Help with Backdoor Roth

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rickberg
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Help with Backdoor Roth

Post by rickberg » Tue Sep 09, 2014 7:47 pm

I've been reading up about the backdoor roth and I'm not exactly sure what I need to do in my situation.

I have 2 accounts:

Fidelity - Contains a IRA account from when I rolled over from a previous employer. It consists of stocks and mutual funds.
Vanguard - Contains a IRA account from when I rolled over from a previous employer. This only consists of mutual funds.

If I were to do a backdoor roth, do I need to convert both of these IRA into my current employers 401k? (I would rather not convert all of this to Roth due to tax implications) Then within one of those brokers, fund a traditional IRA with $5500 and then convert that into a roth?

Is it possible that I leave both existing IRA accounts alone, and open a new IRA with Vanguard with $5500 and do a roth conversion only on this amount?

Thanks in advance.

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mhc
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Re: Help with Backdoor Roth

Post by mhc » Wed Sep 10, 2014 8:40 am

Here is the step by step process:
http://thefinancebuff.com/the-backdoor- ... ow-to.html

You need to move your existing IRA's into your 401k. No need to close any account if you don't want to. Fund your IRA. Move the money from the IRA to the Roth. At Vanguard, I do an exchange from the IRA to the Roth.
Is it possible that I leave both existing IRA accounts alone, and open a new IRA with Vanguard with $5500 and do a roth conversion only on this amount?
It is possible, but you will owe taxes due to the pro-rata rule. Read the link above. It explains it.

Pizzasteve510
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Re: Help with Backdoor Roth

Post by Pizzasteve510 » Wed Sep 10, 2014 10:05 am

Edited out personal details
Last edited by Pizzasteve510 on Fri Sep 19, 2014 9:43 am, edited 1 time in total.

rickberg
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Re: Help with Backdoor Roth

Post by rickberg » Wed Sep 10, 2014 12:24 pm

mhc wrote:Here is the step by step process:
http://thefinancebuff.com/the-backdoor- ... ow-to.html

You need to move your existing IRA's into your 401k. No need to close any account if you don't want to. Fund your IRA. Move the money from the IRA to the Roth. At Vanguard, I do an exchange from the IRA to the Roth.
Is it possible that I leave both existing IRA accounts alone, and open a new IRA with Vanguard with $5500 and do a roth conversion only on this amount?
It is possible, but you will owe taxes due to the pro-rata rule. Read the link above. It explains it.

Thanks for your response. Looking at the article - it mentions this:
When you are doing the backdoor Roth IRA, remember not to rollover from an employer-sponsored plan to a traditional IRA in the same year, either before or after you do the Roth conversion. You can rollover from one plan to another plan, or to your own solo 401k, just not to a traditional IRA.

I just recently rolled over my 401k to an IRA. So does this mean I cannot do a backdoor roth this year? Does this also mean I should convert all my IRA's into my current employers 401k this year so that I can do backdoor roth next year?

How does the pro-rata rule work? If I leave my existing accounts alone, doI owe taxes every year I perform a backdoor roth?

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Duckie
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Re: Help with Backdoor Roth

Post by Duckie » Wed Sep 10, 2014 2:48 pm

rickberg wrote:I just recently rolled over my 401k to an IRA. So does this mean I cannot do a backdoor roth this year?
You are allowed to use the Backdoor Roth IRA method, but it'll cost you because of the pro-rata rule.
Does this also mean I should convert all my IRA's into my current employers 401k this year so that I can do backdoor roth next year?
If you roll (not convert) your non-Roth IRAs to your current 401k then the pro-rata-rule won't be an issue. Whether or not that's a good idea depends on the options/costs in your current 401k.
How does the pro-rata rule work?
The IRS considers all non-Roth IRAs (Traditional IRAs, Rollover IRAs, SEP IRAs, SIMPLE IRAs) to be one big fat IRA. So tax-wise you can't do something to just one IRA without affecting the others.
If I leave my existing accounts alone, do I owe taxes every year I perform a backdoor roth?
Yes. If you have $95K in a combination of Traditional IRAs and SEP IRAs and make a $5K contribution to another TIRA and immediately convert that $5K to a Roth IRA, at the end of the year you will have $95K in non-Roth IRAs and $5K in the Roth IRA. That will mean that 95% of your $5K conversion (or $4750) will be taxable. Look at IRS Form 8606 to see how it works. Line 6 is the issue. To make the backdoor Roth work properly Line 6 has to be 0.

