Roth help - income limit

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AA3
Posts: 74
Joined: Mon Jun 13, 2016 6:05 pm

Roth help - income limit

Post by AA3 » Tue Jan 09, 2018 9:00 pm

Hello:

My retirement savings are made up of 3 accounts:

Roth IRA with Vanguard
Employer profit sharing account (I cannot contribute to this account)
Defined benefit employer plan (I cannot contribute to this account)

In 2018, my wife and I (filing jointly) will exceed the Roth MAGI income max of $199k. Not by a lot, but we will be above it.

Ignorantly, I didn't realize that Roth IRA's had this restriction.

My employer offers a 401k plan, but it has very high fees and not so good investments choices. No matching $. Also, I have missed the enrollment deadline for the 2018 year.

If I can't contribute to my Roth in 2018, what are my best options? Can I open a traditional IRA for myself? If so, can or should I transfer my Roth funds to this new account? Thanks for any advice.

ChuckinMalvern
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Re: Roth help - income limit

Post by ChuckinMalvern » Tue Jan 09, 2018 9:10 pm

You are correct that there is an limit to direct contribution to a Roth Account.

However, you can contribute to a traditional IRA account (e.g., at Fidelity or Vanguard).

Then, a day or two later, roll over that money into a Roth Account.

That is, contribute to an IRA account, then follow-up with a Roth conversion. A two-step process to add money to a Roth account, in spite of the apparent income limit for direct contribution to a Roth account.

I've done this each of the past 4 years with the help of my accountant. It passed IRS audit.

Ragnoth
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Location: New York

Re: Roth help - income limit

Post by Ragnoth » Tue Jan 09, 2018 9:17 pm

ChuckinMalvern wrote:
Tue Jan 09, 2018 9:10 pm
You are correct that there is an limit to direct contribution to a Roth Account.

However, you can contribute to a traditional IRA account (e.g., at Fidelity or Vanguard).

Then, a day or two later, roll over that money into a Roth Account.

That is, contribute to an IRA account, then follow-up with a Roth conversion. A two-step process to add money to a Roth account, in spite of the apparent income limit for direct contribution to a Roth account.

I've done this each of the past 4 years with the help of my accountant. It passed IRS audit.
This is good advice. I also suggest reading up on the backdoor roth in more detail here: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

There are some caveats to a backdoor roth, particularly if you also have an existing traditional IRA funded with deductible contributions. That said, based on what you've shared thus far I think this would be a way for you to get around the income limits on the roth contribution.

AA3
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Joined: Mon Jun 13, 2016 6:05 pm

Re: Roth help - income limit

Post by AA3 » Tue Jan 09, 2018 9:45 pm

Thanks for the responses, much appreciated.

So I can open a Traditional IRA with say Vanguard, fund it with post tax $ and then roll that money into my Roth at Vanguard? If so, can I transfer that money from Traditional to Roth a few different times during the year?

And doing this avoids the Roth income limits?

Thanks.

JBTX
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Re: Roth help - income limit

Post by JBTX » Tue Jan 09, 2018 10:03 pm

AA3 wrote:
Tue Jan 09, 2018 9:45 pm
Thanks for the responses, much appreciated.

So I can open a Traditional IRA with say Vanguard, fund it with post tax $ and then roll that money into my Roth at Vanguard? If so, can I transfer that money from Traditional to Roth a few different times during the year?

And doing this avoids the Roth income limits?

Thanks.
If you are over the income limits the traditional Ira would be a non deductible IRA. There are no income limits to a traditonal Ira. There are only income limits as to whether or not your upfront traditional investment is tax deductible. Then shortly after that convert that to a Roth IRA. Often referred to as “backdoor “ Roth IRA. You are better off to convert it shortly after contribution otherwise you could end up with taxable income if nondeductible Ira goes up in value.

It only makes sense if you don’t have any other traditional deductible IRAs which it appears you don’t.

Ragnoth
Posts: 176
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Location: New York

Re: Roth help - income limit

Post by Ragnoth » Tue Jan 09, 2018 10:25 pm

AA3 wrote:
Tue Jan 09, 2018 9:45 pm
Thanks for the responses, much appreciated.

So I can open a Traditional IRA with say Vanguard, fund it with post tax $ and then roll that money into my Roth at Vanguard? If so, can I transfer that money from Traditional to Roth a few different times during the year?

And doing this avoids the Roth income limits?

Thanks.
That's the gist of it. :D

You should feel free to do some searching and read up on it. Keep in mind that this is basically a loophole in the tax code (albeit, one that is very commonly used). I've never heard of a person getting in trouble for a backdoor Roth, but if you dig down deep enough there is a bit of a legal grey area about how long you should leave the money sitting in the traditional IRA before you roll it over.

In an abundance of caution, some accountants will advise you to have the money be invested for several months before converting. The goal is basically to make it clear that the IRA contribution and the subsequent rollover were clearly two separate and distinct transactions, and avoid the consequences of the "Step Transaction Doctrine." That said, it's pretty common in practice to simply roll over the money as soon as possible. (A quick search on the forums will reveal threads like the following: viewtopic.php?t=171621)

AA3
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Re: Roth help - income limit

Post by AA3 » Tue Jan 09, 2018 10:50 pm

Thank for the responses and explanations.

