What’s in my Roth IRA Account?

Backdoor Roth IRA Mistake

I made my first backdoor Roth IRA mistake and I’ll share it with you in this post along discussing my portfolio strategy for my Roth IRA account.

Backdoor Roth IRA

Before diving into how and what I am investing inside my Roth IRA account, I wanted to share with you my first mistake when contributing to a Roth IRA account.

Mind you, this is not my first time contributing to a Roth IRA account using the backdoor Roth IRA method. In fact, this is my third time performing a back door Roth IRA.

If you’re not familiar with why you have to even bother with a backdoor Roth IRA. The following table will help clarify it for you.

2021 Roth IRA Income Limits
Filing StatusModified AGIContribution Limit
Married filing jointly or qualifying widow(er)Less than $198,000$6,000 ($7,000 if you’re age 50 or older
 $198,000 to $208,000Reduced
 $208,000 or moreNot eligible 
Single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the year)Less than $125,000$6,000 ($7,000 if you’re age 50 or older
 $125,000 to $140,000Reduced
 $140,000 or moreNot eligible 
Source: Investopedia

The list above spells out the income brackets that will make you ineligible for a direct Roth IRA contribution. Which is $140,000 or more for single or head of household and $208,00 or more for married filing jointly.

As a pharmacist and/or another high-income professional then you’re more than likely to hit the income limit for a direct Roth IRA contribution.

But there’s a way around this limitation, you can make a nondeductible contribution to a traditional IRA and then convert that amount to a Roth IRA as soon as possible.

Backdoor Roth IRA Mistake

Turns out there are quite a few ways to “screw up” with your backdoor Roth IRA according to the White Coat Investor.

The mistake that I made for the tax year 2021 is making a contribution directly to a Roth IRA even though our joint income will exceed the limit for a contribution.

Thankfully, The White Coat Investor had a post on how to fix common backdoor Roth IRA mistakes.

I didn’t have to look far since this was listed as the #1 mistake listed.

If you made the same mistake that I made by directly contributing to your Roth IRA account instead of the proper backdoor Roth IRA.

Just understand that mistakes happen and it is not the end of the world and the mistake can be undone with a minor setback.

I have both and the traditional and the Roth IRA account with Vanguard so the first step to do is to call Vanguard.

After you get a hold of a retirement specialist, ask them to help you perform a recharacterization.

You have to recharacterize the Roth IRA to a traditional IRA account. Since the money is already in your Vanguard account, it only takes only one day for the money to settle.

Backdoor Roth IRA

You can now go back to your Vanguard account for convert the money into your Roth IRA account.

The only hiccup in this process is that any gains incurred during this process will be taxable and you will have to fill out the IRS Form 8606 appropriately.

Unfortunately for me, during the few days that I was waiting for my contributing to settling and then realizing that I made a mistake, my contribution gained $55 dollars.

This will be the learning curve and fees (in the form of taxes) that I needed to prevent a future mistake from occurring.

Roth IRA Portfolio

Ever since my first backdoor Roth IRA in 2019, I’ve been employing the three-fund portfolio strategy. I like to keep it simple so I’ve bought into these three funds.

  1. VTSAX Total Stock Index Fund
  2. VTIAX Total International Index Fund
  3. Total Bond Index Fund

I’m planning to keep an allocation of 10% bonds, 30% international, and 60% domestic. This portfolio will be rebalanced once a year to maintain my asset allocation goals and that’s it. This is my version of the lazy portfolio, low maintenance and so far profitable with gains and reinvestment.

As a matter of fact instead of rebalancing by selling shares from each fund I am planning on using my lump sum of $6,000 yearly backdoor Roth IRA contribution to buy additional shares to meet my desired asset allocation since my account balance is still modest!

Parting Words

I am sure that as I perform more backdoor Roth IRA will inadvertently make mistakes along the way. Thanks to great online resources, I was able to fix my rookie mistake.

On another note, if you’re using Turbotax like myself to fill out the IRS form 8606, the finance buff provided a very useful tutorial here.

Hopefully this post and the related links can help you solve a backdoor Roth IRA mistake of your own.

To prevent further complications with your backdoor Roth IRA it is best to keep it simple and avoid common mistakes such as the one I just experienced.

Another mistake I almost committed to is by not following the pro-rata rule. When I recharacterize my direct Roth IRA contribution, there were $55 in gains. For a moment, I thought that you can only convert the $6,000 per year and leave the $55 in gains in the traditional IRA account.

Apparently, you have to empty all of your IRA accounts when performing a backdoor Roth IRA conversion. There’s so much to learn!