Backdoor Roth help

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mybogledhead
Posts: 34
Joined: Wed Feb 04, 2015 10:25 pm

Backdoor Roth help

Postby mybogledhead » Fri Jan 22, 2016 11:02 am

Good morning,
In January 2016 I opened a traditional IRA for my wife, transferred in $5500 cash (2015 contribution), then converted exactly $5500 into her pre-existing Roth IRA. However, during the seven day holding period there was an 18 cent dividend. Also, somehow an additional 6 cents showed up in the settlement fund of the Roth, but there are no transactions indicating a dividend. Since this is my first time doing this, of course I'm worried that the 18 cents left over will screw something up on my taxes. That being said, I'm pretty sure that the only thing I have to do is make sure that 18 cents is gone by 12/31/16, as the tIRA was empty on 12/31/15.
I do plan to do a 2016 contribution some time this year when I've saved up enough to do it all at once, then get on a schedule of doing it every January. My questions are...

1) What should I do with the 18 and 6 cent balances? Cash out the 18 cents and pay taxes, which will obviously be negligible? Can I move the 6 cents into the mutual fund I bought without any tax consequences (I suppose that's the point, to collect dividends and gains)?
2) With Vanguard, is there always a seven day holding period on tIRA contributions from a checking account? I'm currently trying to do a Roth conversion for myself, and the same thing happened...seven day hold, only this time the dividend was 5 cents.

Thanks!

JW-Retired
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Joined: Sun Dec 16, 2007 12:25 pm

Re: Backdoor Roth help

Postby JW-Retired » Fri Jan 22, 2016 11:11 am

Forget about the inconsequential 18 cents. Next time check the box that says to exchange "all". That will mop up the 18 cents.

A tIRA that has a few cents or a few dollars at years end is still going to make only a miniscule effect on your tax.
JW
You can dry run it through the 8606 form to satisfy yourself that this is true. You should have already done that anyway.
Retired at Last

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powermega
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Location: Colorado

Re: Backdoor Roth help

Postby powermega » Fri Jan 22, 2016 12:19 pm

When you fill out Form 8606 for your 2015 taxes, it will reflect the $5500 non-deductible contribution you made into your tIRA. The form shows conversions that were performed during the 2015 calendar year, so the conversion will not appear on your 2015 Form 8606. Let's just say for the sake of argument that you leave the $0.24 there, and eventually contribute another non-deductible $5500 in 2016 to your tIRA. Then you convert that 2016 contribution, and all interest at that time. You'll end up converting some amount around $5500.48. When you file your 2016 taxes, your Form 8606 will show a non-deductible $5500 contribution for 2016, and $11,000.48 for a conversion amount. Of that conversion amount, $11,000 is tax free, and $0.48 is taxable. In the 25% tax bracket, this will result in additional tax of $0.12.

Don't forget that you can enter amounts to the nearest dollar. In this example, you could simply say you converted $11000.00 and have no taxes at all.
Even a stopped clock is right twice a day.

mybogledhead
Posts: 34
Joined: Wed Feb 04, 2015 10:25 pm

Re: Backdoor Roth help

Postby mybogledhead » Fri Jan 22, 2016 12:35 pm

powermega wrote:The form shows conversions that were performed during the 2015 calendar year, so the conversion will not appear on your 2015 Form 8606.


I made the contribution in January 2016, but designated it as a 2015 contribution. Why then, wouldn't it be included in my 2015 tax forms? Also, wouldn't an $11,000 contribution be twice the yearly limit?

clydewolf
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Joined: Tue Jul 21, 2015 12:51 pm

Re: Backdoor Roth help

Postby clydewolf » Fri Jan 22, 2016 1:03 pm

The contribution will be on your 2015 form 8606. Make sure that is the way the IRA custodian recorded the contribution.
The conversion will be on your 2016 tax return/8606.

Generally conversions must be completed by December 31 of the tax year.

Keep a copy of your 8606 and 5498 forms with your IRA statements.

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powermega
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Location: Colorado

Re: Backdoor Roth help

Postby powermega » Fri Jan 22, 2016 1:06 pm

mybogledhead wrote:
powermega wrote:The form shows conversions that were performed during the 2015 calendar year, so the conversion will not appear on your 2015 Form 8606.


I made the contribution in January 2016, but designated it as a 2015 contribution. Why then, wouldn't it be included in my 2015 tax forms? Also, wouldn't an $11,000 contribution be twice the yearly limit?

Here is a link to Form 8606. On line 1, you enter the amounts non-deductible contribution amounts for the 2015 tax year, including contributions made between Jan 1, 2016 and April 18, 2016. The $5500 contribution will be on line 1 of your 8606 for 2015. On line 8 is the amount that you converted from tIRA to rIRA during calendar year 2015. Line 8 will be $0 for you for your 2015 taxes since you performed the conversion in 2016. For your 2016 Form 8606, you will again have $5500 on line 1, line 2 will be $5500, and line 8 will be $11000.xx.

The $5500/year limit applies to IRA contributions. There is no limit for tIRA to rIRA conversions.
Even a stopped clock is right twice a day.

mybogledhead
Posts: 34
Joined: Wed Feb 04, 2015 10:25 pm

Re: Backdoor Roth help

Postby mybogledhead » Fri Jan 22, 2016 1:36 pm

Ok, this has been very helpful. I filled out form 8606 and got the following...

Line 1: 5500
Line 2: 0
Line 3: 5500
Line 4: 5500
Line 5-13: 0
Line 14: 5500
Line 15: 0

It seems that part 2 will be all zero's this year, but will be more exciting next year.

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powermega
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Location: Colorado

Re: Backdoor Roth help

Postby powermega » Fri Jan 22, 2016 2:43 pm

Looks good to me. Yeah, you'll have a few extra lines to fill out for the 2016 form, but still very clean. The value you see on line 14 of the 2015 form will carry over to line 2 of the 2016 form.
Even a stopped clock is right twice a day.


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