Backdoor Roth IRA, Please help?

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Topic Author
benpthompson
Posts: 16
Joined: Sun Nov 25, 2012 7:20 pm

Backdoor Roth IRA, Please help?

Post by benpthompson »

I have been trying to wrap my head around my situation for too long. I need some good ole Bogleheads help!

I converted 17k from a 401k to a traditional IRA to a Roth IRA earlier in the year. I understand that I will need to pay taxes on the 17k as ordinary income. I have now funded a traditional IRA with 5k with the hopes of converting that into my same Roth IRA. I cannot fund the Roth IRA directly, because our MAGI is slightly above the 188k limit. I have no other Roth or Traditional IRA's. I do have a 403b funded through my job.

I would like to put as much money into my Roth as possible. I am 31 years old.

My questions:

A. Is this a smart move and is it legal?

B. Are there any tax implications?

C. Will I be taxed again on the 5k?

Thank you in advance.
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House Blend
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Joined: Fri May 04, 2007 1:02 pm

Re: Backdoor Roth IRA, Please help?

Post by House Blend »

Yes, this is a good move. You won't owe any tax on the $5K, but you will owe tax on any gains in the IRA that happen before it gets converted to Roth.

Take a look at Form 8606. That's where your earlier conversion, your $5K non-deductible contribution, and potential second conversion, will all get reported.

BTW: you mention "our MAGI" and "my Roth". Are you aware that your spouse is also eligible to make $5K contributions to her trad IRA and convert to her Roth? Taxability will of course depend on whether she has an existing trad IRA with pre-tax amounts in it.
JW-Retired
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Joined: Sun Dec 16, 2007 11:25 am

Re: Backdoor Roth IRA, Please help?

Post by JW-Retired »

If you have no other traditional IRAs than the ones you mentioned you should be OK. Fill out the form 8606 to verify. It says what that IRS considers is a traditional IRA.

Probably it's a smart move since it puts you in a position to do a backdoor Roth every year without tax.
JW
Retired at Last
mikegerard
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Joined: Tue Mar 06, 2012 8:15 am

Re: Backdoor Roth IRA, Please help?

Post by mikegerard »

This is a good move...

You can now move 5k per year using the steps you have done for this year. Your spouse can do the same.

IMHO this makes much more sense than converting an existing 401k or IRA to a Roth. In that case you are paying taxes now to avoid taxes later. Makes sense if you think you will be in a higher tax bracket in the future but I expect most working people will have less reportable income when they are retired. If you figure out a way to have more reportable income after you retire please let me know how :D
Topic Author
benpthompson
Posts: 16
Joined: Sun Nov 25, 2012 7:20 pm

Re: Backdoor Roth IRA, Please help?

Post by benpthompson »

Thank you very much for the responses. I was planning on doing the same conversion for my wife. She also has only a ROTH and a 401k through work. Currently, she does not have a traditional IRA. We would open the Traditional and place 5k in for her and then convert it into her ROTH a week later.

Our income/tax bracket should increase in the next several years. My plan is to maximize our 401k/403b and ROTH IRA's each year and pay down low interest student loans and mortgage next with the left over money.

Thanks again. If there is anything else you can think of that would help my situation please let me know.
Alan S.
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Location: Prescott, AZ

Re: Backdoor Roth IRA, Please help?

Post by Alan S. »

Note that the year and amount of the tax impact changes with each action you took here:
1) You converted your entire rollover IRA of 17k - if nothing further was done your taxable income for 2012 is 17k
2) Then you made a 5k non deductible TIRA contribution - that adds basis to your TIRA for 2012 and affects your conversion retroactively - if there is no earnings change on the 5k, you lowered your tax bill on the former conversion to 13,141. 3,859 of your basis is applied to the prior conversion.
3) If you now convert the 5k prior to year end you now have a 22k conversion to report - 17/22 is taxable and therefore your taxable income is back to the 17k in 1) above
4) But if you delay the conversion of the 5k till January you will end 2012 with 13,141 taxable with the other 3,859 taxable in 2013.

Which year do you want that 3,859 to be taxed in? If in 2013 note that if your 5k grows between now and then, the growth will be taxed on your 2013 conversion in addition to the 3,859.

All the above is calculated on Form 8606.

NOTE: Be sure your 17k 401k rollover was all pre tax. If there was any after tax contributions included in it, you would also have basis in your IRA in addition to the 5k contribution.
Topic Author
benpthompson
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Joined: Sun Nov 25, 2012 7:20 pm

Re: Backdoor Roth IRA, Please help?

Post by benpthompson »

-Alan S. Fantastic breakdown. That's what I have been trying to understand. Thank you!
JW-Retired
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Re: Backdoor Roth IRA, Please help?

Post by JW-Retired »

benpthompson wrote: Currently, she does not have a traditional IRA. We would open the Traditional and place 5k in for her and then convert it into her ROTH a week later.
You better get to it if you want it to happen in 2012, which you should. There are not many business days left this year.
JW
Retired at Last
Carl53
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Re: Backdoor Roth IRA, Please help?

Post by Carl53 »

benpthompson wrote:I converted 17k from a 401k to a traditional IRA to a Roth IRA earlier in the year. I understand that I will need to pay taxes on the 17k as ordinary income. I have now funded a traditional IRA with 5k with the hopes of converting that into my same Roth IRA. I cannot fund the Roth IRA directly, because our MAGI is slightly above the 188k limit. I have no other Roth or Traditional IRA's. I do have a 403b funded through my job.
Was your MAGI above the limit if you did not convert the 401k? If it is possible to reduce your income via additional income pretax adjustments such as a FSA contribution, spousal 401k, or increased 403b (I believe these are pretax but have not checked), then you might be able to make the Magi cutoff.
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House Blend
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Re: Backdoor Roth IRA, Please help?

Post by House Blend »

Carl53 wrote:Was your MAGI above the limit if you did not convert the 401k?
Roth conversion amounts do not count towards the MAGI used for determining eligibility for Roth contributions.
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