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Is contributing to a Roth IRA through the backdoor as simple as it seems?

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  • Is contributing to a Roth IRA through the backdoor as simple as it seems?

    This is my first year as an attending making enough money my husband and I can not long put money into a Roth IRA directly. We currently do not have any traditional IRAs. We do have Roth IRAs. I have a 401K at my current place of employment. My husband has a 403b at his current job and a 403b with his previous job. From what I understand, all I have to do is 1) open a traditional IRA for each of us 2) contribute $5500 to each account, 3) convert/transfer the $5500 to our Roth IRAs one day later. 4) Fill out tax forms next April. Is it really that simple?


  • #2
    Yes

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    • #3
      yes.

      5 years for me

      3 for my wife

      easiest financial chore of the year.

      either do your own turbotax or make damned sure your tax preparer understands this.

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      • #4
        yup. theres a step by step guide on WCI and financebuff.

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        • #5
          Polaris - Have you considered the Step Transaction Doctrine in that strategy?
          If I had to choose between investment analysis and my mountain bike, I'd choose the mountain bike 100% of the time.

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          • #6




            Polaris – Have you considered the Step Transaction Doctrine in that strategy?
            Click to expand...


            are you serious?

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            • #7
              No idea what the Step Transaction Doctrine is

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              • #8
                Step Transaction Doctrine is an IRS doctrine defined by the IRS as where you use more than one step on order to evade taxes. In other words, you use a two step process; a non-deductible traditional IRA contribution followed by a Roth conversion to avoid the Roth IRA contribution income limits.

                The largest purveyor of this Fear, Uncertainty and Doubt (FUD) mantra is Michael Kites who has based his entire premise based on third hand information about a couple of IRS agents declaring that a Backdoor Roth was a step transaction and thus not allowed.

                In my opinion the entire line of reasoning is bogus for the following reasons:

                1. To my knowledge this has never been verified or replicated to any degree.

                2. The time frame was right after the $100K MAGI limit for Roth conversions were removed in 2010. So it was a totally new concept then. We have not heard anything since.

                3. Michael Kites basic premise that you should wait a year between the non-deductible traditional IRA and the Roth Conversion. Which is a complete oxymoron, when you consider that there is ample precedent that elapsed time does not alleviate step transaction concerns.

                4. Different IRS spokesmen stated to Financial Planning Magazine and the Wall Street Journal and other IRS personnel at IRS conferences have repeatedly stated that: "There is no caveat to waiting" and "This is settled law." Michael Kite's response was essentially that he knows better than the IRS and IRS' opinion is not a Tax court ruling.

                5. To pour salt in his wounds the IRS released Notice 2014-54, which essentially blessed the so called Mega Backdoor. Which allows tens of thousands of dollars of after-tax contributions followed by a direct rollover to a Roth IRA account. Starting next year, someone could actually do a Mega Backdoor rollover of $55K, ten (10) times a $5.5K Backdoor Roth. The Backdoor Roth is a problem, I think not.

                6. Why did the Obama administration include in the blue print for their last two budgets, proposed legislation to prohibit both the Backdoor Roth and the Mega Backdoor Roth. They were never shy about executive overreach, so why would they propose legislation to outlaw the backdoor Roth if it could be prohibited by IRS under current law.

                7. Finally, earlier this year the U.S. 6th Circuit Court of Appeals ruled in related case that the IRS could not use the “substance-over-form doctrine,” AKA step-transaction doctrine to deny the ability to use two perfectly legal steps to avoid the Roth contribution limit. Here is one quote from the ruling; "But the substance-over-form doctrine does not authorize the Commissioner to undo a transaction just because taxpayers undertook it to reduce their tax bills." and this direct reference to the Backdoor Roth; "Those rollovers permit high-income taxpayers to avoid the income limits on Roth IRA contributions, just as the DISC permitted Summa Holdings to avoid the contribution limits. The Commissioner cannot fault taxpayers for making the most of the tax-minimizing opportunities Congress created."

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                • #9
                  That, and converted money has different fundamental properties than directly-contributed Roth money (such as the five-year rule)...so since the end result isn't completely substantially equal, the step doctrine shouldn't even apply in the first place.

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                  • #10
                    Can you still do a Backdoor Roth if you have a sep-Ira for a 1099 side gig?

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                    • #11
                      I don’t even wait a day. At Schwab I can do the steps back to back on the same day and be done. I asked them if I should wait a day for record keeping on their end. They said no.  The whole process is done online in a few minutes.

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                      • #12




                        Can you still do a Backdoor Roth if you have a sep-Ira for a 1099 side gig?
                        Click to expand...


                        You can always do a backdoor Roth IRA. The question you need to be asking is, "Can you do a nontaxable backdoor Roth if you have a SEP IRA?" The answer to that question is, "No, but you can set up a solo-401k for that side gig and roll your SEP into it" then proceed.

                        When to Convert to a Backdoor Roth IRA

                        The Pro-Rata Rule: A Backdoor Roth Landmine
                        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                        • #13
                          May I ask a follow-up question? My husband already owns a Roth IRA Brokerage account through Vanguard. My understanding of the process is that he can use this existing account for the conversion. Is this correct? So, he will need to:

                          1. First, open a Traditional IRA with Vanguard.

                          2. Contribute to THAT account.

                          3. Roll the money into the EXISTING Roth account.

                          Do I have this correct? And he can open a Traditional IRA even though his income is over the limits for contributing to a Traditional IRA?

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                          • #14




                            May I ask a follow-up question? My husband already owns a Roth IRA Brokerage account through Vanguard. My understanding of the process is that he can use this existing account for the conversion. Is this correct? So, he will need to:

                            1. First, open a Traditional IRA with Vanguard.

                            2. Contribute to THAT account.

                            3. Roll the money into the EXISTING Roth account.

                            Do I have this correct? And he can open a Traditional IRA even though his income is over the limits for contributing to a Traditional IRA?
                            Click to expand...


                            You have the steps correct. Yes, anyone with enough earned income and open and contribute to a TIRA.

                            Here's a thought about your idea, though: An original contributory Roth IRA (to which you have made direct contributions) has special properties that conversion IRAs do not have. Roth IRAs that receive contributions from rollovers and conversions are subject to a "5-year rule" that prohibits you from taking distributions from the account for 5 years without tax and penalty implications. I typically suggest keeping these accounts separate, just in case. However, if you are sure the account will not be touched for at least 5 years, there should be no problem with combining them for simplicity's sake.
                            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                            Comment


                            • #15
                              Thank you so much for taking the time to respond. So, are you suggesting it might be better for him to open a second Roth IRA - one that would be used exclusively for this Backdoor conversion process - and leave his origional Roth IRA alone?

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