Back door Roth IRA contribution

[jfoxcpacfp]

rag145 wrote:

JFOXCPACFP,

In the scenario above, when she rolls the money into a reverse rollover to her current employer’s 401k plan, how long does she have to wait to do the backdoor Roth IRA.  For example, to my understanding, it is counted by year.  Therefore, she should do the reverse rollover before Dec 31st.  Then she won’t get burned with the pro-rata rule on Jan 1.  If she does the back door Roth on Dec 31 or before, she will get hit with the pro-rata rule because the regulations count everything by calendar year.  Is that correct?

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No, they are counted as of 12/31: whatever the balance is on that date is what matters. If there is no pre-tax TIRA in her SSN on 12/31, it is as if she d/n/h one during any of 2016.

[rag145]

JFOXCPACFP,

In the scenario above, when she rolls the money into a reverse rollover to her current employer's 401k plan, how long does she have to wait to do the backdoor Roth IRA.  For example, to my understanding, it is counted by year.  Therefore, she should do the reverse rollover before Dec 31st.  Then she won't get burned with the pro-rata rule on Jan 1.  If she does the back door Roth on Dec 31 or before, she will get hit with the pro-rata rule because the regulations count everything by calendar year.  Is that correct?

[jfoxcpacfp]

RadMoneyMD wrote:

Glad I read this post.  I opened a rollover IRA earlier this year with money from an old 401k plan.  I didn’t even consider how it will mess up my backdoor Roth IRA for 2016.  Fortunately I think my current 401k profit sharing plan will accept rollovers.  Although I won’t be able to do a backdoor Roth IRA this year.

Also the retirement specialist I spoke with on the phone at Fidelity suggested I read the WCI website when he found out I was a physician.  I’m glad to hear even Fidelity employees like this site!

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Actually, as long as your IRA is rolled into the 401k by 12/31, you can still do the tax-free back-door Roth. All that matters are the balances as of the EOY.

[RadMoneyMD]

Glad I read this post.  I opened a rollover IRA earlier this year with money from an old 401k plan.  I didn't even consider how it will mess up my backdoor Roth IRA for 2016.  Fortunately I think my current 401k profit sharing plan will accept rollovers.  Although I won't be able to do a backdoor Roth IRA this year.

Also the retirement specialist I spoke with on the phone at Fidelity suggested I read the WCI website when he found out I was a physician.  I'm glad to hear even Fidelity employees like this site!

[DMFA]

Caligirl wrote:

Hi, So sorry for the basic question, but once it’s converted to Roth IRA, what funds would you recommend me putting the $5500? I was thinking an index fund of some sort? I’ll be using Fidelity and will be using this $ for retirement in about 30 years (if that info helps!).

Thanks so much!

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...what do you have so far in your overall portfolio?  What are your investment goals?  What other accounts do you hold (401k, 403b, taxable, etc) and what's in them?

If you're just starting out, then the lowest-cost total stock market or 500 index you can get with that buy-in (FSTMX or FUSEX) is probably fine, then upgrade to the investor class for half the expense ratio once you're up to $10,000.

[Caligirl]

Hi, So sorry for the basic question, but once it's converted to Roth IRA, what funds would you recommend me putting the $5500? I was thinking an index fund of some sort? I'll be using Fidelity and will be using this $ for retirement in about 30 years (if that info helps!).

Thanks so much!

[jfoxcpacfp]

parkerbassett wrote:

I just started my first job as an attending this year and I am no longer able to contribute to my ROTH IRA due to income.  My wife and I also cannot contribute to a Traditional IRA since she had an employee sponsored plan this year and our income is too high.  I was thinking about doing an HSA but we don’t have a high deductible plan so that leaves me with the option of doing a Back Door Roth.  I spoke to our accountant today who recommended just doing a Traditional IRA and not deducting it from our taxes that way the growth will at least be tax free.  I think its better to do back door so that way we also don’t get taxed upon withdrawal.  Am I thinking about this correctly? Also it is my understanding if I contribute and Back door the same day then I essentially won’t have any gains to be taxed on.

