Backdoor Roth

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Topic Author
Pondo33
Posts: 43
Joined: Sun Mar 10, 2013 9:44 pm

Backdoor Roth

Post by Pondo33 »

In 2013 my wife and I contributed the maximum $5,500 (each) to our traditional IRAs. However, our modified adjusted gross income is going to be too high (over $188,000- married, filing jointly) to qualify for a Roth contribution. In addition, because our modified adjusted gross income (married, filing jointly) is over $115,000 we also will not be eligible for any tax deduction for our IRA contribution in 2013.

Therefore, I am thinking I should absolutely do a backdoor Roth conversion for the traditional IRA contributions for 2013. The only downside I can think of is that I will pay tax on whatever gains occurred in 2013 relative to my traditional IRA contribution. Those gains were minimal and I can’t think of any other reason I should not do a Roth backdoor conversation. Do you agree?
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Duckie
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Joined: Thu Mar 08, 2007 1:55 pm

Re: Backdoor Roth

Post by Duckie »

Pondo33, as you wrote, any gains will be minimal. That's not the issue. Being over the limit means you will have to recharacterize the contributions to a TIRA. Whether you then convert to a Roth IRA or just consider them non-deductible contributions to a TIRA will depend on whether you or your wife have any non-Roth IRAs (Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA). The pro-rata rule is the issue.
placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: Backdoor Roth

Post by placeholder »

Sounds like the OP is already in a TIRA so all that needs to be done is a conversion although as Duckie notes any other taxable IRAs could be a problem.
JW-Retired
Posts: 7189
Joined: Sun Dec 16, 2007 11:25 am

Re: Backdoor Roth

Post by JW-Retired »

Pondo33 wrote: Therefore, I am thinking I should absolutely do a backdoor Roth conversion for the traditional IRA contributions for 2013.
You can't do it just for those particular contributions. Whatever you convert will be a pro-rata sample of all the TIRA (includes SEP, SIMPLE, and rollover) money you presently have. As soon as you made them these contributions were homogenized into all the rest of your TIRAs. http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
JW
Retired at Last
Topic Author
Pondo33
Posts: 43
Joined: Sun Mar 10, 2013 9:44 pm

Re: Backdoor Roth

Post by Pondo33 »

I think I understand this... (maybe)

If I do a backdoor to a Roth, I will pay tax on all the gains across every IRA? Not just the amount I backdoor ($11,000)?

If that's true, what is the advantage of contributing to my IRA? If I do not get a tax deduction, and I still pay tax on it later, how is this different that just investing in my taxable account? If I understand it, I guess it would still be worth contributing to an IRA for bonds, so that any bond income is not taxed now. But other than that, what is the advantage? I thought a TIRA was good because I could deduct my contribution. I thought a Roth was good because I wouldn't be taxed at all later. But if neither of these are true, other than the bond thing, is there an advantage to continuing to fund my TIRA over my taxable account?

What would you recommend I do?
rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Backdoor Roth

Post by rkhusky »

Pondo33 wrote: If that's true, what is the advantage of contributing to my IRA? If I do not get a tax deduction, and I still pay tax on it later, how is this different that just investing in my taxable account? If I understand it, I guess it would still be worth contributing to an IRA for bonds, so that any bond income is not taxed now. But other than that, what is the advantage? I thought a TIRA was good because I could deduct my contribution. I thought a Roth was good because I wouldn't be taxed at all later. But if neither of these are true, other than the bond thing, is there an advantage to continuing to fund my TIRA over my taxable account?
Stocks also throw off dividends and cap gains, which won't be taxed, until you withdraw.
If you have any years without much income (retire early), you can convert to Roth.
Having funds in an IRA also makes buying/selling easier, in that you don't have to worry about cap gains. But you also can't tax loss harvest. The IRA giveth and it taketh away.
Of course the Wiki has some more info: http://www.bogleheads.org/wiki/Non-dedu ... tional_IRA
JW-Retired
Posts: 7189
Joined: Sun Dec 16, 2007 11:25 am

Re: Backdoor Roth

Post by JW-Retired »

Pondo33 wrote:I think I understand this... (maybe)

If I do a backdoor to a Roth, I will pay tax on all the gains across every IRA? Not just the amount I backdoor ($11,000)?

