backdoor Roth...

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moosh
Posts: 4
Joined: Thu Feb 09, 2017 8:17 am

backdoor Roth...

Post by moosh » Thu Feb 09, 2017 9:16 am

Hi folks! First time poster, I'm glad all you knowledgeable people are here for the less experienced of us! Just a quick question about backdoor Roths. Every year I contribute the maximum to my wife's as she does not have a traditional IRA. I'd like to do it for both of us, however I have a traditional IRA from a previous job with about 17k in it. My understanding is the only way to make this work would be to do a 1 time rollover on the traditional IRA and pay a significant fee once, and from then on I could also use the rollover 5.5k/yr. I'm still pretty young (36), over time the benefits of a backdoor for both of us would add up, but I know there are whispers that the loophole may be closed some day. I am in a higher income bracket, and we have 1 child but live pretty frugally. We're already maxing out 401k contributions, HSA, with about 10k/yr going into 529, and paying additional $1k/month on our 30yr 3.625% mortgage to effectively convert to a 15yr. Any additional tax deferred income would be nice!

Raabe34
Posts: 176
Joined: Tue Apr 14, 2009 9:58 am

Re: backdoor Roth...

Post by Raabe34 » Thu Feb 09, 2017 10:40 am

Think a bit outside the box on your 17k IRA. Is your employer 401k plan decent? If so you could roll it into the plan to avoid having to convert that whole amount and then you're scott free for the back door.

In regards to will they close it? Who cares it's open now and they've floated lots of ideas around so make hay while the sun shines.

moosh
Posts: 4
Joined: Thu Feb 09, 2017 8:17 am

Re: backdoor Roth...

Post by moosh » Thu Feb 09, 2017 10:45 am

That's a good thought :) My employer's plan is a little complicated however, unfortunately. It contributes 40k/yr from the employer with a trustee in place. I'm 100% vested but because there is a listed trustee it is not an option to roll an outside IRA in.

Elbowman
Posts: 457
Joined: Tue Apr 03, 2012 2:25 pm

Re: backdoor Roth...

Post by Elbowman » Thu Feb 09, 2017 10:50 am

Well, you seem to have a handle on the tradeoff. If you convert and the backdoor Roth stays available for 3+ years, you'll come out ahead. If they close it next year, you'll come out behind. No one knows which of those it will be.

Raabe34
Posts: 176
Joined: Tue Apr 14, 2009 9:58 am

Re: backdoor Roth...

Post by Raabe34 » Thu Feb 09, 2017 11:03 am

Do you do any freelance work, or lawnmowing ect? If you do you can establish and I401k and then roll it into that plan also.

Taxes on 17k would be notable but not burdensome.

JW-Retired
Posts: 6590
Joined: Sun Dec 16, 2007 12:25 pm

Re: backdoor Roth...

Post by JW-Retired » Thu Feb 09, 2017 12:17 pm

moosh wrote:.........I'd like to do it for both of us, however I have a traditional IRA from a previous job with about 17k in it. My understanding is the only way to make this work would be to do a 1 time rollover on the traditional IRA and pay a significant fee once, and from then on I could also use the rollover 5.5k/yr. I'm still pretty young (36), over time the benefits of a backdoor for both of us would add up, but I know there are whispers that the loophole may be closed some day.
You would need to do a conversion of the tIRA to a Roth. You must get the meaning of the terms rollover, conversion, and re-characterization straight before starting to implement a backdoor Roth maneuver. Misunderstanding these terms when talking to Vanguard, filling out the 8606 form, or answering tax software, will definitely make a mess of things.

If you can't rollover your tIRA to your 401k you might consider converting the tIRA over several years to soften the tax hit. Make a non-deductible contribution of $5500 and then convert e.g. $10k, meaning you would pay tax on $10k(17/17+5.5) = 75.5% of the $10k. The next year's $5500 contribution will further dilute the taxable amount so the tax will keep going down. Maybe in the 3rd or 4th year you convert all the remainer. The IRS 8606 form will figure out the taxable amounts and track the non-deductible amount basis year to year.
JW
Retired at Last

moosh
Posts: 4
Joined: Thu Feb 09, 2017 8:17 am

Re: backdoor Roth...

Post by moosh » Thu Feb 09, 2017 5:57 pm

Thank you, this is helpful :) You're right, I keep screwing up the terminology. I'll talk to Vanguard about the 8606. Is there any advantage to spreading it out over a few years rather than once aside from not having a hefty single payment to make? The tax is based on my marginal tax rate, correct? I guess I should get ahold of that 8606 form and figure it out!

JW-Retired
Posts: 6590
Joined: Sun Dec 16, 2007 12:25 pm

Re: backdoor Roth...

Post by JW-Retired » Fri Feb 10, 2017 12:45 pm

moosh wrote:Thank you, this is helpful :) You're right, I keep screwing up the terminology. I'll talk to Vanguard about the 8606. Is there any advantage to spreading it out over a few years rather than once aside from not having a hefty single payment to make? The tax is based on my marginal tax rate, correct? I guess I should get ahold of that 8606 form and figure it out!
If the whole $17k won't push part of it into the next tax bracket I see no disadvantage to doing it all at once.

You can get an 8606 form & instructions here.
https://www.irs.gov/pub/irs-prior/f8606--2016.pdf
https://www.irs.gov/pub/irs-pdf/i8606.pdf

JW
Retired at Last

moosh
Posts: 4
Joined: Thu Feb 09, 2017 8:17 am

Re: backdoor Roth...

Post by moosh » Sat Feb 11, 2017 9:13 pm

thanks very helpful :) i'll have to bug this board with some more questions once I get it together!

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