We're in RIRA's phase-out area: How/what to plan for next?

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We're in RIRA's phase-out area: How/what to plan for next?

Postby aida2003 » Wed Jun 26, 2013 9:59 am

Hello,

I hope knowledgeable people can give some advice or thoughts for us. Or if there is need, maybe I'll have to visit fairmark.com and post there.

2013 is the 1st year when our AGI will fall into the phase-out area (http://www.irs.gov/Retirement-Plans/Amo ... e-For-2013). Right now we continue contributing to our RIRA's, but will need to stop soon just to be safe and not over-contribute or the IRS will slap us :( http://www.irs.gov/publications/p590/ch ... 1000230988. Future years will depend on a bonus. If yes, we'll have the same 'problem' :).

So, my questions are how to plan further because I've read various opinions all over the place on the Internet.

1. Should we open non-deductible TIRA's? Some blogger said it's not worth it and just do taxable investments, though I deem there would be more pros for a TIRA, wouldn't there?

2. Is opening a non-deductible TIRA only a call away to Vanguard or maybe even online?

3. I'm guessing that we should wait until 2014 to figure out the exact MAGI and then invest in the RIRA to its allowed reduced limit for us and afterwards open a non-deductibe TIRA for the difference to reach $5,500. Does this sound OK or should I think about some other things as well?

4. AMT never applied to us, not sure about this year. In case it does, which AGI is it used for the Question 3: the one from form 1040 or per AMT calculations?

5. Now the biggest question is what to do with the non-deductible TIRA: convert to RIRA immediately or no use to bother?
Some say it's good to have various buckets for the retirement (taxable, 401k, RIRA and TIRA). Others say it's not worth the hassle because it's more work than benefits are derived from it. We might fall in this category, because it will be max $3k/account for 2013, and I have no clue whatsover how the RIRA conversion is done and how it's reported on taxes (don't even want to think about recharacterization). Still others say that if you still wish to do RIRA conversion, one can wait for a few years or do it just before the retirement, but my problem with this advice is that a converter will end up paying more taxes since the account will be of higher value (hopefully) and if laid-off unexpectedly and his/her 401k is rolled-over to a TIRA the latter comes into play when calculating taxes (correct?).

6. This relates to the question 5. In case I chose to convert a new TIRA to RIRA, shouldn't it be done by Dec.31st instead of April 15, 2014. Just checking if I didn't misread this tidbit.

Any thoughts about the above are appreciated. Thank you. :happy
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby Bob's not my name » Wed Jun 26, 2013 11:35 am

Have you exhausted all means of reducing your AGI -- FSA, maxing traditional 401k's, TLH?
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby mhc » Wed Jun 26, 2013 11:37 am

Do you currently have money in an IRA?

Since I do not qualify for direct Roth contributions, I use the backdoor method. It is detailed here:
http://thefinancebuff.com/the-backdoor- ... ow-to.html

non-deductible IRA contributions can be converted to a Roth at any time. No deadlines. You are correct that all gains on the non-deductible IRA contributions are taxed when converted to a Roth. That is why many people do the conversion immediately.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby House Blend » Wed Jun 26, 2013 12:20 pm

If you haven't already, you should read the wiki article on Backdoor Roths.
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Key question is whether you or spouse have any existing trad IRAs with pre-tax amounts. If you do not, then the Backdoor Roth should be easy. Note that this applies to you and your spouse separately.

If you do have a trad IRA with pre-tax amounts, then the usual workaround is to roll it over into your employer's 401k/403b. If your employer does not allow this, or it sounds like too much hassle, I would simply wait until early 2014 and see how much you are eligible to directly contribute to a Roth. Skip the Backdoor.

But if you do decide to use a Backdoor Roth, I don't see much point in continuing Roth contributions. Might as well use the Backdoor for all remaining contributions and stop worrying about your MAGI.

Points to remember:
1. There is no such thing as a "non-deductible TIRA". Sometimes contributions can be deducted, sometimes not. But it's still just a TIRA.

