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Guide to backdoor Roth IRAs

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  • Guide to backdoor Roth IRAs

    There have been so many questions this year about backdoor Roth IRAs that I decided to make Roth IRAs the theme of our newsletter for this month. My featured blog post is Explaining Backdoor Roth IRAs, which I hope somebody finds helpful.

    If you'd like to subscribe to our newsletter for more doctor-specific financial information, go to any page of our website and click on the SUBSCRIBE NOW box in the lower right-hand side of the page. I promise you won't be spammed incessantly with mind-numbing sales drivel + you can unsubscribe with only one click.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

  • #2
    Most common questions being what to do after the calendar year ends, i.e. making your non-deductible trad IRA contribution or deductible SEP-IRA for 2016 in 2017, and then doing the Roth conversion of non-deducted TIRA and 401(k) rollover of SEP contributions, I think.  That seems to have tripped up several people on the boards lately.

    Comment


    • #3
      I agree. I tried explain how/why they work the way they do and then distill down to a 3-step process without writing a book. Maybe it will answer questions for a few folks.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4




        I agree. I tried explain how/why they work the way they do and then distill down to a 3-step process without writing a book. Maybe it will answer questions for a few folks.
        Click to expand...


        That's my biggest shortcoming, I think, in explaining everything from medicine to money.  I don't know when to be short/simple and when to be long/complex.  Talking about the SEP probably applies to a narrow audience and would probably serve as a distractor.

        I think the article is done very well, for whatever that's worth coming from a non-expert.

        Comment


        • #5
          I appreciate that, but I consider you an expert...armchair expert, perhaps?
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            Thank you for the great post. I was late to the game and made my 2016 contribution to TIRA on 1/3/2017 and then converted it to a Roth a few days later. This is my first ever IRA contribution. If I understand correctly, I am only concerned about reporting my TIRA contribution and will worry about the conversion when I file my 2017 taxes. I'm using Turbo Tax. I'm having a little trouble filling out form 8606. I'm guessing it's easiest just to manually fill it in and then submit it with my turbotax papers. Given my situation, does my line 8 = $0?

            Comment


            • #7




              Thank you for the great post. I was late to the game and made my 2016 contribution to TIRA on 1/3/2017 and then converted it to a Roth a few days later. This is my first ever IRA contribution. If I understand correctly, I am only concerned about reporting my TIRA contribution and will worry about the conversion when I file my 2017 taxes. I’m using Turbo Tax. I’m having a little trouble filling out form 8606. I’m guessing it’s easiest just to manually fill it in and then submit it with my turbotax papers. Given my situation, does my line 8 = $0?
              Click to expand...


              Glad you enjoyed it. Yes, your line 8 on form 8606 is zero because your conversion is in 2017, not 2016. I'm surprised you have to manually complete it, though. Surely TT allows you to complete form 8606 along with the rest of your tax return.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                I am a little late to the game for the backdoor Roth IRA, but better late than never!  Love this site and all of the useful information.  A few questions:

                1)  I have funds in several IRAs, including a SEP-IRA (maxed out 53k each year).  What can I do now?  Am I at a cost disadvantage due to the pro rata rule to contribute for 2016?

                2)  Moving forward, I plan to move all IRAs into a solo 401k before 12/31/17 so that I may contribute $11,000 (for wife and I) into backdoor Roth for tax year 2017.  Should I do this asap, or does it matter when you contribute?

                3)  Is it best to contribute on January 1 of the tax year (and then convert on January 2)?

                Comment


                • #9
                  I know this is probably a silly technical question, but next year my husband and I will have to do backdoor Roths (this year we were able to do it directly).  When doing backdoor Roth IRAs, will we both need to open/contribute to individual TIRAs or can we just open one TIRA account and then move $5,500 to each of our Roth IRAs?  In case it's relevant, we are married filed jointly and in the next two years I plan on becoming a stay at home parent.

                  Comment


                  • #10
                    Two things you need to know:

                    1. December 31 is the only day that matters when converting to a Roth IRA via the back door.

                    2. There is no tax impact from contributing to a nondeductible TIRA.


                    Therefore, go ahead and contribute to your nondeductible TIRAs for 2016, move your pre-tax TIRAs to SOLO-401k's before 12/31/17, and convert at any point during the year 2017.

                    For a long-term game plan, it is best to contribute to your IRA each year as early as possible and convert soon thereafter. I won't tell you how long to wait. Nobody has anything beyond an opinion on that.
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11




                      I know this is probably a silly technical question, but next year my husband and I will have to do backdoor Roths (this year we were able to do it directly).  When doing backdoor Roth IRAs, will we both need to open/contribute to individual TIRAs or can we just open one TIRA account and then move $5,500 to each of our Roth IRAs?  In case it’s relevant, we are married filed jointly and in the next two years I plan on becoming a stay at home parent.
                      Click to expand...


