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Backdoor Roth a possibility, how to make it one

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  • Backdoor Roth a possibility, how to make it one

    First time poster, Ive been very inspired by WCI. I'm a new attending, extremely novice investor who refinanced my student loan for 5 years but paid it off in one year (just made my last payment). Now that the student loan is paid off, I'm working on increasing my financial knowledge.

    I would like to do a backdoor roth for my wife and I (hopefully in 2016 if not too late), but we have a couple accounts I'm not sure what to do with after reading the WCI backdoor roth tutorial (my hang up is step one of the tutorial).


    While in residency I contributed to a FICA Alternative plan with VALIC (I'm guessing it was a 401a?) When I finished residency my dad's financial adviser recommended I transfer the funds ($22,905) to Jackson National elite access variable anniuty. The annuity type is listed as an IRA (Individual Retirement Annuity?). Not sure if I need to make this account balance zero to avoid a pro rata calculation, and if so, what should I do with this money to make the balance zero? The only other account I have is a Fidelity 401k through my employer (I am a W2 employee).


    My wife has a couple accounts, both of which, I believe were 401k accounts, from previous employers, which at the advice of my dad's guy were put in to two different accounts both with Fidelity:

    Roll over IRA- $114

    Roth IRA- $1,688

    My wife currently stays at home to raise our kids, so no current employer. For her, I'm guessing the Roth IRA is not a problem, right? Just need to figure out what to do with the Roll over IRA money.


    Thank you for your help. I apologize for the novice questions.

  • #2
    No need to apologize. This forum would not exist without Q&As. Well, maybe it would, but it would be pretty boring and it wouldn't have nearly as many readers.

    First of all, I recommend you stay away from "your dad's guy" in the future. He insulted your intelligence when he rolled your 401a into an IRA inside of an annuity.

    The easy part is that your wife needs to convert her $114 IRA into her Roth IRA before 12/31/16. She then has until 4/18/17 to contribute to a spousal back-door Roth.

    The hard part is that you are stuck with a new annuity. There will be high surrender charges for you to move it out of an annuity to another company. Maybe your dad's guy can help you convert it to a Roth inside the annuity, pay the taxes, and avoid the surrender charges. Unfortunately you're still stuck with the annuity. Fortunately, you're a new attending and the account is relatively small.

    (btw - great job with the student loans!)
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      I'd bite the bullet and get out of the annuity. Then roll that IRA to a ROTH. I'd view the cost of getting out as the cost for your financial education. I think a lifetime of being able to do a backdoor ROTH is worth the cost of surrendering. It could be worse, you could have purchased whole life like WCI. I'd then pay back your dad's financial advisor by helping dad see the light and moving his money elsewhere.


      • #4
        A couple of updates:

        I found out my Fidelity 401k will accept a roll in from this IRA annuity (it is pre tax contributions). I will be required to pay a $1300 early surrender charge to Jackson, but right now I'm thinking it's the preferred move as it gets me out of the annuity and I avoid paying taxes on it if I roll it to a Roth. Thoughts?

        If I'm able to do all this before 4/18/17, can I still pull off a backdoor roth for myself for 2016?


        For my spousal backdoor Roth, I was able to convert her $114 rollover IRA to her Roth account, I will contribute $5500 to her IRA, then rollover to her Roth prior to 4/18/17, but what do I do about the $114 that I rolled to her Roth, list it as a taxable amount on for 8606?

        Thank you for all of your help and advice!




        • #5

          1. You had a pre-tax balance as of 12/31 so you do not qualify to do a tax-free back-door Roth for 2016.

          2. If and when you convert your pre-tax IRA to a Roth IRA, you will owe taxes on the amount converted (for the calendar year of conversion) because you have never paid any taxes on that amount.

          YOUR WIFE:

          1. She will receive a 1099R fir the $114 conversion. This has nothing to do with an 8606.

          2. Her nondeductible TIRA contribution for 2016 will be reported on form 8606.

          3. Her back-door conversion will be reported on form 8606 for the calendar year that you convert.

          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087