late backdoor roth with a previous pretax IRA

[shobivenky]

I am relatively new to investing (just finished reading the WCI book) and was excited about doing the about back door roth  contributions for both 2016 and 2017. however just realized that I have a pre tax IRA OF $1500 from my training . we are confused on what to do with it. Will I be able to roll it over to my current 401 K ? Or can I roll it over to Roth IRA and pay tax if needed ? If thats the case will I still need to pay taxes on it for 2016, since the actual conversion is happening in 2017 (for the 2016 contribution). Will I be still able to contribute for 2016 and 2017 ?

I talked with a financial advisor and a CPA and both had no idea on how to handle this.

[DMFA]

Just convert it to Roth imo.  You pay taxes on the conversion for the calendar year of the conversion, so you'd pay it on your 2017 taxes due in April of 2018.

So, you can do all the following things now:

• Make a 2016 non-deductible TIRA contribution ($5,500)


• Make a 2017 non-deductible TIRA contribution ($5,500)


• Convert those two plus the $1,500 in pre-tax IRA to Roth

For your Form 8606 in 2016, it will read:

• $5,500 on lines 1,3,4,14 (creates a non-deductible basis for 2016; this is OK)


• $1,500 on lines 6,9 (trad IRA value at conversion)


• $0 on lines 2,5,7,8,11,12,13,15,16,17,18 (nothing taxable for 2016)


• 0.000 on line 10

For your Form 8606 in 2017, it will read:

• $5,500 on lines 1,2


• $11,000 on lines 3,5,11,13,17


• $0 on lines 4,6,7,12,14,15 (the basis is eliminated)


• $12,500 on line 8,9,16 (or $11,000 plus trad IRA value at conversion)


• 0.880 on line 10 (line 5 div by line 9)


• $1,500 on line 18 (the taxable amount to add to your 1040 as income, equal to the trad IRA value at conversion)

There would be no tax on the non-deductible portion, and the only tax due would be on the pre-tax value (as it should be), if you eliminate all pre-tax IRAs for 2017 taxes by 12/31/2017.

You *can* roll the pre-tax IRA into a 401(k), but at that low amount I'd just convert.

I'm guessing you're not eligible for direct Roth contributions, which are far less hassle.

I can understand the average person not understanding this, but financial pros?  This is bread-and-butter stuff.  How do financial advisors and/or CPAs not know this?

[jfoxcpacfp]

DMFA wrote:

I can understand the average person not understanding this, but financial pros?  This is bread-and-butter stuff.  How do financial advisors and/or CPAs not know this?

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+1

[shobivenky]

Thank you so much DMFA for the detailed explanation. we were at a loss, when the CPA didn't know anything about it. Its now much clear for us.

Thanks again for taking the time to reply.

[DMFA]

jfoxcpacfp wrote:

DMFA wrote:

I can understand the average person not understanding this, but financial pros?  This is bread-and-butter stuff.  How do financial advisors and/or CPAs not know this? 

Click to expand…

+1

Click to expand...

Well, I know *you* know this, obv...you taught me!