2. In the eyes of the IRS, you have only one TIRA. All or your TIRA accounts are combined and treated as one. Likewise, your spouse has only one TIRA.

Regarding your Q5:
You seem to have gotten confused over the difference between having one or more TIRAs with pre-tax contributions and having all of your TIRAS with a balance (almost) equal to their basis in non-deductible contributions. It is the former where you need to be careful about strategizing if and when to convert. For the latter, the tax cost is near 0, so there's no strategy, you just do it.

Regarding your Q6:
IRA contributions have April deadlines, Roth conversions do not have deadlines.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby Alan S. » Wed Jun 26, 2013 8:29 pm

Since you have been making Roth contributions this year, you will have to deal with those if your MAGI indicates an excess Roth contribution. If you want to pursue the back door Roth you would need to decide whether to request your Roth contributions to be recharacterized OR request a full return of contributions and then make new TIRA non deductible contributions. Criteria for making that decision:
1) If your Roth contribution has gains, you would generally recharacterize the excess amount to avoid tax and penalty on the gains if you removed the contribution.
2) If you have a loss, you can recharacterize but if you want to max your contribution, request a return which due to the loss would incur no tax or penalty. Then re contribute the original amount to your TIRA, and you would effectively have a larger TIRA balance to convert. Either way, your basis on Form 8606 will be the same amount.

In future years, if the back door will work for you, in order to avoid the income question just make your initial contributions to the TIRA. Remember that if you convert non deductible contributions to a Roth IRA, there is no 5 year waiting period to withdraw your conversion without penalty because the penalty only applies to the withdrawal of taxable conversion funds, not non taxable funds.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby aida2003 » Thu Jun 27, 2013 9:05 pm

Bob's not my name wrote:Have you exhausted all means of reducing your AGI -- FSA, maxing traditional 401k's, TLH?


Unfortunately, yes, unless we give more to charity than we already do :confused. We usually get rid of kids' toys, clothes at the YE and take to GW, but not sure that would help us. Isn't only max $250 allowed on Schedule A? Or is it $250 per each trip when I get a separate receipt? $500 would be better than $250, of course.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby livesoft » Thu Jun 27, 2013 9:09 pm

Stop contributing to IRAs now. Then after doing your tax return for 2013 in 2014 (even if you don't file it), come back and ask your questions. You do NOT want to deal with overcontribution, excess contribution, excess deferral or whatever they will be calling it. Believe me. Been there. Done that.

You can donate thousands of dollars to charity. The annual limit is something like 30% or 50% of your AGI or more. There is no $250 total limit.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby aida2003 » Thu Jun 27, 2013 9:38 pm

Alan S. wrote:Since you have been making Roth contributions this year, you will have to deal with those if your MAGI indicates an excess Roth contribution.


Alan,
Are you saying that I've already messed it up? If so, no wonder, it's my 1st pancake with non-deductible TIRA's. We don't have any other TIRA accounts, only Roth IRA's and 401k's.
I'll review/estimate our 2013 MAGI again, but I believe the calculated MAGI will indicate NO excess contributions to the RIRA's. I've just deleted our automatic contributions to RIRA's to be (overly) safe.
Nevertheless if I'm reading/understanding correctly, we shouldn't have contributed to our RIRA's for 2013 at all, if I wanted to contribute the maximum $11k for both of us, correct? Or reading below quote, if our MAGI says we didn't over-contribute to our 2013 RIRA's, perhaps we can still open non-deductible TIRA's, but in this case the IRS might question our income (???). E.g. If YTD we contributed $3k/each to our respective RIRA's, can we open non-deductible TIRA's for $2,500/each or will the IRS get all fussy about it even if we chose not to convert to new RIRA's?

In future years, if the back door will work for you, in order to avoid the income question just make your initial contributions to the TIRA. Remember that if you convert non deductible contributions to a Roth IRA, there is no 5 year waiting period to withdraw your conversion without penalty because the penalty only applies to the withdrawal of taxable conversion funds, not non taxable funds.


