Roth IRA or Backdoor Roth?

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Topic Author
jimbojones
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Roth IRA or Backdoor Roth?

Post by jimbojones »

My income will be near the Roth IRA income limits by year end, depending on year end bonus. I'm looking to fund our Roth IRAs now. How should I fund the Roth IRAs without knowing whether my adjusted AGI will exceed the limit? Standard contribution that may be invalid or Backdoor IRA contribution that may be unnecessary? Or some other method?

Appreciate any insights!
ved
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Re: Roth IRA or Backdoor Roth?

Post by ved »

First of all, do you have any traditional IRAs (including SEP, Simple IRAs) currently with $ in them? If so, doing a back-door Roth will trigger the pro-rata rule, and may make the backdoor Roth conversion impractical.

Assuming you dn't have any traditional IRAs, there are 2 ways:

1. Wait and contribute next year (until April 2018) to 2017 Roth IRA directly or through backdoor (depending on your 2017 income)
2. Contribute to a non-deductible traditional IRA now, and backdoor that to Roth. The process is not onerous.

edited #1 above to provide more clarity
Last edited by ved on Sun Sep 03, 2017 7:06 pm, edited 1 time in total.
Topic Author
jimbojones
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Re: Roth IRA or Backdoor Roth?

Post by jimbojones »

ved wrote: Sun Sep 03, 2017 6:54 pm First of all, do you have any traditional IRAs (including SEP, Simple IRAs) currently with $ in them? If so, doing a back-door Roth will trigger the pro-rata rule, and may make the backdoor Roth conversion impractical.

Assuming you dn't have any traditional IRAs, there are 2 ways:

1. Wait until April 2018 to contribute to 2017 Roth IRA directly or through backdoor (depending on your 2017 income)
2. Contribute to a non-deductible traditional IRA now, and backdoor that to Roth. The process is not onerous.
Thanks - correct- no existing Traditional IRAs.
JW-Retired
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Re: Roth IRA or Backdoor Roth?

Post by JW-Retired »

jimbojones wrote: Sun Sep 03, 2017 7:00 pm Thanks - correct- no existing Traditional IRAs.
Including no rollover IRAs? (which are traditional IRAs.......... but you might need to read the 8606 form instructions fairly carefully to find that in print.)
JW
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Topic Author
jimbojones
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Re: Roth IRA or Backdoor Roth?

Post by jimbojones »

JW-Retired wrote: Sun Sep 03, 2017 7:41 pm
jimbojones wrote: Sun Sep 03, 2017 7:00 pm Thanks - correct- no existing Traditional IRAs.
Including no rollover IRAs? (which are traditional IRAs.......... but you might need to read the 8606 form instructions fairly carefully to find that in print.)
JW
Correct, no rollover IRAs either.
JBTX
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Re: Roth IRA or Backdoor Roth?

Post by JBTX »

I generally wait until early the following year (before Apr 15th) to contribute to Roth and to partially fund my self employed 401k to make sure I'm eligible (for Roth) because we are often on the income bubble and also assess our cash flow/liquidity situation. While it is theoretically from a long term perspective best to put money in as soon as possible there enough variables in play such that it is better for me to wait until last minute.
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TomatoTomahto
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Re: Roth IRA or Backdoor Roth?

Post by TomatoTomahto »

Is there a downside to doing ved's #2? That's what I was going to suggest to my son, who has a Roth but no pre-tax IRAs (of any flavor).

It seems to be a no-harm-no-foul situation that works whether you're over income limits or not. You get an extra year or so in the market, as opposed to waiting until the following year when you know your earned income precisely.
I get the FI part but not the RE part of FIRE.
Alan S.
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Re: Roth IRA or Backdoor Roth?

Post by Alan S. »

TomatoTomahto wrote: Sun Sep 03, 2017 9:02 pm Is there a downside to doing ved's #2? That's what I was going to suggest to my son, who has a Roth but no pre-tax IRAs (of any flavor).

It seems to be a no-harm-no-foul situation that works whether you're over income limits or not. You get an extra year or so in the market, as opposed to waiting until the following year when you know your earned income precisely.
While unlikely, if your Roth has been funded by taxable conversions less than 5 years old and you need to take a distribution, these taxable conversions would have a 10% penalty and would come out before your later back door (non taxable) conversions. Of course a regular Roth contribution comes out without tax or penalty anytime, so will always have a slight temporary potential advantage over a conversion.

While there always seems to be a concern regarding Roth distributions, I don't think too many bogleheads end up having to withdraw conversion money from their Roth IRAs inside of 5 years, if ever.
Topic Author
jimbojones
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Re: Roth IRA or Backdoor Roth?

Post by jimbojones »

TomatoTomahto wrote: Sun Sep 03, 2017 9:02 pm Is there a downside to doing ved's #2? That's what I was going to suggest to my son, who has a Roth but no pre-tax IRAs (of any flavor).

