Traditional to Roth IRA Conversion

[olbaid07]

Hello.  I'm about to make the Traditional to Roth IRA conversion for the very first time.  Very excited.  I started the process on the Schwab platform and came across the following.  I answer "No" to both correct?  Just checking for the last time.  Thanks!

 

1. Distribution Amount: $5,500.00

2. Tax Withholding Election:

Federal Income Tax Withholding Election: As required by federal law, Schwab will withhold 10.00% from your gross distribution for payment of federal income tax, unless you elect to increase the rate of withholding or elect not to have withholding apply.

No, I do not want federal income tax withheld. Yes, I want federal income tax withheld at the rate of

%

State Income Tax Withholding Election: South Carolina As required by state law, Schwab will withhold South Carolina's minimum withholding rate of 0.00%, as determined by the legal address of record on your account. State tax withholding is voluntary regardless of whether or not you elected to have federal tax withheld.

No, I do not want state income tax withheld. Yes, I want state income tax withheld at the rate of

%

[Michael Solari]

If this is a backdoor Roth conversion and seems like it is  , then yes you shouldn't withhold any taxes. If you have IRA money elsewhere then you would want to withhold some taxes.

[jfoxcpacfp]

olbaid07 wrote:

Hello.  I’m about to make the Traditional to Roth IRA conversion for the very first time.  Very excited.

Click to expand...

You do not want to withhold any taxes on a backdoor Roth conversion - ever. That would reduce the amount of the TIRA available to go into your Roth. Leave the boxes "as is".

Be aware that you will owe some taxes on the transaction if you are, for some reason,

• Making a backdoor Roth conversion and will have pre-tax IRA $ in your name on 12/31/17 (the only day that matters), or you are


• Not doing a backdoor Roth and simply converting a pre-tax IRA to a Roth.

I do not think that will be the case based upon your fact pattern, however.

Celebrate!

[olbaid07]

Thank you for the re-inforcement of my plan.  I executed it and feel like a burden has been lifted off my shoulders.

[olbaid07]

Quick follow-up.  I did the traditional to Roth conversion back in November 2017.  I feel a bit smarter this year and wish to do the same thing again for both myself and my wife.  I also feel that the market will continue to rise in the near future and wish to lock in those gains.  I was hoping to do the deposit and conversion for both my wife and I at the beginning of February.  My questions are:

1) When do I submit the Form 8606 for my transaction in 2017?  (I imagine the answer is in April 2018)

2) When do I submit the Form 8606 for my transactions that will happen in February 2018? (I imagine the answer is April 2019, but just making sure)

3) If the answer to Question #2 is not in April 2019 but April 2018 (this year), is there a benefit to one or the other?

 

As always, thank you forum board warriors for your help.  @jfoxcpacfp !!!

[The Physician Philosopher]

Form 8606 should be filled out for the appropriate tax year. So 2017 contributions should be reported in April of 2018. (2018 contributions reported in April of 2019).

Now there are no limits on conversions. These are reported on your 1040.

I made my first backdoor Roth conversion this year (in January 2018) for tax year 2017. I am going to make another in July for 2018. I'll convert all $22000 in 2018.

Therefore, I file 8606 this April for tax year 2017 for $11000 (spouse and me). I'll file 8606 again in april 2019 for 2018 tax year contributions made in July. However I'll report all $22000 in conversions on 1040 in April of 2019.

Does that make sense?

[DMFA]

The Physician Philosopher wrote:

Form 8606 should be filled out for the appropriate tax year. So 2017 contributions should be reported in April of 2018. (2018 contributions reported in April of 2019).

Now there are no limits on conversions. These are reported on your 1040.

I made my first backdoor Roth conversion this year (in January 2018) for tax year 2017. I am going to make another in July for 2018. I’ll convert all $22000 in 2018.

Therefore, I file 8606 this April for tax year 2017 for $11000 (spouse and me). I’ll file 8606 again in april 2019 for 2018 tax year contributions made in July. However I’ll report all $22000 in conversions on 1040 in April of 2019.

Does that make sense?

Click to expand...

You haven't done this before, evidently.  They're *Individual* Retirement Arrangements. Their documentation is separate, even for joint taxpayers. Conversions are also reported on form 8606, and if backdoor is done properly, there should be *nothing* reported on form 1040 for conversions because none should be taxable.

You'll file separate 8606s. Each 8606 for 2017 will only show $5,500 non-deductible contribution and year-end basis. Each 8606 for 2018 will show $5,500 of prior years' basis, $5,500 non-deductible contribution, and $11,000 of conversion.

If you use tax preparation software like TaxAct, TurboTax, or HRB TaxCut, then you don't directly fill out a form 8606; you'll answer a series of questions that will generate them.

So:

• Your 2017 taxes (due April 2018) will show contributions done *for* 2017 (including "late" contributions made Jan-Apr 2018 made for 2017) and conversions done *in* calendar year 2017


• Your 2018 taxes (due April 2019) will show contributions done *for* 2018 and conversions done *in* calendar year 2018 (regardless of the year for which the converted funds were contributed, such as conversions of "late" contributions)

Questions?

