Backdoor & Mega Backdoor Roth in Same Tax Year?

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Topic Author
catchinup
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Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

Hi Friends,
In 2020 I contributed into both a Backdoor Roth and a Mega Backdoor Roth. The Backdoor Roth contribution was transacted by making an after tax contribution to an empty taxable Vanguard IRA before reclassing it to Roth. Am I allowed to do this?

The Mega contribution was transacted by making an after tax contribution to an empty 401k fidelity non- prototype account, and then transacting an in-service distribution to a Fidelity individual Roth account. I'm using both taxable Vanguard IRA and 401k fidelity non-prototype accounts as pass-thru accounts and have no other personal taxable IRA or 401k investments.

Thanks!
Last edited by catchinup on Wed Mar 24, 2021 5:17 am, edited 1 time in total.
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inittowinit
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by inittowinit »

You probably mean you rolled the 401k contributions into a Rollover (traditional) IRA, then converted that to a Roth IRA, correct?

If so, then yes -- as long as you stayed within the respective IRA and 401k annual IRS contribution limits, there should be no problem with what you did.
sailaway
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by sailaway »

Did you recharacterize the IRA or convert it? If you were not eligible to make Roth contributions in the first place, you were not eligible to recharacterize. The "reclassify" wording isn't clear in this context.

When you refer to a prototype IRA, are you referring to a SEP? You can't have both a SEP and a 401k in the same year.
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Duckie
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by Duckie »

catchinup wrote:The Backdoor Roth contribution was transacted by making an after tax contribution to an empty taxable Vanguard IRA before reclassing it to Roth. Am I allowed to do this?
You made a non-deductible contribution to a TIRA and then did what? What do you mean by "reclassing it"? Did you convert it to the Roth IRA or recharacterize? I hope you converted it.

You are allowed to use both the backdoor Roth method and the mega backdoor Roth method in the same year.
The Mega contribution was transacted by making an after tax contribution to an empty 401k fidelity prototype account, and then transacting an in-service distribution to a Fidelity individual Roth account.
What do you mean by "prototype account"? Is this a standard W-2 401k or some type of solo 401k? Did you roll the after-tax contribution directly to the Fidelity Roth IRA or did you detour through a Rollover IRA first?
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

Duckie wrote: Wed Feb 24, 2021 5:06 pm Did you convert it to the Roth IRA or recharacterize? I hope you converted it.
I transferred it out of the traditional ira directly into a Roth IRA.

The Mega contribution was transacted by making an after tax contribution to an empty 401k fidelity prototype account, and then transacting an in-service distribution to a Fidelity individual Roth account.
What do you mean by "prototype account"? Is this a standard W-2 401k or some type of solo 401k? Did you roll the after-tax contribution directly to the Fidelity Roth IRA or did you detour through a Rollover IRA first?
[/quote]

"non-prototype 401k plan" means that the money is housed with fidelity but the 401k plan is my own and it is administered by me, not fidelity, So I am responsible for tax filings against it.

I did an in-service distribution by calling Fidelity and asking them to transfer the voluntary after tax contribution directly into my fidelity Roth IRA.

Thanks!
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

inittowinit wrote: Wed Feb 24, 2021 10:49 am You probably mean you rolled the 401k contributions into a Rollover (traditional) IRA, then converted that to a Roth IRA, correct?

If so, then yes -- as long as you stayed within the respective IRA and 401k annual IRS contribution limits, there should be no problem with what you did.
No, I made a voluntary after tax contribution to my 401k. I also made an after tax contributions to a traditional IRA.

Both of these were then transferred into Roth IRAs.
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

catchinup wrote: Wed Feb 24, 2021 11:51 pm
inittowinit wrote: Wed Feb 24, 2021 10:49 am You probably mean you rolled the 401k contributions into a Rollover (traditional) IRA, then converted that to a Roth IRA, correct?

If so, then yes -- as long as you stayed within the respective IRA and 401k annual IRS contribution limits, there should be no problem with what you did.
No, I made a voluntary after tax contribution to my 401k. I also made an after tax contribution to a traditional IRA.

