Interesting point about backdoor Roth contributions

[The White Coat Investor]

Dreamgiver wrote:

Interesting point about the timing of the rollover:

http://www.investopedia.com/advisor-network/articles/roth-ira-savings-strategy-high-earners/?partner=YahooSA&yptr=yahoo

Basically it recommends at least a year go by between initial investment in non-deductible IRA and rollover to Roth IRA. This far exceeds the common thing I have heard about waiting a week or so. It makes me somewhat nervous.

 

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Read the statement from the IRS- the timing doesn't matter to them, so why should it matter to you?

https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/

[Craigy]

spiritrider wrote:

2. In both their 2015 and 2016 budget blueprint, the Obama administration proposed legislation to prohibit the Backdoor Roth. Why would they need to do that if it was not supported under current law.

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For a politician, changing the law to provide the desired outcome is always superior to working within the confines of the current law.

Explicit legislation, once passed, gives a certain result.  Without explicit legislation, a future administration could direct the secretary to use any and all powers to inhibit or penalize the backdoor roth, without the need to change the law.  However, this is subject to oversight, appeal, suit, delay, etc., aka uncertainty and limitation.

Also, just because you can make a good argument for something under the law, does not mean it is legal.  Likewise, just because something is not explicitly verboten under the law, does not mean it cannot be prosecuted as illegal.

[spiritrider]

We have discussed this many times here. Do you want to listen to some random person on the internet or the IRS, the Obama administration and an Appeals Court.

1. An IRS spokesman replied to the Financial Planner in 2011 and the Wall Street Journal in 2012 in regards to the Backdoor Roth; "There is no caveat about waiting" and "This is settled law".


2. In both their 2015 and 2016 budget blueprint, the Obama administration proposed legislation to prohibit the Backdoor Roth. Why would they need to do that if it was not supported under current law.


3. In the SUMMA HOLDINGS, INC. (02/17/16), U.S. Court of Appeals, sixth circuit stated the following in support of their decision

The Commissioner persists that Congress intended Roth IRAs to be used only by median income and low-income taxpayers, as evidenced by the contribution and income limits. We have our doubts. When pressed, the Commissioner knew of no empirical data to support the point. At any rate, Congress’s decision in 2005 to allow owners of traditional IRAs, who can make contributions regardless of income, to roll them over into Roth IRAs no matter how many assets the accounts hold or how high the owners’ incomes, see 26 U.S.C. § 408A(d)(3), undercuts this contention. Those rollovers permit high-income taxpayers to avoid the income limits on Roth IRA contributions, just as the DISC permitted Summa Holdings to avoid the contribution limits. The Commissioner cannot fault taxpayers for making the most of the tax-minimizing opportunities Congress created.

Now, I will admit that none of these constitute "substantial authority" and the IRS has not provided any official guidance. However, since 2010, there has probably been six figures (maybe seven) of Backdoor Roths without problem.

[RogueDadMD]

I wait such a short period of time that usually get warnings from Vanguard that my initial tIRA contributions aren't even officially settled before when converting it to the Roth IRA.

 

 

[Craigy]

DMFA wrote:

That is literally just some dude and his opinion. Btw you’re not using the term “rollover” properly. It’s a conversion (pretax to post), not a rollover (pretax to pretax or Roth to Roth).

First of all, this is no secret. In fact, major brokerage houses actually recommend this to their investors. Fidelity included it in their newsletter recently.

Second of all, there’s no time factor here, as stated above; the step doctrine only implies sequence, not time. However, I would argue that the step doctrine doesn’t even apply here because money transferred into a Roth IRA is inherently different from money directly contributed to it, mostly vis-à-vis the five-year rule for withdrawals.

If this was actually wrong, or the IRS actually cared about this, then trust me, this wouldn’t be anything more than a whisper and never posted where Big Brother could see it, find out who we are, and audit us…let alone posted by one of the largest investment banks in the world for its customers to use. But like I said, the end result is not *really* the same anyway, so I don’t think the step doctrine applies.

