Understanding the mechanics of Backdoor Roth IRA

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ironmaiden666
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Joined: Sun Nov 13, 2016 5:04 pm

Understanding the mechanics of Backdoor Roth IRA

Post by ironmaiden666 » Sun Nov 13, 2016 6:16 pm

Hello guys, first time poster so please forgive any noob comments from my end.

I've just started my first job after graduating from university. My employer offers only a traditional 403(b) with no roth option. Since I'm in a lower tax bracket today with this being my first job, I really want to take advantage of a Roth account. Hence I thought of starting a Roth IRA to supplement my traditional 403(b). I reasoned that in addition to saving, this would give me some tax diversification in the future as well. However, I believe that in around 2-3 years time, I will be ineligible to fund a Roth IRA due to my income being above the limits.

Now I've been reading that Backdoor Roth IRA's are a way to legally get around income restrictions for contributing to a Roth, but I have a few questions about the mechanics of nondeductible and backdoor roth IRA's:

1) How often can I use the backdoor strategy? Let me illustrate my question with an example: Assuming I'm already over the income limits to fund a Roth and I want only two types of retirement accounts - the traditional 403b with my employer and a Roth IRA. In year 1, I put $5,500 (or whatever be the limit then) towards a non-deductible IRA and then do a backdoor roth conversion. Can I do the same in year 2, 3, 4......? I guess my question is that if I wanted to, could I keep doing a backdoor Roth IRA conversion every single year?

2) If the answer to question 1 is yes, it indicates that every year, I will open a new non-deductible IRA and close it once the roth conversion is done. Am I understanding this correctly?

3) Can the backdoor conversion deposit funds into the same Roth IRA account or do I need to open new Roth IRA accounts every year (this would be tedious). Basically, if I'm opening a new non-deductible IRA every year and doing a backdoor conversion, can I add funds in years 2,3,4.... to my pre-existing Roth IRA?

Really appreciate any advice I can get :sharebeer

mhalley
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by mhalley » Sun Nov 13, 2016 7:10 pm

Welcome to the forum!
1. Yes, repeat this each year.
2. You do not need to close the traditional ira. You will roll the money over to the roth, so the Trad IRA will have no money in it, but the account will still be there. Just contribute the $5500 to the same trad ira each year.
3. You rollover the money from the same traditional ira to the same roth IRA each year. If your income were to decrease or they changed the tax laws so you didn't need to do the backdoor roth anymore, you would just contribute to the roth.
Check out the tutorial from WCI, which includes instructions for the tax form you need to fill out: http://whitecoatinvestor.com/backdoor-r ... -tutorial/

Impromptu
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by Impromptu » Sun Nov 13, 2016 7:47 pm

Through much of the year my traditional IRA mostly had a balance of $0. Then it had $5,500 for a short time, then back to $0. TD Ameritrade didn't close it on me for inactivity.

When I retire early my traditional IRA may be a landing point for my 401(k), which I will then convert into a roth.
I'll gladly pay you Tuesday for a hamburger today.

PDX_Traveler
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by PDX_Traveler » Mon Nov 14, 2016 2:33 am

I wonder if I may ask a related question. I have about 300K in a IRA (a rollover from an earlier employer 401k) and about 50K in a non-deductible traditional IRA at Vanguard. I have a Fidelity 401k at my current employer's.

I would really like to convert the non-deductible Vanguard IRA to a Roth IRA, but the headache of dealing with pro-rata accounting of the taxes has been sufficient to deter me so far. My question is the following - is it possible for me to
(1) roll-over my Vanguard rollover IRA to my Fidelity 401k account, then
(2) perform a Roth conversion of my Vanguard non-deductible IRA and then
(3) undo the roll-over in step 1 to bring the IRA money back to Vanguard? (I'd rather maintain as much money with Vanguard as possible)

I have searched for an answer to this question, but not been successful so far. I thought I'd try this here before approaching Vanguard or Fidelity reps. Thanks for any help.

