IRS comments on backdoor Roth IRA

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IRS comments on backdoor Roth IRA

Postby letsgobobby » Sun Apr 08, 2012 1:58 pm

as described in the WSJ, a spokesman for the IRS seems to confirm its legitimacy:

The Internal Revenue Service hasn't raised any red flags on backdoor Roths that are properly reported on form 8606. According to a spokesman: "The law is pretty clear on this issue."

http://online.wsj.com/article/SB1000142 ... 26954.html

This has been debated many times on this forum. Of course an IRS spokesman is not an official arbiter, but this comment may provide some comfort to those who questioned the backdoor Roth IRA.
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Re: IRS comments on backdoor Roth IRA

Postby chaz » Sun Apr 08, 2012 2:02 pm

IRS agent helps somewhat.
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Re: IRS comments on backdoor Roth IRA

Postby mhc » Sun Apr 08, 2012 3:44 pm

The article does not appear to identify who the spokesman works for. It would be better if the author of the article identified the qualifications of the spokesman.
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Re: IRS comments on backdoor Roth IRA

Postby letsgobobby » Sun Apr 08, 2012 4:35 pm

seems pretty clear to me. But I sent off an email to the author, requesting clarification.
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Re: IRS comments on backdoor Roth IRA

Postby letsgobobby » Sun Apr 08, 2012 4:57 pm

here is her (very speedy) reply:

Yep, it was. I feel pretty comfortable with this; that's about as much as you ever get from them.

THX for reading and writing! LS
________________________________________
From: letsgobobby
Sent: Sunday, April 08, 2012 4:34 PM
To: Saunders, Laura
Subject: re: Backdoor Roth IRA

Hello, in your article you wrote:


The Internal Revenue Service hasn't raised any red flags on backdoor Roths that are properly reported on form 8606. According to a spokesman: "The law is pretty clear on this issue."
I want to clarify that the spokesman you quoted was, in fact, a spokesman for the IRS. Your article suggests that but leaves a little room for interpretation.

Thank you,

letsgobobby
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Re: IRS comments on backdoor Roth IRA

Postby 555 » Sun Apr 08, 2012 5:27 pm

Vanguard is fine with it too, FWIW.
https://personal.vanguard.com/us/insigh ... 3-03082012
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Re: IRS comments on backdoor Roth IRA

Postby mhc » Sun Apr 08, 2012 7:27 pm

letsgobobby wrote:here is her (very speedy) reply:

Yep, it was. I feel pretty comfortable with this; that's about as much as you ever get from them.

THX for reading and writing! LS
________________________________________
From: letsgobobby
Sent: Sunday, April 08, 2012 4:34 PM
To: Saunders, Laura
Subject: re: Backdoor Roth IRA

Hello, in your article you wrote:


The Internal Revenue Service hasn't raised any red flags on backdoor Roths that are properly reported on form 8606. According to a spokesman: "The law is pretty clear on this issue."
I want to clarify that the spokesman you quoted was, in fact, a spokesman for the IRS. Your article suggests that but leaves a little room for interpretation.

Thank you,

letsgobobby


Thanks for eliminating the doubt.
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Re: IRS comments on backdoor Roth IRA

Postby tms » Mon Apr 09, 2012 9:06 pm

I'm not sure why it would be an issue. There are taxpayers choosing to do Roth conversions in part because it will allow them to do the backdoor. It would be very unfair to take it away after a taxpayer has paid the tax to put them in a position to use the backdoor strategy.
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Re: IRS comments on backdoor Roth IRA

Postby retiredjg » Tue Apr 10, 2012 4:29 pm

Thanks for posting this letsgobobby! It is somewhat reassuring.

However, I believe there is an error in the article:

    "What if a taxpayer needs money from a Roth account? Withdrawals from backdoor Roths within five years of conversion are usually subject to a 10% penalty unless the owner is 59½ or older. Each conversion carries a five-year limit.'

I believe there is some truth to this, but it is mostly false because the only part subject to the 10% penalty is the part of the conversion that was taxed at the time of the conversion. For most backdoor Roth contributions (at least how we usually discuss it here) there would be no part that is taxable at the time of the conversion. Even if there is a taxable part of a conversion, the part that was not taxed is not subject to the 10% penalty.

