Backdoor IRA Questions

[Dr_Acula]

Hi,

Newbie here, read all the blogs/forum and still a little confused, any help would be appreicated.

Current Accounts

Vanguard Rollover IRA - $50,000

Vanguard Roth IRA - $235000

Employer 401k - $65000

* My employer does allow rollover to 401k.

Questions

1. Is it still possible to convert $5500 from Rollover to Roth for 2017 tax year? Then the remaining rollover IRA to 401k, or does that have to be completed before calendar year 2017.

2. Do I have to pay any taxes (on the front end, this year) for transferring funds from Rollover IRA to 401k?

I assume I would be taxed when I withdraw from the 401k, so I shouldn’t be taxed 2x.

3. If I file jointly, but my wife has a Rollover/Traditional IRA, does that prevent me from doing a Rollover IRA?

Thanks.

[jfoxcpacfp]

I think you may be mixing a couple of concepts together so I'll try to help clarify.

1. You have until 4/17/18 to contribute $5,500 to a nondeductible IRA and you can convert that n.d. IRA to a Roth any time you want. However, you will owe taxes on the conversion (because of the pro-rata rule) if you have $$ in the rollover IRA on 12/31 of the year that you convert.


2. Your assumption is correct. You do not have to pay taxes when you move your rollover IRA to your 401k. As long as you roll over the full balance in the Vanguard rollover IRA before 12/31/18, you can convert your n.d. IRA to a Roth IRA with no tax consequences (except for any growth in the account, which will be taxed).


3. You and your wife are treated separately (see post #98379). The above rules apply to her and her accounts also, but your ability to do a tax-free backdoor Roth is not affected.

Explaining Backdoor Roth IRAs may be helpful to you.

[Dr_Acula]

Thank you.

My guess is that the taxes owe due to the pro-rata rule is greater than the taxes when withdrawing from the 401k later, although I am not sure of the exact calculation.

So it would make more sense to start the Backdoor IRA in 2018 rather than 2017.

[DMFA]

Dr_Acula wrote:

Thank you.

My guess is that the taxes owe due to the pro-rata rule is greater than the taxes when withdrawing from the 401k later, although I am not sure of the exact calculation.

So it would make more sense to start the Backdoor IRA in 2018 rather than 2017.

Click to expand...

Why?  Your 401(k) accepts incoming rollovers.  Rollover the pretax IRA into there, and Bob's your uncle, backdoor is open.

Your *conversions* will occur in the calendar year 2018, regardless of for which year they're contributed.  That means that any pro rata taxation on the conversion of non-deductible Traditional IRA contributions is based on the balance of Traditional, SEP, and SIMPLE IRAs on 12/31/2018.  As long as you rollover any pretax money in anything called "IRA" to your 401(k) before then (that's 11 months from today), then any Roth conversion of non-deductible IRA money is tax-free.

So your steps are:

1. Contribute $5,500 to a Traditional IRA for 2017 before 4/18/2018


2. Contribute $5,500 to a Traditional IRA anytime [can even be same time as your 2017 contributions]


3. Convert an amount equal to your non-deductible contributions anytime before 12/31/2018 [this is tax-free since it was non-deductible]


4. Rollover any pretax money to 401(k) before 12/31/2018 [this is tax-free since it's pretax to pretax]

These can technically be done in just about any order.  Some people like to ensure they can successfully do the rollover before embarking on the non-deductible contributions or conversion.  Even if you can't actually rollover in 2018, you can still make your non-deductible contribution for 2017 and just wait to convert until a year in which you actually can rollover.  You'll never get the opportunity to make a 2017 contribution again.

Your taxes will show:

• 2017 form 8606: only the "late" $5,500 non-deductible contribution and a $5,500 basis for 2017, $0 taxable


• 2018 form 8606: $5,500 basis, $5,500 non-deductible contribution, $11,000 conversion, $0 basis for 2018, $0 taxable

...clear as mud?

[Dr_Acula]

I already contributed $5500 for 2017 to the Rollover IRA.

So I will contribute another $5500 for 2018 to the Rollover IRA.

Call Vanguard, convert $11000 from Rollover IRA to Roth IRA.

Then rollover the remaining balance from the Rollover IRA to 401k.

No penalties, no taxes owe? Simple enough.

 

Thanks.

[DMFA]

Dr_Acula wrote:

I already contributed $5500 for 2017 to the Rollover IRA.

So I will contribute another $5500 for 2018 to the Rollover IRA.

Call Vanguard, convert $11000 from Rollover IRA to Roth IRA.

Then rollover the remaining balance from the Rollover IRA to 401k.

No penalties, no taxes owe? Simple enough.

 

Thanks.

Click to expand...

...do you need to talk to someone on the phone? Seems like this should be able to be done online. But yeah, that's the right idea. Cheers

[DR R]

Question:   Can a Variable Annuity that is held in a traditional IRA be transferred to a 401K in order to be able to do a Back Door Roth IRA?  thank you.

[jfoxcpacfp]

DR R wrote:

Question:   Can a Variable Annuity that is held in a traditional IRA be transferred to a 401K in order to be able to do a Back Door Roth IRA?  thank you.

Click to expand...

I believe so if the plan allows the 401k to accept it and the annuity provider allows the plan to take over the annuity policy.

[DR R]

thank you for your reply.

Does this mean I would contact the annuity insurance company and ask if they would allow me to make this transfer into my solo 401K?   Also, my 401K is a solo 401k so are there special rules for this type of account regarding annuities in general?   If there are special rules for solo 401K, do you know where I can find this information to answer my question?

( and I apologize if you are seeing this question multiple times.  I was getting error messages on my end so was not sure if going through)

[jfoxcpacfp]

DR R wrote:

thank you for your reply.

Does this mean I would contact the annuity insurance company and ask if they would allow me to make this transfer into my solo 401K?   Also, my 401K is a solo 401k so are there special rules for this type of account regarding annuities in general?   If there are special rules for solo 401K, do you know where I can find this information to answer my question?

Click to expand...

Yes, you'll need to check with the annuity insurance company. Perhaps one of our insurance geniuses will weigh in. As for the solo-k, you'll need to check with your custodian. I have never encountered this situation, to be honest, but I think it will be trickier with an off-the-shelf solo-k.

[Dr_Acula]

I completed a backdoor IRA this year.

Does a IRA beneficiary distribution account violate the pro-rate rule?

Thanks.

[cgossage]

Dr_Acula wrote:

I completed a backdoor IRA this year.

Does a IRA beneficiary distribution account violate the pro-rate rule?

Thanks.

Click to expand...

If you have a inherited IRA, no it is not included in the pro-rata rule calculation.