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  • Trad IRA dilemma

    Hello everyone. I am glad to be one of those people that got their financial awakening through the white coat investor.

     

    Right now I am currently in private practice as a nephrologist. Well I do enjoy the job but I am using this time to also get my financial house in order.  I Currently have a 401(k) since 2017 that I have maxed out and a traditional IRA since 2015. The issue for me is that during the years of 2015 and 2016 I was able to place the maximum 5500 and write it off since I did not have a 401(k). I contributed about $300 for 2017 before the 401k came into effect.  I have contributed nothing since to the IRA.

     

    The traditional IRA has about 16,000 in it right now  ( contributions plus earnings ).   However I  am highly interested in doing a backdoor Roth IRA from this point on.    I am in the 32% tax bracket for 2018, 28% for 2017.   I know that for doing the back door Roth IRA I must have a zero balance in all other IRAs. The contributions and earnings from 2015 and 2016 (all pre tax) I want to roll into my 401(k) which will accept it.   Then I want to finish making the nondeductible contribution for 2017 and roll it over into a Roth IRA.  I do not want to miss out on being able to do a backdoor Roth IRA and contribute more to my retirement.

    So my question is this ...

    For filing for 2017 taxes am l better off just converting the whole thing into a Roth IRA and just pay the taxes on it? Then just do the Backdoor next year?

    Should I proceed with just rolling all my pre-tax money from the IRA into my 401(k) and then make the maximum nondeductible contribution  for the 2017 filing year and convert then?  I am aware that I will need CPA help to calculate the exact pretax amount to move to the 401k.

    Or do I just give up being able to do the Backdoor Roth IRA at all and just open up a taxable account next year?

     

    Again I appreciate all the info and contributions from all the forum users

  • #2
    Welcome to the forum.  It sounds like you have it down.

    I would roll the amount into your existing 401(k).  You don't need a CPA to calculate anything.  Just get the instructions to roll into your employer 401(k) and use those to complete the form provided by the institution holding your IRA.  As long as your roll it over within 60 days of the distribution you are good.

    You can then make make a nondeductible contribution for 2017 and convert it to a Roth.

    If you were to convert the entire balance, it would be for the 2018 tax year and at the 2018 tax rate.

     

    Comment


    • #3
      Whoops. I meant I put in $300 one time after my 401k came into effect then nothing after that.  So the IRA has pretax and post tax right now.  Does that complicate things?

      Comment


      • #4
        I understand what you mean now.  It doesn't complicate things too much.  Just leave at least $300 in the account and rollover the rest.  From Pub 590:

        "Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of
        such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible."

        Comment


        • #5
          Just to clarify a bit, your “basis” also includes proportionate growth in the account. To determine that, you’ll need to divide 300 by 11,300 (total contributions) and multiply by the total (16,000) to arrive at the 424, leaving you with 15,576 to roll over.

          If this is so, you’ve had some pretty good growth in your account. Please double-check your calculations, because average market returns since 2015 don’t bear this out, but perhaps you made some pretty lucky choices.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            Sounds good. You are right jfox. I got lucky...i put my IRA in a Target date retirement fund at vanguard. I think to be safe with the conversion when i call vanguard I will ask them to move it to my money market fund to minimize any changes then do the transfer to the 401k.

            My thanks to both of you for your assistance.

            Comment


            • #7
              so as an update...

              I managed to get the form from vanguard as to do the process.  I also attached a typed letter stating exactly where to write the rollover check.   About to mail it out but ....

              Just so I have my calculations right my current basis based on the formula jfoxcpacfp provided:

              Amt contributed 2017 [300]/ total contributions entire IRA [15608] equals 0.027

              This ratio [0.027] * 15608 = 415

              As an aside I did receive a dividend and capital gain totaling 280.27 which I reinvested in the IRA.

              I also randomly decided to calculate how much each share was at time of purchase compared to the amount its worth today.  That amount came out to 346 but I will use the 415 number to leave in my traditional IRA.

              I will transfer this money over to my MMF as stated earlier to prevent market fluctuations today.  Then send the form.  Am I missing anything?

              My apologies if I seem repetitive but I want to do this right.

              Any info will be much appreciated.

              Comment


              • #8
                Hello.   I have a question about transferring traditional IRA money to a 401K.