I didn't realize that it was possible for me to continue contributing to my Roth IRA via this backdoor method.

My 401k at work has a $150 per quarter "account maintenance fee" and very high ER's, so I didn't want to use that if possible.

Thanks.

AA3
Posts: 74
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Re: Roth help - income limit

Post by AA3 » Wed Jan 10, 2018 1:11 pm

I have a follow up question/s on utilizing a backdoor Roth that I was hoping someone could answer.

Say I open a Traditional IRA, fund it, then transfer that money to my existing Roth IRA.

The Traditional IRA is not tax deductible because I exceed the income restrictions.

But I can put as much post-tax money as I want into this Traditional IRA and then immediately send it to my Roth IRA. Legally avoiding the income restrictions.

And these transferred funds in my Roth are *all* treated as regular Roth post-tax contributions and are not taxable now or in the future?

Thanks.

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Earl Lemongrab
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Re: Roth help - income limit

Post by Earl Lemongrab » Wed Jan 10, 2018 6:47 pm

AA3 wrote:
Wed Jan 10, 2018 1:11 pm
But I can put as much post-tax money as I want into this Traditional IRA and then immediately send it to my Roth IRA. Legally avoiding the income restrictions.
No, you can't. The IRA contribution limit still applies.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

AA3
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Joined: Mon Jun 13, 2016 6:05 pm

Re: Roth help - income limit

Post by AA3 » Wed Jan 10, 2018 7:19 pm

Got it. Thanks for the clarification. So I could add a maximum of $5,500 from my newly created Traditional IRA to my Roth IRA every year?

Is there anything preventing me doing this say 3 times per year, i.e transfers of $2k, $2k and $1500?

Thanks.

clydewolf
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Re: Roth help - income limit

Post by clydewolf » Wed Jan 10, 2018 7:32 pm

That plan would work as long as your IRA custodian has no restrictions.

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Earl Lemongrab
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Re: Roth help - income limit

Post by Earl Lemongrab » Wed Jan 10, 2018 7:42 pm

AA3 wrote:
Wed Jan 10, 2018 7:19 pm
Got it. Thanks for the clarification. So I could add a maximum of $5,500 from my newly created Traditional IRA to my Roth IRA every year?
Not exactly. There's no limit on conversions, only contributions. If you put in 5500 and it grows to 5600, you can convert all of it. You'd owe taxes on the $1000 growth.
Is there anything preventing me doing this say 3 times per year, i.e transfers of $2k, $2k and $1500?
As many slices as you'd like. You'd fill out form 8606 at tax time to record everything.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

AA3
Posts: 74
Joined: Mon Jun 13, 2016 6:05 pm

Re: Roth help - income limit

Post by AA3 » Wed Jan 10, 2018 7:46 pm

Earl Lemongrab wrote:
Wed Jan 10, 2018 7:42 pm
AA3 wrote:
Wed Jan 10, 2018 7:19 pm
Got it. Thanks for the clarification. So I could add a maximum of $5,500 from my newly created Traditional IRA to my Roth IRA every year?
Not exactly. There's no limit on conversions, only contributions. If you put in 5500 and it grows to 5600, you can convert all of it. You'd owe taxes on the $1000 growth.
Is there anything preventing me doing this say 3 times per year, i.e transfers of $2k, $2k and $1500?
As many slices as you'd like. You'd fill out form 8606 at tax time to record everything.
Got it. From what I've read of backdoor Roth's so far, I would plan on putting the funds in a Vanguard money market fund in the Traditional IRA for a few days, and then transfer the funds to my Vanguard Roth IRA. So I would expect any gains/growth in the Traditional IRA to be very minimal.

Thank you for the response.

MotoTrojan
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Re: Roth help - income limit

Post by MotoTrojan » Wed Jan 10, 2018 7:52 pm

AA3 wrote:
Wed Jan 10, 2018 7:46 pm
Earl Lemongrab wrote:
Wed Jan 10, 2018 7:42 pm
AA3 wrote:
Wed Jan 10, 2018 7:19 pm
Got it. Thanks for the clarification. So I could add a maximum of $5,500 from my newly created Traditional IRA to my Roth IRA every year?
Not exactly. There's no limit on conversions, only contributions. If you put in 5500 and it grows to 5600, you can convert all of it. You'd owe taxes on the $1000 growth.
Is there anything preventing me doing this say 3 times per year, i.e transfers of $2k, $2k and $1500?
As many slices as you'd like. You'd fill out form 8606 at tax time to record everything.
Got it. From what I've read of backdoor Roth's so far, I would plan on putting the funds in a Vanguard money market fund in the Traditional IRA for a few days, and then transfer the funds to my Vanguard Roth IRA. So I would expect any gains/growth in the Traditional IRA to be very minimal.

Thank you for the response.
Yup, this is the idea. No problem doing this in small bunches, that is my plan for this year as well.

Also with the spouse, I believe you can contribute $11K/yr.

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