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Can I still do a Back door IRA?

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  • Can I still do a Back door IRA?

    Hi,

    I have been a long time reader but first time posting.  I graduated residency and I started working at the VA.  They offer TSP.  I am doing a traditional TSP to since I am in a higher tax bracket now. I was reading into Backdoor Roth IRA and checking if I could do it for 2017.  Since I am have traditional TSP, does that mean I would not be able to do a backdoor roth ira?  What would be the better option that I should do?  Thanks in advance for the answers!

    -FIREoneDay

  • #2
    The TSP is not relevant to your ability to do a tax-free back-door Roth. If you have a pre-tax personal IRA, that is a problem and would preclude the tax-free back-door maneuver. Note that I stipulate "tax-free" because you can still do the back-door Roth if you have a pre-tax IRA, but you would fall under the pro-rate rule. You asked about 2017 but you can actually do one for 2016, too.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      So even if I did the Back door IRA, it would be at pro rate rule because I have a traditional TSP?  That would mean that I can't do it without paying high in taxes?

      Comment


      • #4
        Is the last day to convert from IRA to Roth IRA Dec 31?

        I haven't contributed to personal IRA yet for this year, but did contribute the maximum to my employer retirement plans (non-Roth versions). Next year I expect income to be less than this year but still higher than allowable for Roth (~280 in 2016 and ~240 in 2017). Would it make sense to hold off on converting this year and instead convert next year?

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        • #5




          So even if I did the Back door IRA, it would be at pro rate rule because I have a traditional TSP?  That would mean that I can’t do it without paying high in taxes?
          Click to expand...


          No, the TSP is irrelevant because it is an employer retirement account, as opposed to a personal account, like a pre-tax Individual Retirement Account (IRA).
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6




            Is the last day to convert from IRA to Roth IRA Dec 31?

            I haven’t contributed to personal IRA yet for this year, but did contribute the maximum to my employer retirement plans (non-Roth versions). Next year I expect income to be less than this year but still higher than allowable for Roth (~280 in 2016 and ~240 in 2017). Would it make sense to hold off on converting this year and instead convert next year?
            Click to expand...


            You can convert any time. The last day to convert for 2016 (and report on your 2016 income tax return) is 12/31/16.

            There are other considerations for timing your conversion, such as the amount you will convert, marital status, ability to pay the taxes, and trend of the stock market. In general, it is better to convert while you're in a lower tax bracket. If you're married, you'll be in the 28% bracket this year (before the conversion) and in the 33% bracket next year (assuming no changes in our tax code, which I believe is unlikely). Of course, if the market trends upward all year, you'll have more to convert in the future and you might wish that growth had been all inside the Roth instead of the pre-tax.

            You can hedge your bets and convert part this year (enough to keep you in the 28% bracket) and the rest in 2017 OR in the next correction or bear market.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #7
              Did you invert the tax bracket figures? If I'm reading the charts right, for married filing jointly the 28% bracket transitions to 33% tax bracket at $231,450 for 2016 and $233,350 for 2017. 280 and 240 are both >231, so I think both of those would be 33%, but if you deduct 36k for employer retirement plans the 240 would fall back to 28%.

              Somewhat complicating things is another IRA account that has pretax money. Only 7k, but this will have to partially convert (and count as income?) and incur taxes. But doing so will reduce that pretax money for future conversions.
              Perhaps this makes the most sense: hold off on contributing for 2016 (to avoid accumulating gains?). Contribute to IRA before deadline April 2017 and convert to Roth right away, potentially also including the entirety of the other IRA with pretax money to zero out total traditional IRA position, with slightly more salary room next year. Then later in 2017 or before April 2018 I can contribute to traditional and convert to Roth again this time (and hopefully every year after) without additional taxes on conversion.


              I'm not sure on whether holding off on contributing for 2016 makes sense, as the alternative is just a taxable brokerage account, but it seems to me you want to minimize the time contributed money sits in the traditional IRA, as long as the cost of converting to Roth isn't too high. This would be different if you had a huge traditional IRA balance.

