Yes, Vanguard is likely correct in this case. A backdoor Roth IRA involves making a nondeductible contribution to a traditional IRA and then converting it to a Roth IRA. However, the IRS applies the "pro-rata rule" during the conversion. This rule considers all your Traditional IRAs, regardless of where they're held (e.g., Vanguard, Fidelity). If you have money in your Traditional, SEP, or SIMPLE IRA before taxes, the rule will make some of the money taxable. This makes a backdoor Roth IRA less effective if you already have pre-tax IRA balances (like the one in Fidelity).
When withdrawing excess contributions, the key is to remove the funds from your IRA accounts entirely to resolve the issue. Here's what you can do:
- Withdraw to a savings or checking account:
- Move the excess contributions (and any earnings generated from them) to a non-retirement account, like your savings or checking account.
- Moving the money into a Roth IRA doesn’t fix the problem, as the original excess contribution must be corrected.
This withdrawal will need to be done before April 15.
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