To be honest, if it's too involving or complicated, I'd rather just contribute to the reduced maximum allowed per our new MAGI and then do a taxable investment to an existing index fund for this year and next year we'll wait till the bonus season to decide anything.

Thanks again.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby aida2003 » Thu Jun 27, 2013 9:44 pm

livesoft wrote:Stop contributing to IRAs now. Then after doing your tax return for 2013 in 2014 (even if you don't file it), come back and ask your questions. You do NOT want to deal with overcontribution, excess contribution, excess deferral or whatever they will be calling it. Believe me. Been there. Done that.

You can donate thousands of dollars to charity. The annual limit is something like 30% or 50% of your AGI or more. There is no $250 total limit.


Yep, I turned off the RIRA contributions just 5 minutes ago :) .

No, no, I wasn't referring to cash giving to charities. I was talking about clothes, toys, small items given to GW or Salvation Army. Schedule A says something if it's more than $250, you must fill out an additional form or/and get an appraisal or something. In the past I recall giving some in Dec, and the rest in Jan in order not to cross the limit, but maybe I've misunderstood that rule then, hence my questioning now.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby letsgobobby » Thu Jun 27, 2013 9:50 pm

Charitable donations don't lower AGI.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby aida2003 » Thu Jun 27, 2013 10:06 pm

House Blend wrote:If you haven't already, you should read the wiki article on Backdoor Roths.
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Key question is whether you or spouse have any existing trad IRAs with pre-tax amounts. If you do not, then the Backdoor Roth should be easy. Note that this applies to you and your spouse separately.

If you do have a trad IRA with pre-tax amounts, then the usual workaround is to roll it over into your employer's 401k/403b. If your employer does not allow this, or it sounds like too much hassle, I would simply wait until early 2014 and see how much you are eligible to directly contribute to a Roth. Skip the Backdoor.

But if you do decide to use a Backdoor Roth, I don't see much point in continuing Roth contributions. Might as well use the Backdoor for all remaining contributions and stop worrying about your MAGI.

Points to remember:
1. There is no such thing as a "non-deductible TIRA". Sometimes contributions can be deducted, sometimes not. But it's still just a TIRA.

2. In the eyes of the IRS, you have only one TIRA. All or your TIRA accounts are combined and treated as one. Likewise, your spouse has only one TIRA.

Regarding your Q5:
You seem to have gotten confused over the difference between having one or more TIRAs with pre-tax contributions and having all of your TIRAS with a balance (almost) equal to their basis in non-deductible contributions. It is the former where you need to be careful about strategizing if and when to convert. For the latter, the tax cost is near 0, so there's no strategy, you just do it.

Regarding your Q6:
IRA contributions have April deadlines, Roth conversions do not have deadlines.


Thanks for the link on Wiki, I'll have to study this more. You're right I'm confused :oops: about this whole thing of TIRA's.
If in the eyes of the IRS, a TIRA is one and the same, then does this imply that contributions of people who don't qualify for a RIRA get double taxed?? I had an impression that if I opened a non-deductible TIRA and then converted to a RIRA (or even if I chose to keep it until the age of 59.5 w/o converting to the RIRA), the only taxable portion would be the capital gain & dividends if any, but not contribution itself, because it's my after-tax contribution. For people, who qualify for a regular deductible TIRA, then everything (contributions + gains & dividends) are taxed at withdrawal. Am I wrong? I think it's time to go to sleep, because my brain cannot process it anymore :annoyed :oops:

House Blend wrote: But if you do decide to use a Backdoor Roth, I don't see much point in continuing Roth contributions. Might as well use the Backdoor for all remaining contributions and stop worrying about your MAGI.

This is what I hope it's possible to do, but Alan S. above was saying that the IRS might frown upon such strategy. If I understood him correctly, the best would be to request returns of my RIRA contributions, then contribute the total $5,500/each to new TIRA's and then convert or otherwise the IRS might question our income (??). I hope I misunderstood him and that I could do what your bold quote is saying.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby aida2003 » Thu Jun 27, 2013 10:07 pm

letsgobobby wrote:Charitable donations don't lower AGI.


