Post reverse rollover timing of backdoor Roth contribution

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CoinCounter
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Post reverse rollover timing of backdoor Roth contribution

Post by CoinCounter » Sun Oct 08, 2017 10:56 pm

In March 2017 I did a reverse rollover of my traditional IRA into my 401k. This left my IRA balance at $0.00. I did this to clear the way for backdoor Roth contributions in 2017 and future years.

I'd now like to do a backdoor Roth IRA contribution for 2017. Almost all information I've been able to find on the process, as well as the instructions for IRS form 8606, indicate that as my IRA balance is now $0.00 I should be okay.

However, a tax planner I've worked with in the past told me that the backdoor only works if my IRA balance is $0.00 on BOTH the first and last day of 2017, with the conversion in the middle. As I had an IRA balance January 1, 2017, this would seemingly preclude a 2017 backdoor. The problem is, I can't corroborate this advice anywhere, and I'm now inclined to disregard it.

Does anyone know about this purported January 1 restriction?
I think what I am seeing here is the ol' behavioral finance trap of loss aversion. Namely, folks rate losses twice as bad as the corresponding gains. Get over it. Get over loss aversion. - livesoft

DSInvestor
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Re: Post reverse rollover timing of backdoor Roth contribution

Post by DSInvestor » Sun Oct 08, 2017 10:58 pm

The 2016 Form 8606 line 6 asks for IRA balances as of DEC 31, 2016. The 2017 form will ask for IRA balances as of DEC 31, 2017. The balance on JAN 1 is not considered.

2016 form 8606: https://www.irs.gov/pub/irs-pdf/f8606.pdf
Last edited by DSInvestor on Sun Oct 08, 2017 11:07 pm, edited 2 times in total.
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celia
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Re: Post reverse rollover timing of backdoor Roth contribution

Post by celia » Mon Oct 09, 2017 4:23 am

There is no January 1 restriction. In fact, you can do a backdoor Roth even if you have money in a traditional IRA at all times.

We just recommend that you empty your traditional IRA by the end of the year of conversion in order to avoid prorating the taxes over the backdoor Roth and the other traditional IRA assets. The IRS looks at it as if all the non-Roth IRAs are one as far as the tax calculation is done. But if you don't have anything in your non-Roth IRAs at the end of the year and only converted the contribution which was already taxed, then the conversion will not be taxed.

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CoinCounter
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Re: Post reverse rollover timing of backdoor Roth contribution

Post by CoinCounter » Mon Oct 09, 2017 11:36 pm

Thanks to both of you for your replies - much appreciated.
I think what I am seeing here is the ol' behavioral finance trap of loss aversion. Namely, folks rate losses twice as bad as the corresponding gains. Get over it. Get over loss aversion. - livesoft

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