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Specific Backdoor Roth IRA Scenario

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  • Hank
    replied
    Better to have the gains over the last two years and pay some taxes than to have the "simplicity" and lost opportunity cost of leaving it in cash.

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  • cspanman
    replied
    Originally posted by billy View Post
    Excluding the stupidity of not gaining any returns.- This actual helps you in the backdoor process, no gains = no taxes due. Dont invest the money until after its converted to roth when you do this in future years.
    Totally agree. By stupidity, I meant leaving the money sitting there for 2 years, instead of doing the RIRA conversion and then investing.

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  • billy
    replied
    Excluding the stupidity of not gaining any returns.- This actual helps you in the backdoor process, no gains = no taxes due. Dont invest the money until after its converted to roth when you do this in future years.

    Leave a comment:


  • cspanman
    replied
    Thanks everyone for the great feedback.

    DAK
    Looking back through my tax forms, I did file an 8606 in 2019. But I did not for 2020. So I will go figure out a way to do that.
    I am walking through the calculations for the 8606 I will file in 2021, which will include another $6000 contribution to my TIRA and then a full rollover of the $18000 to a RIRA.

    Ozarka/artemis
    None of the contributions were tax deductible. So I should be good here...

    jfoxcpacfp
    1. Good differentiation :-)
    2. I will make sure the balance is $0 at the end of this year.
    3. I see that now as I actually walk through the calculations on form 8606. Line 8 just asks you for the total net amount you converted in the tax year, not individual contributions.

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  • jfoxcpacfp
    replied
    1. No, there was no problem with contributing to your TIRA over multiple years before converting. I wouldn’t say you were stupid, just ignorant, which is very different.
    2. There will be no tax implication unless you have a balance in a pre-tax IRA on 12/31/21. This includes SEP IRAs and SIMPLE IRAs.
    3. Ozarka is correct, you can convert as many times as you want in any time period. Some people actually do mini-backdoor Roth maneuvers each month of the year to DCA (Dollar Cost Average). Seems like a big headache, but perfectly acceptable.
    Welcome to the forum!

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  • artemis
    replied
    Originally posted by Ozarka View Post
    I think the main concern from performing a back door Roth conversion from an existing Trad IRA is the pro rata rule when there are gains in the Trad IRA. I will defer to others but in this case I don't believe there would be any tax implications as there are essentially no gains in your Trad IRA, or if there are any tax implications it would be minimal and rounded up/down from the interest gained..
    That depends on whether the contribution to the traditional IRA was tax-deductible. If it was, then the tax-deduction figures in as well as the gains.

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  • Ozarka
    replied
    I think the main concern from performing a back door Roth conversion from an existing Trad IRA is the pro rata rule when there are gains in the Trad IRA. I will defer to others but in this case I don't believe there would be any tax implications as there are essentially no gains in your Trad IRA, or if there are any tax implications it would be minimal and rounded up/down from the interest gained.

    Again will defer to others, but I don't think there are any issues regarding the number of conversions. It's more about the tax year contribution.

    Leave a comment:


  • DAK
    replied
    Have you tried to fill out an IRS form 8606?

    Working through the form should answer your question (note the summation of all IRAs/conversions during a year)

    You may want to go back and file form 8606 for years 2019 and 2020. I think you can send it in on its own without having to file an amended return. Then be sure to file form 8606 for tax year 2021 as you dont want to pay tax on the 1099-R that will be issued when you convert in 2021.

    Leave a comment:


  • cspanman
    started a topic Specific Backdoor Roth IRA Scenario

    Specific Backdoor Roth IRA Scenario

    Hello! I have a specific Backdoor Roth IRA scenario I am trying to wrap my head around. And would love some help. This is the first time I have tried to do a Backdoor Roth conversion. I have read the great "fix-backdoor-roth-ira-screw-ups/" article on WCI, yet I still have several questions. Here's my situation:
    • I opened a Traditional IRA account in 2019 with Merrill Lynch.
    • In 2019 I put $6000 into the Traditional IRA account. This was after-tax money (ie, money from my paycheck after it hit may checking account). This just sat in a money Market account. Gaining almost nothing. I know... bad. And the $6000 stayed in the account into the next year.
    • In 2020 I put another $6000 into the traditional IRA account. Same deal, money from my paycheck after it hit may checking account. Which also sat in a money market account. Total is $12000. And this $12000 stayed into the account into 2021.
    • Now it's 2021. I have not contributed any money to my IRA yet. So there is $12000 + pennies in my money market account.
    • I just completed a Roth IRA conversion to convert the $12000 + pennies over to my Roth IRA account on July 1st 2021.
    • I still want to contribute another $6000 for 2021 (which I plan to contribute on 8/1/2021 and then immediately do the conversion).
    So my questions are:
    • Was there any issue with my funding of the account in 2019 and 2020, and just leaving the money sitting there? Excluding the stupidity of not gaining any returns.
    • When I did the traditional to Roth conversion of the $12000, lets say on July 1st 2021, is there any tax implication?
    • I have not yet contributed $6000 for 2021, which I plan to do. Is there any issue doing two conversations in the same year? Or just that the balance in my Traditional IRA has to be $0 on December 31st 2021?
    Thanks all in advance :-)
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