Backdoor Roth IRA

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Backdoor Roth IRA

Postby fnmix » Tue Oct 23, 2012 10:40 pm

Hello Folks,

My wife was a public school teacher who left teaching to take care of our child, earlier this year. She has a 403b at Vanguard through her previous employer and I was considering rolling over her 403b to an IRA to take advantage of admiral shares (that are not available though her 403b). However, if we rollover her 403b to an IRA, it would make impossible the backdoor Roth IRA described in http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

(More details on my finances are at http://www.bogleheads.org/forum/viewtopic.php?f=1&t=102774)

Questions
1. Given the above, it seems to me that I should hang on to her 403b, instead of rolling it over to an IRA, to preserve flexibility for her to backdoor into a ROTH IRA. Would you agree?
2. Does somebody here have a pointer to an "Adjusted Gross Income" scale for single income bur married couples (filing taxes jointly), that I could use to decide if I am eligible for Traditional or Roth IRA investments (backdoor or otherwise).
3. Same question as #2 but for my wife

Thanks in advance.
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Re: Backdoor Roth IRA

Postby mhc » Tue Oct 23, 2012 10:47 pm

1. Yes. The fees are reasonable. Don't worry about it.
2. http://www.irs.gov/Retirement-Plans/IRA ... ion-Limits
3. see #2

If you are close to the cutoff for contributing to a Roth, just use the Backdoor Roth method and don't worry if you are above or below the cutoff.
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Re: Backdoor Roth IRA

Postby Default User BR » Wed Oct 24, 2012 12:23 am

It would have been a much better idea just to continue the other thread with this new information. Plus an update on what you were able to do with your existing rollover IRAs.


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Re: Backdoor Roth IRA

Postby Bob's not my name » Wed Oct 24, 2012 4:06 am

fnmix wrote:2. Does somebody here have a pointer to an "Adjusted Gross Income" scale for single income bur married couples (filing taxes jointly), that I could use to decide if I am eligible for Traditional or Roth IRA investments (backdoor or otherwise).
3. Same question as #2 but for my wife
You need to consider three categories of tax years:
1. In 2012 your wife had partial year income and was covered by an employer plan. This will happen again in 2015 when she returns to work, right?
2. In 2013 and 2014 your wife will have no income and will not be covered by an employer plan.
3. In 2016 and beyond your wife will have full year income and will be covered by an employer plan.

The MAGI phaseout for deductible spousal TIRA and direct Roth IRA eligibility is the same, and it is inflation-adjusted. For 2012 it is $173,000 - $183,000. For 2013 it is $178,000 - $188,000. It will be a little higher each year due to inflation adjustment, or the government might change the rules on you. Let's consider a year in which your wife has no income, such as 2013. Here's a simplified stack of numbers (review your 1040 to see what other things affect MAGI).

$200,000 gross income from your work only, plus any other income such as investment income
- $17,500 401k contributions
- $2,500 FSA contributions
- $4,000 pre-tax health, dental, and disability insurance premiums
----------------
$176,000 AGI --> $2,000 below the phaseout in 2013, so she can do either deductible TIRA or non-deductible Roth IRA

She's not eligible for a spousal TIRA if she was covered by an employer plan at any time during the tax year.
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Re: Backdoor Roth IRA

Postby JoeTaxpayer » Wed Oct 24, 2012 9:27 am

For (1) - I'd only ask - have you gotten a complete disclosure of the fees within the 403(b)? The Vanguard Target fund expense is great, but does the custodian or state add any fees on top of that? (I'm more familiar with 401(k) accounts where you have to be on the look out for both sets of fees, the funds themselves, and any additional layer from the custodian)
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Re: Backdoor Roth IRA

Postby fnmix » Wed Oct 24, 2012 4:24 pm

Hi Bob,

You are right on #1 but with one catch which I am having trouble with. While my wife was officially employed by her school till June 2012, she was on unpaid leave and did not receive any income or benefits from the school - and therefore could not contribute to her 403b. Her W-2 should show $0 in income, if the school sends one at all. Does that mean she can contribute to an IRA in 2012?

