Backdoor Roth Question

[cgossage]

In the way you worded it, no it isn't an option. If you are operating a trade or business with the intent to make a profit you could open one and then roll your IRA into it.  You may want to consider continuing your side business for a brief period or even opening a small ebay business this year to allow you to open the plan and roll your IRA into it.

[Wister5]

Got it. Thank you. But, in the event that I do not want to keep a business going, I could still contribute to my Traditional IRA (even though my husband contributes to his 401K and a Roth via back door.)

Correct?

So...our investments would be:

- maxing out his 401K via contributions & profit sharing

- making a $5500 contribution to his Roth via back door strategy

- making a $5500 contribution to my Traditional IRA (unless we decided to open a solo-k and make a Roth contribution via back door strategy)

- maxing out our HSA contribution

- contributing to our 529

Is there anything I am missing that we could still be contributing to? And, with the additional money we still have left over to invest...our plan is to put it into a mutual fund so that we have access to cash if need be before retirement. (This mutual fund would be separate from our Emergency Fund; earmarked for retirement.)

Does that plan make sense...or is there something I am not considering?

TIA for your input.

[jfoxcpacfp]

I will presume that you ended up here because your spouse is a doctor and will further presume that he makes > $196k or somewhere thereabouts. If that is correct, your IRA contributions will be nondeductible, which is the worst place to be in terms of retirement savings. If you convert the nondeductible IRA into a Roth IRA (the "backdoor Roth" maneuver), you will owe tax under the "pro-rata rule". Therefore, best for you to set up the solo-k and roll your pre-tax IRA into it.

If there had been a chance that you might continue a business (not necessarily the same one) in the future, you could have set up the solo-k in 2017, even given the decision to discontinue operation in 2018. Unfortunately, it is too late for that now. Best thing for you to do at this point (imo) is to contribute to a nondeductible IRA for a couple of years - at most - in hopes of future IC income and convert to a Roth when you can set up a solo-k. If you are sure there will be no further IC income, then build a taxable account instead.

[Wister5]

So, if I understand you correctly, I could open a Roth Solo 401K account in 2018 if I continue the business this year...even if I plan to discontinue the it in 2019. And, I would still be able to make contributions (via "backdoor Roth" maneuver) going forward using a spousal contribution from my husband's income.

Yes?

 

 

[Wister5]

Please see my follow-up below.

[jfoxcpacfp]

Wister5 wrote:

So, if I understand you correctly, I could open a Roth Solo 401K account in 2018 if I continue the business this year…even if I plan to discontinue the it in 2019. And, I would still be able to make contributions (via “backdoor Roth” maneuver) going forward using a spousal contribution from my husband’s income.

Yes?

Click to expand...

That is correct.

[cgossage]

Wister5 wrote:

So, if I understand you correctly, I could open a Roth Solo 401K account in 2018 if I continue the business this year…even if I plan to discontinue the it in 2019. And, I would still be able to make contributions (via “backdoor Roth” maneuver) going forward using a spousal contribution from my husband’s income.

Yes?

 

 

Click to expand...

Yes, except you don't want to open a Roth Solo 401k since you are looking to Roll a Traditional IRA balance into it.  You will want to open a Solo 401k without the Roth option, and then roll your TIRA balance.  Everything else you said is correct.

[HumbleInvestor]

DMFA wrote:

HumbleInvestor wrote:

Piggybacking on this question. I will be in similar boat soon. I was able to empty out my roll over IRA accounts to my 401k plan. At the same time I opened a new IRA and Roth IRA accounts at Vangaurd and contributed $5500 to the IRA account on 12/27. The funds are being held and are not available to roll over to Roth IRA until Jan 2nd. When I spoke to Vangaurd they said, I cant do anything about 2017 now and that rollover will be for year 2018. I was thinking as long as my tax deferred IRA accounts are empty by 12/31, I can contribute to IRA and roll over to Roth till April of the following year. Is my understanding correct? 2) Did my contribution to the new Vangaurd IRA impact anything? Thanks for your feedack.

Click to expand…

I beg your pardon, but moving money from Traditional to Roth IRA is not a “rollover;” it’s a “conversion.”

“Rollover” refers to only pretax to pretax transfers, such as Traditional or SEP IRA to 401(k) or vice versa.

Contributions are made “for” a tax year, up to the filing deadline.  Thus 2017 contributions can be made through 4/17/2018.

Conversions depend on the year they’re done *in*, regardless of the year the contributions were *for*.  Therefore any conversion made in the calendar year 2018 will be reflected on your taxes for 2018 (due Apr 2019).  There is no consequence of contributions made for 2017 being converted in 2018.

The 12/31 balance of pretax IRAs only matters for the year in which the conversion was done.  So, for any conversion in 2018, the day on which pretax IRAs need to be $0 to avoid pro rata taxation of non-deducted basis is 12/31/2018.

…did you convert anything to Roth in 2017?

Click to expand...

Thanks for the details and I mixed up few scenarios. Here is what I did.

1) Rolled over two pre-tax IRA accounts (my wife and I) to our company 401K. Ensured those accounts got to 0 by 12/31/2017. (On one of those accounts I am due to receive a dividend that has not posted to the account yet. Not sure how that works). My wife's pre-tax IRA custodian TDAM sent a check (instead of a wire as I requested) addressed to her 401K plan but to our home address. I need to send it to her 401K ASAP.

2) Opened IRA and Roth IRA accounts for my wife and I at Vangaurd. I funded my IRA account on 12/27 that was put on hold to convert to Roth IRA till Jan 2nd. On Jan 3rd I funded for 2018 contribution as well and am waiting for that to clear, so I can convert the entire $11000 + change  ASAP.

