Need help with Roth

[chrisg202]

Hi guys,

I'm a current fellow and I started moonlighting this year. I just found that our AGI is greater that 194K which is higher than the limit to fund our roth IRA accounts (me and wife).

Is it too late now to do the backdoor Roth IRA? i've never done it before

If it is too late; I would appreciate guidance to best invest 8-10K: Brokerage account vs. maxing out our 401K and why?

 

Thank you

[DMFA]

Nope, not too late to make a traditional IRA contribution *for* 2016.  Contributions are made *for* a tax year up through the filing deadline; e.g. 2016 IRA contributions can be made 1/1/2016 - 4/18/2017.

You'll do the conversion *in* 2017.  Conversions are done *in* a calendar year.  Only conversions made 1/1/2016 - 12/31/2016 will be on 2016's taxes (filed in Jan-Apr 2017).

The "pro rata" rule for taxation of non-deducted contributions converted to Roth applies to the year it was converted *in* - hence if you have zero in pre-tax IRA (Trad, SEP, SIMPLE) balances on 12/31/2017, there won't be a tax penalty to conversion.

It will work like this:

• Open a Traditional IRA (probably best done at your institution with your Roth, unless their transfer/conversion policies are cumbersome.  It's very easy with Fido and VG, like 5 minutes online)


• Make a 2016 non-deductible TIRA contribution of $5,500 (before 4/18/2017)


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


• Convert those both to Roth ($11,000 in conversions)

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)


• $0 on lines 2,5-9,11-13,15,16-18 (nothing converted in or 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 3,5,8,9,11,13,16,17


• $0 on lines 4,6,7,12,14,15,18 (the basis is eliminated, nothing taxable to add to the 1040 as income)


• 1.000 on line 10

You should owe no taxes on these conversions since they were made with post-tax money and there was no pre-tax money in the IRAs to convert pro-rata.

If you are you doing your taxes yourself (using TurboTax or HR Block, e.g.) for 2017 when you will have a 1099-R, make absolutely certain that you include that Form 1099-R box 2b is checked indicating "taxable amount not determined."  Otherwise, it will erroneously count it as a taxable early distribution.

[DMFA]

Also, do you have a retirement account for your self-employed business (moonlighting)?  If you can make enough contributions to SEP-IRA for 2016, you might even be able to get your AGI down below the limit.

I think it's too late to open an individual 401(k) for 2016 and hence a SEP would be your only tax deductible/adjustable option for 2016, but *if* that was something you wanted to do, you could just roll over your 2016 SEP contributions into an indie 401(k) opened this year to eliminate any pro-rata taxation of future non-deducted IRA contributions converted to Roth (i.e. backdoor).

Based on your AGI, I'd recommend maxing your employed 401(k) at $18,000/yr anyway.  It's generally recommended to save/invest 20% of gross income for retirement, which would put your annual amount around $35,000.

[jfoxcpacfp]

chrisg202 wrote:

I’m a current fellow and I started moonlighting this year. I just found that our AGI is greater that 194K which is higher than the limit to fund our roth IRA accounts (me and wife).

Is it too late now to do the backdoor Roth IRA? i’ve never done it before

If it is too late; I would appreciate guidance to best invest 8-10K: Brokerage account vs. maxing out our 401K and why?

Click to expand...

No, it is not too late. You can go ahead and contribute to a nondeductible TIRA for 2016. You can do the tax-free conversion in 2017 (assuming you have no pre-tax IRAs in your names).

[chrisg202]

Thank you very much for the detailed reply!

If I will be funding the Roth IRA of my wife and myself... Do I need to open separate TIRA for each of us or I can do it using only one TIRA, one transaction at a time? puting 5500 one day and converting the second day, then repeating the process

Thank you

 

[jfoxcpacfp]

TIRAs are owned separately, not jointly.

[chrisg202]

I've a question please:

So I opened two TIRA and did the conversion to Roth. I contributed towards 2016 only and the conversion is made in 2017.

I'm using Turbo tax for filling.

Do I fill for 1099-R (even that I didn't receive one for 2016)? Or do I just fill the form 8606?

Thank you

[DMFA]

No, there will be no 1099-R for a traditional IRA in 2016 since it didn't exist. For 2016, you'll just file the 8606, which TurboTax does automatically...provided you fill in the prompts correctly.

All you will put on there is a non-deductible traditional IRA contribution where it says "Did you make any non-deductible traditional IRA contributions this year?" It will trick you because it says "this is not common" and will pre-fill the "no" button. Here is a tutorial with pictures: https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html

However, you'll just put the contribution, not the conversion. There should be no tax change.

[chrisg202]

DMFA wrote:

No, there will be no 1099-R for a traditional IRA in 2016 since it didn’t exist. For 2016, you’ll just file the 8606, which TurboTax does automatically…provided you fill in the prompts correctly.

