Backdoor Roth Question

[Mr. Frugal]

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!

[jfoxcpacfp]

Either one. Amounts under $10 are typically ignored by the IRS. You can take it out and close the account or leave it there and keep the account open for future backdoor Roth's.

[DMFA]

Meh. Convert it to Roth and pay the monstrous $0.25 or whatever your bracket is on the $1 conversion, or just leave it at zero. NBD :-)

[Craigy]

Go figure out the 8606 and you'll have your answer.

[HumbleInvestor]

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.

[cgossage]

Your understanding is pretty much correct.  You have until April 30th to contribute to make a non-deductible Traditional IRA contribution for the 2017 tax year.  Your Roth Conversion can take place at any time.  In your case, you want to make sure to record your 12/27 contribution as a non-deductible contribution to a Traditional IRA.  When you convert on January 2nd, any gains on the account will we recorded as ordinary income at the time of conversion.  If you were only invested in the Money Market account you shouldn't have any gains on the account to worry about for the 5 day waiting period.  You will record the Roth Conversion in the 2018 tax year but that isn't a big deal.

[jfoxcpacfp]

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...

It is your rollover date that matters for the pro-rata rule, not the contribution date. As long as you have no balance in pre-tax IRAs on 12/31 of the year you do a Roth conversion, you won't owe any tax. You're fine, regardless.

Small correction to Clint above, which I'm sure was a typo. The postmark date for 2017 IRA contributions is 4/17/18.

[cgossage]

jfoxcpacfp 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…

It is your rollover date that matters for the pro-rata rule, not the contribution date. As long as you have no balance in pre-tax IRAs on 12/31 of the year you do a Roth conversion, you won’t owe any tax. You’re fine, regardless.

Small correction to Clint above, which I’m sure was a typo. The postmark date for 2017 IRA contributions is 4/17/18.

Click to expand...

Indeed.  Thanks Johanna!

[DMFA]

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?

[Wister5]

I am in the same position as the poster: After making my 2017 conversion, $.78 remains in my Traditional IRA account. So, is the general consensus is that I can just leave it there until my 2018 conversion?

 

 

[jfoxcpacfp]

Wister5 wrote:

I am in the same position as the poster: After making my 2017 conversion, $.78 remains in my Traditional IRA account. So, is the general consensus is that I can just leave it there until my 2018 conversion?

Click to expand...

Yes.

[cgossage]

Wister5 wrote:

I am in the same position as the poster: After making my 2017 conversion, $.78 remains in my Traditional IRA account. So, is the general consensus is that I can just leave it there until my 2018 conversion?

 

 

Click to expand...

Yep.  You could even contribute $5,500 for 2018 right now and convert the entire amount.

[Wister5]

Thank you for taking the time to reply.

 

May I ask another question? The conversion discussed above was for my husband's account; he contributes to his 401K and then made a back door conversion to his Roth IRA.

As his spouse, I had a small amount of taxable income from a side business for 2017. I have a Traditional IRA from when I worked as a teacher 20 years ago. Can I make a contribution to that Traditional IRA that would be = to $5500 (as long as that does not exceed my taxable income)?

I should note that we decided to not covert my IRA to a Roth, because we didn't want to lose a portion of it in the conversion. But what I do not understand is whether I can still contribute to it, or not.

[jfoxcpacfp]

You don't even have to have earned income. As long as your hubbie has enough earned income to cover both contributions, you can make a "spousal contribution" of $5,500/yr. I would go even farther and suggest you do the following:

• Set up a solo-k for your side business.


• Roll your IRA into the solo-k.


• Start making backdoor Roth contributions. (You can contribute $5,500/yr for both 2017 and 2018 and then convert into a backdoor Roth.)

[Wister5]

I considered rolling the IRA into a solo-k, but I have actually stopped my side business and can not guarantee that I will make an income in the future. My understanding was that, because of this, a solo-k was not a viable option. Is that incorrect?