Definitely bed time for me. You're totally right. It reduces taxable income, but not the AGI, gee :oops: :oops:
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby House Blend » Fri Jun 28, 2013 10:56 am

aida2003,

Alan S is talking about what your options are if you've already contributed too much to Roth this year. If you're 100% confident that you'll be within bounds for your MAGI, then you don't have to worry about that.

And livesoft is saying that you really do want to be 100% confident.

The phaseout range for MFJ is $178K to $188K. Seems like something as simple as an unexpected raise or bonus could be enough to bump you out of that range.

You could fix that problem by requesting a full return of your 2013 Roth contributions. (One of the options mentioned by Alan S.) You could even wait until January 2014 to do it. The main drawback is that you'll owe tax on the gains from these contributions.

The question you've directed at me suggests more confusion. The $5500 limit is for the total amount of Roth and TIRA contributions you can designate for 2013. You can spread between the two in any amounts you like (as long as your MAGI says that the Roth part is kosher).

Example: your MAGI leaves you eligible to make a $2000 Roth contribution. So you contribute $2000 to Roth and $3500 to TIRA. Or, you contribute $37 to Roth and $5463 to TIRA. Then you convert the TIRA to Roth at essentially no tax cost.
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby aida2003 » Fri Jun 28, 2013 2:03 pm

House Blend wrote: The question you've directed at me suggests more confusion. The $5500 limit is for the total amount of Roth and TIRA contributions you can designate for 2013. You can spread between the two in any amounts you like (as long as your MAGI says that the Roth part is kosher).

Example: your MAGI leaves you eligible to make a $2000 Roth contribution. So you contribute $2000 to Roth and $3500 to TIRA. Or, you contribute $37 to Roth and $5463 to TIRA. Then you convert the TIRA to Roth at essentially no tax cost.


Thanks for getting back to me, House Blend. At this point, I will not do anything and I'll wait until January 2014 to see our 'set in stone' income of 2013 and then I'll come back to BH with my questions. I don't want to overload myself now.
However, I'm reading a transcript of Vanguard webcast that aired on 5/23/13 https://personal.vanguard.com/us/insigh ... ing-062013 that gives some great points which brings me to your example above and an argument that it's fine to keep a TIRA (it was nagging me yesterday that I forgot to mention something important). I suppose we'll be pushed to the 28% tax bracket for 2013. If we see a new bonus in 2014, perhaps it's not a good idea for us to convert our new TIRA's to RIRA's and rather wait until we get back to a lower tax bracket or even until retirement. I'm optimistic that we will not be paying 28% in taxes at that time, we're not planning to have hight income then.
OTOH, if the turnaround is very fast at Vanguard, I can create a TIRA and convert to a RIRA immediately with hopefully very tiny earnings, though I'd need to study how all this conversion stuff would behave with regards to the AMT.

Thank you all and I think you'll hear my questions in the 1st quarter next year thought I'll read the provided links first.
Enjoy your summer :beer
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Re: We're in RIRA's phase-out area: How/what to plan for nex

Postby House Blend » Fri Jun 28, 2013 3:53 pm

You've said that you don't currently have any TIRAs.

In that case, if you make a TIRA contribution and convert it to Roth the next day, you'll only owe tax on one day's worth of gains. Which should be minimal; zero if you use a MMF in the TIRA. Your tax bracket, MAGI, and AMT status is largely irrelevant for this purpose.

If you've already contributed $2000 to your Roth this year, there's no additional headache or danger created if you contribute $3500 to a TIRA on Monday and convert it to Roth on Tuesday. But you will still have to wait until January to know for sure whether all or part of that $2000 Roth contribution was kosher.
aida2003 wrote:OTOH, if the turnaround is very fast at Vanguard,

It is. I did an IRA recharacterization (not a conversion) on Monday, and got the confirmation statement on Tuesday.
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