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celia
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Re: Help with Backdoor Roth

Post by celia » Wed Sep 10, 2014 4:24 pm

Some answers to questions that have been posed so far:

Backdoor Roth contributions are actually a non-deductible contribution to a traditional IRA followed by a conversion from the traditional IRA to a Roth.

IRAs are owned by individuals. A backdoor contribution or a conversion by an individual does not affect his/her spouse's IRAs or conversions.

All of your traditional IRAs at all custodians are thought of as one traditional IRA for tax purposes. It does not matter if you make a new contribution to an existing IRA or new one before you do a conversion. What matters for tax purposes is the total value of your traditional IRAs' deductible vs non-deductible contributions (and growth) at the time you do the conversion. Any conversion you do will be considered as a percent (pro-rata) of your total IRAs being converted, even if the actual dollars come out of an account that is totally just deductible contributions (and growth) or totally non-deductible contributions and growth.

For example, if you have $45,000 in deductible contributions (and growth) in your IRAs and $5,000 in non-deductible contributions (and growth), your accounts are 90% deductible and 10 % non-deductible. If you convert $5,000 this year, you will pay taxes on 90% of the converted amount. The remaining $45,000 is still considered to be 90% deductible and 10% non-deductible as taxes have been paid on part of it during the conversion.

For simplification, assume the $45,000 does not gain or lose value. Next year you add another $5,000 in non-deductible contributions. You now have ($45,000* 90%) in deductible contributions and ($45,000 * 10%) + $5,000 in non-deductible contributions. In total your IRA is now 81% deductible and 19% non-deductible. So a conversion of part of the money would be taxed on 81% of the converted amount. The remaining money remains at 81 vs 19%.

This continues until all money in the traditional IRA is converted. Assuming you don't change tax brackets during any of this, the taxes are the same as if you converted the original deductible IRA and the non-deductible IRA. To avoid all of this, the original traditional IRA can be "hidden" in a retirement plan before you start.
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.

Rolyatroba
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Re: Help with Backdoor Roth

Post by Rolyatroba » Wed Sep 10, 2014 4:52 pm

I didn't read thru the thread, besides the OP, so sorry if there is any duplication here.

The short answer is to open an IRA account at a third company, say Schwab. It will have a zero balance, then you just put the funds in it and convert it to a Roth.

Longer answer is I am at Schwab with IRA accounts for DW and myself, and a personal 401k for myself. The Schwab rep said I had to empty the two IRA accounts to enable the Roth conversion. Well, I could do that easily for myself (rolling the IRA to the 401k), but not so easily for my wife. So it occurred to me to open 2 IRA accounts at VG, where I have 529s. I did this, albeit needing to have a 2nd account/login/etc. for my wife. I then just ACH'd funds from my bank account to fund the IRAs (6500 me, 5500 wife), and finally converted them both to Roths.

Was super easy, and very quick, and didn't have to fill out any forms that weren't online.

Edit...I didn't read the last line in your post well. So, the above is really a long "yes" to that question. :)

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mhc
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Re: Help with Backdoor Roth

Post by mhc » Wed Sep 10, 2014 5:11 pm

Rolyatroba wrote:I didn't read thru the thread, besides the OP, so sorry if there is any duplication here.

The short answer is to open an IRA account at a third company, say Schwab. It will have a zero balance, then you just put the funds in it and convert it to a Roth.