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First of all, everyone with earned income qualifies to contribute to a TIRA. The distinction is whether it is deductible or not. It sounds as if your accountant is not familiar with back-door Roth IRAs. Keeping money in a nondeductible TIRA is a bad move since any growth and income will be taxed as ordinary rates (not tax free as your accountant said) whereas you would at least get preferential tax rates on a taxable account.

Unfortunately, you now have a pre-tax TIRA that will prevent you from doing a tax-free back-door Roth conversion. You have 2 options for this:

1. Convert it to a Roth IRA and pay the tax (if the amount is relatively low, this would probably be the best year to do so since you only have 1/2 year of attending salary.


2. See if your current employer plan accepts reverse rollovers from IRAs. I wouldn't be surprised if you find out it does.

If you take one of the 2 above suggestions, then you should wait a few days between initial contribution to your TIRA and conversion to a Roth to avoid step transaction rules. Just keep your contribution in a money market account and you won't have to worry about gain or loss.

[DMFA]

Hi Parker!

Yeah, non-deductible TIRAs kinda suck, and you probably missed your best opportunity to rollover/convert to Roth since you're out of residency and the tax would be higher now. The backdoor probably wouldn't be worth it (due to the pro rata rule) until you eliminate the TIRA...perhaps you can roll it into a solo 401k if you have any 1099 income?

HSAs are great accounts, and if your health expenditures are low, it may well be worth getting an HDHP to enable contributions to an HSA.

Other than that, what other tax-advantaged options do you have? Employer and/or solo 401k? 403b? 457? etc. Just trying to find out when/how a taxable account would fit in.

[parkerbassett]

I rolled over my 403B from residency into a traditional IRA this year. I'm guessing that was a mistake because now that won't allow me to easily do the back door because of the pro-rata rule.

[PhysicianOnFIRE]

Yes, ParkerBassett, make a non-deductible IRA contribution, and convert to Roth IRA the next day. If you make the IRA contribution into a stable money market fund or cash, you shouldn't have to worry about changes in the value of the investment.

If you haven't already, look at WCI's tutorial.

[parkerbassett]

I just started my first job as an attending this year and I am no longer able to contribute to my ROTH IRA due to income.  My wife and I also cannot contribute to a Traditional IRA since she had an employee sponsored plan this year and our income is too high.  I was thinking about doing an HSA but we don't have a high deductible plan so that leaves me with the option of doing a Back Door Roth.  I spoke to our accountant today who recommended just doing a Traditional IRA and not deducting it from our taxes that way the growth will at least be tax free.  I think its better to do back door so that way we also don't get taxed upon withdrawal.  Am I thinking about this correctly? Also it is my understanding if I contribute and Back door the same day then I essentially won't have any gains to be taxed on.

 

Thanks for anyones help.

[KansasHawk]

Thanks a lot for the response. I'm still debating on investing in them before the end of the year or not but wanted to confirm. I appreciate the help.
Thanks again!

[jfoxcpacfp]

KansasHawk wrote:

We haven’t invested in back door Roth IRAs yet this year and it’s looks like we have until the tax file deadline of April 17, 2017 to contribute for 2016. Can anyone just confirm this for me? I wanted to make sure that the back door doesn’t change anything and if so then we will contribute before the end of the year.

Thanks,

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You have until the tax filing date (not extended due date) to contribute to a back door Roth IRA. If you do so after the EOY and then convert, you will report the contribution to your nondeductible TIRA in 2016 and the conversion in 2017. The conversion is reported on a calendar year basis.

[KansasHawk]

We haven't invested in back door Roth IRAs yet this year and it's looks like we have until the tax file deadline of April 17, 2017 to contribute for 2016. Can anyone just confirm this for me? I wanted to make sure that the back door doesn't change anything and if so then we will contribute before the end of the year.

Thanks,