Both of these were then transferred into Roth IRAs.
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inittowinit
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by inittowinit »

catchinup wrote: Wed Feb 24, 2021 11:51 pm
inittowinit wrote: Wed Feb 24, 2021 10:49 am You probably mean you rolled the 401k contributions into a Rollover (traditional) IRA, then converted that to a Roth IRA, correct?

If so, then yes -- as long as you stayed within the respective IRA and 401k annual IRS contribution limits, there should be no problem with what you did.
No, I made a voluntary after tax contribution to my 401k. I also made an after tax contributions to a traditional IRA.

Both of these were then transferred into Roth IRAs.
I see. As long as you stayed within the contribution limits there should be no issues here. In general you can do both a backdoor and megabackdoor Roth in the same year as long as you follow their respective contribution rules, since neither affects your ability to use the other.

Is there something specific about how you executed the contributions that worries you? Or were you just wondering whether you can do both a backdoor and mega backdoor in the same year?
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

inittowinit wrote: Thu Feb 25, 2021 7:46 pm
catchinup wrote: Wed Feb 24, 2021 11:51 pm
inittowinit wrote: Wed Feb 24, 2021 10:49 am You probably mean you rolled the 401k contributions into a Rollover (traditional) IRA, then converted that to a Roth IRA, correct?

If so, then yes -- as long as you stayed within the respective IRA and 401k annual IRS contribution limits, there should be no problem with what you did.
No, I made a voluntary after tax contribution to my 401k. I also made an after tax contributions to a traditional IRA.

Both of these were then transferred into Roth IRAs.
I see. As long as you stayed within the contribution limits there should be no issues here. In general you can do both a backdoor and megabackdoor Roth in the same year as long as you follow their respective contribution rules, since neither affects your ability to use the other.

Is there something specific about how you executed the contributions that worries you? Or were you just wondering whether you can do both a backdoor and mega backdoor in the same year?
nothing specific. I was just wondering if you're allowed to do both in the same year. Thanks 😊
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

Hi I had a follow up question -- will I need to file separate 8606 forms for each distribution? Or do the total distributions go on the same 8606 form?
retiredjg
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by retiredjg »

There is only one Form 8606 per person per year.

The backdoor Roth process definitely requires the form. The Mega-backdoor does not require the form to file your taxes. That is handled completely by 1099. Some people update Part III of the form 8606 to keep up with how money gets into Roth IRA.
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

retiredjg wrote: Tue Mar 23, 2021 10:52 am There is only one Form 8606 per person per year.

The backdoor Roth process definitely requires the form. The Mega-backdoor does not require the form to file your taxes. That is handled completely by 1099. Some people update Part III of the form 8606 to keep up with how money gets into Roth IRA.
I see. I will review part III. BTW, I have two Roth IRA accounts. One is dedicated to the 401k distributions and the other is dedicated to the distributions from my traditional IRA account. It seemed like a good idea to keep the moneys separated just in case.

2020 is my first year doing these "backdoor" distributions.

Thanks for responding to my postings.
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

sailaway wrote: Wed Feb 24, 2021 10:52 am Did you recharacterize the IRA or convert it? If you were not eligible to make Roth contributions in the first place, you were not eligible to recharacterize. The "reclassify" wording isn't clear in this context.

When you refer to a prototype IRA, are you referring to a SEP? You can't have both a SEP and a 401k in the same year.
I meant converted. Sorry I'm obviously a bit of a newbie at this.

I corrected my original post.. It should have read non-prototype 401k. The taxable IRA is a traditional IRA.

I used to have a SEP- IRA but I rolled it into the 401K before I started doing all this crazy stuff. So I started with zero basis.
sidwin516
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by sidwin516 »

I do it every year and haven’t had a problem. I do it the same way you are doing it.
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

sidwin516 wrote: Wed Mar 24, 2021 8:04 am I do it every year and haven’t had a problem. I do it the same way you are doing it.
I see. Do you administer your own 401k?
sidwin516
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by sidwin516 »

catchinup wrote: Wed Mar 24, 2021 1:24 pm
sidwin516 wrote: Wed Mar 24, 2021 8:04 am I do it every year and haven’t had a problem. I do it the same way you are doing it.
I see. Do you administer your own 401k?
unfortunately i do everything lol....

