Backdoor Roth screw up?

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Malinois000
Posts: 65
Joined: Sun Feb 26, 2017 6:08 pm

Backdoor Roth screw up?

Postby Malinois000 » Sun May 14, 2017 8:34 am

My DW returned to the workplace this year so last Thursday I attempted to set up a back door Roth IRA through Vanguard. The chain of events so far: 1) Set up tIRA on 5/11 and electronically funded $6,500. 2) Purchased Vanguard Growth ETF and Vanguard International Stock Index which totaled $6,240.65, remainder of $259.35 in sweep account. 3) I tried to convert on Friday to Roth and received message that the two funds do not "settle until May 17 so only partial convert could be done? After Friday the account reflects a value of $6,508.65 so there is small gain?

I am questioning if I should just leave as an IRA? It's just that we then could not deduct due to the income restrictions?

Is is still possible to convert to backdoor Roth IRA on Monday? Would we just add the additional amount to the form 8606 when we submit taxes?

Any assistance is appreciated.

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

Re: Backdoor Roth screw up?

Postby JW-Retired » Sun May 14, 2017 9:29 am

Malinois000 wrote:3) I tried to convert on Friday to Roth and received message that the two funds do not "settle until May 17 so only partial convert could be done? After Friday the account reflects a value of $6,508.65 so there is small gain?

I am questioning if I should just leave as an IRA? It's just that we then could not deduct due to the income restrictions?

Is is still possible to convert to backdoor Roth IRA on Monday? Would we just add the additional amount to the form 8606 when we submit taxes?

There is no $ limit on Roth conversions. Convert the full amount now. So what if you have a small gain and owe a dollar or two in taxes come next year? Always always check the Vanguard box saying exchange "all" in doing the second step in a backdoor Roth.
JW
ps: Also, dry run the 8606 form to see how it all works.
Last edited by JW-Retired on Sun May 14, 2017 9:36 am, edited 3 times in total.
Retired at Last

fabdog
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Location: Williamsburg VA

Re: Backdoor Roth screw up?

Postby fabdog » Sun May 14, 2017 9:29 am

You can still complete your original plan. Just have Vanguard do the rest after the funds settle. You'll get one 1099R reflecting the conversion.

You'll have a slight taxable amount on the $8.65 (or whatever gain you have in the funds before the transfer) that will go on your 2017 return

To avoid this issue, I usually fund the TIra and do not purchase anything in that IRA. Then just do the conversion, and the money goes right over.
With interest rates at these levels, I usually never have a gain from the small amount of time the money is in the TIra

Mike

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BolderBoy
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Location: Colorado

Re: Backdoor Roth screw up?

Postby BolderBoy » Sun May 14, 2017 9:43 am

Both of the above are the right answers.

Small taxable gains are insignificant in the long run. In the future, do the Backdoor Roth on cash amounts, then buy what you want in the Roth account.
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"

Malinois000
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Joined: Sun Feb 26, 2017 6:08 pm

Re: Backdoor Roth screw up?

Postby Malinois000 » Sun May 14, 2017 3:36 pm

Got it! Thanks for the info!

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celia
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Location: SoCal

Re: Backdoor Roth screw up?

Postby celia » Mon May 15, 2017 2:12 am

Malinois000 wrote:3) I tried to convert on Friday to Roth and received message that the two funds do not "settle until May 17 so only partial convert could be done?
....
Is is still possible to convert to backdoor Roth IRA on Monday?

You can't convert until May 17 since the ETF purchase takes 3 business days to complete (it is like stock in its buy/sell behavior). On or after that day, be sure you check off to convert everything in the TIRA.

Malinois000
Posts: 65
Joined: Sun Feb 26, 2017 6:08 pm

Re: Backdoor Roth screw up?

Postby Malinois000 » Fri May 19, 2017 6:20 am

I checked my wife's account this morning and the Backdoor Roth process is now complete (after 1 week). Given the drop in the market this week the original $6,500 contribution is was $6,469.54 at the time of conversion. Does that mean I will not need to file the form 8606 with next years' taxes?

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Backdoor Roth screw up?

Postby retiredjg » Fri May 19, 2017 6:36 am

Malinois000 wrote:I checked my wife's account this morning and the Backdoor Roth process is now complete (after 1 week). Given the drop in the market this week the original $6,500 contribution is was $6,469.54 at the time of conversion. Does that mean I will not need to file the form 8606 with next years' taxes?

You still have to file form 8606. You must document the contribution of $6,500 to a non-deductible IRA on the front of the form. And you must document the conversion of $6,470 to Roth on the back of the form.


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