Longer answer is I am at Schwab with IRA accounts for DW and myself, and a personal 401k for myself. The Schwab rep said I had to empty the two IRA accounts to enable the Roth conversion. Well, I could do that easily for myself (rolling the IRA to the 401k), but not so easily for my wife. So it occurred to me to open 2 IRA accounts at VG, where I have 529s. I did this, albeit needing to have a 2nd account/login/etc. for my wife. I then just ACH'd funds from my bank account to fund the IRAs (6500 me, 5500 wife), and finally converted them both to Roths.

Was super easy, and very quick, and didn't have to fill out any forms that weren't online.

Edit...I didn't read the last line in your post well. So, the above is really a long "yes" to that question. :)
I hope you know about the pro-rata rules.

Rolyatroba
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Re: Help with Backdoor Roth

Post by Rolyatroba » Wed Sep 10, 2014 5:31 pm

mhc wrote:I hope you know about the pro-rata rules.
Is there an emoji for a scream? I didn't know about that rule, and now as I understand it (albeit with only 5 mins. of googling), it seems we'll owe taxes on nearly the entire $12k. Hopefully this can be undone before 12/31.

I talked to both a Schwab and a Vanguard rep. about this and neither mentioned the rule. (Well the Schwab rep mentioned doing the IRA emptying, but made it sound like it was a procedural control required by Schwab, not a tax-related thing.)

Thanks for bringing this up.

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Re: Help with Backdoor Roth

Post by placeholder » Thu Sep 11, 2014 12:44 pm

Your next look up task will be for "recharacterization".

Rolyatroba
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Re: Help with Backdoor Roth

Post by Rolyatroba » Thu Sep 11, 2014 12:54 pm

placeholder wrote:Your next look up task will be for "recharacterization".
Assuming that is directed at my boo-boo...yes, I got off the phone with VG only 20 minutes ago to do this for our recent Roth conversion. So I believe there won't be a tax event now.

I think next then, I need to move the funds/securities in my Schwab IRA into my Schwab 401k. And then move my wife's Schwab IRA into her company's VG 401k. After that, I can convert the two VG IRA's to Roth IRA's.

If there's more to this than that, to avoid the pro-rata tax, please chime in again or PM me.

Thanks.

P.S. I assume this is all worth it--we have 6 years until retirement, with myself contributing $6,500*6 and my wife contributing $5,500*2 + $6,500*4. That's like $76k + earnings that will never be taxed, right?

glosing
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Re: Help with Backdoor Roth

Post by glosing » Thu Sep 11, 2014 12:59 pm

Rolyatroba wrote:
placeholder wrote:Your next look up task will be for "recharacterization".

P.S. I assume this is all worth it--we have 6 years until retirement, with myself contributing $6,500*6 and my wife contributing $5,500*2 + $6,500*4. That's like $76k + earnings that will never be taxed, right?
Umm isn't the $76K already taxed? It is just the earnings that will never be taxed I believe.

Rolyatroba
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Re: Help with Backdoor Roth

Post by Rolyatroba » Thu Sep 11, 2014 1:08 pm

glosing wrote:Umm isn't the $76K already taxed? It is just the earnings that will never be taxed I believe.
True...should have clarified.

I guess I should have asked that way...is it worth it to do this? At 6%, the payment stream over 6 years would gain about $12k, with only $4-5k in taxes saved.

glosing
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Re: Help with Backdoor Roth

Post by glosing » Thu Sep 11, 2014 1:16 pm

Rolyatroba wrote:
glosing wrote:Umm isn't the $76K already taxed? It is just the earnings that will never be taxed I believe.
True...should have clarified.

I guess I should have asked that way...is it worth it to do this? At 6%, the payment stream over 6 years would gain about $12k, with only $4-5k in taxes saved.
We are grappling with the same decision. However you would continue to gain during retirement if the Roth continues to grow, since I don't believe you have to take RMDs out of that. I also think you can continue to contribute to it until age 70 at least. Please correct me if I am wrong. I am not 100% sure.

