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2021 Backdoor Roth IRA Home Base

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  • 2021 Backdoor Roth IRA Home Base

    Here is my pre-emptive update for 2021.
    Seriously, please post any info you want added (blog posts, info, etc), and post questions here about completing a successful bdrIRA.

    Enjoy.

    – !!! STOP. DO NOT PASS GO. DO NOT COLLECT $200 !!!

    Read all the blog posts. Do nothing until you understand the steps and know what accounts you have and your projected income for the year. Repeat, STOP and pay attention. Please ask questions here before you do anything if something is unclear.

    Again, STOP.

    General Overview

    – So whats the point of all this?
    You make too much money fancy pants high earner to get a tax deduction from a tIRA contribution. However, you can still contribute, nothing changes on your taxes, and you have more money in an IRA now. Good, its protected.
    However, once it comes time to remove that money, the gains are taxed as income.
    So you got no deduction on the way in, you did get tax free growth over the years, but the gains are taxed on the way out. Not the most efficient choice.

    Now, you also make too much money to directly contribute to a rIRA.
    Some history, congress changed the law >10 years ago that removed the income restriction on conversions which was the hold up in the past. Now, you can contribute to the tIRA, its nondeductible, and then convert that money to a rIRA without restriction.
    Since its nondeductible, and a conversion is a taxable event, the taxes on money already taxed is…$0.
    So now you still didn’t get the deduction on the way in, you still get tax free growth over the years, but now everything is tax free on the way out. Way more efficient.

    But peds, I want to save taxes because I am a high earner and omg taxes keep me from buying houses/teslas/spouses, why do I even bother with this?
    Because you need all the sheltered space you can get. You fill up workplace plans and IRAs. Its not either/or. Protected money is the whole point.

    Blog posts:
    – WCI Ultimate Guide: https://www.whitecoatinvestor.com/ba...-ira-tutorial/

    – Finance Buff Complete Guide: https://thefinancebuff.com/the-backd...te-how-to.html

    - PoF bdrIRA Step by Step Guide: https://www.physicianonfire.com/backdoor/

    – WCI Screw Up bdRIRA: https://www.whitecoatinvestor.com/17...door-roth-ira/

    – Finance Buff Unplanned Roth IRA: https://thefinancebuff.com/unplanned-backdoor-roth.html

    – WCI Fix Your Screw Ups: https://www.whitecoatinvestor.com/fi...ira-screw-ups/

    -- Finance Buff Report Backdoor Roth Taxes: https://thefinancebuff.com/backdoor-...made-easy.html

    – WCI IRA Re-characterizations: https://www.whitecoatinvestor.com/ir...acterizations/

    – WCI Leftover Interest: https://www.whitecoatinvestor.com/pe...door-roth-ira/

    – WCI Its been 10 years, Professionals Should Know This: https://www.whitecoatinvestor.com/ce...door-roth-ira/

    – Finance Buff Report HR Block: https://thefinancebuff.com/how-to-ba...-software.html

    – Finance Buff Report FreeTaxUSA: https://thefinancebuff.com/how-to-ba...reetaxusa.html

    – Finance Buff Report TurboTax: https://thefinancebuff.com/how-to-re...-turbotax.html

    Common questions/scenarios

    – I/spouse have an existing tIRA/SEPIRA/SIMPLEIRA and I want to….STOP.

    – Do I need to open a tIRA/rIRA? Yes you have to create these accounts.

    -- Can I use old ones? Yes. Makes it easier.

    -- Wont my tIRA disappear now that its zero? No the account wont close after.

    -- So every year I have to make new ones? No you'll use the same ones next year. Or new ones, go crazy.

    – I heard I want to dollar cost average, what time frame should I use? No. Lump sum, lump convert immediately.

    – I don’t have 6K yet, should I add money over X period of time as I save up? No. Save up, them lump sum, lump convert immediately.

    – My method involves daily contribution of $16/some other equally crazy scheme/etc is this fine? No. Lump sum, lump convert immediately.

