Backdoor Roth Question

[new doctor]

Hi all!

 

I am a resident and just started residency a few months ago. I make a typical residents salary and my wife makes about $65,000 a year. Because of my student loan situation we have decided to file taxes married filing separately since I am going for PSLF. Other than my student loans our only debt is a car payment with a 2.5% interest rate. We have been working on our budget and we should be able to both max out our employee sponsored Roth 403(b) and may have some extra money to invest. My question is with the extra money we have to invest can we contribute to a Traditional IRA and then convert it to a Roth IRA using the backdoor? In other words, is the process of doing this the same as is outlined in the many articles by White Coat Investor?

 

Thank you all for your help! I appreciate everything you all do!

[PhysicianOnFIRE]

You can contribute directly to a Roth IRA. That's not to say you can't do the Backdoor Roth, but you're well under the income limits where it's necessary to take the extra step(s).

 

[new doctor]

Thanks for the response!

I should have said this in my initial post but I don't believe we can contribute directly to a Roth IRA given our filing status as married filing separately and our incomes. Unless I am reading or understanding the rules wrong which is very possible.

 

Thanks for the help!

[Larry Ragman]

Yes, the rules on Roth for married filing separate are restrictive for direct Roth contributions. If you feel that MFS is advantageous for PSLF (I don’t know) then sure, backdoor Roth works great. No income restrictions.  https://www.physicianonfire.com/white-coat-investor-backdoor-roth/

[Peds]

What is different than doing MFJ, 2x trad 401k, 2x rIRA?

[Larry Ragman]

He wants to file MFS, which has severe income restrictions. See the income link in POF’s post. He can do the 2xrIRA, but it needs to be backdoor.

[GasFIRE]

Larry Ragman wrote:

Yes, the rules on Roth for married filing separate are restrictive for direct Roth contributions. If you feel that MFS is advantageous for PSLF (I don’t know) then sure, backdoor Roth works great. No income restrictions.  https://www.physicianonfire.com/white-coat-investor-backdoor-roth/

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MFS definitely gets the raw end of this deal. My daughter and SIL got married this year and are in a similar boat as the OP, except they both already made their Roth contributions earlier in the year as singles. Both earn less than the $122K single limit but together will exceed the MFJ $203K limit. I suggested to them that they should file MFS because of this, but that’s clearly bad advice. Can their current year Roth contributions be reversed to traditional so they can do the backdoor Roth this year?

[Larry Ragman]

No, recharacterizations of Roth contributions are no longer allowed. However, they can simply withdraw their Roth contributions. They are after tax, so no penalties. Then they have their total IRA limit available to do a Backdoor Roth.

[GasFIRE]

So no recharacterization, but they can still use a three step process from here if I interpret your answer correctly. Withdraw Roth, contribute to Traditional IRA for 2018 before 4/15/2019, convert to Roth. It makes no sense to me to penalize MFS but I guess it’s not a requirement for IRS rules to make sense.

[spiritrider]

Larry Ragman wrote:

No, recharacterizations of Roth contributions are no longer allowed. However, they can simply withdraw their Roth contributions. They are after tax, so no penalties. Then they have their total IRA limit available to do a Backdoor Roth.

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Incorrect, recharacterizations of Roth conversions done after 12/31/17 can no longer be done, but recharacterizations of Roth IRA contributions can still be done by your tax filing deadline including extensions.

@GasFIRE, they can directly recharacterize the Roth contributions to traditional IRA contributions and do Roth conversions, subject to pro-rata considerations

[GasFIRE]

@spiritrider - thanks for the clarification regarding conversions vs. contributions.

[DMFA]

new doctor wrote:

My question is with the extra money we have to invest can we contribute to a Traditional IRA and then convert it to a Roth IRA using the backdoor? In other words, is the process of doing this the same as is outlined in the many articles by White Coat Investor?

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Yes.

GasFIRE wrote:

Can their current year Roth contributions be reversed to traditional so they can do the backdoor Roth this year?

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Also yes.  Recharacterize Roth contributions to TIRA contributions and then convert the TIRA to Roth.  Declare the contribution as non-deductible on Form 8606.  They'll pay taxes on any gains, which given this past year's performance, might be zero or even less.