All you will put on there is a non-deductible traditional IRA contribution where it says “Did you make any non-deductible traditional IRA contributions this year?” It will trick you because it says “this is not common” and will pre-fill the “no” button. Here is a tutorial with pictures: https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html

However, you’ll just put the contribution, not the conversion. There should be no tax change.

Click to expand...

Thank you very much DMFA!

- I answered "yes" for the question "Did you make any non-deductible traditional IRA contributions this year?”

- Now to verify is everything look ok, I followed the Buff tutorial and looking into my 1040 summary line 15a (IRA distribution) it is still blank!! any tips?

- Also, is there a way to review my 8606 form for 2016 to make sure it's correct?

 

[DMFA]

There won't be a distribution in 2016, so it shouldn't be reflected on the 1040. In fact, there shouldn't be anything on your 1040 from a backdoor Roth, unless you converted money that somehow wasn't taxed already, like old deducted IRAs or if your traditional contribution earned money before you converted it (unlikely).

I don't use TurboTax, but in other tax software I've used, it lets you print your return before filing it. Review it to make sure that nothing was deducted, nothing was taxed, and that 8606 only has the contributions amount (prob $5500) on lines 1,3,4,14 and zero everywhere else.

[chrisg202]

DMFA wrote:

There won’t be a distribution in 2016, so it shouldn’t be reflected on the 1040. In fact, there shouldn’t be anything on your 1040 from a backdoor Roth, unless you converted money that somehow wasn’t taxed already, like old deducted IRAs or if your traditional contribution earned money before you converted it (unlikely).

I don’t use TurboTax, but in other tax software I’ve used, it lets you print your return before filing it. Review it to make sure that nothing was deducted, nothing was taxed, and that 8606 only has the contributions amount (prob $5500) on lines 1,3,4,14 and zero everywhere else.

Click to expand...

Thank you very much!

[nicktadros]

I have a totally unrelated Roth question. A few years ago ny wife recently wanted to help out a friend who just got a job with Ameriprise so she let her mange her 403b from a previous job. Unfortunately, she just converted it to a traditional IRA and so now we have $40K in an IRA with Ameriprise (with its high fees). This was all done before I knew anything about finances and became a WCI follower. I am getting ready to start a relatively high paying attending job after 9 years of residency/fellowship (narrowed down to two jobs). I was wondering what I should do with the money. I feel like my best two options are covert it all to a Roth IRA (and pay the taxes/fees associated with that) or wait until I get my job and see if I can put a lump sum into my employer 401k. I guess another potential option would be to see if I can put it into the 403b that my fellowship offers, but I haven't checked what their contribution limits are yet (it's with fidelity).

For some more info: I have already maxed out our Roth ($11k) for 2016 and we have about a $70k gross income.

If anyone has any suggestions or other ideas, it would be greatly appreciated!

[jfoxcpacfp]

nicktadros wrote:

I have a totally unrelated Roth question. A few years ago ny wife recently wanted to help out a friend who just got a job with Ameriprise so she let her mange her 403b from a previous job. Unfortunately, she just converted it to a traditional IRA and so now we have $40K in an IRA with Ameriprise (with its high fees). This was all done before I knew anything about finances and became a WCI follower. I am getting ready to start a relatively high paying attending job after 9 years of residency/fellowship (narrowed down to two jobs). I was wondering what I should do with the money. I feel like my best two options are covert it all to a Roth IRA (and pay the taxes/fees associated with that) or wait until I get my job and see if I can put a lump sum into my employer 401k. I guess another potential option would be to see if I can put it into the 403b that my fellowship offers, but I haven’t checked what their contribution limits are yet (it’s with fidelity).

For some more info: I have already maxed out our Roth ($11k) for 2016 and we have about a $70k gross income.

If anyone has any suggestions or other ideas, it would be greatly appreciated!

Click to expand...

You wouldn't happen to have any IC income, would you? That would allow you to set up a SOLO-401k and roll your IRA into that. Too late to convert the IRA for 2016, which w/h/b the ideal time to do so (darn it!)

Otherwise, I'd probably recommend checking with the 2 jobs you have narrowed down to and find out if their plans will accept rollovers of IRAs. You shouldn't have to wait until you get your job to find this out - go ahead and ask for a copy of the SPD! If you roll over to your employer plan, you'll give up control but you'll be able to take advantage of backdoor Roth conversions going forward.

[tex]

DMFA wrote:

All you will put on there is a non-deductible traditional IRA contribution where it says “Did you make any non-deductible traditional IRA contributions this year?” It will trick you because it says “this is not common” and will pre-fill the “no” button. Here is a tutorial with pictures: https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html

Click to expand...

First of all, cheers for the very clear response from DMFA. Question about the quote above... The turbotax prompts at finance buff and my 2016 copy say "non-deductible contributions in 'TAX YEAR - 1' and prior years"

If this is somebody's FIRST backdoor (2016 contribution - reported this year, 2017 conversion - reported next year), wouldn't the answer to this question be no? Since previous tax filings didn't have non-deduct tIRA contributions?

Not at home so can't play with it to see how it changes the forms.