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Here's Vanguard talking about it in 2013:

https://personal.vanguard.com/us/insights/video/2505-Exc2

They very conspicuously feature stuff on backdoor roths from time to time.  It's by no means a secret.

 

[Craigy]

One thing I don't understand about the one-year wait...

In theory, and in reality, you are making these contributions on an annual basis, since the law allows you do make these contributions annually.  I suppose you could be putting $500/mo in and waiting a year to convert that $500, whatever, but it's a regular thing occurring around the same time.  So you put your $5,500 in, and wait a year, convert your old ~$5,500 and put another $5,500 in.

But after that first year's time, you'll end up back in the same predicament:  Making a $5,500 nondeductible contribution, and then doing a conversion of ~$5,500 that's already sitting in the account, either simultaneously or within days of each other.  So timing wise, you're back to square one, with contemporaneous contributions and conversions of the same amount of money.  Only difference is that you now maintain a balance of about $5,500 in your nondeductible IRA on a permanent basis.

And then, in general, the whole waiting game being the solution for avoiding the step transaction doctrine demonstrates a very limited and flawed understanding of the step transaction doctrine.  The amount of time between events is only one of many factors in implementing the doctrine.  And simply waiting a period of time solely for the purpose of avoiding the step transaction doctrine isn't going to help you out either.  Read enough tax court decisions and this is becomes pretty clear.  Or perhaps even more nebulous.   :lol:

[jfoxcpacfp]

So the author of the article states, "The safest way to get around the IRS disallowing a backdoor Roth contribution is to wait at least one year to convert the non-deductible IRA funds to a Roth IRA."

Sez who? I think he made that rule of thumb up.

[DMFA]

That is literally just some dude and his opinion. Btw you're not using the term "rollover" properly. It's a conversion (pretax to post), not a rollover (pretax to pretax or Roth to Roth).

First of all, this is no secret. In fact, major brokerage houses actually recommend this to their investors. Fidelity included it in their newsletter recently.

Second of all, there's no time factor here, as stated above; the step doctrine only implies sequence, not time. However, I would argue that the step doctrine doesn't even apply here because money transferred into a Roth IRA is inherently different from money directly contributed to it, mostly vis-à-vis the five-year rule for withdrawals.

If this was actually wrong, or the IRS actually cared about this, then trust me, this wouldn't be anything more than a whisper and never posted where Big Brother could see it, find out who we are, and audit us...let alone posted by one of the largest investment banks in the world for its customers to use. But like I said, the end result is not *really* the same anyway, so I don't think the step doctrine applies.

[MPMD]

Dr. Mom wrote:

Did mine same day.  The article is his opinion only.  Why overcomplicate?  Just because he recommends waiting a year doesn’t mean the IRS won’t see it as a step doctrine violation if they want to.  They have not given any formal clarification, nor have they gone after anyone.  I think the author is just sowing fear to make it seem like you need his services.

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this is the key thing.

the only issue here is step doctrine.

if a day violates it a year isn't going to make it different in effect or in intention. essentially you would just be trying to make a more plausible case that you weren't quiiiiite sure you were going to do backdoor rIRA

[Dr. Mom]

Did mine same day.  The article is his opinion only.  Why overcomplicate?  Just because he recommends waiting a year doesn't mean the IRS won't see it as a step doctrine violation if they want to.  They have not given any formal clarification, nor have they gone after anyone.  I think the author is just sowing fear to make it seem like you need his services.

[MPMD]

i think you'll find that the vast majority of us are waiting about a day.

 

[Dreamgiver]

Interesting point about the timing of the rollover:

http://www.investopedia.com/advisor-network/articles/roth-ira-savings-strategy-high-earners/?partner=YahooSA&yptr=yahoo

Basically it recommends at least a year go by between initial investment in non-deductible IRA and rollover to Roth IRA. This far exceeds the common thing I have heard about waiting a week or so. It makes me somewhat nervous.