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Backdoor Roth Question

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  • jfoxcpacfp
    replied


    If you have already done a Roth conversion this year and there will be substantial pre-tax IRA assets on 12/31, do a recharacterization by 12/31/17. This is because under the tax bill, recharacterizations will no longer be allowed and it is not clear if 2017 recharacterizations will be allowed in 2018.
    Click to expand...


    Excellent point.

    Leave a comment:


  • spiritrider
    replied
    To amplify the points already presented.

    1. It does not matter when or for what year the non-deductible contribution is made to a traditional IRA is made. You have until your tax filing deadline 04/17/2018 to make your 2017 contribution.

    2. What matters is that there are little to no taxable balances in all (traditional, SEP, SIMPLE) IRAs on 12/31 of the year you do a Roth conversion.

    Steps you should/should not take.

    A. There is no harm if you have already made your 2017 non-deductible traditional IRA contribution. If not, I would probably wait until 2018.

    B. It is so late in the year that it is questionable whether any rollover contribution of pre-tax IRA assets to a 401k will happen in 2017.

    C. Do not do a Roth conversion until you verify the pre-tax IRA assets are in the 401k by 12/31. If you have already done a Roth conversion this year and there will be substantial pre-tax IRA assets on 12/31, do a recharacterization by 12/31/17. This is because under the tax bill, recharacterizations will no longer be allowed and it is not clear if 2017 recharacterizations will be allowed in 2018.

    D. If you have not done your 2017 IRA contribution, Roth conversion and/or rollover in 2017. I suggest you do the following first thing in 2018:

    1. Rollover all pre-tax IRA assets to the 401k.

    2. After verifying the assets are in the 401k, make both your 2017 and 2018 non-deductible contribution to a traditional IRA. As soon as allowed do a Roth conversion of the entire balance hopefully with little to know earnings.

    3. Don't be contributing/rolling any other pre-tax assets into a pre-tax IRA. Remember it is the pre-tax balance on 12/31. The balances on the date of conversion or any other date are irrelevant.

    4. In 2019 file your 2018 tax returns with a Form 8606 documenting the two non-deductible IRA contributions and hopefully little to no taxable earnings.

    Leave a comment:


  • jfoxcpacfp
    replied
    A backdoor Roth IRA is a 2-step process:

    1. The nondeductible IRA contribution, which is tracked by your tax due date (not including extensions) of 4/15/xx. iow, your contribution must be made by 4/15 of the following year to count for the tax year. You have 15-1/2 months, every year, to make this contribution.

    2. The Roth IRA conversion, which is tracked on a calendar year basis.


    It is important never to miss the contribution for any tax year - once the opportunity is gone, you'll never get it back. The conversion, otoh, can be made at any time you have $$ in a TIRA. The timing of the conversion is "tactical". You want to convert when you have no $$ in a pre-tax TIRA on 12/31 of the year in which you convert. 12/31 is the only day of the year that matters for conversions and the pro-rata rule.

    To answer your question, no, you don't need to do anything. You might consider waiting until January and contributing for both 2017 and 2018 in one fell swoop.

    These posts may help:

    Leave a comment:


  • TheCHFinancialAdvisor
    replied
    Small point, but remember you are making a non-deductible Traditional IRA contribution (after-tax dollars) that is being "converted" into the ROTH.  As the funds being converted are after-tax, they are not taxed again.  Only the gain on the account is taxed.

    Normally, one can do the non-deductible year-after year and keep updating your 8606 with your basis.  If never converted to ROTH, you need the basis number as you never have to pay tax on those funds, only on the growth when you make withdrawals from that traditional IRA.

    KJF

    Leave a comment:


  • emergencysavings
    replied
    Here’s the quick answer, there’s no hurry.

    Here’s the lowest stress way to handle this.

    Don’t worry about transferring anything before the end of the year. It makes no difference and here’s why.

    You can contribute $5500 (each) to a traditional IRA account for 2017 now, or up until filing taxes in April.

    You can contribute another $5500 to that account for 2018 starting on January 1. Each account will have $11,000 in the T-IRA account. Get the old employer rolled over money into the new employer 401k at some point in the next couple months so that your rollover IRA balance is zero. Now it’s just the $11,000 in your T-IRA accounts and all other money in your 401k (not subject to Pro Rata rule). You can then convert all the 11,000 to your Roth without paying pro Rata tax.

    You will need to fill out a 8606 form for 2017 declaring a $5500 contribution to a TIRA but NO conversion to Roth. Then next year when you fill out 8606 you will list your prior $5500 basis in the TIRA AND the 2018 TIRA contribution of $5500. The conversion amount will be $11000 and none of that is taxed on conversion to the ROTH through the back door.

    Done deal. Don’t sweat the new year deadline.

    Also if you choose to invest the TIRA money before conversion you will pay taxes on the gains at your marginal tax bracket for 2018 when you convert. So if you make ~$250 in investment money and convert 11,250 in 2018, that extra $250 will be taxed.

    Make sense?

    Leave a comment:


  • GoodLife
    replied
    Thanks again to everyone who gave advice above.  I'm re-posting on this thread because I have a new question regarding our backdoor roths, hopefully it will be an easy one to answer.