You are right about all of the other details. Thanks for the clear explanation of the AGI schedule.

Sidenote: when I read your "Formula" on the other thread from a few weeks ago, I could not completely understand it, till I started going through the process of making a backdoor ROTH IRA possible for my wife.

Bob's not my name wrote:
fnmix wrote:2. Does somebody here have a pointer to an "Adjusted Gross Income" scale for single income bur married couples (filing taxes jointly), that I could use to decide if I am eligible for Traditional or Roth IRA investments (backdoor or otherwise).
3. Same question as #2 but for my wife
You need to consider three categories of tax years:
1. In 2012 your wife had partial year income and was covered by an employer plan. This will happen again in 2015 when she returns to work, right?
2. In 2013 and 2014 your wife will have no income and will not be covered by an employer plan.
3. In 2016 and beyond your wife will have full year income and will be covered by an employer plan.

The MAGI phaseout for deductible spousal TIRA and direct Roth IRA eligibility is the same, and it is inflation-adjusted. For 2012 it is $173,000 - $183,000. For 2013 it is $178,000 - $188,000. It will be a little higher each year due to inflation adjustment, or the government might change the rules on you. Let's consider a year in which your wife has no income, such as 2013. Here's a simplified stack of numbers (review your 1040 to see what other things affect MAGI).

$200,000 gross income from your work only, plus any other income such as investment income
- $17,500 401k contributions
- $2,500 FSA contributions
- $4,000 pre-tax health, dental, and disability insurance premiums
----------------
$176,000 AGI --> $2,000 below the phaseout in 2013, so she can do either deductible TIRA or non-deductible Roth IRA

She's not eligible for a spousal TIRA if she was covered by an employer plan at any time during the tax year.
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Re: Backdoor Roth IRA

Postby fnmix » Wed Oct 24, 2012 4:33 pm

Hi JoeTaxpayer

1. I moved the 403b from a target retirement fund to a total bond fund (VBMFX). Across all my retirement accounts, I am now invested 25% each in US-stock, US-bond, Intl-stock and Intl-bond. The first three are index funds and the last is Fidelity's FNMIX.
2. The fees for the 403b are $15/year which is nominal. However the 403b does not allow me to invest in VBTLX which has slightly lower expenses than VBMFX.

JoeTaxpayer wrote:For (1) - I'd only ask - have you gotten a complete disclosure of the fees within the 403(b)? The Vanguard Target fund expense is great, but does the custodian or state add any fees on top of that? (I'm more familiar with 401(k) accounts where you have to be on the look out for both sets of fees, the funds themselves, and any additional layer from the custodian)
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Re: Backdoor Roth IRA

Postby Bob's not my name » Wed Oct 24, 2012 4:54 pm

fnmix wrote:While my wife was officially employed by her school till June 2012, she was on unpaid leave and did not receive any income or benefits from the school - and therefore could not contribute to her 403b. Her W-2 should show $0 in income, if the school sends one at all. Does that mean she can contribute to an IRA in 2012?
See this thread for discussion of marginal cases: viewtopic.php?f=1&t=104512&p=1516792#p1516792
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Re: Backdoor Roth IRA

Postby fnmix » Wed Oct 24, 2012 5:17 pm

Thanks for the reference Bob. I took one pass through the thread and my head hurts.

I am realizing now that while my wife made $0 in 2012 through her school, she is in theory eligible for both a defined contribution (403b) and defined benefit (pension) plan through her school.

I am going to wait till Jan 31, 2012 to see if my wife receives a W2. If she does and if the "eligibility for retirement plan" is checked on the W2, I am not going to attempt a backdoor ROTH IRA for her.