    – Wow haven't you guys heard about this step doctrine thing? Please google TCJA.

    – I sent money in but it wont let me do anything yet? Yes it has to settle, yes you have to wait, yes you'll have to come back and then convert it when its ready.

    – I want to invest in stocks/bonds/BTC/TSLA before converting, what do I pick? No, just use a money market fund.

    – My account grew to $6,XXX.XX, what do I do/is it too much/do I only convert 6K/etc. Yes, convert it all, choose 100%. Gains are taxed.

    -- But peds you said no taxes and now you say I am getting taxed, ugh I hate taxes! Assuming you converted in a matter of days, you will have <$2 in this current interest rate environment. In the 24% bracket, that's $0.48 in tax. Haven't you noticed the tax forms always round? So that’s $0 in tax still.

    – My account shrunk to $5,XXX.XX, what do I do/can I add more/should I wait till it comes back? I said use a MM fund. No, you cant add more as you already hit the 6K maximum. Convert 100%.

    – Isn’t the market going to plummet (insert whatever reason here)/shouldn't I wait for a RBD? Doesn't matter. It’s 6K. This isn’t a lot of money. A 50% drop (3K) will be eclipsed next year by a 200% contribution (another 6K).

    – I have $X.XX leftover after the conversion, what now? I said do 100%. Convert it again, it doesn’t matter if it’s twice, yes you’ll pay tax on it. Make sure you select 100% next time.

    – But I already contributed to my 401k/401a/403b/gov 457/nongov 457/SEPIRA/SIMPLEIRA/grandmas retirement party fund, can I still contribute to an IRA? Yes, IRAs are individual. Nothing affects the contribution limit of 6K/person/year.

    – But I did an IRA/401/403/457/etc rollover/conversion already, do I still get 6K? Yes, IRAs are individual. Nothing affects the contribution limit of 6K/person/year.

    -- No you dont understand peds I have to rollover more than 6K, so am I limited to 6K because that's the limit? No, conversions and contributions are not the same thing. You can rollover/convert 1MM and still contribute 6K. Nothing affects the contribution limit of 6K/person/year.

    – My spouse has X problem, can I still do my own? Yes, IRAs are individual. Spouse does not affect you and vice versa.

    -- My spouse doesn't have an account yet, can I just use mine? No, they are individual. Each person needs their own accounts.

    – It says what year do I want to contribute for? Please choose correct year.

    – I just did 2020, when can I do 2021? There is no waiting period, immediately. Lump sum, lump convert immediately.

    – I haven't done 2020, can I do 2021 at the same time? You can do them at the same time until April tax day. Lump sum, lump convert immediately.

    – When can I do 2021? Until 2022 April tax day. Lump sum, lump convert immediately.

    – I haven't done 2019, when can I do it? Too late….

    – I will make less than the limit, what should I do? Nothing, normal rIRA.

    – I will make more than the limit, what should I do? Everything, backdoor rIRA.

    – I don’t know how close I’ll be to the limit, what should I do? Anyone can do a backdoor rIRA. It just involves completing the steps and submitting the forms. The IRS doesn't care if you make extra work for yourself. But it saves you a huge hassle if you were wrong. Do a preemptive bdrIRA.

    – I am in the phase out limit, should I calculate and contribute the exact amount? No. Do a preemptive bdrIRA and always contribute the max 6K.

    – Wait I was above the limit and did a direct contribution, what now? Re-characterize.

    – Wait I was above the limit the past few years and I/spouse/accountant/CPA/yoda/etc didn't catch it? You need to fix all those years, re-characterize, file forms, pay tax, etc. because you didn't qualify for direct Roth and you don't want the IRS finding out and penalizing all that money.

    – When I choose convert/exchange/etc a warning pops up that this is taxable, I hate taxes, peds you said no taxes multiple times now, ugh taxes, what do I do? You are using a nondeductible tIRA aka post tax money, therefore no taxes owed except for gains. This is a blanket statement as all tIRA to rIRA conversions are taxable events.

