Backdoor Roth IRA - Can I make multiple contributions this year?

[jfoxcpacfp]

See if you can get a different representative. I cannot find any fault with what you are proposing. As long as the SEP and pre-tax IRA are both emptied before 12/31, you are fine with the backdoor Roth. As I'm sure you're aware, you'll pay taxes on any of the growth in the 2016 nondeductible IRA.

Besides, it's really not the rep's business. You can do this and it's up to you or your CPA to correctly complete the form 8606 to show contribution, basis, and conversion. Be sure you filed the form 8606 for 2016, btw.

If, for some reason, you cannot get this accomplished before 12/31, you can always convert in January - it's only a few weeks longer.

[CN]

JFoxCPACPF, love your contributions and insights on this post but i'm still a bit confused. So I opened a traditional IRA in 2015 and contributed 5500 that was pre-tax, in 2016 my income rose and I made a contribution in the same account that was not tax deductible. Incidentally, I opened a SEP IRA last year and made pre-tax contribution, my understanding was that to qualify for a back door Roth I could open a solo 401k( currently 1099), roll over the SEP IRA and traditional IRA from 2015 and 2016, close the SEP IRA, make a traditional IRA contribution and then roll over to the Roth. However, the representative at Schwab told me that since  still had a balance on the account this year it would not be possible, is this correct? Would appreciate your response, thanks in advance

[DMFA]

Redwings13 wrote:

I am in a similar boat. My wife had a pension from her former employer that she was able to roll into a roth IRA this year. We know that this was a taxable event since it was pre-tax dollars rolling into a roth IRA. We also individually will make too much money to contribute to a roth IRA this year, but we were wondering if she could backdoor into a roth IRA this year even though she already “contributed” to it with the rollover. Many thanks.

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Rollovers, conversions, and contributions are all separate entities.

Contributions are when you take money from outside a retirement account (like cash) and put them into a retirement account.  This is what is limited to $5,500 for IRAs.

Conversions (changing pretax to Roth) and Rollovers (pretax to pretax or Roth to Roth) are *not* contributions and do not count toward that limit.

So you can still make $5,500 *each* in IRA contributions for 2017.  You likely make too much to deduct traditional contributions or to make direct Roth contributions, so the answer is to make a traditional contribution, don't deduct it on your taxes, and convert it to Roth as soon as you're able.  This is what the "backdoor" Roth is.

Your IRAs have no bearing on her IRAs.  Her contribution limit or pretax balances for factoring tax on pro rata conversions have no effect on yours.

[Redwings13]

I am in a similar boat. My wife had a pension from her former employer that she was able to roll into a roth IRA this year. We know that this was a taxable event since it was pre-tax dollars rolling into a roth IRA. We also individually will make too much money to contribute to a roth IRA this year, but we were wondering if she could backdoor into a roth IRA this year even though she already "contributed" to it with the rollover. Many thanks.

[Miss Bonnie MD]

familydocPA wrote:

Bobcat – You’re not the only one who’s been getting questionable financial advice.  I asked my CPA and a financial advisor about a backdoor Roth. Their replies?

The CPA tried to sell me on some insurance policy instead. “I get paid by the company, so we can talk about this at not cost to you.”

The financial advisor said “yeah, I guess some people do that. Paying taxes isn’t such a bad thing though.”

 

Anyhow, thank you both for your help, so that I can actually do the backdoor strategy this year.

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Continually surprised at the bad advice or NO advice out there!

[Miss Bonnie MD]

jfoxcpacfp wrote:

familydocPA wrote:

Sorry to belabor this point, but after reading this thread multiple times I’m not clear on the answer to question #1 above.

I also have a Rollover IRA that I will be moving to my company’s 403(b) plan, but have not done so yet. Is it too late to move this money over and do a backdoor Roth for 2016 for myself?  (From the above it seems that “Peds” is saying no but our CPA friend says yes).

And if not, my spouse (who currently has no IRA) can still contribute to a backdoor Roth for 2016, correct?

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A backdoor Roth is a 2-step process:

• The initial nondeductible TIRA contribution, which anybody can make, no tax consequences (except you get no deduction as you make too much $$) and


• The conversion, which may or may not generate tax liability.

The TIRA contribution is made on a tax year basis, meaning it can be done up to the due date of the tax return. The conversion is reported on a calendar year basis. Reporting is made on IRS form 8606.

As long as you have no balance in a pre-tax IRA on 12/31 of the year of the conversion, you will have no tax liability. It does not matter if you have a balance in a pre-tax IRA on any other day of the year.

In your case, you will be converting in 2017 and will (I presume) roll your IRA into your company’s plan before 12/31, so you’re in the clear. Your spouse should be able to contribute to a backdoor Roth with no tax liability. I hope this helps.

 

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This is great - I think there is a misconception that the IRA balances have to be zero of the tax year the backdoor roth IRA is done in.

[familydocPA]

Bobcat - You're not the only one who's been getting questionable financial advice.  I asked my CPA and a financial advisor about a backdoor Roth. Their replies?

The CPA tried to sell me on some insurance policy instead. "I get paid by the company, so we can talk about this at not cost to you."

The financial advisor said "yeah, I guess some people do that. Paying taxes isn't such a bad thing though."

 

Anyhow, thank you both for your help, so that I can actually do the backdoor strategy this year.