This was first pointed out to us by interplanetjanet and Alan S. (a year or so ago?). Prior to that, the thinking discussed here was that the whole thing was subject to the 5 year period or the penalty. I worked through the chart in one of the IRS publications and had to agree that they were right.
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Re: IRS comments on backdoor Roth IRA

Postby interplanetjanet » Wed Apr 11, 2012 3:21 am

retiredjg wrote:I believe there is some truth to this, but it is mostly false because the only part subject to the 10% penalty is the part of the conversion that was taxed at the time of the conversion. For most backdoor Roth contributions (at least how we usually discuss it here) there would be no part that is taxable at the time of the conversion. Even if there is a taxable part of a conversion, the part that was not taxed is not subject to the 10% penalty.

This was first pointed out to us by interplanetjanet and Alan S. (a year or so ago?). Prior to that, the thinking discussed here was that the whole thing was subject to the 5 year period or the penalty. I worked through the chart in one of the IRS publications and had to agree that they were right.

Speaking as someone who hadn't a clue about savings or how tax-advantaged accounts really worked as of less than two years ago, it's kind of neat that I was able to ferret out some useful information from a poorly understood set of rules. I think everyone should try to dig a bit and see what they find. :)

-janet
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Re: IRS comments on backdoor Roth IRA

Postby VictoriaF » Wed Apr 11, 2012 6:59 am

interplanetjanet wrote:
retiredjg wrote:I believe there is some truth to this, but it is mostly false because the only part subject to the 10% penalty is the part of the conversion that was taxed at the time of the conversion. For most backdoor Roth contributions (at least how we usually discuss it here) there would be no part that is taxable at the time of the conversion. Even if there is a taxable part of a conversion, the part that was not taxed is not subject to the 10% penalty.

This was first pointed out to us by interplanetjanet and Alan S. (a year or so ago?). Prior to that, the thinking discussed here was that the whole thing was subject to the 5 year period or the penalty. I worked through the chart in one of the IRS publications and had to agree that they were right.

Speaking as someone who hadn't a clue about savings or how tax-advantaged accounts really worked as of less than two years ago, it's kind of neat that I was able to ferret out some useful information from a poorly understood set of rules. I think everyone should try to dig a bit and see what they find. :)

-janet


You had an advantage of being an intelligent novice unencumbered by the baggage of wrong assumptions that plague experts.

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Re: IRS comments on backdoor Roth IRA

Postby Gauntlet » Wed Apr 11, 2012 9:18 am

As I mentioned in a previous thread, I called the IRS regarding the backdoor Roth. The IRS agent that I talked with told me that the backdoor Roth transaction was allowed. Just another data point, for what it is worth.
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Re: IRS comments on backdoor Roth IRA

Postby letsgobobby » Wed Apr 11, 2012 9:20 am

VictoriaF wrote:
interplanetjanet wrote:
retiredjg wrote:I believe there is some truth to this, but it is mostly false because the only part subject to the 10% penalty is the part of the conversion that was taxed at the time of the conversion. For most backdoor Roth contributions (at least how we usually discuss it here) there would be no part that is taxable at the time of the conversion. Even if there is a taxable part of a conversion, the part that was not taxed is not subject to the 10% penalty.

This was first pointed out to us by interplanetjanet and Alan S. (a year or so ago?). Prior to that, the thinking discussed here was that the whole thing was subject to the 5 year period or the penalty. I worked through the chart in one of the IRS publications and had to agree that they were right.

Speaking as someone who hadn't a clue about savings or how tax-advantaged accounts really worked as of less than two years ago, it's kind of neat that I was able to ferret out some useful information from a poorly understood set of rules. I think everyone should try to dig a bit and see what they find. :)

-janet


You had an advantage of being an intelligent novice unencumbered by the baggage of wrong assumptions that plague experts.

Victoria

You are really digging the Kahneman book, aren't you? :)
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Re: IRS comments on backdoor Roth IRA

Postby interplanetjanet » Wed Apr 11, 2012 11:51 pm

VictoriaF wrote:
interplanetjanet wrote:Speaking as someone who hadn't a clue about savings or how tax-advantaged accounts really worked as of less than two years ago, it's kind of neat that I was able to ferret out some useful information from a poorly understood set of rules. I think everyone should try to dig a bit and see what they find. :)

-janet


You had an advantage of being an intelligent novice unencumbered by the baggage of wrong assumptions that plague experts.

I had another advantage: this was directly relevant to my situation and my ability to max my Roth IRA depended on emergency access to the money involved if necessary. There's nothing like a bit of self-interest to motivate you to pull hard when you see a loose thread, so to speak.

-janet
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