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  • Quick Backdoor Roth question

    I completed my backdoor Roth this year and my wife received a 1099 in the mail. She had a previous 403B through her employer but is no longer working at the local hospital. They transitioned her 403B to a custodial IRA which I was not aware of. Does this custodial IRA count as having money in an IRA at the end of 2021 and can I expect to be taxed on this for the year?

    Thanks in advance,
    Matt

  • #2
    Yes the custodial IRA counts. What matters is when did she complete her 2021 BDR? If the conversion for the 2021 tIRA contribution occurred in 2022 there is no pro-rata tax issue for 2021 since this is determined by calendar year. If done prior to 12/31/21 then yes. To not be subject to this in 2022 she would have to rollover this IRA to either her current retirement plan if working and participating, a solo 401k plan if she has 1099 income, or Roth convert it.

    Comment


    • #3
      I see a couple of pronouns used in the original post. I and She.

      The pro-rata rule is indivual because IRAs are Individual. Who completed the backdoor roth?

      If you had no IRA but she did, then you would not have the pro-rata rule on your form 8606. However she would have to pay pro-rata taxes on her conversion if she completed a backdoor roth. And obviously if you are filing jointly then you'd be jointly liable for her conversion but not yours.

      Comment


      • #4
        I apologize for the confusion.

        I complete backdoor Roth's for both my wife and I. I do not have an IRA but she has the custodial IRA from her previous 403B. The conversion was prior to 12/31/21 so it looks like there will be pro-rata taxes for 2021.

        For 2022, I already contributed 6000 to both accounts and did the backdoor conversion prior to my knowledge of the custodial IRA. Is it possible to still convert this IRA to a Roth or will the max contribution already have been met?

        Comment


        • #5
          Rollovers or conversions are not subject to and do not impact contribution limits. The only date that matters for prorata taxation of Roth conversions is 12/31.

          You will have file an amended 2021 1040X return with an amended 2021 Form 8606. You will include the new found IRA's 12/31/21 balance on Line 6 of Form 8606. This will result in a prorata conversion of both non-deductible basis and pre-tax balances. The pre-tax prorata amount will be taxable. The contents of that IRA will now be part non-deductible basis and part pre-tax balance.

          If the pre-tax balance in that account can be rolled over to a 401k, 403b or 457b by 12/31/22, the remaining non-deductible basis can also be converted this year with little to no tax liability. Otherwise, both the remaining non-deductible and pre-tax balances can be converted with a tax liability.

          In either case you should be doing another Roth conversion. The size of that conversion and the tax liability depends on the ability to rollover. Make sure you know what you can and want to do before doing any additional Roth conversion(s) this year.

          Comment


          • #6
            Originally posted by Schwgrrudy View Post
            I apologize for the confusion.

            I complete backdoor Roth's for both my wife and I. I do not have an IRA but she has the custodial IRA from her previous 403B. The conversion was prior to 12/31/21 so it looks like there will be pro-rata taxes for 2021.

            For 2022, I already contributed 6000 to both accounts and did the backdoor conversion prior to my knowledge of the custodial IRA. Is it possible to still convert this IRA to a Roth or will the max contribution already have been met?
            You can convert the custodial IRA to Roth. There is no limit on how much you can convert to Roth, the only limit is on how much you can contribute to an IRA, $6K ($7K if over 50).

            Comment


            • #7
              Thank you both for the help. I have changed form 8606 for my wife to show the IRA balance and will plan to convert her custodial IRA to Roth soon.

              Comment


              • #8
                Originally posted by Schwgrrudy View Post
                I apologize for the confusion.

                I complete backdoor Roth's for both my wife and I. I do not have an IRA but she has the custodial IRA from her previous 403B. The conversion was prior to 12/31/21 so it looks like there will be pro-rata taxes for 2021.

                For 2022, I already contributed 6000 to both accounts and did the backdoor conversion prior to my knowledge of the custodial IRA. Is it possible to still convert this IRA to a Roth or will the max contribution already have been met?
                As everyone mentioned, there is no limit on conversion. Its good that you have done BDR for this year.
                You have 2 options for your wife's custodial IRA.
                1. Convert it to Roth and pay the tax if it is a small amount and you have cash to pay for the tax.

                2. Roll it over to her retirement account either employer 401k/403B or Solo 401K if self employed with 1099 income. If you need to open a solo 401k as a independant contractor, make sure you don't do that with Vanguard as they don't allow rollover of IRA to retirement account.

                Comment


                • #9
                  Originally posted by FireFox View Post
                  If you need to open a solo 401k as a independent contractor, make sure you don't do that with Vanguard as they don't allow rollover of IRA to retirement account.
                  While I have no first hand experience, this no longer appears to be true.

                  Comment


                  • #10
                    Originally posted by spiritrider View Post
                    While I have no first hand experience, this no longer appears to be true.
                    I don't have personal experience too but heard at Jim's podcast many times

                    Comment


                    • #11
                      Originally posted by FireFox View Post
                      If you need to open a solo 401k as a independant contractor, make sure you don't do that with Vanguard as they don't allow rollover of IRA to retirement account.
                      Rollovers of pre-tax assets are now permitted according to VGs info site:
                      https://investor.vanguard.com/accoun...dual-solo-401k
                      Never could figure out why they wouldn’t allow it in the past.

                      Comment


                      • #12
                        Originally posted by FireFox View Post
                        I don't have personal experience too but heard at Jim's podcast many times
                        While this certainly used to be true, you are missing my point.

                        Vanguard has changed their i401k IRA rollover policy. Many people have reported in the last 9-10 months that they have been able to do IRA rollovers to Vanguard's Individual 401k.

                        Comment


                        • #13
                          A side question- If you are going to roll an old 401k ultimately to a Roth IRA. I have already done a backdoor Roth IRA contribution of 6k and conversion for the year. Is it easier to roll the old 401k over to my traditional IRA and then convert it to my Roth IRA or should I have it directly transferred from the old 401K to my Roth IRA. I realize that I am going to be paying taxes on the amount converted either way. Rep at Vanguard said they recommend rolling the amount to the TIRA (pretax to pretax) and then converting it to my Roth. Will this rollover mess anything up with the backdoor Roth conversion I've already done this year as long as I ultimately get it rolled over/converted to my Roth this year? I just want to make sure that I avoid any pro-rata issues and that the rollover doesn't count as a contribution. Any insight is much appreciated.

                          Comment


                          • #14
                            I find it hard to believe that Vanguard recommends taking the extra step of rolling over to a traditional IRA and then doing a Roth conversion. This sounds like a rep that has no idea what they are doing.

                            Doing a direct Roth rollover is a far superior single step requiring no interaction with Form 8606. Rolling over to the traditional IRA first introduces another risk of error, subjects the assets to potential taxable earnings and provides absolutely no benefit.

                            Comment


                            • #15
                              This is what was on their website. It is also what the representative told me from vanguard. On the paperwork for the rollover from Schwab I can select to have it rolled over directly to the Roth IRA account at Vanguard. Attached is a screen shot of the vanguard website. Am I still ok to proceed with a 401k rollover directly to the Roth IRA account at vanguard ?
                              Attached Files

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