3) Waiting to fund my wife's IRA at Vangaurd and convert it as her account needed paper documents. (Silly us failed the online verification check)

[cgossage]

HumbleInvestor wrote:

DMFA wrote:

HumbleInvestor wrote:

Piggybacking on this question. I will be in similar boat soon. I was able to empty out my roll over IRA accounts to my 401k plan. At the same time I opened a new IRA and Roth IRA accounts at Vangaurd and contributed $5500 to the IRA account on 12/27. The funds are being held and are not available to roll over to Roth IRA until Jan 2nd. When I spoke to Vangaurd they said, I cant do anything about 2017 now and that rollover will be for year 2018. I was thinking as long as my tax deferred IRA accounts are empty by 12/31, I can contribute to IRA and roll over to Roth till April of the following year. Is my understanding correct? 2) Did my contribution to the new Vangaurd IRA impact anything? Thanks for your feedack.

Click to expand…

I beg your pardon, but moving money from Traditional to Roth IRA is not a “rollover;” it’s a “conversion.”

“Rollover” refers to only pretax to pretax transfers, such as Traditional or SEP IRA to 401(k) or vice versa.

Contributions are made “for” a tax year, up to the filing deadline.  Thus 2017 contributions can be made through 4/17/2018.

Conversions depend on the year they’re done *in*, regardless of the year the contributions were *for*.  Therefore any conversion made in the calendar year 2018 will be reflected on your taxes for 2018 (due Apr 2019).  There is no consequence of contributions made for 2017 being converted in 2018.

The 12/31 balance of pretax IRAs only matters for the year in which the conversion was done.  So, for any conversion in 2018, the day on which pretax IRAs need to be $0 to avoid pro rata taxation of non-deducted basis is 12/31/2018.

…did you convert anything to Roth in 2017?

Click to expand…

Thanks for the details and I mixed up few scenarios. Here is what I did.

1) Rolled over two pre-tax IRA accounts (my wife and I) to our company 401K. Ensured those accounts got to 0 by 12/31/2017. (On one of those accounts I am due to receive a dividend that has not posted to the account yet. Not sure how that works). My wife’s pre-tax IRA custodian TDAM sent a check (instead of a wire as I requested) addressed to her 401K plan but to our home address. I need to send it to her 401K ASAP.

2) Opened IRA and Roth IRA accounts for my wife and I at Vangaurd. I funded my IRA account on 12/27 that was put on hold to convert to Roth IRA till Jan 2nd. On Jan 3rd I funded for 2018 contribution as well and am waiting for that to clear, so I can convert the entire $11000 + change  ASAP.

3) Waiting to fund my wife’s IRA at Vangaurd and convert it as her account needed paper documents. (Silly us failed the online verification check)

Click to expand...

You are on the right track.  A couple of points of clarification:

1. You have 60 days to rollover your TIRA's into an eligible account.  It's frequent that they send a check to your home that you have to forward on, so don't worry about that.  Often there are residual amounts that trickle into these accounts as well.  For the dividend you received, I would either just liquidate the account or roll it into you Traditional IRA and covert it to your Roth.  You could pay an insubstantial amount of tax but if the dividend is small enough you won't pay anything.

2. Yes

3. When your wife's account is open you can still make contributions for both 2017 and 2018 and then covert the entire $11,000.

[Bonez]

Mr. Frugal wrote:

Ok… this a newbie question… but I need to know…

So I made my first backdoor Roth IRA contribution this morning by converting the funds in my traditional IRA (which I deposited a few days ago) into my previously established Roth IRA. I only had the money sitting in the traditional account for a few days and it was invested in the Vanguard Prime Money Market Fund. The ‘problem’ is that it made 0.89 and I wasn’t sure to do with this measly amount. I ended up not converting it and so it is still sitting in my settlement fund within the traditional IRA account. Is this a problem? Should I have taken this small amount over to the Roth as well even though it would have just bumped me over the 5.5K limit?

Thanks for your help!

Click to expand...

You already reached the limit when you contributed $5,500 to the tIRA, there isn't a limit on the amount you convert to the Roth IRA. If you somehow had $1M in gains on it in the few days between making the initial $5,500 you could convert the entire $1,005,500 to your Roth IRA. The only "issue" is that you have to pay the taxes on the gains. In this case it would have been paying taxes on $0.89.

[spiritrider]

There are two common misconceptions about 401k plans of self-employed individuals that have been alluded to in this thread.

First, it is not necessary to have net self-employment earnings in the year a 401k is adopted. You can also adopt one if you had such earnings in "any" prior year.

Second, the lack of self-employment earnings does not equate to termination of the business. A 401k sponsored by a self-employed individual can remain in existence from the date of first contribution until there are no funds remaining in the plan. This can include the RMDs of the self-employed individual and/or their beneficiaries.

[jfoxcpacfp]

spiritrider wrote:

There are two common misconceptions about 401k plans of self-employed individuals that have been alluded to in this thread.

First, it is not necessary to have net self-employment earnings in the year a 401k is adopted. You can also adopt one if you had such earnings in “any” prior year.

Second, the lack of self-employment earnings does not equate to termination of the business. A 401k sponsored by a self-employed individual can remain in existence from the date of first contribution until there are no funds remaining in the plan. This can include the RMDs of the self-employed individual and/or their beneficiaries.

Click to expand...

You're right, of course. This is not the first time I've fallen for that misconception - thanks for clearing it up.