Boy this is way more complicated than it should be :-(

Bob's not my name wrote:
fnmix wrote:While my wife was officially employed by her school till June 2012, she was on unpaid leave and did not receive any income or benefits from the school - and therefore could not contribute to her 403b. Her W-2 should show $0 in income, if the school sends one at all. Does that mean she can contribute to an IRA in 2012?
See this thread for discussion of marginal cases: viewtopic.php?f=1&t=104512&p=1516792#p1516792
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Re: Backdoor Roth IRA

Postby Alan S. » Wed Oct 24, 2012 5:57 pm

fnmix wrote:Thanks for the reference Bob. I took one pass through the thread and my head hurts.

I am realizing now that while my wife made $0 in 2012 through her school, she is in theory eligible for both a defined contribution (403b) and defined benefit (pension) plan through her school.

I am going to wait till Jan 31, 2012 to see if my wife receives a W2. If she does and if the "eligibility for retirement plan" is checked on the W2, I am not going to attempt a backdoor ROTH IRA for her.

Boy this is way more complicated than it should be :-(

Bob's not my name wrote:
fnmix wrote:While my wife was officially employed by her school till June 2012, she was on unpaid leave and did not receive any income or benefits from the school - and therefore could not contribute to her 403b. Her W-2 should show $0 in income, if the school sends one at all. Does that mean she can contribute to an IRA in 2012?
See this thread for discussion of marginal cases: viewtopic.php?f=1&t=104512&p=1516792#p1516792


The back door option is not in question. She can do the non deductible TIRA contribution regardless of your joint MAGI, and therefore you don't have to worry about coming in over 173k this year. If she has no other non Roth IRA balance, the 5k contribution can be made and immediately converted to a Roth IRA. Whether her W-2 Box 13 is checked or not is immaterial.

However, if you think that the IRA deduction is more beneficial, these other variables DO come into play and at this late date you may wish to wait until the MAGI numbers and her W-2 have been received next winter, and then make the TIRA contribution before 4/15 next year if the deduction is available.
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Re: Backdoor Roth IRA

Postby Bob's not my name » Wed Oct 24, 2012 7:20 pm

Alan S. wrote: next winter
:D An Arizona man might call January "next winter". A New Englander would call it "this winter."
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Re: Backdoor Roth IRA

Postby interplanetjanet » Thu Oct 25, 2012 4:40 am

Bob's not my name wrote:
Alan S. wrote: next winter
:D An Arizona man might call January "next winter". A New Englander would call it "this winter."

This, especially in the form of "this weekend" vs "next weekend" ALWAYS throws me. I have to ask for clarification every time, because no matter what I guess I get it wrong.

I don't know if it's so much geographically dependant, I find variations in this and I'm living in the town I grew up in.
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Re: Backdoor Roth IRA

Postby Bob's not my name » Thu Oct 25, 2012 4:46 am

Ha. No, I'm specifically noting the geographical dependence. If you live up north, winter has already started, so it's "this winter", same as if it's Saturday you say "this weekend". If you live up north, winter is Oct-Apr. If you live down south, winter is January.

And nationwide Christmas is October to January.
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Re: Backdoor Roth IRA

Postby interplanetjanet » Thu Oct 25, 2012 4:54 am

Bob's not my name wrote:Ha. No, I'm specifically noting the geographical dependence. If you live up north, winter has already started, so it's "this winter", same as if it's Saturday you say "this weekend". If you live up north, winter is Oct-Apr. If you live down south, winter is January.

Yeah that came to me just after I posted. The other thing that threw me is that the only part of AZ I lived in was Flagstaff, and you had better believe it's winter there already. :)

And nationwide Christmas is October to January.

Well of course real Christmas is January 7...
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Re: Backdoor Roth IRA

Postby fnmix » Sun Apr 14, 2013 4:35 pm

Just closing the loop on this.

I did wait till the end of march (2013) to ensure that there was no W-2 coming in from my wife's employer and that I had a good handle on my taxes (including AGI). I was able to successfully execute a $5000 backdoor Roth IRA contribution to my wife's account.

For a first timer, the whole backdoor Roth IRA thing looks far more complicated than it actually is. So many people must balk at the jargon and the perceived complexity and walk away.
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