Yes, I agree, but this most commonly comes up -- or, rather, I bring it up -- when a new poster who is eligible for a deductible IRA is hammered with the "rule of thumb" to contribute to a Roth instead. Rather than fight that outright, I often point out that doing a backdoor Roth, if Roth is where you want to end up, will save quite a bit of money. I didn't hit on this myself, I stole the idea from bdpb.Alan S. wrote:This list should also apply to all TIRA distributions for any purpose, not just those converted to Roth IRAs. If so, you could substitute the term "double tax free on state return" for "backdoor both". I think that term has been used to describe HSA accounts for which you get the deduction and generally take tax free distributions.
I expect that any states with a double tax free feature have a minimum age (like NY) under which there will be no double benefit, since these exceptions were generally adopted to attract retirees to the state or keep them from fleeing the state. But it will be interesting to see if any states turn up that offer this benefit to younger taxpayers.
soaring wrote:This link will tell you about each States sales tax and other tax info.
Bob's not my name wrote:As for states without a minimum age, I believe these have none (but the latter three have dollar limits below the $5,000 contribution limit):
The mechanics of conversion would be the same as normal, e.g., just use the Vanguard forms. You should be able to convert the next day. See the instructions for Line 5. The contribution and conversion do cancel out in your federal AGI, but not in your Illinois taxable income.lrisius wrote:Hi,
I hadn't ever thought of this before-I understand the concept but have a couple of questions. I live in Illinois
1) Is there a thread somewhere that discusses the mechanics of this? I looked around some but wasn't able to find much. If someone can point me at a good thread, that would be wonderful.
2) How long do I need to leave it in the deductible IRA to make this work? Do I need to wait to recharacterize till after the first of the year or till after I file or can I do it immediately? Seems like if I did it immediately, the deduction and conversion would offset each other as far as income and I wouldn't get the benefit. I looked at my Illinois return from last year and it uses the AGI from the federal form and it appears they would cancel out in the federal AGI if done in the same year.
3) If the answer to #2 requires that I shift the income to next year for the federal return, I will need to watch how that affects our marginal tax rate since our taxable income is close to the line for our bracket. If done every year with the same amounts, this would cancel out after the first year, I guess.
I really appreciate the link, but it occurs to me that it would be more useful on the regular Roth page, since your typical Backdoor Roth reader is a high income taxpayer (>$200,000 MFJ) whose income exceeds the direct Roth phaseout and therefore also exceeds the spousal TIRA phaseout (which is the same) and the regular TIRA phaseout (which is much lower). The Backdoor Both trick is most useful to taxpayers who are already making direct Roth contributions and paying unnecessary state tax. These would typically be MFJ < $100,000.LadyGeek wrote:I added this thread to the wiki: Backdoor Roth IRA
Each individual may exclude their retirement benefits, up to
$10,000, but not to exceed the amount included in the Federal
Adjusted Gross Income.
Bob's not my name wrote:Thanks xerty. Ten left.
Hmm. It looks like a Backdoor Both is allowed by this $10,000 exclusion. Am I wrong?kd2008 wrote:Oklahoma: Same as Federal deduction.
Also,Each individual may exclude their retirement benefits, up to $10,000, but not to exceed the amount included in the Federal Adjusted Gross Income.
Each individual may exclude their retirement benefits, up to $10,000 ... The retirement benefits must be received from the following and satisfy the requirements of the Internal Revenue Code (IRC): ... an individual retirement account, annuity or trust or simplified employee pension under IRC section 408,
Bob's not my name wrote:Done. Corrections still welcome.
JimInIllinois wrote:So, if I have already made my 2011 Roth IRA contribution, can I recharacterize it to a deductible IRA and then convert it back to a Roth? Any gotchas?
JimInIllinois wrote:It looks like this strategy would also be applicable (with greater rewards) to a 401(k)/(403(b)/457(b) plan that allows in-plan Roth rollovers. Anyone have a plan that allows such a rollover?
xerty24 wrote:JimInIllinois wrote:So, if I have already made my 2011 Roth IRA contribution, can I recharacterize it to a deductible IRA and then convert it back to a Roth? Any gotchas?
You can do this recharacterize - it as a traditional contribution in the year you make it. I forget whether you have a delay before you can convert or not, check Pub 590.
Bob's not my name wrote:New York (6.85%, 10.45% for NYC residents and municipal employees, 7.5% in Yonkers) Per MarkNYC, taxpayers over 59.5 get to exclude $20K of IRA income, so a couple could save $822/year in state taxes on Backdoor Both (don’t know about NYC taxes). And of course they should convert more than this year’s contributions to make full use of the exemption.
