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Traditional to Roth IRA & Tax Implications

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  • Traditional to Roth IRA & Tax Implications

    Hello,

    Earlier this year, I contributed 3k to Roth and 2.5k to Traditional IRA (total of $5,500)
    In December of 2017, I converted the total earnings in the Traditional IRA (which had accumulated to more than $3,000 at the time) to Roth IRA, making my total Roth account to great than $6,000.

    In this case, would I have to pay penalties on the conversion given that my Roth "contribution" is more than 5.5k?
    And to avoid it paying the penalty/taxes, would I have to withdraw a certain amount from the Roth?

    Any insight would be great.

    Thank you

  • #2
    Hi,

    In the situation you described, no you wouldn't have to pay any penalties.  The limit is on contributions, not the amount converted.  I want to make sure to clarify a few things.

    1. What was your income in 2017 and are you married? Many dentists are over over the income limits to directly contribute to a Roth IRA.  If you made over $118,000 if you are single or $186,000 filing joint you will be over this limit.  Don't panic though, you still have time to take action.  You can recharacterize the Roth contributions to a Traditional IRA before April 17th, and then convert the rest of the balance to a Roth after the recharacterization has taken place.

    2. Also, are you already contributing to a retirement plan through work?

    3. Do you have any other IRA balances?  If you do, you will need to rollover these to a work 401(k) or Solo-401k before going ahead with the Roth Conversion


    Thanks

     

    Comment


    • #3
      Clint,

      Thank you for your informative response. My fault for not fully including the information.
      I'm a resident (sorry for the confusion, graduating in 5 months!) with an  income of 60k, so well below the 118k limit. No other retirement plans through work and no other IRA balance and no 401k either.

      I apologize for the confusion.

      Comment


      • #4




        Clint,

        Thank you for your informative response. My fault for not fully including the information.
        I’m a resident (sorry for the confusion, graduating in 5 months!) with an  income of 60k, so well below the 118k limit. No other retirement plans through work and no other IRA balance and no 401k either.

        I apologize for the confusion.
        Click to expand...


        No apologies needed.  I just wanted to make sure I wasn't going to give you bad information.  Since you are under the income limits, you will only need to pay taxes on the additional $500 of income you converted.

        Comment


        • #5
          I know a lot has been written about backdoor Roths so I apologize in advance if my question is redundant but I’m still trying to understand it. My husband is a family dr and I used to be an educator pre-children but now staying home with our 4 kids.

          i had/have a 403b pre-tax with valic. A while back I did a rollover Ira to fidelity from valic (26k) but for some reason 4K was left in my 403b. If I’m understanding your posts correctly on pro rata, I would first have to transfer the rollover Ira (26k) to a non deductible Ira and pay taxes on that before I can convert to a Roth–is that correct?

          So my questions are:
          1. How much would I have to pay in taxes if I did that for 26k? Our income for 2017 is about 215k. Can I do the 26k at once or can I only do $5,500/yr?
          2. Should I wait till my husband’s income is lower (we’re anticipating his income will go from 215k to 150k in the next 2-3 years since he’s feeling burnt out and wants to work less) or wait a bit when the market is lower before converting to a Roth?
          3. What should I do with the 4K that is still in the 403b in valic with my old employer fund? Leave it in the 403b for now (but I think valic has high fees)? Roll it over to add to the existing rollover Ira with fidelity or open a new account with vanguard?

          Thanks for taking the time to read my long question.

          Any advice would be greatly appreciated!

          Comment


          • #6




            I know a lot has been written about backdoor Roths so I apologize in advance if my question is redundant but I’m still trying to understand it. My husband is a family dr and I used to be an educator pre-children but now staying home with our 4 kids.

            i had/have a 403b pre-tax with valic. A while back I did a rollover Ira to fidelity from valic (26k) but for some reason 4K was left in my 403b. If I’m understanding your posts correctly on pro rata, I would first have to transfer the rollover Ira (26k) to a non deductible Ira and pay taxes on that before I can convert to a Roth–is that correct?

            So my questions are:
            1. How much would I have to pay in taxes if I did that for 26k? Our income for 2017 is about 215k. Can I do the 26k at once or can I only do $5,500/yr?
            2. Should I wait till my husband’s income is lower (we’re anticipating his income will go from 215k to 150k in the next 2-3 years since he’s feeling burnt out and wants to work less) or wait a bit when the market is lower before converting to a Roth?
            3. What should I do with the 4K that is still in the 403b in valic with my old employer fund? Leave it in the 403b for now (but I think valic has high fees)? Roll it over to add to the existing rollover Ira with fidelity or open a new account with vanguard?

            Thanks for taking the time to read my long question.

            Any advice would be greatly appreciated!
            Click to expand...


            Hold on.  There is no such thing as a specific Traditional IRA which is either deductible or non-deductible; they're all Traditional IRAs.  There can be both deducted and non-deducted money in the same IRA.  If something was deducted, ever, it's forever deducted, and if it wasn't, it wasn't.  If anything was ever not deducted, its "basis," or the amount of non-deducted money within, is tracked using Form 8606.  You would have to get all that pretax money *out* of an account with the word "IRA" in it; you'd have to do a rollover to a qualified plan like a 401(k).  Can you re-rollover *back* to the 403(b) from whence it came?  That'd solve this problem.

            The only day the Traditional/SEP/SIMPLE IRA balances matter in this regard is December 31 of the year in which the conversion takes place.  So if you want to do a non-deductible contribution for 2017, go ahead.  You can also do 2018.  You don't get time back.  If you're going to do the conversion eventually, it'd be wise to do it.  You could even get some self-employed income in 2018, start an individual 401(k), and rollover your IRA into that in order to clear out the pretax money, thus allowing you to convert an amount equal to the non-deducted basis and rollover the rest.

            1. Assuming you did a non-deductible $5,500 contribution and a $5,500 Roth conversion in a year you had $26,000 in Traditional IRA on December 31, you'd owe taxes on 5500 * 1 - [5500/(26,000+5500)] = 5500 * (1 - 0.175) $4,537 added to your taxable income, and have $4,537 remaining in non-deductible basis in the traditional IRA.  See Form 8606 for this calculation.

            2. That would move you from the 24% to the 22% bracket, not including any state taxes.  Probably not making a big difference there.

            3. Why not leave it?  Can you just rollover the IRA back to the 403(b)?  Or start a self-employed 401(k) with someone other than Vanguard (because they don't accept incoming rollovers to 401(k) accounts) to move it to?

            Comment


            • #7
              Dmfa,

              Thanks for taking time to respond to my question.

              i don't think I can reroll it back to 403b where it came since I'm no longer working for the school/university.  Also, since I'm not working, I don't have access to any 401k.  We currently live on an Indian reservation and there aren't many job opportunities here even if I was looking for one.

               

              So in your opinion, it's better to leave the 4K in my 403b at valic even though it has high fees? I think they're annuities since that was all that was available when I did it 10 years ago through my employer (a university).

               

              Thanks,

              ha

               

              Comment

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