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              • #8
                I also work for the VA and contribute the pre-tax-max to the TSP.  You can think of it as a 401(k) equivalent and as Johanna said No, this does not prevent you from doing a back-door Roth.  Not sure if you have ever done this yourself, but if you're interested, here's what I do:

                1. Open a Traditional IRA (I do everything with Vanguard).  This takes all of 10 minutes online.  Do not put any money into this prior to 12/31.

                2. Any time between 1/1/17 and 4/15/17 just put $5500 into the Traditional IRA as a 2016 contribution (the web site will ask you if this is a 2016 or 2017 contribution), in the Prime Money Market fund.  Open a Roth IRA account as well.  The next day convert the Traditional to a Roth IRA. This will generate a 1099-R which is a "taxable event" on your 2016 return, but the tax is zero when reported correctly, as discussed elsewhere by WCI.  If you do this in TurboTax, as you go through the process it will ask you "Oh by the way, what was your balance in any/all pre-tax IRA accounts on 12/31/2016?" This is the pro-rata rule about to mess with you, and you want that answer to be $0.00 so you deftly avoid it.

                3. Leave that traditional IRA account open but with zero balance and do the same thing in January 2018 for tax year 2017 (if you want to make it an annual thing, or you could do the 2017 contribution at the same time as well) then repeat each year to build your Roth IRA.

                4. I also have a SEP-IRA from some 1099 income, the balance of which I transferred to the TSP a few weeks ago, so that the balance in that is also zero on 12/31.  This avoids any complication with the back-door Roth (pro-rata rule).

                Bottom line is, yes you can do the back-door Roth, just make sure any SEP or Traditional IRA accounts you may have are all showing zero-balance on 12/31.  In fact we all need to check this in the next couple days...!

                 

                 

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                • #9


                  I also have a SEP-IRA from some 1099 income, the balance of which I transferred to the TSP a few weeks ago, so that the balance in that is also zero on 12/31.  This avoids any complication with the back-door Roth (pro-rata rule).
                  Click to expand...


                  Oh that's really good, I hadn't thought about it, this just combines this pretax money with the TSP / 401k / 40x pretax. No downside to doing this that I can see? And avoids pro-rata / form 8606 headache.

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                  • #10





                    I also have a SEP-IRA from some 1099 income, the balance of which I transferred to the TSP a few weeks ago, so that the balance in that is also zero on 12/31.  This avoids any complication with the back-door Roth (pro-rata rule). 
                    Click to expand…


                    Oh that’s really good, I hadn’t thought about it, this just combines this pretax money with the TSP / 401k / 40x pretax. No downside to doing this that I can see? And avoids pro-rata / form 8606 headache.
                    Click to expand...


                    No I think it's prudent (and necessary) if you have a SEP IRA and want to do a back-door Roth.  The process I have followed for that is:

                    1. You need to fill out an IRA Distribution Kit ( https://personal.vanguard.com/pdf/0032t.pdf ) and designate the distribution as a Transfer to the TSP (not a direct payment to you).  In Section 4, choose Option D and provide your TSP account number.  You do not need the signature guarantee they mention later so ignore that.

                    2. You must fill out and enclose TSP form 60 ( https://www.tsp.gov/PDF/formspubs/tsp-60.pdf ) when you mail the Distribution Kit form to Vanguard, and tell them to fill out their portion (Section II) of that form and send a check to the TSP.  For item 13, even though it's Vanguard's section to fill out, I still check Eligible Employer Plan for them and write "SEP-IRA" next to it, to make sure they do the right thing. The instructions on pages 2-4 are pretty clear but I tack a Post-It note on the front and say "Please fill out Section II and mail with check to TSP address provided on page 2."

                    I have done this several times with my SEP-IRA from moonlighting and the transaction only takes about 10-14 days to occur once I mail the forms to Vanguard.  Then with my SEP IRA balance safely at $0.00 prior to 12/31, I am ready for the back-door Roth transaction for 2016 in January.

                    Some would say you can also wait to contribute to your SEP IRA until January, when you know your total 1099 income from 2016 and know the exact maximum number (20% net) for your SEP IRA contribution, then just do all of this in January for the prior year.  That is totally fine--what you want is to have zero balance in any pre-tax IRAs on 12/31 and if you have a TSP account, transferring them into the TSP is just one way to do that.  For myself, following this process this year I will put into the TSP: $18K + 5% salary match + about $10K from moonlighting via my SEP-IRA transfer.  Next week I'll do the back-door Roths for me and my wife.