Rolyatroba
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Re: Help with Backdoor Roth

Post by Rolyatroba » Thu Sep 11, 2014 1:47 pm

glosing wrote:We are grappling with the same decision. However you would continue to gain during retirement if the Roth continues to grow, since I don't believe you have to take RMDs out of that. I also think you can continue to contribute to it until age 70 at least. Please correct me if I am wrong. I am not 100% sure.
I will have to put more thought and analysis into this. I've done a bunch of scenario planning using the I-ORP calculator, and it always has us doing large IRA to Roth conversions for the first 6-7 years of retirement (and only small Roth withdrawals for years after that). My gut says I'll have to do this at some point, so might as well start now.

glosing
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Re: Help with Backdoor Roth

Post by glosing » Thu Sep 11, 2014 2:13 pm

Rolyatroba wrote:
glosing wrote:We are grappling with the same decision. However you would continue to gain during retirement if the Roth continues to grow, since I don't believe you have to take RMDs out of that. I also think you can continue to contribute to it until age 70 at least. Please correct me if I am wrong. I am not 100% sure.
I will have to put more thought and analysis into this. I've done a bunch of scenario planning using the I-ORP calculator, and it always has us doing large IRA to Roth conversions for the first 6-7 years of retirement (and only small Roth withdrawals for years after that). My gut says I'll have to do this at some point, so might as well start now.
Also I am thinking that in the retirement years you (or we) could contribute directly to the Roth without doing IRA-->Roth conversion if your AGI will be below the Roth income limit. I am assuming that ours will be during retirement, but that we can continue to fund the Roth if it would make sense to do so.

Is anyone else following this thread continuing to fund a Roth in retirement?

JimmyD
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Re: Help with Backdoor Roth

Post by JimmyD » Thu Sep 11, 2014 2:24 pm

I'll chime in to say that we have a pretty complicated tax situation due to my wife's massive student loans and the implications of the federal programs we utilize in order to have those forgiven.

That said, we're maxing out a 403b and are very close to maxing out a 401k and would also love to do backdoor Roths, but given the complexity of our tax situation, I've decided to forgo the backdoors. Instead, we'll just start maxing Roths out when we're eligible, seven years from now when her loans are forgiven and we can file jointly. I realize this strategy may not be the optimal one financially, however I'm okay with that.

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Re: Help with Backdoor Roth

Post by niceguy7376 » Thu Sep 11, 2014 2:46 pm

jimday1982 wrote:I've decided to forgo the backdoors. Instead, we'll just start maxing Roths out when we're eligible, seven years from now when her loans are forgiven and we can file jointly.
Hi Jim, this is more of an educative purpose. I assume that you two are filing as married filing separately due to educational loans and the 10 year waive period.
If that is the case, just for you, you should be able to do either ROTH or backdoor ROTH, right?

JimmyD
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Re: Help with Backdoor Roth

Post by JimmyD » Thu Sep 11, 2014 2:53 pm

niceguy7376 wrote:
jimday1982 wrote:I've decided to forgo the backdoors. Instead, we'll just start maxing Roths out when we're eligible, seven years from now when her loans are forgiven and we can file jointly.
Hi Jim, this is more of an educative purpose. I assume that you two are filing as married filing separately due to educational loans and the 10 year waive period.
If that is the case, just for you, you should be able to do either ROTH or backdoor ROTH, right?
Yes, we're filing as married filing separately and my understanding is that we're both eligible for backdoor Roths, but not normal Roths. Again, I have too limited of an understanding as to how the backdoors would affect our tax situation (she has a traditional IRA as well) and don't want to take the risk.

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celia
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Re: Help with Backdoor Roth

Post by celia » Thu Sep 11, 2014 2:55 pm

Rolyatroba wrote:
placeholder wrote:Your next look up task will be for "recharacterization".
Assuming that is directed at my boo-boo...yes, I got off the phone with VG only 20 minutes ago to do this for our recent Roth conversion. So I believe there won't be a tax event now.

I think next then, I need to move the funds/securities in my Schwab IRA into my Schwab 401k. And then move my wife's Schwab IRA into her company's VG 401k. After that, I can convert the two VG IRA's to Roth IRA's.

If there's more to this than that, to avoid the pro-rata tax, please chime in again or PM me.