    In early November my husband started attempting to take out his IRA's to roll into his current 401k (he's the physician, I'm a SAHM).  It was a nightmare trying to get it out (Fidelity kept telling us they were waiting on Vanguard to take action on something, Vanguard insisted that Fidelity had to make the first move, it was ridiculous.  My husband called them every other day for 3 weeks.  Vanguard would tell us that a transaction was pending, it would take 3 days, and then it would be canceled at the last minute and no one could tell us why.  So we'd start all over again.).  Very frustrating, especially considering we have a Fidelity branch in our town, but they can't do anything to help us.  Everything must be done by snail mail.  Anyway....

    The IRA's were eventually all rolled into a single account in Vanguard.  Now, there's a check from Vanguard for the whole amount in the mail to us (should be here any day), which we will then put back in the mail to Fidelity, where it will (hopefully) be rolled into his current 401k (I say "hopefully" because we've gotten so much mis-information during this process that we are crossing our fingers that his practice manager was correct that it's possible to add our own funds to their retirement account.  Fidelity would not tell us over the phone if this was possible.).

    The Vanguard account has been closed, so technically, at this point, my husband has NO standing IRA's, correct?  Can we start the backdoor Roth process?  We are planning to do it in Vanguard since that's where our current Roths are.  Or should we wait until the IRA funds are safely added to the 401k?

    I guess my main question is: is there anything else that NEEDS to be done in 2017 in order to fund our 2017 backdoor roths?  Or, do we have until April 15 to do everything from this point on, where we stand today (a check in the mail, closed IRA accounts, etc)?  Do we need to fund the non-deductible IRA before Jan 1?  Can we even fund it with this money in limbo?

    Nothing like waiting until the last minute...  Thanks everyone.  I hope this made sense!

    Leave a comment:


  • GoodLife
    replied
    Thank you for the advice. Got started on rolling those IRAs into the 401k so we can hopefully have it all done in time to contribute for 2017.

    Leave a comment:


  • ENT Doc
    replied
    My advice is #2.  Here is how I would go about doing it:

    1. Verify with Fidelity the funds you have and see if you can do an in-kind transfer.  If not, you may have to sell admiral shares to investor shares and/or buy other funds in order to do an in-kind transfer.

    2. Sell/buy to allow for a seamless transfer to Fidelity

    3. Set up a traditional IRA with fidelity

    4. Fund this traditional IRA with an in-kind transfer from your traditional IRA elsewhere

    5. Fill out Fidelity's form to transfer your IRA holdings in-kind to the 401k, mail this in with a statement as the plan administrator accepting/approving this.

    6. Once the funds are in the 401k buy/sell to new funds if that is appropriate per your asset allocation

     

    Fidelity can walk you through this and this can all happen in about 3 weeks.  You'll want to do this NOW to avoid having an IRA balance by Dec 31st if you're interested in doing a backdoor Roth for 2017.  After the above is done you can put $5500 (per person) in your respective IRAs, then convert to Roth.  Not sure about the waiting period.  I've heard anywhere between <1 day and >1 year.  No one really knows what is safe.

    Leave a comment:


  • Michael Solari
    replied
    Agree with FIREshrink, option #2 is the best option. After making the contribution to your IRA I'd wait 1 month before the conversion. The IRS hasn't ruled on backdoor Roth conversions for being a step transaction but I think the waiting period gives you enough breathing room in case they do. Might be overly cautious

    Leave a comment:


  • FIREshrink
    replied
    If number 2 is an option, it is your best choice.

    We didn’t have that choice so we went with number 1 (ate the taxes) and don’t regret it.

    Leave a comment:


  • GoodLife
    started a topic Backdoor Roth Question

    Backdoor Roth Question

    My husband and I would like to fund backdoor Roths for 2017.  This will be our first year doing a backdoor Roth.  We already have 2 Roth IRAs with Vanguard (one for each of us), each has around 14k in it.  They are currently in Target Retirement funds.

     

    However, my husband has a few rollover IRAs (one from residency, around $21k in Vanguard in a 3-fund style portfolio, and one from his fellowship, around $5k with Fidelity, in an aggressive index fund with mostly stocks and which has done really well over the last year).

     

    My question is, what would be the best, most tax-efficient way to handle starting the setup for backdoor Roth IRA contributions?  I think our options are:

     

    1. Convert our rollover IRAs into Roth IRAs (is there a limit on how much we can convert?) and suck up any tax bill that would come with that all at once.

    2. Roll the IRAs into his current retirement 401k (with Fidelity), then set up new IRAs of $5500 each to roll over into Roths. Those IRA accounts would then be emptied at time of conversion and would be available for future yearly backdoor Roth contributions/conversions.

    3. Don't touch the rollover IRAs and begin the process of doing a backdoor IRA with newly formed IRAs funded with post-tax dollars, knowing that the amount converted to backdoor Roth IRAs would eventually also be subject to the pro-rata taxation rules (this seems like the least appealing as this will be a recurring problem year after year as long as those other rollover or TIRAs are held).

    4. Some hybrid where we convert some funds directly to Roth and roll-in some funds into the employer's 401k.

     

    We are in 33% tax bracket. No state income tax. We are already maxing out 401k and HSA contributions. If you need more info, feel free to ask. Thank you in advance for your suggestions.

     
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