Advice on backdoor Roth IRA

Your situation is complex but manageable, and it's good that Vanguard has acknowledged the error and committed to making you whole. The key here is balancing the resolution process with your Backdoor Roth IRA timeline while minimizing tax and investment opportunity costs.

Core Principles to Keep in Mind

The Backdoor Roth IRA Process:
- To avoid pro-rata rule complications, your traditional IRA balance must be $0 by December 31 of the tax year you're converting.
- Failure to clear the balance will result in taxable income on the portion of the conversion attributable to pre-tax dollars in the IRA.
Vanguard’s Accountability:
- Vanguard has admitted fault and will either reimburse you or adjust your account.
- However, the delay and bureaucracy make it uncertain whether the issue will resolve before year-end.

Your Specific Questions

1. Should you leave the money in Fidelity and proceed with the Roth conversion?

Not yet. Leaving the balance in Fidelity and proceeding with the conversion risks triggering the pro-rata rule, as the Vanguard rollover IRA has not yet been corrected.
You need to ensure the traditional IRA balance is $0 by December 31 before completing the conversion.
Waiting for Vanguard to resolve the issue is preferable, as they’ve committed to returning your VTSAX shares or reimbursing you for the loss.

2. Should you wait for the process to finish, even if it risks missing the Roth conversion?

Yes, prioritize resolution. Missing the Roth conversion for this year is unfortunate but preferable to creating unnecessary tax liability due to the pro-rata rule.
If Vanguard reimburses you after December 31, it’s still worth proceeding with the Backdoor Roth in January for the following tax year.

Steps to Take Right Now

A. Push Vanguard for Timely Resolution

Vanguard has indicated multiple methods for resolution (e.g., requesting Fidelity to return funds, direct reimbursement, or adjustments).
Ask Vanguard for a clear timeline for each option and the most expedited path to resolution.
Escalate to supervisors or ombudsmen at Vanguard if necessary. Document every conversation for accountability.

B. Maintain Liquidity

Ensure you have enough cash or other liquid assets to make the Roth IRA contribution (or redo the Backdoor Roth process) once the IRA balance issue resolves.

C. Be Prepared to Delay the Roth Conversion

If the issue isn’t resolved by December 31, recharacterize your Roth contribution for the current year to the following year. You can then perform the Roth conversion early in the new tax year.

Final Considerations

Since this money isn’t needed for 20 years, your focus should remain on minimizing unnecessary taxes and ensuring your investments return to their original allocation.
Missing one tax year for the Backdoor Roth IRA is a minor setback compared to the long-term impact of rushing the process and incurring unexpected taxes.
Once resolved, consider consolidating assets at a single institution to simplify future processes and reduce the chance of similar errors.