Opening up the backdoor - how much tax do I owe?

[Foster]

I currently have a standard IRA that I rolled over from my residency training two years ago. The value wasn't very much, so I gambled and put in all in Apple stock. It worked out well. BUT - now the value is almost 40K and it is preventing me from opening up the back door.

If I want to contribute to a Roth via the backdoor in the future (and for the forseable future until they amend the tax code) then I would need to convert that regular IRA account to a Roth.  That is a taxable event. I assume this would be a smart move since I am youngish at 34 years old and I would hopefully have 20+ years of backdoor conversions.

My question is what will be the taxes on that 40K to convert it.  Will I pay regular income tax on the initial rolled over balance and then long term capital gains on the value increase?  Or, do I have to pay full income tax on the entire thing?

Assume the current value is 40K, with 25K being the initial investment and 15K gains over the past two years.  My income tax bracket is 35%. How much is it going to cost me to open up the backdoor?

[FIREshrink]

Regular income tax on the whole thing. 35% of 40k is $13,500. That’s assuming your initial contributions were deductible.

Do you have a 401k you can roll your IRA into? That would be the standard advice.

 

[Foster]

Excellent advice.  I do have a 401K and just confirmed that I can roll it over.

Thank you for your help.

F

[Peds]

easy then. roll it over, and diversity out of individual stocks.

[HumbleInvestor]

I am in similar position as OP and am rolling over the IRA's to 401k. Once that is done, what is a good place to open a Regular IRA and Roth IRA accounts to do backdoor year in year out? Appreciate your help.

Thanks

HI.

[PhysicianOnFIRE]

HumbleInvestor wrote:

Once that is done, what is a good place to open a Regular IRA and Roth IRA accounts to do backdoor year in year out?

Click to expand...

Vanguard is probably the most popular here, and I have step by step instructions with screenshots on how I do the contribution and conversion.

Fidelity, Schwab, maybe eTrade, Ameritrade... many options. I would just stick with a brokerage you're already using as long as they're a quality, low-cost provider.

[dayman]

I use Vanguard, it's very simple. This guide even shows you exactly where to click on the Vanguard site:

https://www.biglawinvestor.com/backdoor-roth-ira-step-by-step-guide/

I imagine Fidelity would be a good option as well.

 

Edit: Oops, PoF beat me to the punch. I guess backdoor Roth how-to guides are popular blog posts   

[HumbleInvestor]

Thanks for the quick response POF and dayman. Do I need to wait for the rollover to 401 (K) is complete to open the new accounts or can I open the accounts and have them ready but can only contribute to new IRA after the rollover is complete? Or can I contribute to new IRA before the rollover from old IRA to 401k is complete but transfer to Roth after the original rollover is completed? Appreciate your feedback.

[CN]

If you have a mix of pretax(2015) and post tax(2016) contributions in a traditional IRA and wanted to start doing backdoor roth, is it advisable to roll over the whole amount to a 401k and worry about the 2015 tax later and start fresh on an empty account with the 2017 back door? Or should/can I roll the whole amount into a roth since the tax on the 5,500 won't be that much (not even sure i can do that as the funds are already invested). Any advice would be appreciated

[jfoxcpacfp]

HumbleInvestor wrote:

Thanks for the quick response POF and dayman. Do I need to wait for the rollover to 401 (K) is complete to open the new accounts or can I open the accounts and have them ready but can only contribute to new IRA after the rollover is complete? Or can I contribute to new IRA before the rollover from old IRA to 401k is complete but transfer to Roth after the original rollover is completed? Appreciate your feedback.

Click to expand...

You can open the new accounts as soon as you want. Go ahead and contribute to the nondeductible TIRA but wait until 2018 to convert the TIRA to a Roth if you won’t be able to complete the rollover to the 401k before 12/31.

[jfoxcpacfp]

CN wrote:

If you have a mix of pretax(2015) and post tax(2016) contributions in a traditional IRA and wanted to start doing backdoor roth, is it advisable to roll over the whole amount to a 401k and worry about the 2015 tax later and start fresh on an empty account with the 2017 back door? Or should/can I roll the whole amount into a roth since the tax on the 5,500 won’t be that much (not even sure i can do that as the funds are already invested). Any advice would be appreciated

Click to expand...

You cannot roll post-tax IRA contributions into a 401k. You can either:

• isolate the pre-tax from the post-tax portions and roll pre-tax into the 401k and post-tax into a Roth IRA or


• just roll all into a Roth IRA and pay tax on the pre-tax + growth along with the growth on the post tax.

I would go with the 2nd option given that we’re not talking much money here.

[CN]

jfoxcpacfp wrote:

CN wrote:

If you have a mix of pretax(2015) and post tax(2016) contributions in a traditional IRA and wanted to start doing backdoor roth, is it advisable to roll over the whole amount to a 401k and worry about the 2015 tax later and start fresh on an empty account with the 2017 back door? Or should/can I roll the whole amount into a roth since the tax on the 5,500 won’t be that much (not even sure i can do that as the funds are already invested). Any advice would be appreciated

Click to expand…

You cannot roll post-tax IRA contributions into a 401k. You can either:

• isolate the pre-tax from the post-tax portions and roll pre-tax into the 401k and post-tax into a Roth IRA or


• just roll all into a Roth IRA and pay tax on the pre-tax + growth along with the growth on the post tax.

I would go with the 2nd option given that we’re not talking much money here.

Click to expand...

Thank you so much, appreciate all your help!