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