IT 150 Instructions, page 68 wrote:Qualifying pension and annuity income includes:
- periodic and lump-sum payments from an IRA, but not payments derived from contributions made after you retired;
Bob's not my name wrote:Oregon (9%, 9.63% in Portland) no Backdoor Both, but there appears to be an exemption for low-income 62-year-olds
Here: http://taxes.about.com/od/statetaxes/a/ ... -Taxes.htmchipmonk wrote:Hmm... where did you get the extra 0.63% personal income tax for Portland? I've never heard of it before, but would sure be interested to know if it exists, since I live thereBob's not my name wrote:Oregon (9%, 9.63% in Portland) no Backdoor Both, but there appears to be an exemption for low-income 62-year-olds
But it turns out that information is outdated:Oregon: The Tri-Met Transit District (includes Portland) assesses an income tax of 0.6318% and the Lane County Transit District (includes Eugene) assesses an income tax of 0.60%.
I'll edit my first post to show the higher rate, but I can't reconcile this information with your statement. Possibly you live outside the TriMet zone? There's an interactive map and a list of zip codes at the site. If they've been taking 0.6918% out of your pay obviously you would have noticed.http://trimet.org/taxinfo/ wrote:Payroll and self-employment taxes, which provide operating revenue for TriMet, are collected and administered by the Oregon Department of Revenue.
Effective January 1, 2011, the tax rate increased to .6918% ($6.918 per $1,000) of the wages paid by an employer and the net earnings from self-employment for services performed within the TriMet District boundary. Employers should apply the new rate with their reporting related to wages for the first quarter of 2011. Self-employed individuals should use the new rate when first reporting earnings for 2011.
The 2003 Oregon Legislature provided TriMet with the authority to increase the rate over 10 years to help pay for new transit service throughout the region. The rate increases annually by 1/100 of a percent.
Bob's not my name wrote:I'll edit my first post to show the higher rate, but I can't reconcile this information with your statement. Possibly you live outside the TriMet zone? There's an interactive map and a list of zip codes at the site. If they've been taking 0.6918% out of your pay obviously you would have noticed.
The transit tax is imposed directly on the employer. The tax is figured only on the amount of gross payroll for services performed within the TriMet or Lane Transit Districts. This includes traveling sales representatives and employees working from home.
The following are exempt from transit payroll taxes:
Federal credit unions.
Public school districts.
501(c)(3) nonprofit and tax-exempt institutions (except hospitals).
Insurance companies (except domestic insurers).
Domestic service in a private home.
The following are exempt from LTD, but subject to TriMet taxes:
Public education districts.
Public special service and utility districts.
City, county, and other local governments.
Ah! Good to know I haven't been missing something or unknowingly cheating on my taxes. Thanks for clearing this up.tfb wrote:Bob's not my name wrote:I'll edit my first post to show the higher rate, but I can't reconcile this information with your statement. Possibly you live outside the TriMet zone? There's an interactive map and a list of zip codes at the site. If they've been taking 0.6918% out of your pay obviously you would have noticed.
Sounds like it's levied on the employer, like employer's portion of FICA, FUTA, worker's comp, etc., which the employees don't see. Anyway it doesn't appear to be applicable to IRA withdrawals or Roth conversions.
nhandy007 wrote:Thanks to all who have contributed to documenting this strategy. It is an interesting idea that I would like to pursue. While reviewing some of the state tax instructions regarding retirement benefits, I see that the states commonly phrase their exception for the "receipt of retirement benefits from an individual retirement account." How does the rollover of a traditional IRA into a Roth IRA constitute the receipt of retirement benefits?
nhandy, if you're willing to share which state you're talking about I'd like to look at the form and instructions. I'm inferring South Carolina from the $3,000, but maybe that's an arbitrary number. Also, please confirm that you are eligible for a deductible TIRA under federal tax rules -- otherwise it doesn't work because your AGI isn't reduced. Well, that's not really accurate either. Typically the way state forms work is:nhandy007 wrote:Thanks for the clarification. I was trying to determine where I would take the deduction on last year's return. When I modified my IRA contributions to reflect this hypothetical scenario, TurboTax did not reduce my state taxes. I suppose I'll have to take the deduction manually.
Well, first off, my reading of the NC form (see my OP) was that only $2k is exempted, not $3k, so your yin and yang are reversed.nhandy007 wrote:instead of contributing $5k to the Roth, I contributed $2k to the Roth and $3k to the TIRA. I then rolled over the TIRA into the Roth
If you don't enter $2,000 on line 48 you're not going to see the effect.Line Instructions wrote:Retirement benefits also include amounts received from an individual retirement account or from an individual retirement annuity (IRA) ... Private Retirement Benefits. If you received retirement benefits from one or more private retirement plans other than federal, state, or local government retirement plans, you may deduct the amount included in federal taxable income or $2,000, whichever is less. Married individuals filing a joint return where both received such retirement benefits may each deduct up to $2,000 for a potential deduction of $4,000.
nhandy007 wrote:I used TurboTax 2010 to modify last year's return so that instead of contributing $5k to the Roth, I contributed $2k to the Roth and $3k to the TIRA. I then rolled over the TIRA into the Roth, and my federal and state tax owed remained the same before and after the change. This left me wondering whether I should manually classify the $2k of TIRA as retirement benefits received.
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