It seems to be a no-harm-no-foul situation that works whether you're over income limits or not. You get an extra year or so in the market, as opposed to waiting until the following year when you know your earned income precisely.
The biggest downside to me seems to be the pain of setting up new traditional IRA accounts and doing the extra funds transfer. But others have said it's not that difficult. FWIW, I'll be using Vanguard.
kaneohe
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Re: Roth IRA or Backdoor Roth?

Post by kaneohe »

jimbojones wrote: Sun Sep 03, 2017 10:07 pm
TomatoTomahto wrote: Sun Sep 03, 2017 9:02 pm Is there a downside to doing ved's #2? That's what I was going to suggest to my son, who has a Roth but no pre-tax IRAs (of any flavor).

It seems to be a no-harm-no-foul situation that works whether you're over income limits or not. You get an extra year or so in the market, as opposed to waiting until the following year when you know your earned income precisely.
The biggest downside to me seems to be the pain of setting up new traditional IRA accounts and doing the extra funds transfer. But others have said it's not that difficult. FWIW, I'll be using Vanguard.
You need to also be aware of the tax reporting issues. There seem to be so many threads about IRS auditing folks doing backdoor Roths.
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TomatoTomahto
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Re: Roth IRA or Backdoor Roth?

Post by TomatoTomahto »

kaneohe wrote: Mon Sep 04, 2017 1:28 am
jimbojones wrote: Sun Sep 03, 2017 10:07 pm
TomatoTomahto wrote: Sun Sep 03, 2017 9:02 pm Is there a downside to doing ved's #2? That's what I was going to suggest to my son, who has a Roth but no pre-tax IRAs (of any flavor).

It seems to be a no-harm-no-foul situation that works whether you're over income limits or not. You get an extra year or so in the market, as opposed to waiting until the following year when you know your earned income precisely.
The biggest downside to me seems to be the pain of setting up new traditional IRA accounts and doing the extra funds transfer. But others have said it's not that difficult. FWIW, I'll be using Vanguard.
You need to also be aware of the tax reporting issues. There seem to be so many threads about IRS auditing folks doing backdoor Roths.
TBH, I haven't looked carefully, but it was my impression that the issue was always improperly filled-out 8606 forms, apparently something TurboTax does.
I get the FI part but not the RE part of FIRE.
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TomatoTomahto
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Re: Roth IRA or Backdoor Roth?

Post by TomatoTomahto »

Alan S. wrote: Sun Sep 03, 2017 9:31 pm
TomatoTomahto wrote: Sun Sep 03, 2017 9:02 pm Is there a downside to doing ved's #2? That's what I was going to suggest to my son, who has a Roth but no pre-tax IRAs (of any flavor).

It seems to be a no-harm-no-foul situation that works whether you're over income limits or not. You get an extra year or so in the market, as opposed to waiting until the following year when you know your earned income precisely.
While unlikely, if your Roth has been funded by taxable conversions less than 5 years old and you need to take a distribution, these taxable conversions would have a 10% penalty and would come out before your later back door (non taxable) conversions. Of course a regular Roth contribution comes out without tax or penalty anytime, so will always have a slight temporary potential advantage over a conversion.

While there always seems to be a concern regarding Roth distributions, I don't think too many bogleheads end up having to withdraw conversion money from their Roth IRAs inside of 5 years, if ever.
Thanks. At his age, I expect no distributions for decades, if ever.
I get the FI part but not the RE part of FIRE.
JW-Retired
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Re: Roth IRA or Backdoor Roth?

Post by JW-Retired »

jimbojones wrote: Sun Sep 03, 2017 10:07 pm
TomatoTomahto wrote: Sun Sep 03, 2017 9:02 pm Is there a downside to doing ved's #2? That's what I was going to suggest to my son, who has a Roth but no pre-tax IRAs (of any flavor).

It seems to be a no-harm-no-foul situation that works whether you're over income limits or not. You get an extra year or so in the market, as opposed to waiting until the following year when you know your earned income precisely.
The biggest downside to me seems to be the pain of setting up new traditional IRA accounts and doing the extra funds transfer. But others have said it's not that difficult. FWIW, I'll be using Vanguard.
After doing the Roth conversion of all the funds in a tIRA, I've found that Vanguard still keeps that zero balance tIRA open for a long time. Don't know exactly how long, but the empty tIRA has always still been there for me to use for the following year's backdoor.

IMO, setting up one tIRA account one time at Vanguard is very little pain.
JW
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TomatoTomahto
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Re: Roth IRA or Backdoor Roth?

Post by TomatoTomahto »

I set up a tIRA and a Roth for DW; I have too much in my own tIRA. It took maybe 5-10 minutes, and was painless.
I get the FI part but not the RE part of FIRE.
bada bing
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Re: Roth IRA or Backdoor Roth?

