Backdoor Roth IRA Question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
jj99
Posts: 13
Joined: Wed Jan 17, 2018 1:30 am

Backdoor Roth IRA Question

Post by jj99 » Wed Jan 17, 2018 1:39 am

Hi All,

I have some questions on Backdoor Roth IRA based on the follow article

https://thefinancebuff.com/the-backdoor ... plete-how-

1. My wife and I have only 401k, but no traditional IRA. We max out our 401k each year. We do not qualify for direct Roth IRA because of the income limits. So can we each open a new traditional IRA account and convert it into Roth before April 15 and claim it as 2017 contribution while filing taxes this year?
2. What exactly happens when i "convert" the funds in Traditional IRA to Roth IRA? Will my broker open a new Roth IRA account and move the assets in Traditional IRA to the new one?

-JJ

mhalley
Posts: 6010
Joined: Tue Nov 20, 2007 6:02 am

Re: Backdoor Roth IRA Question

Post by mhalley » Wed Jan 17, 2018 2:53 am

Looks like you missed the last couple of letters in the link so it is not working, but I am familiar with the article.
1.yes, then you could do the same for 2018.
2. You create the Roth account,with no funding, then convert the traditional to it.
Once it’s setup, fund the same traditional Ira each year, then convert to the same Roth. Remember to say no to any tax withholding. You might also read his guide to filling out the 8606
https://thefinancebuff.com/backdoor-rot ... -easy.html

User avatar
celia
Posts: 8210
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Backdoor Roth IRA Question

Post by celia » Wed Jan 17, 2018 3:28 am

jj99 wrote:
Wed Jan 17, 2018 1:39 am
1. My wife and I have only 401k, but no traditional IRA. We max out our 401k each year. We do not qualify for direct Roth IRA because of the income limits. So can we each open a new traditional IRA account and convert it into Roth before April 15 and claim it as 2017 contribution while filing taxes this year?
Yes, it would be a 2017 non-deductible contribution, which you would report on Form 8606 for 2017 taxes. (The tax software will generate the form if you answer the questions correctly, which can be a little tricky.) Then since you will be converting in 2018, the conversion step will be reported on Form 8606 for your 2018 taxes.

You can each also make a 2018 contribution this year and convert it. Both of those steps would be reported on your 2018 tax return.
2. What exactly happens when i "convert" the funds in Traditional IRA to Roth IRA? Will my broker open a new Roth IRA account and move the assets in Traditional IRA to the new one?
Ask your broker what the process is for them. You will have to request the conversion. (The broker does not know what your income is or what you are eligible for. But many people do the backdoor Roth these days.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

User avatar
Duckie
Posts: 5880
Joined: Thu Mar 08, 2007 2:55 pm

Re: Backdoor Roth IRA Question

Post by Duckie » Wed Jan 17, 2018 5:53 pm

jj99 wrote:My wife and I have only 401k, but no traditional IRA. We max out our 401k each year. We do not qualify for direct Roth IRA because of the income limits. So can we each open a new traditional IRA account and convert it into Roth before April 15 and claim it as 2017 contribution while filing taxes this year?
The 2017 contribution has to happen before mid-April. The conversion can happen anytime, although sooner is better.
What exactly happens when i "convert" the funds in Traditional IRA to Roth IRA? Will my broker open a new Roth IRA account and move the assets in Traditional IRA to the new one?
The backdoor Roth IRA method is a series of steps:
  1. Open a Traditional IRA and a Roth IRA at the same custodian.
    .
  2. Make your 2017 contribution to the TIRA before mid-April. This will be a non-deductible contribution, but the IRA custodian doesn't need that information. You may want the TIRA to hold a money market fund to avoid market swings.
    .
  3. Once the contribution posts and as soon as you're allowed, convert 100% of the assets to your Roth IRA. Don't use dollar amounts because account values shift, use 100%. If the custodian asks to withhold taxes, say NO. If, in a few weeks, a tiny amount from some dividends shows up in the TIRA, just convert that, too.
    .
  4. As soon as you have the money, contribute for 2018 and then convert.
    .
  5. When you file your taxes for 2017 add IRS Form 8606 . Fill out Part I for the 2017 non-deductible contribution. If using an accountant or tax-software make sure they/it know you made a TIRA contribution of $XX for 2017 in 2018 and that the contribution was non-deductible.
    .
  6. When you file your taxes for 2018 fill out Part I for the 2018 non-deductible contribution and Part II for all conversions. If using an accountant or tax-software make sure they/it know you made a TIRA contribution of $XX for 2018 in 2018, that the contribution was non-deductible, and that you converted $YY in 2018. It's best to make both the contribution and conversion happen in and for the same year. As long as the TIRA is empty as of December 31st any taxes will be negligible.
    .
  7. Do it again the next year. The TIRA should stay open for awhile even though empty so you should be able to use the same TIRA the next time. If not, just open another TIRA.
This will only work properly if you have no other non-Roth IRAs (Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA) because of the pro-rata rule. All non-Roth IRA accounts must have a $0 balance as of December 31st in the year of the conversion or you'll be paying a chunk of taxes.

