Backdoor Roth IRA

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Bcon123
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Backdoor Roth IRA

Post by Bcon123 » Sun Oct 08, 2017 3:56 pm

Good morning all,

I am a 29 year old single guy who rents, has zero debt and a good stable job. I have not yet contributed to my Roth IRA this year as I will exceed the income limits by the end of the year. I currently max out my 401k and still have a good amount of $ in savings. I want to clarify that if I put 5500 into a traditional IRA and then call vanguard to convert it to a Roth IRA, there is no penalty for exceeding the income limit? Also, is it in my best interest to go this route? Any insight would be greatly appreciated!

kaneohe
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Re: Backdoor Roth IRA

Post by kaneohe » Sun Oct 08, 2017 4:18 pm

There is no income limit for contributing to TIRA and no income limit for doing Roth conversion so no violations. However you should be aware of tax issues if you have other deductible contributions in this TIRA or any other TIRA accounts. https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

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Duckie
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Re: Backdoor Roth IRA

Post by Duckie » Sun Oct 08, 2017 4:24 pm

Bcon123 wrote:I want to clarify that if I put 5500 into a traditional IRA and then call vanguard to convert it to a Roth IRA, there is no penalty for exceeding the income limit?
There is no penalty for exceeding the income limit because you did not exceed the income limit. There is no income limit when making a non-deductible TIRA contribution. There is no income limit when converting TIRA assets to a Roth IRA.
Also, is it in my best interest to go this route?
If you want to contribute more to a tax-sheltered account and you can't do it directly, then the backdoor method is the way to go as long as you have no other non-Roth IRAs (and it reads as if you have none).

Take a look at IRS Form 8606. If you decide to use the backdoor method, when you file your taxes for 2017 you will need to fill out Parts I and II of this form. If using tax software make sure you answer the right questions correctly. Here is an example of how to do it in TurboTax.

mega317
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Re: Backdoor Roth IRA

Post by mega317 » Mon Oct 09, 2017 12:38 am

Bcon123 wrote:
Sun Oct 08, 2017 3:56 pm
and then call vanguard to convert it to a Roth IRA
I'll just point out that this is so easy--there is a "convert to Roth IRA" button.
Take a look at IRS Form 8606
And also so easy to screw up. Take care when filling out this form, especially through Turbotax.

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celia
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Re: Backdoor Roth IRA

Post by celia » Mon Oct 09, 2017 3:54 am

Note: The contribution that is made to your traditional IRA is NOT deductible on your taxes. You will pay taxes on it as ordinary income. But, when you convert it to Roth, the conversion IS NOT taxed, as long as you convert before it starts growing (the growth will be taxable).

For this to work best, you should not have any other non-Roth IRAs. If you do have any non-Roth IRAs with assets in them at the end of the year in which you convert, the conversion will be partly taxed and partly untaxed.

Bcon123
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Re: Backdoor Roth IRA

Post by Bcon123 » Mon Oct 09, 2017 9:32 am

I hank you all for your assistance!

DSInvestor
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Re: Backdoor Roth IRA

Post by DSInvestor » Mon Oct 09, 2017 11:13 am

When you prepare your 2017 tax return, make sure you enter both steps:
1) Contribution to Traditional IRA for 2017 tax year. This will allow the tax software to examine your tax situation to see if you were covered by an employer plan. If covered and MAGI exceeds certain limits, the TIRA contribution will be non-deductible and the non-deductible amount (IRA basis) will tracked using form 8606.

2) Roth conversion. The IRA basis from the non-deductible TIRA contribution (IRA basis) should be converted tax free.

IRS form 8606: https://www.irs.gov/pub/irs-pdf/f8606.pdf

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LadyGeek
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Re: Backdoor Roth IRA

Post by LadyGeek » Tue Nov 07, 2017 5:23 pm

New member londonfeb26 has a question which I've moved into a stand-alone post: [Can we do a Backdoor Roth IRA?]
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Sir Don
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Re: Backdoor Roth IRA

Post by Sir Don » Tue Nov 07, 2017 8:20 pm

Can someone explain the Non-Roth IRA's please.

What if you have a Simple IRA, or Rollover IRA, or a SEP. Anything besides a 401(k) plan.

Also, what happens if you have a Simple IRA but its setup through the employer and you are a participant. Does that mean, a portion of it would be taxable.

DSInvestor
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Re: Backdoor Roth IRA

Post by DSInvestor » Tue Nov 07, 2017 8:48 pm

Sir Don wrote:
Tue Nov 07, 2017 8:20 pm
Can someone explain the Non-Roth IRA's please.

What if you have a Simple IRA, or Rollover IRA, or a SEP. Anything besides a 401(k) plan.

Also, what happens if you have a Simple IRA but its setup through the employer and you are a participant. Does that mean, a portion of it would be taxable.
Non-Roth IRAs affect the Roth conversion step of the backdoor into Roth IRA. This is because the tax form (form 8606) which calculates the taxable and non-taxable amounts of conversions considers assets in all of your non-Roth IRA accounts (Traditional IRA, Rollover IRA, SIMPLE-IRA, SEP-IRA).

For example, you have a 45K SIMPLE-IRA and made 5K non-deductible Traditional IRA contribution. Form 8606 considers you to have a 50K Traditional IRA with 5K of IRA basis (non-deductible money). If you converted 100% of the 50K, the non-taxable amount would be 5K (IRA basis) and taxable amount 45K. If you converted a portion of the 50K, say 5K, form 8606 will prorate the IRA basis. Your 5K conversion is 10% of the total IRA so 10% of the IRA basis is consumed. This results in non-taxable amount of $500 and taxable amount of $4500. The remaining 45K in your SIMPLE IRA will have $4500 of IRA basis.

IRS Form 8606: https://www.irs.gov/pub/irs-pdf/f8606.pdf
I suggest running through form 8606 lines 1-18 to see how this works. Note that line 6 asks for IRA balances as of 12/31 for your Traditional IRA, SIMPLE-IRA and SEP-IRAs.

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