Rollover IRA, Backdoor Roth -- when to make conversion

[surfdoc]

Hi,

Made a 2016 TIRA --> roth contribution on April 5.  Rolled over 401K from old job to rollover IRA on vanguard (around May 15 this year).  I will not be able to roll this over to the 401K at my new job until earliest Jan 5, 2017.

I currently have:

$5K in rollover IRA

$5500 in TIRA (2017 tax year contributions)

 

When should I do conversion?  I obviously have to wait until 2017 and i assume i should wait until after I move the rollover IRA into a new 401K for the new job?

Any advice?

[jfoxcpacfp]

Need to clarify - what do you mean by "2016 TIRA ->Roth contribution"? Did you already convert this one? If so, you will be taxed on it due to having a balance in a pre-tax IRA as of 12/31/16. If my assumption is correct, probably want to recharacterize and re-convert in 2017.

I'm also confused by your "2017 tax year contributions" as you do not qualify to contribute for 2017 until the BOY.

Is the $5k in r/o IRA the 401k rollout?

Maybe it's too early and I'm just not following the flow :-)

[surfdoc]

Need to clarify – what do you mean by “2016 TIRA ->Roth contribution”? Did you already convert this one? If so, you will be taxed on it due to having a balance in a pre-tax IRA as of 12/31/16. If my assumption is correct, probably want to recharacterize and re-convert in 2017.

--- Yes i converted this one BEFORE i rolled over the 401K into my rollover IRA.  I was told by vanguard that because the conversion happened before the rollover, then i'm fine.  However, the conversion took place ~ april1, and the rollover took place ~ may 1.

 

So i currently have:

$5000 in backdoor roth (that i converted ~ april 1 of this year from TIRA)

$3500 in rollover IRA (that was rolled over into the IRA ~ may 1 of this year)

$5500 in TIRA that is just sitting there right now, waiting to be converted to roth

 

[jfoxcpacfp]

What matters is the balance as of 12/31 of the year of conversion. If you do not convert the $3,500 in the r/o IRA to a Roth IRA by 12/31/16, you will owe tax on the conversion. Still don't understand the $5,500 in TIRA (2017) mentioned in original post. Did you mean 2016? If so, makes sense and that is a ND TIRA that you will convert when you clean up the $3,500 issue.

[surfdoc]

I currently have:

$2000 in roth (converted April 1, 2016)

$3000 in TIRA (all post tax dollars deposited in 2016)

$3500 in r/o IRA (money was not converted from employee 401K --> r/o IRA until ~ may 1, 2016).  This $$ cannot be put back into 401K until earliest 1/5/17.

 

So even though the roth conversion was done BEFORE the r/o IRA account was opened, i can still get taxed on it, due to the sum as of 12/31/16?

I take it this means i should re-convert roth back to TIRA before 12/31/16?

[PenguinMD]

Confused did you do a $5k or $2k Roth conversion? You list out two different amounts in two different messages.

As mentioned if you have an ending balance by 12/31 in your TIRA accounts (including any rollover IRA) then you will pay tax base on the pro-rota rule.

Also to put things in perspective, let's say it was a $2k roth conversion and let's say your marginal is 40%. If you had to pay the tax on the full $2k (but it would be lower since you already have cost basis from before) it would be $800. So is the juice worth the squeeze?

They being said, recharacterizing is not too bad just some paperwork.

So in short don't do any Roth conversion this year (recharacterizing any you already did) and wait till next year if you want to avoid paying the least tax as possible.

Also depending if your new employer plan allows it you can also try to move all money above your cost basis to your 401k (beyond your roll-over account) so you pay the least tax as possible when you convert.

Good luck!

[jfoxcpacfp]

surfdoc wrote:

I currently have:

$2000 in roth (converted April 1, 2016)

$3000 in TIRA (all post tax dollars deposited in 2016)

$3500 in r/o IRA (money was not converted from employee 401K –> r/o IRA until ~ may 1, 2016).  This $$ cannot be put back into 401K until earliest 1/5/17.

So even though the roth conversion was done BEFORE the r/o IRA account was opened, i can still get taxed on it, due to the sum as of 12/31/16?

I take it this means i should re-convert roth back to TIRA before 12/31/16?

Click to expand...

That is correct. The order does not matter during the year, but the balances at the EOY. What you need to do is to "recharacterize" the Roth conversion back to the nondeductible TIRA (what you refer to as "re-convert").