Thanks.

P.S. I assume this is all worth it--we have 6 years until retirement, with myself contributing $6,500*6 and my wife contributing $5,500*2 + $6,500*4. That's like $76k + earnings that will never be taxed, right?
Your next move is to find out how to un-do the contributions for this year.

Right now it appears you have a traditional IRA with your roll-over 401k money in it plus this year's IRA contribution. Even if they are in separate accounts and different custodians, they are considered one traditional IRA for tax purposes and the pro-rata rule applies.

It is recommended that you move all your previous 401k money back to 401k's in the year before you make the contributions to your traditional IRA that you want to convert. Why don't you complete the 401k transfers this year, then make your 2014 contribution early next year when you will have a clean slate with no other tax-deferred money in your IRAs to worry about. If you want to convert part of your previous 401k to a Roth IRA, leave that amount in the account and convert it when you convert the 2014 contribution next year. You will pay taxes on that for the year the conversion is done. So it is up to you how much money you want to save in a Roth. More than the future traditional IRA contributions can be converted as you have other tax-deferred funds available. It's just a matter of how much you want to pay in income taxes each year. (Income taxes should be paid from wage withholdings or taxable funds you own.)

You will also be able to make 2015 traditional IRA contributions and convert them next year, either at the same time you do the 2014 contributions or later in the year.

There is no age limit for contributing to an IRA (traditional or Roth). What matters is that you or your spouse have more wages than the amount being contributed to both of your IRAs.

I strongly recommend you read this entire thread and follow the referenced links. The more you know, the better. Following these super easy steps in the correct order will prevent nasty surprises at tax time (like being underwithheld).
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.

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Re: Help with Backdoor Roth

Post by niceguy7376 » Thu Sep 11, 2014 3:07 pm

Pizzasteve510 wrote:Any rule of thumb on what size of a rollover IRA makes it not worth transfer to justify the 5500 per conversion?
---- My assumption is that keeping the growth of the 1.2m 'low fee' (under .10 pct) outweighs the benefits of a $5500 Roth contribution. It is unlikely we will get a better 401k plan option available. I am assuming my wife or I could individually roll in our account(s) and do a back door without impacting the respective partner's IRA accounts.
PizzaSteve, I am no expert but I feel that it might not be worth for you to rollover your 1.2M trad IRA to current 401k due to expense ratios. Also, I am curious if 401k plans would take that much amount as roll over. On the other side, you have 10+ years before you need to take RMDs and when that time comes, you might have huge RMDs that might push you into a higher tax bracket than lower ones (though not as high as you might be now).
So, at the end, please do consider the tax rates at retirement and just not the ER before you make a decision. Maybe your spouse can do her first and then you two can re-evaluate.

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Re: Help with Backdoor Roth

Post by niceguy7376 » Thu Sep 11, 2014 3:10 pm

jimday1982 wrote:Yes, we're filing as married filing separately and my understanding is that we're both eligible for backdoor Roths, but not normal Roths. Again, I have too limited of an understanding as to how the backdoors would affect our tax situation (she has a traditional IRA as well) and don't want to take the risk.
I am fairly sure that you trying to do a backdoor ROTH would NOT have any affect on your wife's tax filing situation. What matters to you is you having any existing Trad IRA /SIMPLE IRA/SEP IRA or not.

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celia
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Re: Help with Backdoor Roth

Post by celia » Thu Sep 11, 2014 3:34 pm

jimday1982 wrote:
niceguy7376 wrote:
jimday1982 wrote:I've decided to forgo the backdoors. Instead, we'll just start maxing Roths out when we're eligible, seven years from now when her loans are forgiven and we can file jointly.
Hi Jim, this is more of an educative purpose. I assume that you two are filing as married filing separately due to educational loans and the 10 year waive period.
If that is the case, just for you, you should be able to do either ROTH or backdoor ROTH, right?
Yes, we're filing as married filing separately and my understanding is that we're both eligible for backdoor Roths, but not normal Roths. Again, I have too limited of an understanding as to how the backdoors would affect our tax situation (she has a traditional IRA as well) and don't want to take the risk.
Often when you file as "married filing separately", you lose out on some other tax benefits due to the other advantage you gain by filing separate. It all depends on the tax credit or program you want to benefit from. So you have to weigh which program is more important to you.
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.