Jan 2, i add 6k in my IRA for my wife and I.
A week later i'll move the 6k from the IRA to the roth.

At least now my wife's company is pretty cool. They automatically convert the money from her 401k and move it to an out of plan roth automatically and also lands in the funds i want it land in. At my last job it would convert in plan to an after tax plan. This is a bigger pain because only fidelity keeps track of what is what...
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

retiredjg wrote: Tue Mar 23, 2021 10:52 am Some people update Part III of the form 8606 to keep up with how money gets into Roth IRA.
Hi I looked at Part III of 8606 -- it's entitled "Distributions From Roth IRAs". But I am not taking distributions from my Roth. Rather, I am taking a distribution of after-tax money from my 401k into a Roth IRA. So does Part III apply in that case?

Thanks
MrJedi
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by MrJedi »

catchinup wrote: Sat Apr 03, 2021 7:46 pm
retiredjg wrote: Tue Mar 23, 2021 10:52 am Some people update Part III of the form 8606 to keep up with how money gets into Roth IRA.
Hi I looked at Part III of 8606 -- it's entitled "Distributions From Roth IRAs". But I am not taking distributions from my Roth. Rather, I am taking a distribution of after-tax money from my 401k into a Roth IRA. So does Part III apply in that case?

Thanks
There are a few lines in that section that keep track of your contribution and conversion basis in your Roth IRA. These are numbers that may update and carryover each year. I think that's what's being referred to. If you don't keep track of it here (since it's not required to fill out if you don't distribute that year), you'll want your own tracking somewhere else so you know your basis.
retiredjg
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by retiredjg »

MrJedi wrote: Sat Apr 03, 2021 7:54 pm
catchinup wrote: Sat Apr 03, 2021 7:46 pm
retiredjg wrote: Tue Mar 23, 2021 10:52 am Some people update Part III of the form 8606 to keep up with how money gets into Roth IRA.
Hi I looked at Part III of 8606 -- it's entitled "Distributions From Roth IRAs". But I am not taking distributions from my Roth. Rather, I am taking a distribution of after-tax money from my 401k into a Roth IRA. So does Part III apply in that case?

Thanks
There are a few lines in that section that keep track of your contribution and conversion basis in your Roth IRA. These are numbers that may update and carryover each year. I think that's what's being referred to. If you don't keep track of it here (since it's not required to fill out if you don't distribute that year), you'll want your own tracking somewhere else so you know your basis.
Yes. That is what I meant. I suspect most people do this on a ledger or spreadsheet, but it can be done on the form.

:happy
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

retiredjg wrote: Sun Apr 04, 2021 6:35 am
Yes. That is what I meant. I suspect most people do this on a ledger or spreadsheet, but it can be done on the form.
Yes, I'm keeping track in a spreadsheet. Thanks!!
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

retiredjg wrote: Tue Mar 23, 2021 10:52 am The Mega-backdoor does not require the form to file your taxes. That is handled completely by 1099.
How then does the IRS ever know about voluntary after tax 401K contributions and subsequent conversions to Roth IRAs? There appears to be no way to specifically denote after tax contributions on form 5500ez. We are also saying here that there is no requirement to report subsequent conversions to Roth IRAs. The only way I see anything being reported is the distribution/conversion to on the 1099.

Am I missing something here?
retiredjg
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by retiredjg »

This is my best guess. You need to hear from Alan S on this. He posted something about this recently - you may want to look through his posts for information.

The basis (your after-tax contributions) from your Roth conversion from the after-tax account is kept up with on line 24 on Form 8606. See the form instructions, part III, line 24, I think it is the last bullet.

The problem is the IRS tells you not to file the form every year just for changes to part III (see instructions to part III). It specifically says "don't do part III unless you....yada, yada".

This seems to be some disconnect. I guess you are supposed to remember to add in these numbers the next time you use part III of the form. Like that's going to happen...(eyes rolling).

I don't think the IRS actually keeps up with basis. They may collect the information in some form that could be gathered and analyzed if they think a tax payer is cheating. But most likely, if they think a tax-payer is cheating on this issue, they are probably going to require the tax-payer to show where their numbers came from.

There is no way in heck I would depend on tax software to keep up with this for me. Not alone anyway.