Longdog
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by Longdog » Mon Nov 14, 2016 7:16 am

PDX_Traveler wrote:I wonder if I may ask a related question. I have about 300K in a IRA (a rollover from an earlier employer 401k) and about 50K in a non-deductible traditional IRA at Vanguard. I have a Fidelity 401k at my current employer's.

I would really like to convert the non-deductible Vanguard IRA to a Roth IRA, but the headache of dealing with pro-rata accounting of the taxes has been sufficient to deter me so far. My question is the following - is it possible for me to
(1) roll-over my Vanguard rollover IRA to my Fidelity 401k account, then
(2) perform a Roth conversion of my Vanguard non-deductible IRA and then
(3) undo the roll-over in step 1 to bring the IRA money back to Vanguard? (I'd rather maintain as much money with Vanguard as possible)

I have searched for an answer to this question, but not been successful so far. I thought I'd try this here before approaching Vanguard or Fidelity reps. Thanks for any help.
1) Yes
2) Yes
3) Probably not; it depends on the terms of the 401k
Steve

runner23
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by runner23 » Mon Nov 14, 2016 7:28 am

Not to hijack the thread, but I have a related question. I believe that I will be on the bubble in 2017 for Roth income limits. Is there any harm in doing the backdoor Roth in January of 2017 for 2017 tax year and I ultimately happen to not be above the income limits for regular Roth contribution? I have no other traditional IRAs open.

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BL
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by BL » Mon Nov 14, 2016 9:40 am

runner23 wrote:Not to hijack the thread, but I have a related question. I believe that I will be on the bubble in 2017 for Roth income limits. Is there any harm in doing the backdoor Roth in January of 2017 for 2017 tax year and I ultimately happen to not be above the income limits for regular Roth contribution? I have no other traditional IRAs open.
Should be no problem, just do the form.
Or; wait until you know for sure, and simply contribute to the Roth directly if you can.

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Earl Lemongrab
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by Earl Lemongrab » Mon Nov 14, 2016 2:26 pm

PDX_Traveler wrote:(1) roll-over my Vanguard rollover IRA to my Fidelity 401k account, then
(2) perform a Roth conversion of my Vanguard non-deductible IRA and then
(3) undo the roll-over in step 1 to bring the IRA money back to Vanguard? (I'd rather maintain as much money with Vanguard as possible).
1. Yes, if the employer plan accepts the rollovers.
2. Yes.
3. Yes, if the employer plan will allow distribution of rollover contributions (mine does) BUT you have to do it in the next year (or later).

Earl
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

ironmaiden666
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by ironmaiden666 » Mon Apr 16, 2018 1:35 pm

Following up on my thread from a couple years ago, I'm surprised that I could even find it!

In these last two years, my situation changed as I had predicted - I now exceed the income limit to contribute to a Roth IRA. I am planning to use a backdoor Roth IRA in 2018 but was wondering whether there are contribution limits to the Backdoor Roth.

Here is my situation:
- No other pre-tax IRA,
- Roth IRA which I opened and maxed out in 2017

Would that mean that 2018 backdoor conversion limit would be = Contribution limit of a 2018 non-deductible IRA ($5,500)? I keep reading that there is no "contribution/conversion $ limit" for backdoors, but nowhere does it make clear whether or not I can overfund a non-deductible IRA and then do a backdoor conversion of the entire amount a few days later.

Eventually, I'm trying to understand if I can open a non-deductible IRA with $10000 post tax money (even though 2018 limits are $5,500), and then convert the entire $10000 to a Roth IRA through the backdoor method, especially since all the money is post-tax.

Anyone have any thoughts?

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Earl Lemongrab
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Re: Understanding the mechanics of Backdoor Roth IRA

Post by Earl Lemongrab » Mon Apr 16, 2018 2:15 pm

There is no such thing as a backdoor Roth. It's a shorthand for two distinct actions, contributing to a TIRA and converting amounts from a TIRA.

The annual limit for contributions to any IRA (other than SIMPLE) is $5500 or $6500 (age 50+). There is no income limit for contributions to a TIRA other than you have to have enough eligible income for the full amount. There is no limit to how much in a TIRA can be converted.

It's as simple as that. No special rules for backdoor Roth, because it doesn't exist.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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