Backdoor Roth IRA Questions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
robocop
Posts: 255
Joined: Fri Jan 27, 2012 8:44 pm

Backdoor Roth IRA Questions

Post by robocop »

Hi,

These are probably basic backdoor Roth questions, so I apologize in advance. Thanks for any help you can provide!

I did a Roth conversion in 2011 (my income is too high to contribute directly), and I would like to contribute again for 2012.

First, when I convert from the non-deductible tIRA that I will open, do I have to convert into a new Roth account, or is it ok for me to convert into the same Roth IRA that I opened last year when I converted?

Second, I waited to contribute for 2012 since I was in aggressive debt repayment mode. However, I am now in a place where I feel comfortable paying only the minimum payments, as my loans are all around 2-2.5%. Given that, is there any advantage to waiting until 2014 to convert for 2013 like I did this year for 2012? I will be getting a 'bonus' this year in March (to replace a discretionary 401k contribution that my company discontinued), and was thinking of just directing that to my 2013 Roth contribution.

Finally, I noticed that there are no Admiral shares for the Target Retirement Funds at Vanguard. Given that, would you recommend that I try to do a 3 fund portfolio with lower costs (VTSAX = 0.06%, VTIAX = 0.18%, and VBTLX = 0.10) as opposed to doing a Target Retirement Fund (VFIFX [2050] = 0.19%)? I like the simplicity of not having to rebalance in Target 2050, but am willing to do the work of rebalancing if it is worth it. I know I wouldn't get to Admiral yet given my AA and only having ~11k total, but it is something I should probably think about this year or next.

Thanks in advance for your wisdom!
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Backdoor Roth IRA Questions

Post by celia »

robocop wrote:First, when I convert from the non-deductible tIRA that I will open, do I have to convert into a new Roth account, or is it ok for me to convert into the same Roth IRA that I opened last year when I converted?
You can convert into the existing Roth, but I recommend that you convert into a NEW or empty Roth account each time you convert. This will make life much easier should you need to re-characterize (un-do the conversion), which you might consider if the market drops a lot between the date you convert and the last day for re-characterizing. (Conversions done in 2013 can be re-characterized until Oct. 15, 2014.) Would you want to pay taxes on the value that was converted or on the new lower value if the money is re-converted in the future? Warning: there are rules as to when the re-characterized amount can be converted again.

If you end up not re-characterizing, and it is after the re-characterization deadline, then you can move the money from that Roth into your primary Roth. You will then have an "empty" Roth you can re-use for another conversion.
... is there any advantage to waiting until 2014 to convert for 2013 like I did this year for 2012? I will be getting a 'bonus' this year in March (to replace a discretionary 401k contribution that my company discontinued), and was thinking of just directing that to my 2013 Roth contribution
If you wait and the value of the traditional IRA increases, you will pay taxes on that higher amount instead of the amount you contributed to the traditional IRA. That is why people usually do the Roth conversion a day or two after contributing to a traditional IRA. But it is your choice. You could even wait 10 years! (Note that if you wait and end up with deductible and non-deductible contributions in traditional IRA(s), a partial conversion is taxed proportionally--a little messy.)
Finally, I noticed that there are no Admiral shares for the Target Retirement Funds at Vanguard. Given that, would you recommend that I try to do a 3 fund portfolio with lower costs (VTSAX = 0.06%, VTIAX = 0.18%, and VBTLX = 0.10) as opposed to doing a Target Retirement Fund (VFIFX [2050] = 0.19%)? I like the simplicity of not having to rebalance in Target 2050, but am willing to do the work of rebalancing if it is worth it. I know I wouldn't get to Admiral yet given my AA and only having ~11k total, but it is something I should probably think about this year or next.
All the Target funds are funds of funds. They have their own expense ratios as well as absorbing the expenses ratios of the funds they hold. However, the Target funds can invest in the Admiral version of each of the funds it owns and absorb the lower ERs that smaller investors may not be eligible for (until they have enough to put $10 in each sub-fund). You could go either way.

Why don't you calculate the dollar amount you think you would be saving at this point, using Investor shares. When your balances are low, the amount paid (in dollars) for ERs is also small. Will it be worth your time? (If I went with separate funds, I would only re-balance once a year.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
robocop
Posts: 255
Joined: Fri Jan 27, 2012 8:44 pm

Re: Backdoor Roth IRA Questions

Post by robocop »

Thank you so much for your detailed reply. It is extremely helpful!

One further question I had: when I said wait to convert until April 2014 for 2013, I actually meant is there an advantage to waiting to open the tIRA and then converting immediately. I know there was this year, as I still got the tax-free space but could focus my 2012 money instead on paying off high-interest debt, but I wasn't sure if there is any other reason people would recommend waiting until 2014 to contribute for 2013.

Thanks!
sscritic
Posts: 21853
Joined: Thu Sep 06, 2007 8:36 am

Re: Backdoor Roth IRA Questions

Post by sscritic »

celia wrote: All the Target funds are funds of funds. They have their own expense ratios as well as absorbing the expenses ratios of the funds they hold.
True; not true.
User avatar
Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: Backdoor Roth IRA Questions

Post by Duckie »

sscritic wrote:
celia wrote: All the Target funds are funds of funds. They have their own expense ratios as well as absorbing the expenses ratios of the funds they hold.
True; not true.
What sscritic is saying is that yes, they are funds of funds, but no, they do not "have their own expense ratios as well". They just have the pro-rated expense ratios of their bucket of funds. Nothing extra on top.
Post Reply