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Don't give up on your backdoor Roth...

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  • Don't give up on your backdoor Roth...

    You have only 4 days left (as of today, April 14) to contribute to an IRA for 2016. It has come to my attention that there is some confusion with a few folks over whether you can have anything to do with a backdoor Roth if you have pre-tax IRA accounts in your name. If you're in that boat, I've got good news and I'm posting this to clarify your opportunity.

    The backdoor Roth is done in 2 steps (see Explaining Backdoor Roth IRAs for details).

    • Step 1, contributing to a nondeductible IRA, has NO tax implications, whether or not you have $$ in pre-tax IRA accounts.

    • Step 2, converting to a backdoor Roth IRA, will cause you to be subject to the prorata tax rule if you have pre-tax IRA accounts.


    Anyone with enough earned income + their spouse can contribute to an IRA each year. The door is about to close for 2016. You should always go ahead and complete Step 1 annually - once you miss a year, you can't get it back. Just keep your money in a MMA (Money Market Account) if you don't want to pay taxes on any growth when you convert. Even if you can't convert for a few years because of your pre-tax IRAs, go ahead and contribute to your annual nondeductible IRA.

    When you are able to move your pre-tax IRA dollars to a SOLO-k or employer 401k/403b, or decide to convert that money to a Roth, then you will complete the backdoor Roth with step 2, the conversion. Be creative, find some IC income, and set up a SOLO-k. It can be done eventually, even if not in the current year. Just let those nondeductible TIRA contributions build and do a mass conversion when you have rid yourself of the pre-tax IRA funds.

    Remember, you do not have to do the backdoor Roth all in the same year and you should not pass up the annual opportunity to do step 1. Also remember, the only day that matters when you convert (step 2) is the last day of the calendar year of conversion. If you have pre-tax IRA money on 12/31 of the year you convert, you will owe taxes. Otherwise, you won't.

     
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

  • #2
    Hi Johanna,

     

    Forgive my ignorance, but how does one set up a pre-tax IRA if they are a W-2 employee?  Myself and most of my colleagues have after-tax IRA's(non-deductible due to income limits).  The only investment vehicle we have  that uses pre-tax $$ is a "pooled" unmatched 401k thru our employer. And this 401k does not permit any rollovers.

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    • #3




      Forgive my ignorance, but how does one set up a pre-tax IRA if they are a W-2 employee?  Myself and most of my colleagues have after-tax IRA’s(non-deductible due to income limits).  The only investment vehicle we have  that uses pre-tax $$ is a “pooled” unmatched 401k thru our employer. And this 401k does not permit any rollovers.
      Click to expand...


      Not ignorant at all. In general, a pre-tax IRA is created by:

      • Contributing to a SIMPLE or SEP IRA through your employer,

      • Rolling a 401k/403b over to an IRA when you change jobs, and

      • Making personal contributions in years that your income/employment situation renders TIRA contributions deductible.


      The pre-tax IRAs I mentioned in the post would be TIRAs that you previously created , not from current contributions because, as you said, your tax bracket/employer 401k means you are ineligible.

      Hope this helps!
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        Just wanted to say thanks! I missed this detail, I assumed I couldn't submit 2016 since it took until Jan 2017 to transfer accounts completely to a solo-401k.  You gave me just enough time to submit for 2016, transactions cleared on the 18th

        Now, I believe I can convert my 2016 contribution immediately to the Roth since this year the SEP and IRA balances are 0 (minus the money market contribution we just made for 2016).

        Hopefully I got this all correct.

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        • #5
          Johanna, A friend of mine is very skeptical of the backdoor Roth. He thinks all it takes is an IRS bureaucrat who wants to advance his career and the IRS will come after everyone who contributed to a backdoor Roth with penalties and interest. I do not share his opinion. He even talked to his tax attorney and was told that the backdoor Roth does not pass the smell test. I am aware of the talks about this along the years. Anything I can tell him to appease his fears?

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          • #6




            Johanna, A friend of mine is very skeptical of the backdoor Roth. He thinks all it takes is an IRS bureaucrat who wants to advance his career and the IRS will come after everyone who contributed to a backdoor Roth with penalties and interest. I do not share his opinion. He even talked to his tax attorney and was told that the backdoor Roth does not pass the smell test. I am aware of the talks about this along the years. Anything I can tell him to appease his fears?
            Click to expand...


            Honestly, if he's gone so far as to talk to "his tax attorney", it's probably not worth the effort. You can't rescue somebody who doesn't want to be rescued. The fact that he even has a tax attorney is symptomatic.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7




              Just wanted to say thanks! I missed this detail, I assumed I couldn’t submit 2016 since it took until Jan 2017 to transfer accounts completely to a solo-401k.  You gave me just enough time to submit for 2016, transactions cleared on the 18th

              Now, I believe I can convert my 2016 contribution immediately to the Roth since this year the SEP and IRA balances are 0 (minus the money market contribution we just made for 2016).

              Hopefully I got this all correct.

              Dave
              Click to expand...


              Glad to hear that. Sounds like you're doing everything right.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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