IRA and backdoor IRA Questions

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Topic Author
sc3
Posts: 8
Joined: Tue Apr 02, 2013 7:22 pm

IRA and backdoor IRA Questions

Post by sc3 »

Hi,
Apologize in advance if this has been previously answered, tired reading through many posts on the topic, but did not get a definitive answers to questions I have (total noob on all matters related to IRA, and generally a dunce in all things finance).

- I dont have an IRA account, just 401k at work.
- Income suddenly high enough (and while not in the 250K range that will trigger additional taxes, high enough to worry about the taxes I pay in taxable mutual fund accounts).
- Trying to shift from my taxable accounts to tax advantaged accounts -- specifically roth IRA.

Questions:

First question I have is that most of the topics/thread that I read seem to imply that IRA contributions are to be done in a lump sum (I do realize I need to do that for 2012). Can we have IRA accounts that invest a small sum every month? Can this be done automatically in Vanguard? Or does it need manual transactions? (I see some posts which say you need to specify tax year for the investments)

I want to do the backdoor conversions, can I do the automatic investment plan and use automatic conversion every 30/60/90 days? Or will I have to do it manually? Does Vanguard mind?

If I do automatic investments, and by mistake, I invest over the allowed limit, can I revert (or reclassify) the transactions?


Thanks in advance for your time.
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Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: IRA and backdoor IRA Questions

Post by Duckie »

sc3 wrote:Can we have IRA accounts that invest a small sum every month?
Yes. Once you have the $3K or $1K minimum in, for additional manual contributions the low limit is $100. For additional automatic contributions the low limit is $50 in most cases.
Can this be done automatically in Vanguard?
Yes, you can have Vanguard pull money from your bank account through their Automatic Investment Plan.
Or does it need manual transactions?
That'll work, too.
(I see some posts which say you need to specify tax year for the investments)
You might for contributions between January 1 and April 15. It depends on whether Vanguard knows you have already maxed the previous year or not.
I want to do the backdoor conversions, can I do the automatic investment plan and use automatic conversion every 30/60/90 days? Or will I have to do it manually? Does Vanguard mind?
The contribution can be automatic, the conversion cannot.
If I do automatic investments, and by mistake, I invest over the allowed limit, can I revert (or reclassify) the transactions?
You can have Vanguard make a corrective distribution if necessary. But really, don't let it be that automatic. You need to keep an eye on things.
Topic Author
sc3
Posts: 8
Joined: Tue Apr 02, 2013 7:22 pm

Re: IRA and backdoor IRA Questions

Post by sc3 »

thanks for the answers.

I do plan to keep an eye, but just was worried what happens if I miss tracking the amounts by one or two cycles. What is the worst that can happen, from the tax stand point? Will I have to forego the additional money, or do I pay fines? Glad to know I can do the corrective distribution.
Topic Author
sc3
Posts: 8
Joined: Tue Apr 02, 2013 7:22 pm

Re: IRA and backdoor IRA Questions

Post by sc3 »

Thanks again!,

One more question: Since I want to invest in a couple of funds (3K min), I plan to transfer 5K for 2012 and 1K for 2013 and invest in VMMXX (as a place holder) and then move it to my targeted fund when I convert to ROTH. I want to keep the VMMXX fund active so that I can continue to add funds on a monthly basis (and then transfer it to ROTH). What is the minimum amount I need to keep invested in the fund to keep VMMXX active and not have to buy in again @3K?
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Duckie
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Joined: Thu Mar 08, 2007 1:55 pm

Re: IRA and backdoor IRA Questions

Post by Duckie »

I'm not sure. I've never let my VMMXX get below $3K so I don't know what happens. I would think that if you leave at least $1K there and keep moving money in and out it wouldn't be a issue, but I'm not positive.

The problem is that you want the entire amount converted by the end of the year to avoid the pro-rata rule so you'll have to convert everything to a Roth before December 31st. I'm not sure if once VMMXX is empty you can add just a little to it or if you have to put in $3K to start over again.

It might be better to use a taxable savings account to accumulate the entire amount ($5.5K for 2013) and then do the contribution/conversion all at once. It would probably be less hassle.
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Epsilon Delta
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Joined: Thu Apr 28, 2011 7:00 pm

Re: IRA and backdoor IRA Questions

Post by Epsilon Delta »

Duckie wrote: The problem is that you want the entire amount converted by the end of the year to avoid the pro-rata rule so you'll have to convert everything to a Roth before December 31st.
That's factually correct but ...

If you leave a small amount in the traditional IRA the pro-rata rules are invoked, but if it's a small amount they have little economic impact (they are pro-rata after all). They do make filing your taxes a little harder in that you have to fill out about a dozen extra lines on form 8606, but most of those are calculations. The only extra piece of data you have to enter is the value of the traditional IRA on Dec 31st, and next year you have to carry forward the few dollars in basis that remain in the traditional IRA.
Topic Author
sc3
Posts: 8
Joined: Tue Apr 02, 2013 7:22 pm

Re: IRA and backdoor IRA Questions

Post by sc3 »

Thanks for all the answers and suggestions.

Just thinking whether ING IRA savings will allow ACH pull from Vanguard? Fatwallet etc. says ING allows ACH target for savings account, but their website is not clear about it. I plan to ask their customer service reps.

I could open a traditional IRA savings with ING (no fees, no minimum), and then use that account as the funds for automatic investment in Vanguard ROTH account. Will that scheme work? I can collect the money in a taxable savings account and transfer the amount at end of the year, but I like the idea of regular investments rather than one off transactions.
Topic Author
sc3
Posts: 8
Joined: Tue Apr 02, 2013 7:22 pm

Re: IRA and backdoor IRA Questions

Post by sc3 »

I called CapitalOne360, the CSR said I can't do ACH outside of their sharebuilder IRA, and would need to fill the "transfer form" to move any monies to a 3rd party brokerage. Not sure if the CSR understood my questions. Will try again tomorrow.

Ally apparently doesn't do any ACH (including for funding into the IRA account).
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