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Can I still do a Back door IRA?

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  • DMFA
    replied




    I have the same issue.  I’ve read that I should complete a separate 8606 for both of them, and label the inherited IRA from as “Inherited”–just write it out on the top of the 8606.  Is that correct?  Thank you!
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    https://www.irs.gov/publications/p590b#en_US_2017_publink1000230538

    The inherited IRAs don't count for anything with regard to the backdoor Roth unless you directly assumed ownership of them as a surviving spouse, in which case they actually become "yours," and you can move them into other accounts, convert to Roth, etc.

    If it was inherited from any other way (parent or grandparent, for example), then Inherited IRAs have nothing to do with the Backdoor Roth since they're not originally "yours."  The only time you worry about reporting them to the IRS is for ensuring you take your RMDs and paying the tax on them.  They are not figured into the Traditional, SEP, and SIMPLE IRAs that form the pro rata rule calculation on Form 8606.  There is no Form 8606 requirement for Traditional IRAs *unless* there is non-deductible basis in them as contributed by the original owner...in that instance, there is a separate Form 8606 solely for tracking that non-deductible basis within the Traditional.  It, again, does not affect your Backdoor Roth.

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  • lexic
    replied
    I have the same issue.  I've read that I should complete a separate 8606 for both of them, and label the inherited IRA from as "Inherited"--just write it out on the top of the 8606.  Is that correct?  Thank you!

    Leave a comment:


  • FIREoneDay
    replied
    Ok, thank you for the prompt response!

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  • jfoxcpacfp
    replied




    Hi,

    I have a follow up question.  Should I put the money in the existing Roth IRA that I had as a resident or open a new Roth IRA after I do the conversion?

    -FIREoneDay
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    You should set up a new Roth IRA for your back-door conversions and use it for all back-door Roths going forward. The reason is that conversions are subject to a 5-year rule for distributions (which I won't explain here) whereas pure contributions are not. Probably will not ever matter, but that is my standard advice.

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  • FIREoneDay
    replied
    Hi,

    I have a follow up question.  Should I put the money in the existing Roth IRA that I had as a resident or open a new Roth IRA after I do the conversion?

    -FIREoneDay

    Leave a comment:


  • jfoxcpacfp
    replied




    Thought I would piggy back on this thread…

    I am a physician. I set up a Vanguard traditional IRA for myself a couple months ago, contributed 5500, converted to a Vanguard Roth IRA a few days later and have 0 in the traditional. Successful 2016 back-door roth.

    My wife owns her own small business. She has never had any retirement accounts. She set up a traditional IRA at Vanguard just after Christmas and funded it with 5500. Rookie mistakes on our parts I guess, but she could not convert the money to the Roth before today because it took a while for the transfer to go through/bank info to be confirmed etc. She will have 5500 in a traditional IRA on 12/31/2016.

    We plan to open an individual 401K at Vanguard for her business just after the new year.

    In reading this thread, I now realize the error of not being able to convert her account before 12/31. Is this going to put my Roth IRA “at risk” for pro-rata or does it depend on how we file (separately v jointly) or are our IRAs independent?

    I was thinking we can set up her 401k after the 1st, roll over her traditional IRA money to the 401k, and concede that we lost the ability to do the backdoor roth for 2016 for her and just do one for 2017.

    Not sure if anyone else has creative solutions. We can/will talk to our tax guy too…

    Bummer…
    Click to expand...


    No problem. Your wife contributed to a pre-tax TIRA (you almost certainly don't qualify for a TIRA deduction). Now all she has to do is convert and she'll file an 8606 for both 2016 and 2017. Also no need to roll her TIRA to a 401k. Even if she weren't going to convert it to a Roth, it could remain in the TIRA.

    Your IRAs are independent. Hers has nothing to do with yours, not that it would have mattered.

    Of course, if it really had been a mistake, she could just remove the contribution by 4/18/17.

    Good luck and Happy New Year!

    Leave a comment:


  • BrianY
    replied
    Thought I would piggy back on this thread...

    I am a physician. I set up a Vanguard traditional IRA for myself a couple months ago, contributed 5500, converted to a Vanguard Roth IRA a few days later and have 0 in the traditional. Successful 2016 back-door roth.

    My wife owns her own small business. She has never had any retirement accounts. She set up a traditional IRA at Vanguard just after Christmas and funded it with 5500. Rookie mistakes on our parts I guess, but she could not convert the money to the Roth before today because it took a while for the transfer to go through/bank info to be confirmed etc. She will have 5500 in a traditional IRA on 12/31/2016.

    We plan to open an individual 401K at Vanguard for her business just after the new year.

    In reading this thread, I now realize the error of not being able to convert her account before 12/31. Is this going to put my Roth IRA "at risk" for pro-rata or does it depend on how we file (separately v jointly) or are our IRAs independent?

    I was thinking we can set up her 401k after the 1st, roll over her traditional IRA money to the 401k, and concede that we lost the ability to do the backdoor roth for 2016 for her and just do one for 2017.

    Not sure if anyone else has creative solutions. We can/will talk to our tax guy too...

    Bummer...

    Leave a comment:


  • FIREoneDay
    replied
    Thank you!  Hope you have a Happy New Year!

    Leave a comment:


  • jfoxcpacfp
    replied




    Great!  Just to make sure that I am understanding correctly, even though I have an inherited IRA and TSP, I can do a Backdoor IRA in 2017 without worrying about it being taxed?  Also, as a new attending, is there other retirement investments I do besides TSP and Backdoor IRA?
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    Yes, if those are the only accounts you have, you can contribute to a back=door Roth without paying taxes. You should also have a taxable account should also set up a SOLO-401k if you ever have any IC income.

    Leave a comment:


  • FIREoneDay
    replied
    Great!  Just to make sure that I am understanding correctly, even though I have an inherited IRA and TSP, I can do a Backdoor IRA in 2017 without worrying about it being taxed?  Also, as a new attending, is there other retirement investments I do besides TSP and Backdoor IRA?

    Leave a comment:


  • jfoxcpacfp
    replied




    Ok, thank you!  Your explanation helped alot. I have a non-spouse inherited IRA. Because it is non-spouse account, I can’t convert it to Roth IRA.  It is currently a traditional IRA account.   It sound like if I did a Back Door IRA, I would be taxed due to the traditional IRA. I was wondering if there are other alternatives for investing?  I just have a TSP from work which I am contributing.
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    I just double-checked my answer and I was wrong - good news for you. The inherited IRA does not affect your ability to do a tax-free backdoor Roth IRA conversion. I am going to delete my prior answer so that I won't lead others awry. Sorry for creating confusion!

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  • FIREoneDay
    replied
    Thanks!

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  • FIREoneDay
    replied
    Ok, thank you!  Your explanation helped alot. I have a non-spouse inherited IRA. Because it is non-spouse account, I can't convert it to Roth IRA.  It is currently a traditional IRA account.   It sound like if I did a Back Door IRA, I would be taxed due to the traditional IRA. I was wondering if there are other alternatives for investing?  I just have a TSP from work which I am contributing.

    Leave a comment:


  • jfoxcpacfp
    replied




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

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  • DMFA
    replied




    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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    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?
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    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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