Rolyatroba
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Re: Help with Backdoor Roth

Post by Rolyatroba » Thu Sep 11, 2014 3:47 pm

celia wrote:Your next move is to find out how to un-do the contributions for this year.
Thanks...already recharacterized with VG earlier today. Tomorrow, the Roth balances should be transferred to the traditional IRA accounts.

Also you recommended to transfers IRAs to 401ks this year but wait until next year to convert. Any other reason for that, other than to avoid a possible misunderstanding by the IRS? If I move forward on this, I'd like to get that extra $12k into the Roth this year.

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celia
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Re: Help with Backdoor Roth

Post by celia » Thu Sep 11, 2014 4:50 pm

Pizzasteve510 wrote:Any rule of thumb on what size of a rollover IRA makes it not worth transfer to justify the 5500 per conversion?
I don't think we've ever talked about a "rule of thumb" on when backdoor Roth conversions make sense when the pro-rata rule applies. We HAVE talked about considering your tax rate now vs when you first retire (and SS may not have started) vs when you turn 70. Convert when your tax rate is lower. Of course, there are many unknowns, especially if you are younger.

Assumedly you know your current tax rate. [If you were to have an additional $100 in wages, how much more would you have to pay in state and federal taxes. If you would pay $5 more to the state and $25 more to the IRS, you are in the 5% + 25% = 30% tax bracket.] However, you could move to a low/no tax state in retirement.

When you first retire, you may not start/have a pension immediately or want to wait on taking SS. Waiting until age 70 is popular with many Bogleheads--not only for the larger monthly benefit but so they can convert to Roths meanwhile.

At age 70 1/2 you will have to start withdrawing from traditional IRAs and other retirement plans, if you had not started earlier. For people who saved a lot during their working years, the RMDs can be more than they ever expected. But they will be taxed.

This article changed my perspective so that we started converting our IRAs to Roth even before we retired:
http://www.savingadvice.com/articles/20 ... etire.html
(sorry, if you have to answer a short survey there)

The way I look at IRAs is since most of us have to pay income taxes anyway, you might as well put some of that money that you have already paid taxes on into a Roth where it will continue to grow tax-free forever. Taxes have already been paid whether you put it in a Roth or not, so why not shelter it for your retirement? But if you think you could have a lower tax rate later on, put it into a traditional IRA instead and convert it (or part of it) when the lower tax rate applies to you.

Even if you're not eligible to contribute to a Roth directly or make a deductible traditional contribution, you could still consider a non-deductible traditional IRA contribution and conversion as a method for 1) adding to your traditional IRA AND 2) converting part of your IRAs to Roths. These are not just steps to be taken. Think of whether each step is something you would do even if you didn't do the other step. If you would be willing to do each individually, why wouldn't you do them in conjunction? To me the only drawback is the calculation of the pro-rata taxes. You will have to refer to the previous IRS Form 8606 you generated when you filed your taxes when you do a future conversion and calculate the taxes. But if you are good about keeping track of this form and what part of your traditional IRAs is deductible and non-deductible, you will have an easier time filing your taxes.
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.

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celia
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Re: Help with Backdoor Roth

Post by celia » Thu Sep 11, 2014 5:03 pm

Rolyatroba wrote:Also you recommended to transfers IRAs to 401ks this year but wait until next year to convert. Any other reason for that, other than to avoid a possible misunderstanding by the IRS? If I move forward on this, I'd like to get that extra $12k into the Roth this year.
I have not worked with the pro-rata rule myself, but I understand that either the combined traditional IRA balances on December 31, 2013 and/or December 31, 2014 and/or date of conversion(s) will be taken into account in the calculation. Does anyone else know?