[DMFA]

olbaid07 wrote:

Quick follow-up.  I did the traditional to Roth conversion back in November 2017.  I feel a bit smarter this year and wish to do the same thing again for both myself and my wife.  I also feel that the market will continue to rise in the near future and wish to lock in those gains.  I was hoping to do the deposit and conversion for both my wife and I at the beginning of February.  My questions are:

1) When do I submit the Form 8606 for my transaction in 2017?  (I imagine the answer is in April 2018)

2) When do I submit the Form 8606 for my transactions that will happen in February 2018? (I imagine the answer is April 2019, but just making sure)

3) If the answer to Question #2 is not in April 2019 but April 2018 (this year), is there a benefit to one or the other?

 

As always, thank you forum board warriors for your help.  @jfoxcpacfp !!!

Click to expand...

Your contribution and conversion were both done in calendar year 2017. Hence form 8606 for 2017 (due April 2018) will show zero prior basis, $5,500 non-deductible contribution, $5,500 conversion, zero taxable, and zero remaining basis.

Likewise for 2018. Your contribution *for* any tax year goes on that year's taxes. However, the *conversion* is filed based on the year it was done *in*, regardless of *for* which year the money was contributed. So if you convert on 2018, or will go on your 2018 taxes due in April 2019'

[The Physician Philosopher]

Definitely my first time doing this!

I guess I wasn't specific enough on that and mixed my words regarding the 1040. I recognize that it'll be 5500 each for my wife and me (two separate 8606 tax forms).

I unfortunately made $1 as it sat in the traditional IRA for ten days and a dividend was paid to the account prior to my Roth conversion. So I'll have to report the gain on my 1040.

I meant to say that you should acknowledge the conversion on the 8606 for the year in which it was converted (calendar year) as you stated in the later post. Not the 1040. Sorry for the mistake.

Thanks for clearing that up! Sorry for the confusion.

[DMFA]

The Physician Philosopher wrote:

Definitely my first time doing this!

I guess I wasn’t specific enough on that and mixed my words regarding the 1040. I recognize that it’ll be 5500 each for my wife and me (two separate 8606 tax forms).

I unfortunately made $1 as it sat in the traditional IRA for ten days and a dividend was paid to the account prior to my Roth conversion. So I’ll have to report the gain on my 1040.

I meant to say that you should acknowledge the conversion on the 8606 for the year in which it was converted (calendar year) as you stated in the later post. Not the 1040. Sorry for the mistake.

Thanks for clearing that up! Sorry for the confusion.

Click to expand...

The dreaded $1, lol...however, you only have to take line 10, the proportion of contribution (line 5) to conversion (line 9) to at least 3 decimal places (by which you multiply to find the untaxed portion). So if you gain $2 or less, it still rounds 3 places to 1.000.

5500 ÷ 5503 = 0.9994, so at that point 0.999 * 5503 = $5497, so you'd actually be taxed on $6. However it says *at least* 3 decimal places, so you can take it as far as it benefits you so that the rounding error doesn't result in your contribution appearing lower. I don't know if/where the tax software will round it, but there is often an advanced option to review and edit individual forms. This will, however, take you time to do, and will likely save you no more than about $5 in taxes...so that's honestly probably not the best use of your time.

Might as well claim the loose change you dropped in the Salvation Army bin at the mall on your itemized deductions  :lol:

[The Physician Philosopher]

That's helpful. Good info! Appreciate the help!

Even though it was a struggle it was a beneficial experience. Most backdoor Roth tutorials start with the assumption that you have something in a Roth IRA already. So, I wrote a post (for those who have truly never done a Roth IRA or backdoor Roth) about my experience. It'll be getting published tomorrow.

Thanks again for the help!

[justlearning]

The Physician Philosopher wrote:

That’s helpful. Good info! Appreciate the help!

Even though it was a struggle it was a beneficial experience. Most backdoor Roth tutorials start with the assumption that you have something in a Roth IRA already. So, I wrote a post (for those who have truly never done a Roth IRA or backdoor Roth) about my experience. It’ll be getting published tomorrow.

Thanks again for the help!

Click to expand...

Did you publish the tutorial? What is the URL?

[The Physician Philosopher]

Sure did.  Published it yesterday.  Click the link below to go directly to it.

Step by Step Tutorial for FIRST Backdoor Roth (Vanguard)

Let me know what you think!  Always ears for feedback.

TPP

[Peds]

I'm sorry....non straight forward process lol? What, you thought you could convert into an account you didn't have?

[The Physician Philosopher]

The issue was the vanguard would not tell me why it was throwing an error. Would have been simple enough to say "You need to open an unfunded Roth IRA to convert. You currently don't have one."

When it says "convert to Roth" just about the TIRA, that meant to me that they would walk me through the process of opening a Roth (which wouldn't be difficult to do) that would then allow me to convert. Instead it just brings you to a general screen on whether Roth's are appropriate for you or not.

At the end of the day they could have told me why it was showing an error or created a more intuitive system to guide someone.