jj99
Posts: 13
Joined: Wed Jan 17, 2018 1:30 am

Re: Backdoor Roth IRA Question

Post by jj99 » Thu Jan 18, 2018 3:08 am

When you file your taxes for 2017 add IRS Form 8606 . Fill out Part I for the 2017 non-deductible contribution. If using an accountant or tax-software make sure they/it know you made a TIRA contribution of $XX for 2017 in 2018 and that the contribution was non-deductible.
Thanks Duckie for your awesome explanation

Can i try the following scenario? Will it work? Basically I want to catch up on the contribution & conversion for 2017 and do the same for 2018 this year
1. Contribute to TIRA before April 15
2. Convert the same to Roth IRA before April 15
3. Declare the TIRA Contribution and subsequent Distribution to RIRA in 2017 tax return
4. Contribute to TIRA in May for 2018 Contribution
5. Convert the same to Roth IRA before Dec 31, 2018
6. Declare the 2018 TIRA Contribution and subsequent Distribution to RIRA in 2018 tax return

ivk5
Posts: 353
Joined: Thu Sep 22, 2016 9:05 am

Re: Backdoor Roth IRA Question

Post by ivk5 » Thu Jan 18, 2018 4:19 am

Contributions (to tIRA in this case) are made for a certain year, even if they are made in a different year (prior to due date of return). The return on which you report the contribution is the return for the year for which the contribution was made.

This is not true of conversions (to rIRA), which by the way are not subject to an annual limit anyway. Conversions are reported on the return for the year in which they are made. It does not matter that the amount being converted may have come from a contribution made for a different tax year.

Nothing in the backdoor IRA process involves making a distribution. Rules governing distributions do not apply here. If you use that word in providing instructions to your custodian, there is a risk that they will do exactly what you ask, and cause a world of tax/reporting pain for you.

In summary: you can make your 2017 contribution now and report it on your 2017 return. The subsequent conversion of that amount, and your 2018 contribution and conversion, will all be reported on your 2018 return, assuming all completed this year. You can even make the 2018 contribution right after the 2017 contribution, and then convert the 11k at once.

The Wizard
Posts: 12156
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Backdoor Roth IRA Question

Post by The Wizard » Thu Jan 18, 2018 4:31 am

If you have the funds available, you can contribute $11,000 combined for 2017 + 2018 right now (prior to April 15) on the same day.
Then convert the combined total the following day, which might be $11,021 or similar if there was a small uptick in the market on day one.

If you open IRA accounts at Vanguard and use mutual funds, not ETFs, this whole process is quite simple to do on-line...
Attempted new signature...

nolesrule
Posts: 708
Joined: Thu Feb 26, 2015 10:59 am

Re: Backdoor Roth IRA Question

Post by nolesrule » Thu Jan 18, 2018 8:14 am

jj99 wrote:
Thu Jan 18, 2018 3:08 am
When you file your taxes for 2017 add IRS Form 8606 . Fill out Part I for the 2017 non-deductible contribution. If using an accountant or tax-software make sure they/it know you made a TIRA contribution of $XX for 2017 in 2018 and that the contribution was non-deductible.
Thanks Duckie for your awesome explanation

Can i try the following scenario? Will it work? Basically I want to catch up on the contribution & conversion for 2017 and do the same for 2018 this year
1. Contribute to TIRA before April 15
2. Convert the same to Roth IRA before April 15
3. Declare the TIRA Contribution and subsequent Distribution to RIRA in 2017 tax return
4. Contribute to TIRA in May for 2018 Contribution
5. Convert the same to Roth IRA before Dec 31, 2018
6. Declare the 2018 TIRA Contribution and subsequent Distribution to RIRA in 2018 tax return
Slight adjustment to your steps. Conversions are reported on the taxes for the calendar year in which they occur.

1. Contribute to TIRA before April 15
2. Convert the same to Roth IRA before April 15
3. Declare the TIRA Contribution and subsequent Distribution to RIRA in 2017 tax return
4. Contribute to TIRA in May for 2018 Contribution
5. Convert the same to Roth IRA before Dec 31, 2018
6. Declare the 2018 TIRA Contribution and subsequent Distribution any RIRA conversions that took place in 2018 in 2018 tax return

jj99
Posts: 13
Joined: Wed Jan 17, 2018 1:30 am

Re: Backdoor Roth IRA Question

Post by jj99 » Thu Jan 18, 2018 11:15 pm

Slight adjustment to your steps. Conversions are reported on the taxes for the calendar year in which they occur.

