Backdoor Roth IRA questions

[nachos31]

1) Making sure I'm filling out the correct portions of Form 8606. First time backdoor Roth IRA, no prior IRAs (i.e. no pro-rata concerns). Will be contributing $5500 for 2015 in 2016. So on Form 8606:

Line 1: 5500
Line 2: 0
Line 3: 5500
Line 14: 5500

Between item 3 and 4 is a question asking if you took any distribution OR made a Roth conversion for the year, which is "no." If the answer is "no," then it instructs you to skip the rest of Part 1 and just transfer the amount on line 3 to line 14. I think that's all you have to fill out, right? I ask because in others' examples of the same scenario, I find people still filling out lines 4-13 (including at the behest of WCI in the comments section of his backdoor IRA tutorial). Am I missing something?

 

2) I'm having to do the backdoor Roth IRA this year because I'm filing Married Filing Separately for IBR reasons. However, before realizing I would have to file MFS (and do the backdoor Roth IRA), I had already put $1000 directly into my Roth IRA in the summer of 2015. I need to pull this out ("removal of excess contribution") and put it into a non-deductible trad IRA (that I will fill up to $5500). However, the market has been a bit rocky since then, so that $1000 is likely now less. How do I account for that? Do I only remove the current worth of that $1000 as the excess contribution? If so, does that mean I cannot contribute a full $5500 to the non-deductible trad IRA? If I happened to have made a gain on that contribution, what do I do?

 

Thanks.

[jfoxcpacfp]

1. You are doing it correctly.


2. You can accomplish this in two ways:
   
   
   
   1. Ask your custodian to "re-code" your contribution to a TIRA, explaining that you made a mistake. Then you'll need to contribute only the $4,500 difference to the same account. Same difference but saves you a step.
   
   
   2. Remove the original and contribute a full $5,500 to your TIRA. You cannot deduct the loss.
   
   
   
   

[nachos31]

Custodian is Betterment. They said I can remove the $1000 as an excess contribution and that they'd give me the exact $1000 whether there were any losses/gains on that amount. If there were losses, then those just come out of the remainder of the balance to make up the $1000 original contribution. They said if there were any gains on that $1000, the gains would stay in the Roth, which sounds peculiar to me. Most sites I find say that the contribution and any net income needs to be withdrawn.

What you stated above seems to indicate that you just deal with the original contribution and fund the TIRA without worrying about losses/gains (which matches what Betterment customer support was suggesting)? However, you could also be assuming that the custodian takes care of these issues behind the scenes.

[jfoxcpacfp]

So Betterment is saying that if you just happened to invest in a stock that became totally worthless, they'll make you whole? That's news to me. There is no "Roth" for any gains to stay in - you are having to undo it because you don't qualify.

I gave you 2 options. One way, you use what is already there (recoded to a TIRA) and add another $4,500. Or, you can withdraw whatever is left in the account and add enough more to get you to $5,500. I can't believe Betterment is going to give you an exact $1,000, unless I'm totally misunderstanding what you are saying...which wouldn't be the first time.

[nachos31]

You did not misunderstand me, that is what the first rep with whom I chatted was implying! I mean I asked her about five different ways to clarify how they could give me the full $1000. I'm not sure if she was confused because I already had a balance in the Roth IRA from prior years.

I called again and the second rep with whom I chatted gave correct advice--removal of the contribution included any gains/losses associated with that amount. She was also kind enough to confirm with a supervisor. Going through the motions on their website also confirmed that the $1000 is now worth $915, which is what I'd be getting back.

If I'm reading your last post correctly, I can fully fund $5500 into a TIRA? There's no reduction for the $85 I lost (= $1000 - $915) in having to remove the original Roth contribution, right?

[jfoxcpacfp]

Yes, you can fully fund the TIRA if you withdraw the $915 (or whatever it is when you close it out). It will be as if that contribution last year never happened. You just have to come up with another $85 :-)

[nachos31]

Thanks! Any issues or any action I have to take given the 2015 1099-R that Betterment sent the IRS had a higher amount listed than I currently have in the account?

[jfoxcpacfp]

nachos31 wrote:

Thanks! Any issues or any action I have to take given the 2015 1099-R that Betterment sent the IRS had a higher amount listed than I currently have in the account?

Click to expand...

I'm not sure they have reported to the IRS yet. The IRS does not get a 1099R for Roth IRA contributions, but they send 5498s sometime around May. Since you are removing your Roth contribution and there is no income on it, there should be nothing to report.

[nachos31]

I guess the Form 5498 that gets sent out in May to the IRS would clarify that point.

 

*Edit: beat my by one minute, Johanna!

[nachos31]

I see no reason why I cannot do this, but just want to make sure:

Can I file my 2015 taxes before making my 2015 non-deductible TIRA contributions that I will convert to Roth later this year?

[K]

My wife and I are new to the physician investing world and plan to start doing annual Roth conversions this year. We plan on doing this through Vanguard. I am trying to figure out tax rules. I see that we can make an IRA contribution until April 18,2016 for the 2015 tax year, but everything I have found says that the Roth conversion deadline for the 2015 tax year was December 31,2015. If we do our Roth conversions before April 18, are these the only conversions we can do for the 2016 tax year or is there someway to do 2 $5500 contributions for each of us this year. Just to complicate things we already filed taxes for the year through turbo tax so I’m wondering if we can make this work for the 2015 tax year, if im going to have to deal with doing a taxes addendum. Thank you as well for all your information in the book and this site … I am in the process of getting out of a whole life plan, firing an insurance(financial) advisor, and putting our own financial plan into work.

Reply

[jfoxcpacfp]

K - You can convert an unlimited amount to Roth IRAs annually. There is no reason you "have" to convert in the same year that you contribute to a non-deductible TIRA, 2 separate transactions. The conversion won't affect your tax return unless the account earns any money between the time you contribute to the TIRA and the date of conversion. Just be sure to file the form 8606 for your TIRA contributions.