    – When do I file form 8606, the same week/month/etc? You file with your taxes, so next year.

    – Wait my past taxes never had form 8606, what now? Assuming you did the correct process just send in form 8606 for the missing years.

    – I/spouse have an existing inherited IRA, what now? Doesn't matter, not counted in pro-rata since its technically not yours.

    – I haven't earned 6K yet, can I still contribute Jan 1? As long as in the calendar year you and/or spouse earn >6K you can contribute anytime. The IRA doesn't know what date you got there.

    – I don’t work but my spouse does, can I contribute? Yes, while IRAs are individual the qualified income can be from spouses.

    – Im giving my kid money for picking up their toys, this is a full time job imo, can they open a Roth IRA? No, please google qualified income.

    – I am old(er) and can do 7K, can I do it all? Yes, over 50 gets catch up.



    – Isnt the market closed on Jan 1? ….Sorry, what’s your question….?
    Last edited by Peds; 01-05-2021, 04:13 PM.

  • #2
    This is a fantastic resource. I think you should be promoted to Lead Moderator, with a commensurate increase in pay.

    Comment


    • #3
      Originally posted by VagabondMD View Post
      This is a fantastic resource. I think you should be promoted to Lead Moderator, with a commensurate increase in pay.
      thanks.

      hard pass, but ill take the money and run!

      Comment


      • #4
        Cue the numerous posts about backdoor Roth questions and screw ups.

        Nice post.

        Comment


        • #5
          is this the longest post by peds ever?!

          Comment


          • #6
            Originally posted by JBME View Post
            is this the longest post by peds ever?!
            Yes.

            Comment


            • #7
              Originally posted by JBME View Post
              is this the longest post by peds ever?!
              Yes

              Comment


              • #8
                Originally posted by JBME View Post
                is this the longest post by peds ever?!
                Peds was saving up for this one!

                Comment


                • #9
                  have you decided which building you’ll jump off when the first thread show up Jan 3?

                  Comment


                  • #10
                    Bump - because the forum is starting to resemble the gym on January 2nd.

                    Comment


                    • #11
                      Originally posted by VagabondMD View Post
                      This is a fantastic resource. I think you should be promoted to Lead Moderator, with a commensurate increase in pay.
                      I’ll contribute $5 to the cause. Seriously,Peds, thank you for this post. It had to take a lot of work. Agree you s/b lead moderator as a result of your demonstrated dedication to going above and beyond for the readers and participants here.
                      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                      Comment


                      • #12
                        Originally posted by VagabondMD View Post
                        This is a fantastic resource. I think you should be promoted to Lead Moderator, with a commensurate increase in pay.
                        I propose we triple his current pay!

                        Comment


                        • #13
                          Originally posted by Hank View Post

                          I propose we triple his current pay!
                          When you have no number in front of the 0, does 000 make it better?

                          Comment


                          • #14
                            Originally posted by SLC OB View Post

                            When you have no number in front of the 0, does 000 make it better?
                            Yes

                            Comment


                            • #15
                              I need some help.

                              I logged on to my wife's vanguard account today (1-2-21) to make the 2021 contribution to her TRADITIONAL IRA for the 2021 back door, and noticed that there was $0.51 in her Traditional IRA account.

                              I have done the back door roth for her account the past 4 years and always thought I had emptied out the traditional IRA but when I look back at the transactions, last year on 1-13-20, there was dividend paid out of $0.51 after I already did the conversion and I never logged back into the account to see it.

                              That means that there was NOT a zero balance in all her other IRA accounts and I guess Im subject to the Pro Rata Rule. Other than filling out the 8606 correctly, is there anything else I need to do?

                              Can I convert it today for the year 2020 since it has been holidays or weekend since Thursday the 31st?

                              What are the actual reprecussions of this?

                              I am also frustrated by the fact that Vanguard wont let me choose to direct any future dividends from this account to a bank account because im under 59.5.

                              So this could happen again next year unless I go back in and convert the dividends at a later date?

                              Comment

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