transfer money from your bank now or later you don't need to transfer money yet we'll do that in step two when we make non-deductible ira contribution in the next step you'll enter employment information certain occupations may have additional rules and regulations on the next few pages you'll answer some final questions which are required for all new brokerage accounts your answers will affect what products you can invest in and you can update them anytime once you review your information accepted agreements you will receive a confirmation all right let's move into step two let's make a non-deductible ira contribution into the traditional ira account that you just opened after logging in go to balance and holdings under my account find your traditional ira brokerage account and click the arrow to the right of buy and sell and select contribute to ira vanguard asks if it's a rollover from another tax deferred account select no towards the bottom you'll choose the year for which you want this contribution to count this is a 2022 backdoor roth ira tutorial so put six thousand dollars into the 2022 slot next tell vanguard where this money is coming from since you've already set up your bank account earlier it should be available under the drop down menu next you'll be asked to review and submit your ira contribution double check to make sure that you're making the appropriate contribution to the desired tax year and the fund is coming from an appropriate account if it looks good go ahead and click submit you'll get a confirmation and a nice thank you from your new friends at vanguard step 3 is to open a roth ira account the steps are pretty identical to opening up a traditional ira so i won't go through all the steps again here review the steps for traditional ira and open a roth ira account so we can convert all our money into it step four is to convert your contribution to roth ira now one tricky item i want to call out is that even if you have a roth ira account and you just made a non-deductible contribution into it you can't do step 4 right away it actually takes a few days for you to be able to convert your non-deductible ira contribution to your roth ira you need to check in every few days to see if you can make your withdrawal at worst you might need to wait a whole week depending on when you made your contribution but once you're ready click on the convert to roth ira next select convert all of the account scroll down the page and select a box that states you will not elect to withhold federal and state income taxes we're converting a non-deductible ira contributions since we've already paid taxes once on this money the conversion shouldn't cost us anything continue on to the next screen on the next screen simply review and submit your roth conversion the confirmation screen is pretty straightforward alright step 5 invest in roth ira in the last step you successfully moved your money from traditional ira to a roth ira however it isn't invested in anything yet it's still sitting in a money market account and you don't want it to just keep sitting in there it's like a checking account with almost no interest rate you want to invest your money to grow and good options are vanguard's total market index fund like vtsax or vanguard's smp-500 index funds like vfiax in order to do this click on buy vanguard funds under buy and sell from here you can type in the fund name or symbol choose the index fund on the left with the settlement fund the money market being used to fund the purchase review and submit and you're done congratulations you have just legally funded your roth ira regardless of your income using the backdoor roth ira method now let's cover some common backdoor roth ira errors to avoid after going through the process you might have noticed that it is bit meticulous and there's a reason for that the backdoor roth ira is trying to take advantage of specific tax law requirements set up by the internal revenue service so it's important that you follow the steps outlined in this video if you want to avoid issues with irs the first most common backdoor roth ira error to avoid is forgetting to invest the money in the roth ira as you saw earlier when you convert the money from a traditional ira to a roth ira your money is sitting in a money market account i've heard horror stories of people who thought they were done and stopped right there they thought they were investing in roth ira which is technically true but their money wasn't invested in any appreciating asset so that six thousand dollars is still six thousand dollars years from now instead of growing don't forget the step to take the money in the roth ira account and invest it in good index funds like a total market index fund or a s p 500 next month another common backdoor roth ira error you want to avoid is to trickle in your contribution this will make your financial life very complicated people do this because they're trying to automate their contributions this is perfect for funding your 401k or your brokerage account but when it comes to something sensitive like a backdoor roth ira it can actually create more problems and solutions when you trickle on your contributions you have tens or even 100 small transactions you need to go through all the steps that we just went over save yourself the time and the headache i'm assuming if you have enough money to contribute to a roth ira using a backdoor strategy you make enough to make the contribution in one lump sum and the third common mistake with back to roth ira is not filling out the 8606 tax form when it comes to doing your taxes ad606 is an irs form you need to fill out when you make a non-deductible contribution to a traditional ira since you're doing this as a first step to a backdoor roth ira it's important to include this in your tax forms if you do your own taxes make sure to include it and if you have a cpa let him or her know that you did it back to roth ira that's it guys i'm sure we could talk many more hours about the backdoor roth ira but this covers the gist of the process i'll also have some links to more detailed resources in the description below written by individuals way smarter than i am if you're a high income earner take advantage of this process and invest in the roth ira if you'd like to learn more about all the different types of tax advantage retirement accounts check out my video here thank you guys for watching until next time all the best

Channel: Tae Kim - Financial Tortoise

Views: 202,119

Keywords: Personal Finance, Money, Sandwich Generation, Family, Multigenerational Family, Finance, Saving Money, Investing

Id: 9NFsOxrktyA

Length: 10min 26sec (626 seconds)

Published: Thu May 19 2022