The taxable part of the 401k after-tax account to Roth IRA conversion is handled by the 1099. The 1099 tells you how much was rolled over/converted. I think it also tells you how much your contributions were and how much was the taxable part. This is what the IRS is interested in and what will get flagged if you do not report it.

I hope that helps.
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

retiredjg wrote: Sun May 09, 2021 2:44 pm The problem is the IRS tells you not to file the form every It specifically says "don't do part III unless you....yada, yada".
The top of the section III says not to fill out section 3 unless you took a distribution from a Roth IRA which is not what happened. I took an in-service distribution from a sub-account of my 401k designated for my after tax contributions. (This is how I keep those cleanly separated from my tax deferred contributions.) I'm afraid if I fill out section 3, the IRS will think I took a Roth IRA distribution and didn't pay taxes on it.
retiredjg wrote: Sun May 09, 2021 2:44 pm The taxable part of the 401k after-tax account to Roth IRA conversion is handled by the 1099. The 1099 tells you how much was rolled over/converted. I think it also tells you how much your contributions were and how much was the taxable part. This is what the IRS is interested in and what will get flagged if you do not report it.
The 1099 allowed me to report the total distribution and how much was taxable.

I'll look for Alan S' post.

All this is making me regret setting up my own 401k plan, etc. It's nice to get more into Roth but all this takes time and creates stress :(

Thanks!
retiredjg
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by retiredjg »

Part III of the form is specifically designed for reporting distributions from Roth IRA. It is not designed to keep up with basis in Roth IRA. However, you have to know the basis in Roth IRA to fill out part III properly when you need Part III.

That's why I'm saying the IRS does not intend to keep up with the Roth IRA basis. You are supposed to do that.

If you keep up with your basis, when you DO take a distribution from Roth IRA, that is when you fill in line 22 and 24 from records you have kept yourself.

It is my understanding that some people go ahead and fill add basis to line 22 and line 24 in their tax software each year as it happens. That does not mean that they send Form 8606 to the IRS every year. They are just keeping the software balances up to date. I would not trust that myself. I would want a paper record.
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catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

retiredjg wrote: Sun May 09, 2021 5:47 pm
It is my understanding that some people go ahead and fill add basis to line 22 and line 24 in their tax software each year as it happens. That does not mean that they send Form 8606 to the IRS every year. They are just keeping the software balances up to date. I would not trust that myself. I would want a paper record.
I guess I am missing something about when/why it's important to track the basis on an IRA. In the case of Roth, all of the basis is after tax, and when I start withdrawing in retirement, it is also tax free. In the case of tax deferred (either 401k or IRA), all of it is pretax, so I pay ordinary income tax when I start withdrawing in retirement. In both these situations, I don't see where the basis comes into play. Where am I going wrong? Thanks
MrJedi
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by MrJedi »

catchinup wrote: Sun May 09, 2021 7:35 pm
retiredjg wrote: Sun May 09, 2021 5:47 pm
It is my understanding that some people go ahead and fill add basis to line 22 and line 24 in their tax software each year as it happens. That does not mean that they send Form 8606 to the IRS every year. They are just keeping the software balances up to date. I would not trust that myself. I would want a paper record.
I guess I am missing something about when/why it's important to track the basis on an IRA. In the case of Roth, all of the basis is after tax, and when I start withdrawing in retirement, it is also tax free. In the case of tax deferred (either 401k or IRA), all of it is pretax, so I pay ordinary income tax when I start withdrawing in retirement. In both these situations, I don't see where the basis comes into play. Where am I going wrong? Thanks
Basis would be the amount that hasn't been deducted (i.e. income tax has already been paid). If you make a nondeductible contribution into a traditional IRA, you can withdraw that basis out
(or convert it to Roth) without additional taxable income. It can be confusing because you could have both basis and tax deferred monies in the same account. So it is important to track so that you don't pay tax twice.