Not only will it be cleaner as you suggest, but have you considered that the stock markets could go down before the end of the year and your $12K contributions could buy more shares in January? Certainly, time has a nice compounding effect, but the "simplicity" of the contributions and conversions next year seem more important to me.
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.

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Re: Help with Backdoor Roth

Post by Rolyatroba » Thu Sep 11, 2014 5:16 pm

celia wrote:...have you considered that the stock markets could go down before the end of the year and your $12K contributions could buy more shares in January? Certainly, time has a nice compounding effect, but the "simplicity" of the contributions and conversions next year seem more important to me.
As a Boglehead, I don't make market timing considerations. :)

The compounding effect will be the greatest for the early contributions ($4.5k or so of the $12k gain I mentioned would come from the first of the 6 annual contributions). But true, maybe the clean approach outweighs that tax savings for the first year contribution.

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Re: Help with Backdoor Roth

Post by JimmyD » Thu Sep 11, 2014 6:00 pm

niceguy7376 wrote: I am fairly sure that you trying to do a backdoor ROTH would NOT have any affect on your wife's tax filing situation. What matters to you is you having any existing Trad IRA /SIMPLE IRA/SEP IRA or not.
You know what? You're absolutely right and I'm embarrassed to have not realized that. Guess I've been on this whole "OUR finances" thing ever since we got married and neglected to realize my taxes wouldn't be affected.

Quick questions for you however, I assume it's recommended that the IRA be maxed out ($5,500) in one contribution as opposed to regular contributions over time, right? Also, is it best practice to make the contribution and conversion around December 31 (or right before the current year's taxes are filed)?

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Re: Help with Backdoor Roth

Post by placeholder » Thu Sep 11, 2014 7:24 pm

No the best practice is to do it as early in the year as possible as that gives the longest period of tax free growth.

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celia
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Re: Help with Backdoor Roth

Post by celia » Thu Sep 11, 2014 7:35 pm

jimday1982 wrote:Quick questions for you however, I assume it's recommended that the IRA be maxed out ($5,500) in one contribution as opposed to regular contributions over time, right? Also, is it best practice to make the contribution and conversion around December 31 (or right before the current year's taxes are filed)?
It makes no difference if you do a lump sum or spread it out. Some people like the diversification of dollar cost averaging by buying on different dates and even set it up to automatically occur each month on a given date. However, if you buy ETFs or stocks, the commissions would eat a lot of it unless you did that in lump sums. (However, there are no commissions when you buy and sell Vanguard ETFs through Vanguard.)

Some people think the best practice is to contribute to an IRA early in the year so that you gain the growth for the year. Don't forget that you can contribute up to next April 15 for this year's contribution. If you make a January-April 15 contribution for the previous year, you can also do another contribution for the same year. Each January, we usually have a thread called something like "Who's Made Their IRA Contribution for This Year?" and a lot of people will chime in.
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.

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Re: Help with Backdoor Roth

Post by JimmyD » Thu Sep 11, 2014 8:34 pm

So if I begin IRA contributions on Jan 1 and convert them to my Roth on December 31, I'm liable for taxes on the gains for that year, correct? Is that approach recommended over doing the lump sum contribution and conversion within a few days of each other, thereby avoiding or lessening the tax consequence?

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Re: Help with Backdoor Roth

Post by placeholder » Fri Sep 12, 2014 12:27 am

Ideally early in the year and quickly converted so that you have the money in the funds you want working for you tax free.

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celia
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Re: Help with Backdoor Roth

Post by celia » Fri Sep 12, 2014 1:13 am

Jim, If you are asking how to minimize the taxes, you want to get the money into the Roth as soon as possible and let the gains occur when in the Roth.

If you make a lump sum contribution to a traditional IRA, you can put it into a money market account or convert it the next day to minimize the chance growth will occur in the traditional IRA.

If you make monthly contributions to a traditional IRA, you can also put it into a money market account or convert it the next day. The main thing to watch for is if you want to start a new fund in the Roth, you need to have enough to meet the minimum balance required to open the fund (usually $3,000).
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.

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