                      You cannot have joint IRAs, just like you cannot have joint 401ks. An IRA is an Individual Retirement Account.
                      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                      Comment


                      • #12
                        That's what I thought so thanks for confirming Johanna!

                        Comment


                        • #13




                          Two things you need to know:

                          1. December 31 is the only day that matters when converting to a Roth IRA via the back door.

                          2. There is no tax impact from contributing to a nondeductible TIRA.


                          Therefore, go ahead and contribute to your nondeductible TIRAs for 2016, move your pre-tax TIRAs to SOLO-401k’s before 12/31/17, and convert at any point during the year 2017.

                          For a long-term game plan, it is best to contribute to your IRA each year as early as possible and convert soon thereafter. I won’t tell you how long to wait. Nobody has anything beyond an opinion on that.
                          Click to expand...


                          Thank you!

                          Comment


                          • #14




                            I am a little late to the game for the backdoor Roth IRA, but better late than never!  Love this site and all of the useful information.  A few questions:

                            1)  I have funds in several IRAs, including a SEP-IRA (maxed out 53k each year).  What can I do now?  Am I at a cost disadvantage due to the pro rata rule to contribute for 2016?

                            2)  Moving forward, I plan to move all IRAs into a solo 401k before 12/31/17 so that I may contribute $11,000 (for wife and I) into backdoor Roth for tax year 2017.  Should I do this asap, or does it matter when you contribute?

                            3)  Is it best to contribute on January 1 of the tax year (and then convert on January 2)?
                            Click to expand...



                            1. No. It will create a non-deductible basis for 2016, but as long as the balance of all pretax IRAs is zero on 12/31 of the year of *conversion*, this should fly. You may consider keeping your non-deductible and deductible traditional balances in separate accounts, though, to facilitate rolling over pretax to 401(k) and converting already-taxed to Roth.

                            2. No point in waiting, but the only day that matters is the last of the year of conversion (in this case, 12/31/2017), since that's what shows on form 5498 and is used for figuring taxable amounts for Roth conversions. One does not have to precede the other this year, but I don't think you can do SEP and 401(k) contributions in the same year - check my work on that.

                            3. Banks are closed on New Year's Day, lol...but yes, no point in waiting. Contribute the max ($5,500 to each acct, or $6,500 of age 50+) on Jan 2 and do the Roth conversion as soon as the funds clear. It is exceedingly unlikely you'll earn anything in your sweep account in that short period to make anything taxable. "Time in" > "timing" imo. As an aside, choose a custodian that won't close the account when it goes back to zero to keep things easy. Fido and VG both don't close them, and their process takes like 5 min tops.

                            Comment


                            • #15







                              I am a little late to the game for the backdoor Roth IRA, but better late than never!  Love this site and all of the useful information.  A few questions:

                              1)  I have funds in several IRAs, including a SEP-IRA (maxed out 53k each year).  What can I do now?  Am I at a cost disadvantage due to the pro rata rule to contribute for 2016?

                              2)  Moving forward, I plan to move all IRAs into a solo 401k before 12/31/17 so that I may contribute $11,000 (for wife and I) into backdoor Roth for tax year 2017.  Should I do this asap, or does it matter when you contribute?

                              3)  Is it best to contribute on January 1 of the tax year (and then convert on January 2)?
                              Click to expand…



                              1. No. It will create a non-deductible basis for 2016, but as long as the balance of all pretax IRAs is zero on 12/31 of the year of *conversion*, this should fly. You may consider keeping your non-deductible and deductible traditional balances in separate accounts, though, to facilitate rolling over pretax to 401(k) and converting already-taxed to Roth.

                              2. No point in waiting, but the only day that matters is the last of the year of conversion (in this case, 12/31/2017), since that’s what shows on form 5498 and is used for figuring taxable amounts for Roth conversions. One does not have to precede the other this year, but I don’t think you can do SEP and 401(k) contributions in the same year – check my work on that.

                              3. Banks are closed on New Year’s Day, lol…but yes, no point in waiting. Contribute the max ($5,500 to each acct, or $6,500 of age 50+) on Jan 2 and do the Roth conversion as soon as the funds clear. It is exceedingly unlikely you’ll earn anything in your sweep account in that short period to make anything taxable. “Time in” > “timing” imo. As an aside, choose a custodian that won’t close the account when it goes back to zero to keep things easy. Fido and VG both don’t close them, and their process takes like 5 min tops.


                              Click to expand...


                              Awesome info!

                              Comment

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