Post by bada bing »

I do a yearly backdoor Roth with accounts at Schwab. The initial
set up years ago was trivial and the annual deposit and conversion
is even more trivial. Schwab - probably like most other big brokerages -
leaves the tIRA used for the backdoor open with a $.00 balance. The
same account is used each year as a temporary conduit to the Roth
account. Makes it really easy each year after the initial set up.

If you don't have pre-tax tIRA balances to worry about, I'd do the annual
Roth contribution as a backdoor if there is going to be any question about
eligibility. It is too simple to do the backdoor and no worries after it is done
about unforeseen changes in earned income.
DA200
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Re: Roth IRA or Backdoor Roth?

Post by DA200 »

Creating a traditional IRA and Roth IRA account at most major brokerages (Vanguard, Fidelity, Schwab) is VERY easy online. A few years ago I believe I created and funded a traditional IRA account on Day 1 and did the backdoor on Day 2. Total time spent was less than 10 minutes for everything. The only challenge is making sure 8606 tax forms are filed correctly...

I always do backdoor Roths during the first week of January (even though we sometimes are below the MAGI limit). The only problem would be if my wife and I both were fired (or both died) in early January and we didn't make enough income for the year. In our case (tenured faculty and doctor with own practice) are very unlikely to lose their jobs. If we die, its not our problem to deal with...
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retiredjg
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Re: Roth IRA or Backdoor Roth?

Post by retiredjg »

jimbojones wrote: Thanks - correct- no existing Traditional IRAs.
Since we are double checking...no SEP IRA or SIMPLE IRA either. :D

If I were faced with not knowing what the MAGI will be, I'd just go ahead and use the back door now - contribute and convert in and for the same year. There is no reason not to do this and it keeps both steps on the same IRS form instead of spreading the documentation process out between 2 tax years.
TN Bogle
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Re: Roth IRA or Backdoor Roth?

Post by TN Bogle »

A poster mentioned form 8606 is notoriously improperly filed with turbo tax. I am planing on doing a back door this year for the first time and also have been using turbotax. What is the best way to ensure this is filed correctly?
crit
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Re: Roth IRA or Backdoor Roth?

Post by crit »

To the OP, I'd just do the backdoor already. There's no cost to doing it even if you do end up under the Roth threshold.

To the poster above me, with the 8606: Turbotax indeed did it wrong first (good thing I looked). What worked for me was skipping ahead in the program to report the contribution first, and then the 1099 that reported the conversion later. By default, TT does it in the opposite order. But take a look at the forms, along the way, to make sure. And even before that, pencil out the 8606 so you know what it should look like.
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Duckie
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Re: Roth IRA or Backdoor Roth?

Post by Duckie »

TN Bogle wrote:A poster mentioned form 8606 is notoriously improperly filed with turbo tax. I am planing on doing a back door this year for the first time and also have been using turbotax. What is the best way to ensure this is filed correctly?
When answering the questions make sure TT knows the following:
  1. You made a contribution to a TIRA for the tax year (even if the contribution was made in the next year, e.g. in 2018 for 2017). This is covered in the Deductions section.
  2. The contribution, or part of it, is non-deductible. Again, in the Deductions section.
  3. You converted the contribution/earnings to a Roth IRA in the tax year. This is in the Deductions section but you'll have to input the 1099-R information in the Income section.
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retiredjg
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Re: Roth IRA or Backdoor Roth?

Post by retiredjg »

TN Bogle wrote: Mon Sep 04, 2017 5:05 pm A poster mentioned form 8606 is notoriously improperly filed with turbo tax. I am planing on doing a back door this year for the first time and also have been using turbotax. What is the best way to ensure this is filed correctly?
The first thing to do is fill out a dummy Form 8606 (front and back) with a pencil. Then you will know what it is supposed to look like. Then do it with TT and see if it is different.

An OK difference - TT may not fill in lines 6 - 12. Don't worry about that. But if TT comes up with the wrong taxable amount or wrong line 14 or does not fill in the back, you know something is wrong.

It is unclear if TT actually did it wrong or if TT had a question that was easy to answer wrong, resulting in a lot of errors. But apparently things have been working OK since that one year when something was amiss.
Topic Author
jimbojones
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Re: Roth IRA or Backdoor Roth?

Post by jimbojones »

Thanks everyone for your input. Funding Roth IRA via tIRA seems to be the best move for me. Account setup and funding was simple.
The Wizard
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Re: Roth IRA or Backdoor Roth?

Post by The Wizard »

I had no problem doing a backdoor Roth in 2016 using FreeTaxUSA.
But because I'm retired and am no longer contributing to any other retirement plan, the $6500 tIRA contribution from my part-time job was categorized correctly as a DEDUCTIBLE tIRA contribution.
So then the Roth conversion of that amount was all taxable income.
The numbers work out the same either way...
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