1. Contribute to TIRA before April 15
2. Convert the same to Roth IRA before April 15
3. Declare the TIRA Contribution and subsequent Distribution to RIRA in 2017 tax return
4. Contribute to TIRA in May for 2018 Contribution
5. Convert the same to Roth IRA before Dec 31, 2018
6. Declare the 2018 TIRA Contribution and subsequent Distribution any RIRA conversions that took place in 2018 in 2018 tax return
Thanks to the Wizard/ivku/nolesrule

Here is the status of the whole process. I just opened two accounts ( 1 TIRA and 1 RIRA) with Vanguard. I am currently going through the process of account verification. I think it will take few days before i can fund the account. Few questions i can think of

1. Lets say I credit the account with $5.5k towards 2017 TIRA. Do i have to buy any mutual funds before i convert it to RIRA? or Can I convert the cash in TIRA to RIRA ?
2. What exactly should i tell Vanguard to perform this conversion?
3. Do i have to wait for any time before i do the conversion? Will IRS fine me for doing this backdoor roth transfer?
4. Can i do the same process for my wife?

nolesrule
Posts: 708
Joined: Thu Feb 26, 2015 10:59 am

Re: Backdoor Roth IRA Question

Post by nolesrule » Fri Jan 19, 2018 8:13 am

jj99 wrote:
Thu Jan 18, 2018 11:15 pm
Slight adjustment to your steps. Conversions are reported on the taxes for the calendar year in which they occur.

1. Contribute to TIRA before April 15
2. Convert the same to Roth IRA before April 15
3. Declare the TIRA Contribution and subsequent Distribution to RIRA in 2017 tax return
4. Contribute to TIRA in May for 2018 Contribution
5. Convert the same to Roth IRA before Dec 31, 2018
6. Declare the 2018 TIRA Contribution and subsequent Distribution any RIRA conversions that took place in 2018 in 2018 tax return
Thanks to the Wizard/ivku/nolesrule

Here is the status of the whole process. I just opened two accounts ( 1 TIRA and 1 RIRA) with Vanguard. I am currently going through the process of account verification. I think it will take few days before i can fund the account. Few questions i can think of

1. Lets say I credit the account with $5.5k towards 2017 TIRA. Do i have to buy any mutual funds before i convert it to RIRA? or Can I convert the cash in TIRA to RIRA ?
2. What exactly should i tell Vanguard to perform this conversion?
3. Do i have to wait for any time before i do the conversion? Will IRS fine me for doing this backdoor roth transfer?
4. Can i do the same process for my wife?
1. Some people choose to invest in funds. I leave mine in the Money market settlement fund.
2. You can perform the conversion online. There is a Convert to Roth link on the Balances & Holdings page. Or call them and tell them you want to do a Roth conversion. You just have to wait for the funds to settle because transfers between accounts can only be done with settled money/securities.
3. No (other than waiting for the funds to settle). Yes.
4. Yes. Well, technically she has to do it herself unless you are authorized to use her account.

User avatar
Epsilon Delta
Posts: 7430
Joined: Thu Apr 28, 2011 7:00 pm

Re: Backdoor Roth IRA Question

Post by Epsilon Delta » Fri Jan 19, 2018 6:13 pm

ivk5 wrote:
Thu Jan 18, 2018 4:19 am
Nothing in the backdoor IRA process involves making a distribution. Rules governing distributions do not apply here. If you use that word in providing instructions to your custodian, there is a risk that they will do exactly what you ask, and cause a world of tax/reporting pain for you.
A conversion is treated as a distribution from the traditional IRA followed by a rollover into the Roth IRA. Some sources (such as the US Code, some IRS publications, and a few custodians) will describe a conversion in exactly that way.

The language used is a bit of a mess. You need to pay attention to the details, instead of thinking there are magic words that signify the correct (or incorrect) thing is being done.

If a custodian mistakenly cuts you a check for the tIRA distribution you can still complete the rollover by depositing the money into a Roth within 60 days. It doesn't even count as your once per 12 months indirect rollover.

ivk5
Posts: 353
Joined: Thu Sep 22, 2016 9:05 am

Re: Backdoor Roth IRA Question

Post by ivk5 » Sat Jan 20, 2018 1:37 am

Thanks for the correction. I learned something!

Post Reply