                I have a traditional IRA account that contains both pretax and after tax contributions over the last 8 years or so.    Both the pretax portion and after tax portion of this account have appreciated in value during these years. Question-  Can I roll the GAIN made from the after tax contribution ( this gain has never been taxed) into my company's 401k?

                Comment


                • #9
                  You can (and should) rollover the entire pre-tax balance and no more to the 401k. That balance will include all pre-tax contributions and pre-tax earnings on both the pre-tax balances and non-deductible basis. This balance will simply be the total of all your traditional, SEP and SIMPLE IRA balances - your non-deductible basis.

                  Do not do the Roth conversion of the remaining non-deductible basis until the rollover of pre-tax assests has been confirmed and shows in your 401k account. It is no longer possible to recharacterize Roth conversions done after 1/1/18.

                  Comment


                  • #10


                    It is no longer possible to recharacterize Roth conversions done after 1/1/18.
                    Click to expand...


                    And just to make sure that everyone understands what this means (because I misread it at first), you can still recharacterize Roth IRA conversions that were made in 2017 until 10/15/18. After that date, no more recharacterizations can be made beyond the end of the calendar year in which the conversion was done.
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11







                      It is no longer possible to recharacterize Roth conversions done after 1/1/18.
                      Click to expand…


                      And just to make sure that everyone understands what this means (because I misread it at first), you can still recharacterize Roth IRA conversions that were made in 2017 until 10/15/18. After that date, no more recharacterizations can be made beyond the end of the calendar year in which the conversion was done.
                      Click to expand...


                      that's what vanguard told me.  I got confused by the above posts.  thank you both.

                       

                       

                      Comment


                      • #12
                        So I just want to make sure because all of this is confusing to me: Can the GAIN  (only the GAIN, not the principal) from a non deductible contribution in a traditional IRA be transferred to a pretax 401k plan?  Please assume that the maximal contribution to the 401K plan has already been made .   thank you.

                        Comment


                        • #13
                          Principal and gain (or loss) are supposed to move pro rata.

                          Comment


                          • #14
                            A little clarity to the clarifications are in order.




                            Just to clarify a bit, your “basis” also includes proportionate growth in the account. To determine that, you’ll need to divide 300 by 11,300 (total contributions) and multiply by the total (16,000) to arrive at the 424, leaving you with 15,576 to roll over.
                            Click to expand...


                            The above is not correct. All earnings whether on pre-tax balances or on non-deductible basis are pre-tax. Basis never comes from anything other than non-deductible contributions.




                            Principal and gain (or loss) are supposed to move pro rata.
                            Click to expand...


                            This is also not correct. While non-deductible basis and pre-tax balances are subject to pro rata during Roth conversions. Only pre-tax balances are permitted to be rolled over to non-IRA employer 401k, 403b and 457b plans. This coupled with the fact that such rollovers from traditional IRA accounts are considered to come first from pre-tax balances, is what allows you to "isolate" the pre-tax balance and roll it over leaving just the non-deductible basis.




                            So I just want to make sure because all of this is confusing to me: Can the GAIN  (only the GAIN, not the principal) from a non deductible contribution in a traditional IRA be transferred to a pretax 401k plan?  Please assume that the maximal contribution to the 401K plan has already been made .   thank you.
                            Click to expand...


                            I can understand it confusing you. The short answer is not only can just the pre-tax balances be rolled over to the 401k, any rollover must contain only pre-tax balances. Non-deductible IRA contributions are not permitted to be rolled over to a 401k. In fact your rollover paperwork likely requires a certification from you and maybe even the IRA custodian that the rollover contains only pre-tax balances. Repeating my earlier post.




                            You can (and should) rollover the entire pre-tax balance and no more to the 401k. That balance will include all pre-tax contributions and pre-tax earnings on both the pre-tax balances and non-deductible basis. This balance will simply be the total of all your traditional, SEP and SIMPLE IRA balances – your non-deductible basis.
                            Click to expand...


                             

                            Comment


                            • #15
                              I'm a bit confused by this. I thought that the only amount you had basis in with respect to a TIRA was the non-deductible contribution only. The growth is taxable at ordinary income and thus has zero basis. Can you clarify further? Thanks!

                              Comment

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