Backdoor Roth: Am I doing this right?

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Backdoor Roth: Am I doing this right?

Postby Xanadu » Wed Dec 26, 2012 4:30 pm

Hi All,

This is the first year I have done a Backdoor Roth, so I want to make sure I'm doing this right.

- No non-roth IRA's prior to 2012
- On 6/18/12 I contributed $3,000 to traditional IRA (Vanguard Money Market fund)
- On 7/30/12 I contributed another $2,000 to traditional IRA (Vanguard Money Market fund)
- On 8/13/12 I converted the entire balace of $5,000.16 to a Roth

My wife also does not have any non-roth IRA's yet. We would like to complete a $5,000 backdoor Roth for her as well for 2012, but want to wait as long as possible before doing so. We will likely wait until March 2013 to complete the 2012 contribution and coversion.

Here's my question:
Can we wait until March 2013 to complete both the contribution and conversion for 2012 (for the Wife)? Or do we really need to complete the conversion before the end of 2012 to avoid extra taxes from the "pro rata" rule?


Sorry if this seems like a stupid question with an obvious answer, but I can't seem to find a clear answer from searching on the wiki or from other threads, etc. I've also been trying to work through the 8606 form, but this has left me even more confused as I'm realizing how dumb I am when it comes to taxes.

Thanks for the help.
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Re: Backdoor Roth: Am I doing this right?

Postby DSInvestor » Wed Dec 26, 2012 4:43 pm

The backdoor into Roth IRA combines two actions 1) an IRA contribution and 2) a Roth IRA conversion. They are treated separately.

Your wife can has until April 15, 2013 to make her IRA contribution. Let's say she contributes for 2012 in March 2013 and converts the next day.

Her contribution will be handled by the 2012 tax return. Non-deductible contributions must be tracked by IRS Form 8606. Your tax return will need an 8606 for each of you assuming her IRA contribution is non-deductible as well.

Her Roth conversion was done in calendar 2013, which means it must be handled by your 2013 tax return. Be careful about any rollovers into Traditional IRA during 2013 because the 2013 Form 8606 will look at Traditional-IRA, SEP-IRA, SIMPLE-IRA, Rollover IRA balances as of Dec 31, 2013 for the pro-rata calculation.

If she were to complete the IRA contribution and conversion in calendar, both the contribution and conversion will be handled by the 2012 tax return.
Last edited by DSInvestor on Wed Dec 26, 2012 4:52 pm, edited 2 times in total.
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Re: Backdoor Roth: Am I doing this right?

Postby bUU » Wed Dec 26, 2012 4:46 pm

You didn't address the specific question about the pro rata rule. Could you fill that in please?
Last edited by bUU on Wed Dec 26, 2012 6:36 pm, edited 2 times in total.
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Re: Backdoor Roth: Am I doing this right?

Postby Epsilon Delta » Wed Dec 26, 2012 6:17 pm

If you convert the entire balance of your traditional IRAs the pro rata rules are moot*. The taxable amount is then simply the difference between your non-deductible contributions and the amount you convert. In your example the difference was $0.16 so you will report that on your 2012 taxes. The same calculation will apply to your wifes situation, it does not make a difference if the contributions and conversion are in the same year or not.

* To put it another way the ratio is 1.00000000, i.e. 100% of your basis is applied against your conversion.
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Re: Backdoor Roth: Am I doing this right?

Postby Xanadu » Thu Dec 27, 2012 12:47 pm

Ahh, I think I got it now. Thanks!

I was confused, because I was thinking that the 8606 form was supposed to include both of our contributions combined. That's why I was thinking that part of the conversion (2012 contribution made in March 2013) wouldn't be recognized until 2013 taxes, so the pro rate rule might include the wife's tIRA contribution when calculating the taxable amount converted in 2012.

I guess it would have helped if I would have read the first line on the 8606 form that says "If married, file a separate form for each spouse required to file Form 8606." :oops:

Thanks again for the help! :sharebeer
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