Backdoor Roth legal question, money with a transfer agent

[mlcunni]

Hello all,

Longtime lurker, first time poster. I'm attempting to follow the rules as layout out in the AWESOME guide on backdoor Roth's.  I followed each step to a tee so far.  Got a speaking gig, got paid, got a EIN, opened a Solo 401K at Fidelity.  Moved Rollover and Traditional IRAs to Fidelity in preparation of dumping them into the Solo 401K to net 0 by Dec 31st.  Here's the snag.  The Fidelity guys told me it would be faster to get the money moved if I opened a traditional at their end, transferred in kind then moved it to my 401K.  Since I did all this at the end of the year (crunchtime) the money hasn't hit Fidelity yet, and they are saying it won't until 2 Jan......(cue sad music).  But......he said that the account would show $0 and Vanguards also show $0 since the money is with a "transfer agent".  Can I still backdoor this year???  I don't want to get hit with a big oops if I do it.  We have about 7.5K in my husband account and 18k in my account, would hate to have to do a pro rata on that.  Does this transfer agent report IRAs?  Will Vanguard still report $$$ on the 31st if they've already processed the accounts? Regardless, I would still have to roll them into the 401k, my guess is that they would do an addended form and we would still get hit.  I'm mad that we couldn't get anyone to work faster, but understand that this time of year is tough with all the holiday closures.  We will be all set for 2018 though!!!!!!

 

Thanks for any advice.

[Peds]

The money needs to be xferred, so I think yes it will be pro-rata-ed (lol).

So undue the IRA, you can convert them next year once all the dust has settled and the accounts are truly moved (you have until April to contribute).

Then in 2018 you backdoor 2017 and 2018 at the same time.

[DMFA]

mlcunni wrote:

Hello all,

Longtime lurker, first time poster. I’m attempting to follow the rules as layout out in the AWESOME guide on backdoor Roth’s.  I followed each step to a tee so far.  Got a speaking gig, got paid, got a EIN, opened a Solo 401K at Fidelity.  Moved Rollover and Traditional IRAs to Fidelity in preparation of dumping them into the Solo 401K to net 0 by Dec 31st.  Here’s the snag.  The Fidelity guys told me it would be faster to get the money moved if I opened a traditional at their end, transferred in kind then moved it to my 401K.  Since I did all this at the end of the year (crunchtime) the money hasn’t hit Fidelity yet, and they are saying it won’t until 2 Jan……(cue sad music).  But……he said that the account would show $0 and Vanguards also show $0 since the money is with a “transfer agent”.  Can I still backdoor this year???  I don’t want to get hit with a big oops if I do it.  We have about 7.5K in my husband account and 18k in my account, would hate to have to do a pro rata on that.  Does this transfer agent report IRAs?  Will Vanguard still report $$$ on the 31st if they’ve already processed the accounts? Regardless, I would still have to roll them into the 401k, my guess is that they would do an addended form and we would still get hit.  I’m mad that we couldn’t get anyone to work faster, but understand that this time of year is tough with all the holiday closures.  We will be all set for 2018 though!!!!!!

 

Thanks for any advice.

Click to expand...

Wait...what about the actual act of the non-deducted Traditional IRA contribution and its conversion to Roth?  Did that happen in 2017?  If not, then there's no problem, because what matters is the balance of pretax money in IRAs on 12/31 of the year of *conversion*.

You'll just make your tax year 2017 contribution before 4/15/2018 and do your conversion in calendar year 2018. Your tax return will show a $5,500 non-deducted basis in Traditional IRA; that's it.  As long as your pretax IRA balance on 12/31/2018 is zero, everything is A-OK.

[mlcunni]

That's the question.  Is it going to read $0 on 12/31?  Right now, everybody is reporting $0 because the money is floating in a netherworld of "transfer agent", no company (Vanguard or Fido) is holding the money on 12/31.  However, it will hit Fido on 1/2 and then be rolled into the Solo 401K, so technically I had pre-tax IRA $ after the 31st.  I think since I have time to do the contribution until April, I will wait to see what the paperwork looks like from all the firms before committing to anything.  Worse comes to worse, since the $$ is relatively small I could pay the pro-rata tax if I had to.  Not sure if it's worth the hassle, might just contribute to the tIRA and roll it in the 401k.  At some point I think I'm splitting hairs over a small chuck of tax change, when the real story is just getting it invested in the market somewhere.

