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

[Bobcat]

Here's my situation:

 

Currently have a former 401k plan that I rolled into an IRA at Nowthwestern mutual.

Now I have a 401k with current employer through Fidelity that allows directed investments as well as employer sponsored funds.

In order to contribute to Backdoor Roth I am currently receiving a rollover check from NWM in order to roll into my current 401k to eliminate any traditional/rollover IRA funds that could cause tax implications.

 

Question:

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?

 

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?

 

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

 

Thanks for any input

 

 

[Peds]

1) no. the IRA existed at end of 2016, so prorata takes effect.

2) its easiest to do the backdoor in the same year you contribute.

3) possibly. the tax cut is up to you.

[Bobcat]

Excellent, thanks for a quick response. This is exactly what I was thinking but wanted to explore all options.

Just to clarify - I can go ahead and contribute $5500 to Traditional IRA and go ahead with the backdoor Roth conversion for tax year 2017 even though there is still money in a rollover IRA account currently so long as that account is $0 balance by December 31, 2017?

[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?

Click to expand...

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?

Click to expand...

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?

Click to expand...

NIMO.

[Peds]

good to know jfox!

[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.

[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.

Click to expand...

That is correct.

[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]

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.

 

[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]

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!

 

[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.

[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?

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.

 

Click to expand...

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.

[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.

Click to expand...

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

[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.