[jfoxcpacfp]

lol, anybody who didn't have great returns over the past year must have been in cash. With all due respect, they must have thought you had your head up your arse. Recommend you read the latest version (2013) of Simple Wealth, Inevitable Wealth (ignoring the reference sto 1% AUM fees).

Contact either Scott at MD Financial Services or Larry LBKCLU to get a 2nd opinion of your disability policy. They are both recommended advisors and great guys. Get away from NWM!

 

[Bobcat]

FamilyDocPA-

Based on what our CPA friend has advised I did the calculations on the IRS form 8606. I will do one this year showing that I made a $5500 traditional IRA contribution for 2016 year but I will not be doing the Roth conversion until 2017 tax year for the entire $11000 (years 2016 and 2017 contributions). It all checks out.

Incidentally, I just half-fired my soon to be former NWM advisors yesterday and informed them I am going to be directing my own investments from now on. They tried hard to retain my business and told me the "great returns they have achieved over the past year. Funny thing is my own returns were better with a diversified strategy of my own! The only saving grace was they advised me to wait 2 weeks before completing the rollover to eliminate a 1% unloading fee of C shares for funds bought within the past year.

**They still have my disability insurance and the dreaded whole life policy I bought after residency. Unloading that is next.

I read on one of these forums that a NWM same specialty disability policy may not in fact be a real same specialty policy. Anyone have any insight into this and what type of language I should look for in the policy? I can post this on a separate forum if better.

[jfoxcpacfp]

familydocPA wrote:

Sorry to belabor this point, but after reading this thread multiple times I’m not clear on the answer to question #1 above.

I also have a Rollover IRA that I will be moving to my company’s 403(b) plan, but have not done so yet. Is it too late to move this money over and do a backdoor Roth for 2016 for myself?  (From the above it seems that “Peds” is saying no but our CPA friend says yes).

And if not, my spouse (who currently has no IRA) can still contribute to a backdoor Roth for 2016, correct?

Click to expand...

A backdoor Roth is a 2-step process:

• The initial nondeductible TIRA contribution, which anybody can make, no tax consequences (except you get no deduction as you make too much $$) and


• The conversion, which may or may not generate tax liability.

The TIRA contribution is made on a tax year basis, meaning it can be done up to the due date of the tax return. The conversion is reported on a calendar year basis. Reporting is made on IRS form 8606.

As long as you have no balance in a pre-tax IRA on 12/31 of the year of the conversion, you will have no tax liability. It does not matter if you have a balance in a pre-tax IRA on any other day of the year.

In your case, you will be converting in 2017 and will (I presume) roll your IRA into your company's plan before 12/31, so you're in the clear. Your spouse should be able to contribute to a backdoor Roth with no tax liability. I hope this helps.

 

[familydocPA]

Sorry to belabor this point, but after reading this thread multiple times I'm not clear on the answer to question #1 above.

I also have a Rollover IRA that I will be moving to my company's 403(b) plan, but have not done so yet. Is it too late to move this money over and do a backdoor Roth for 2016 for myself?  (From the above it seems that "Peds" is saying no but our CPA friend says yes).

And if not, my spouse (who currently has no IRA) can still contribute to a backdoor Roth for 2016, correct?

[jfoxcpacfp]

Bobcat wrote:

JFox-

If I’m reading this correct then I can contribute a total of $11,000 to a new traditional IRA this year, $5500 is for tax year 2016 and $5500 for tax year 2017.

When I do the backdoor Roth conversion it will be $11000 converted but $5500 contributed in 2016 (contribution made prior to April 17, 2017) and $5500 contributed for 2017 and since the remaining IRA balance at the end of 2017 will be $0 there is no “pro-rata” consideration and this does not become a taxable event?

If so this is great news for someone who got on board a little too late.

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That is correct.

[Bobcat]

JFox-

If I'm reading this correct then I can contribute a total of $11,000 to a new traditional IRA this year, $5500 is for tax year 2016 and $5500 for tax year 2017.

When I do the backdoor Roth conversion it will be $11000 converted but $5500 contributed in 2016 (contribution made prior to April 17, 2017) and $5500 contributed for 2017 and since the remaining IRA balance at the end of 2017 will be $0 there is no "pro-rata" consideration and this does not become a taxable event?

 

If so this is great news for someone who got on board a little too late.

[Peds]

good to know jfox!

[jfoxcpacfp]

Bobcat wrote:

If the rollover is complete prior to April 17, 2017 can I contribute $5500 to my new traditional IRA then backdoor it into a Roth without “pro-rata” implications for tax year 2016 or is this dependent on the amount of IRA funds in accounts as of Dec 31, 2016 if making a late contribution/rollover?

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The 1st TIRA contribution is for tax year 2016. The back-door Roth conversion counts on a calendar year basis so will be for tax year 2017. (fyi - all Roth conversions are counted on a calendar year basis.) As long as you have no pre-tax IRA balance on 12/31/17, there are no tax implications.

Bobcat wrote:

If this is an option will I run into problems contributing to backdoor Roth if I do this again after April 17, 2017 for tax year 2017?

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The 2nd TIRA contribution is for 2017 (you can actually contribute before 4/18/17, which is this year's "tax day"). Same rules for back-door Roth conversion as above.

Bobcat wrote:

Am I just better off forgetting about 2016 contribution altogether to make things simpler?

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NIMO.