In the case of Roth IRA, if you make an early / non qualified distribution, the basis comes out tax free. Once you are qualified it does not really matter anymore.
placeholder
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by placeholder »

Right don't confuse the different uses of "basis" because it means something different in iras than taxable accounts.
retiredjg
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by retiredjg »

catchinup wrote: Sun May 09, 2021 7:35 pm I guess I am missing something about when/why it's important to track the basis on an IRA. In the case of Roth, all of the basis is after tax, and when I start withdrawing in retirement, it is also tax free. In the case of tax deferred (either 401k or IRA), all of it is pretax, so I pay ordinary income tax when I start withdrawing in retirement. In both these situations, I don't see where the basis comes into play. Where am I going wrong? Thanks
Roth IRA basis from direct contributions is available any time with no penalty. In order to tap into that, you have to know how much the basis is.

Roth IRA basis from Roth conversions are available with no penalty after the 5 tax year clock has run on that conversion. In order to tap into that, you have to know how much each conversion basis is and when each conversion occurred.

Anything that is not basis in a Roth IRA would be "earnings" that have occurred inside the Roth IRA. To know what the earnings are, you have to know what the basis is. The earnings are not available tax free until you are 59.5 years old and your first contribution to Roth iRA was at least 5 tax years ago.

It is important to keep up with how and when every dollar gets into Roth IRA. You will need that information to take money from Roth IRA prior to age 59.5.

Once you are 59.5 and the first contribution to Roth IRA was at least 5 tax years ago, the Roth IRA is "qualified" and the entire balance is available with no tax and no penalty.
Topic Author
catchinup
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by catchinup »

retiredjg wrote: Mon May 10, 2021 6:47 am
catchinup wrote: Sun May 09, 2021 7:35 pm I guess I am missing something about when/why it's important to track the basis on an IRA. In the case of Roth, all of the basis is after tax, and when I start withdrawing in retirement, it is also tax free. In the case of tax deferred (either 401k or IRA), all of it is pretax, so I pay ordinary income tax when I start withdrawing in retirement. In both these situations, I don't see where the basis comes into play. Where am I going wrong? Thanks
Roth IRA basis from direct contributions is available any time with no penalty. In order to tap into that, you have to know how much the basis is.

Roth IRA basis from Roth conversions are available with no penalty after the 5 tax year clock has run on that conversion. In order to tap into that, you have to know how much each conversion basis is and when each conversion occurred.

Anything that is not basis in a Roth IRA would be "earnings" that have occurred inside the Roth IRA. To know what the earnings are, you have to know what the basis is. The earnings are not available tax free until you are 59.5 years old and your first contribution to Roth iRA was at least 5 tax years ago.

It is important to keep up with how and when every dollar gets into Roth IRA. You will need that information to take money from Roth IRA prior to age 59.5.

Once you are 59.5 and the first contribution to Roth IRA was at least 5 tax years ago, the Roth IRA is "qualified" and the entire balance is available with no tax and no penalty.
It so happens I am turning 60 tomorrow. I'm certain the first contribution was more than 5 tax years ago, but I don't know if I can prove it. Perhaps I can ask Fidelity and Vanguard to pull the history.

I also have 2 Roth IRA accounts. So I am not sure if what you are saying applies separately to each account? It seems like it should not, but maybe I'm wrong?

Also, does it matter if I continue to contribute after age 59.5?

Thanks for all your input!
retiredjg
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Re: Backdoor & Mega Backdoor Roth in Same Tax Year?

Post by retiredjg »

catchinup wrote: Mon May 10, 2021 10:59 pm It so happens I am turning 60 tomorrow. I'm certain the first contribution was more than 5 tax years ago, but I don't know if I can prove it. Perhaps I can ask Fidelity and Vanguard to pull the history.

I also have 2 Roth IRA accounts. So I am not sure if what you are saying applies separately to each account? It seems like it should not, but maybe I'm wrong?

Also, does it matter if I continue to contribute after age 59.5?
You can continue to contribute as long as you have earned income/compensation.

All penalties go away at 59.5. After that, the earnings that have occurred in Roth IRA will be taxed (but no penalty) if your first contribution to any Roth IRA was made after 2016. So you don't need to prove anything unless you intend to pretty much empty the entire Roth IRA.

Both Vanguard and Fido should have records easily visible back to 2016. If your first contribution to Roth was in 2016 or before, your Roth IRA (no matter how many there are) is "qualified". And you don't have to keep up with anything any more. Happy Birthday :D
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