[DMFA]

mlcunni wrote:

That’s the question.  Is it going to read $0 on 12/31?  Right now, everybody is reporting $0 because the money is floating in a netherworld of “transfer agent”, no company (Vanguard or Fido) is holding the money on 12/31.  However, it will hit Fido on 1/2 and then be rolled into the Solo 401K, so technically I had pre-tax IRA $ after the 31st.  I think since I have time to do the contribution until April, I will wait to see what the paperwork looks like from all the firms before committing to anything.  Worse comes to worse, since the $$ is relatively small I could pay the pro-rata tax if I had to.  Not sure if it’s worth the hassle, might just contribute to the tIRA and roll it in the 401k.  At some point I think I’m splitting hairs over a small chuck of tax change, when the real story is just getting it invested in the market somewhere.

Click to expand...

Hold on. Stop. Do not proceed with your line of thinking until you answer this question.

Did a conversion of Traditional IRA to Roth IRA occur *in* 2017 (i.e. already)?

If not, this is all a moot point and you're totally fine.

 

[mlcunni]

No, I haven't committed yet.  Everything is still in it's pre-tax place, just moving companies.  I hadn't made it to step #3, contribute to tIRA and then convert to rIRA.  I got stuck on #2, empty all pre-tax IRAs into a 401K.

But.........I'm my question is, am I really stuck on #2 if all the companies "say" I have $0 in any pre-tax accounts on 12/31.  I know I have money in pre-tax, but will the IRS know if Vanguard and Fido report that they don't have anything on 12/31.  That's the crux of the question.

[DMFA]

mlcunni wrote:

No, I haven’t committed yet.  Everything is still in it’s pre-tax place, just moving companies.  I hadn’t made it to step #3, contribute to tIRA and then convert to rIRA.  I got stuck on #2, empty all pre-tax IRAs into a 401K.

But………I’m my question is, am I really stuck on #2 if all the companies “say” I have $0 in any pre-tax accounts on 12/31.  I know I have money in pre-tax, but will the IRS know if Vanguard and Fido report that they don’t have anything on 12/31.  That’s the crux of the question.

Click to expand...

It's immaterial.

DMFA wrote:

what matters is the balance of pretax money in IRAs on 12/31 of the year of *conversion*.

Click to expand...

If the conversion occurs in 2018, which it will, the only day on which the pretax balances matter is 12/31/2018, as in 367 days in the future.

[mlcunni]

Oh yes, I get that my 2018 contributions will be fine.  I was really hoping/attempting to get this done for 2017 contributions, hence the hesitation.  My guess is that it's too late and will just have to do it for 2018, as you suggested, that will be golden.

[DMFA]

mlcunni wrote:

Oh yes, I get that my 2018 contributions will be fine.  I was really hoping/attempting to get this done for 2017 contributions, hence the hesitation.  My guess is that it’s too late and will just have to do it for 2018, as you suggested, that will be golden.

Click to expand...

I beg your pardon, but you do not understand what I am saying.

Contributions are made *for* a tax year, for 2017 that's 1/1/17 - 4/15/18. Conversions occur *in* a calendar year, 1/1/17 - 12/31/17 or 1/1/18 - 12/31/18.

You can make your contribution *for* 2017 anytime, now through 4/15/2018. It will be considered to be *for* 2017. Your 2017 taxes will show a non-deductible basis for 2017. That is fine. That does not matter, even if you had pretax money on 12/31/2017. No conversion happened *in* 2017. That is also fine.

Conversions, on the other hand, only count for the year they're made *in*. It doesn't matter if you convert contributions *for* 2017 *in* 2018. That's fine. Anything you convert *in* 2018 will go on your 2018 taxes.

The only date on which pretax balances matter is 12/31 of the year the conversion occurs. It does not matter for which tax year the converted money was contributed.

You could make your traditional IRA contribution for 2017 right now, if you wanted...or you could make it next week. Either is fine. You could have all that pretax money on 12/31/2017; it doesn't matter. There is nothing pro rata to tax for 2017 if no conversion occurred in the calendar year 2017.

You can make your contribution for 2017 and convert it in 2018, no problem. You could even make both 2017 and 2018 contributions and conversions at the same time.

The conversion of your 2017 contribution will occur in 2018. That is fine. That also means that the calculation for pro rata taxation will be based on your pretax IRA balances on 12/31/2018.

[mlcunni]

Whoa, *mindblown*.  Ok, I didn't realize any of that.  I was working really hard to get it done before the 31st because I misunderstood the rule.  It seems when I read all the tutorials they made a real point of getting things out before the 31st of the calendar year that you were going for, ie 2017.  But you are saying that it doesn't matter as long as the pretax IRA balance and the conversion are in the same calendar year, 2018, but I can still attribute them to 2017.  And then as a sidenote, do my 2018 magic at the same time. That's a load off for sure!!

Thanks for your help, sorry it was so rough to get your point across.