To backdoor or not??

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
6bquick
Posts: 45
Joined: Sat Mar 26, 2016 8:56 pm

To backdoor or not??

Post by 6bquick » Sun Nov 12, 2017 5:52 am

Hello,
I was hoping for some insight from someone who's done it before. The past 2 years i've backdoor'd my roth contributions bc household income was right on the cusp and i figured it was better safe than sorry. for 2018, however, our income will be substantially below the phase-out. (i contribute annually in early jan) I was wondering, as far as record-keeping or continuity goes, is there any reason i have to continue via backdoor contributions? will it make it harder upon withdrawal if i do not continue to do so? again, not a real tedious process either way, just wondering if any of you have pearls of wisdom from prior experience. thank you in advance!

retiredjg
Posts: 34181
Joined: Thu Jan 10, 2008 12:56 pm

Re: To backdoor or not??

Post by retiredjg » Sun Nov 12, 2017 6:00 am

There is no reason you have to continue using the back door.

What you do need to do, if you have not already, is compile a list of how all your money has gotten into the Roth IRA since the beginning. Save this list along with the 1099 forms and the 5498 Forms until your mid 60's.

Money comes out of Roth IRA in a certain order and it is not necessarily in the order you put it in. Having this information will be necessary if you need to take money out of the Roth IRA before age 59.5.

exigent
Posts: 752
Joined: Fri May 07, 2010 8:49 am

Re: To backdoor or not??

Post by exigent » Sun Nov 12, 2017 9:01 am

We’re in a similar position and have just continued doing the backdoor “contribute and convert” method. I’m not really sure why, just habit I guess. But for the past few years we would’ve been able to just make direct Roth contributions if we’d wanted to. Not sure this really answers your question, just trying to give you some personal experience.

User avatar
TomatoTomahto
Posts: 7656
Joined: Mon Apr 11, 2011 1:48 pm

Re: To backdoor or not??

Post by TomatoTomahto » Sun Nov 12, 2017 9:06 am

My son has done “straight through” Roth for the past couple of years. Next year he will start at a full-time job after college, and his total compensation will be unknown until year-end.

I’m recommending to him that he do a backdoor Roth. If it turns out to be an unnecessary step, c’est la vie, no harm no foul.
Zero Net Carbon by 2019.

retiredjg
Posts: 34181
Joined: Thu Jan 10, 2008 12:56 pm

Re: To backdoor or not??

Post by retiredjg » Sun Nov 12, 2017 9:26 am

TomatoTomahto wrote:
Sun Nov 12, 2017 9:06 am
I’m recommending to him that he do a backdoor Roth. If it turns out to be an unnecessary step, c’est la vie, no harm no foul.
6bquick, I agree there is no harm no foul if you prefer to do this.

What you have to remember is this. If there is any gain before the conversion (e.g. contribute $5,500 and convert $5,575), then that $75 in gains is subject to a 5 year clock - 10% penalty for early withdrawal. If you contribute and convert the same exact amount, this is not an issue.

If you contribute directly, not through the back door, there is no clock at all. The money is available any time for any reason.

MotoTrojan
Posts: 2469
Joined: Wed Feb 01, 2017 8:39 pm

Re: To backdoor or not??

Post by MotoTrojan » Sun Nov 12, 2017 10:04 am

retiredjg wrote:
Sun Nov 12, 2017 9:26 am
TomatoTomahto wrote:
Sun Nov 12, 2017 9:06 am
I’m recommending to him that he do a backdoor Roth. If it turns out to be an unnecessary step, c’est la vie, no harm no foul.
6bquick, I agree there is no harm no foul if you prefer to do this.

What you have to remember is this. If there is any gain before the conversion (e.g. contribute $5,500 and convert $5,575), then that $75 in gains is subject to a 5 year clock - 10% penalty for early withdrawal. If you contribute and convert the same exact amount, this is not an issue.

If you contribute directly, not through the back door, there is no clock at all. The money is available any time for any reason.
That $75 is also taxed as income. Will your son but lump summing? If so, this is likely fine.

6bquick
Posts: 45
Joined: Sat Mar 26, 2016 8:56 pm

Re: To backdoor or not??

Post by 6bquick » Sun Nov 12, 2017 11:26 am

retiredjg wrote:
Sun Nov 12, 2017 6:00 am
There is no reason you have to continue using the back door.

What you do need to do, if you have not already, is compile a list of how all your money has gotten into the Roth IRA since the beginning. Save this list along with the 1099 forms and the 5498 Forms until your mid 60's.

Money comes out of Roth IRA in a certain order and it is not necessarily in the order you put it in. Having this information will be necessary if you need to take money out of the Roth IRA before age 59.5.
Thanks for the insight. However, is this redundant if i choose to continue to backdoor the roth, even unnecessarily, and fill out form 8606? or should it be done in addition to 8606?

retiredjg
Posts: 34181
Joined: Thu Jan 10, 2008 12:56 pm

Re: To backdoor or not??

Post by retiredjg » Sun Nov 12, 2017 12:42 pm

In addition. Not all money that gets into Roth IRA triggers a Form 8606. For example, money going directly into Roth IRA is not recorded on Form 8606. Perhaps you don't see that happening, but how do you know what will happen in 25 years?

And as I understand it, money from a rollover of Roth 401k or after-tax 401k is not documented on Form 8606 or maybe it is not documented until the next time you need Form 8606 or until you start withdrawing or something odd like that.

Even if Form 8606 captures everything you will ever need, I'd be redundant - you may forget to save that Form 8606 one year....and your records would be wrong.

Post Reply