                    Comment


                    • #11
                      Thank you so much!!  This was helpful.  I tried opening a traditional IRA on Vanguard.  It is asking me to enter an amount greater than $1.  I can't keep it at zero.  I was wondering if you had this problem when opening traditional IRA?  I plan on contributing only in 2017 (I contributed to Roth IRA in 2016). Should I just put $5500 in traditional IRA and then put it in my Roth IRA in 2017?  Please let me know when you can. Have a good day!

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                      • #12
                        Ok, thank you!  That helps!  I also have an inherited IRA.  That would not affect backdoor IRA?

                        Comment


                        • #13


                          Should I just put $5500 in traditional IRA and then put it in my Roth IRA in 2017
                          Click to expand...


                          Yes mine was opened long ago but if they are requiring an initial deposit and you're just looking at 2017 you can just wait until January and do it all at once (contribute to the Traditional IRA then convert to Roth) for tax year 2017. There is no need to do anything prior to January 1.  As for the inherited IRA I am not sure about that...if the IRA is in your name then yes it would affect your backdoor Roth conversion but you may want to verify that with an accountant.

                          Comment


                          • #14




                            Thank you so much!!  This was helpful.  I tried opening a traditional IRA on Vanguard.  It is asking me to enter an amount greater than $1.  I can’t keep it at zero.  I was wondering if you had this problem when opening traditional IRA?  I plan on contributing only in 2017 (I contributed to Roth IRA in 2016). Should I just put $5500 in traditional IRA and then put it in my Roth IRA in 2017?  Please let me know when you can. Have a good day!
                            Click to expand...


                            If you have ANY pre-tax (basically, non-Roth) IRA holdings tomorrow (31 Dec 2016) then it will cause taxation of any Roth conversion you make for 2016 (including the "backdoor" Roth conversion).  Also, if that inherited IRA is pre-tax (probably is), that will also hinder your "backdoor" conversion, causing it to be taxed.  Just wait until 2017 to make the traditional contribution, especially since you already made a Roth IRA contribution in 2016 and you can't contribute more than $5,500 to all IRAs in a single tax year.

                            You can do your 2016 TIRA contribution and "backdoor" Roth in 2017 before filing your 2016 taxes, and then do another one for 2017 in the same calendar year.




                            Ok, thank you!  That helps!  I also have an inherited IRA.  That would not affect backdoor IRA?
                            Click to expand...


                            It will if it's traditional/pre-tax.  Any *non-Roth* IRA holdings you have on 31 Dec 2016 of the tax year is how the pro-rate rule is calculated.  See IRS Form 8606 for specific details.  This is the form you file when you make non-deductible IRA contributions (which is how you do the "backdoor").  See lines 2 and 6 which talk about existing non-Roth IRAs.  If you have additional basis in traditional IRAs, it causes the conversion to be taxed.

                            This might seem like one of those "clear as mud" moments, so the best way to simplify it is:

                            1. Have ZERO non-Roth IRA holdings (i.e. roll them over to non-IRA accounts, such as TSP, 401k, or convert them to Roth if you can afford the taxes)

                            2. Make the non-deductible traditional IRA contribution and put it into a non-earning account (i.e. brokerage cash, money market)

                            3. Convert that contribution to Roth few days later

                            4. Form 8606 should have $5,500 on lines 1,3,5,8,9,11,13,16,17; 1.000 on line 10, and 0 on all the others.  WCI has a link to the expected image on his tutorial [link].

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                            • #15




                              Ok, thank you!  That helps!  I also have an inherited IRA.  That would not affect backdoor IRA?
                              Click to expand...


                              ORIGINAL ANSWER: Yes, an inherited IRA, if pre-tax, would affect your ability to convert, tax free, to a back-door Roth IRA.

                              CORRECTED ANSWER: I was wrong! An inherited IRA does not affect the back-door Roth strategy! See following conversation.
                              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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