If that's true, what is the advantage of contributing to my IRA? If I do not get a tax deduction, and I still pay tax on it later, how is this different that just investing in my taxable account? If I understand it, I guess it would still be worth contributing to an IRA for bonds, so that any bond income is not taxed now. But other than that, what is the advantage? I thought a TIRA was good because I could deduct my contribution. I thought a Roth was good because I wouldn't be taxed at all later. But if neither of these are true, other than the bond thing, is there an advantage to continuing to fund my TIRA over my taxable account?

What would you recommend I do?
Maybe I have misled you. I was thinking you definitely had a large TIRA in addition to this $11,000 account. Re-reading your posts you have not said that explicitly but you sort of imply it. Can you tells us the total size of all your TIRA type accounts (including Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA) and how much of all the total contributions to them were non-deductible?

If you have a 401k that you can roll TIRA pre-tax money into, that will isolate the post tax basis in the TIRA(s). Then you can convert that to a Roth tax free.
http://fairmark.com/retirement/roth-acc ... onversion/
JW
Retired at Last
Topic Author
Pondo33
Posts: 43
Joined: Sun Mar 10, 2013 9:44 pm

Re: Backdoor Roth

Post by Pondo33 »

JW Nearly Retired wrote:
Pondo33 wrote:I think I understand this... (maybe)

If I do a backdoor to a Roth, I will pay tax on all the gains across every IRA? Not just the amount I backdoor ($11,000)?

If that's true, what is the advantage of contributing to my IRA? If I do not get a tax deduction, and I still pay tax on it later, how is this different that just investing in my taxable account? If I understand it, I guess it would still be worth contributing to an IRA for bonds, so that any bond income is not taxed now. But other than that, what is the advantage? I thought a TIRA was good because I could deduct my contribution. I thought a Roth was good because I wouldn't be taxed at all later. But if neither of these are true, other than the bond thing, is there an advantage to continuing to fund my TIRA over my taxable account?

What would you recommend I do?
Maybe I have misled you. I was thinking you definitely had a large TIRA in addition to this $11,000 account. Re-reading your posts you have not said that explicitly but you sort of imply it. Can you tells us the total size of all your TIRA type accounts (including Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA) and how much of all the total contributions to them were non-deductible?

If you have a 401k that you can roll TIRA pre-tax money into, that will isolate the post tax basis in the TIRA(s). Then you can convert that to a Roth tax free.
http://fairmark.com/retirement/roth-acc ... onversion/
JW


I did not say it, but you are correct- my wife has a roller over IRA with $180k and a rollover Roth IRA with $18k; both opened with Vanguard in 2013. She has a 401k with her current employer and I have a simple IRA through my office. We also have a taxable account.

So it sounds like I don't get the deduction or the roth. And, if I understand it, if I do a backdoor to a roth with last years $11k IRA contributions, I'll be taxed on any gains in any of the above-noted IRAs. Boo.

It sounds like I should continue contributing soley to avoid the tax on the bond funds and to avoid taxes on dividends. I do not plan on selling anything.

Is this right?
JW-Retired
Posts: 7189
Joined: Sun Dec 16, 2007 11:25 am

Re: Backdoor Roth

Post by JW-Retired »

So it sounds like I don't get the deduction or the roth. And, if I understand it, if I do a backdoor to a roth with last years $11k IRA contributions, I'll be taxed on any gains in any of the above-noted IRAs. Boo.
No, not exactly. IRAs are totally individual. Your wife's IRAs are not counted at all in any conversions you make or anything else like RMDs. Your 401k isn't counted but the SIMPLE would be. In taxing conversions IRS views you as having one big personal "IRA" = your TIRA + your SIMPLE + your rollover IRA + your SEP IRA. Also, you would be taxed on some of the pre-tax contributions + gains, you wouldn't be taxed on the $11k post-tax (non-deductible) contributions.

You will not have to pay taxes on the whole amount you convert. You will be taxed pro-rata on the conversion of the TIRA with $11k post-tax contributions as if it came from a composite IRA = your TIRA + your SIMPLE. If the SIMPLE is small compared to the TIRA you will pay only a little tax, if it is large you will pay a lot. If it is comparable in size you would pay on roughly half the conversion. The pro-rata calculation is done in IRS form 8606, which you need to file every time you make non-deductible contributions or do any conversions. It keeps track of your after-tax basis in your entire "IRA". IRAs are individual so both you and wife need to do separate 8606 depending on whose "IRA" is involved. Anybody contemplating non-deductible contributions or a backdoor Roth needs to be familiar with the 8606.

You can dry run the form 8606 and see how much tax you would actually have to pay. It is not the clearest form to fill out so don't hesitate to ask if you find it difficult, as many of us do.
JW
Retired at Last
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