Backdoor Roth IRA Conversion with Possible IRA Aggregation Rule

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california1977
Posts: 13
Joined: Tue Aug 23, 2016 7:39 pm

Backdoor Roth IRA Conversion with Possible IRA Aggregation Rule

Post by california1977 » Sun Aug 19, 2018 11:11 am

So I've been reading all the steps to do a backdoor Roth IRA conversion and the steps seem straightforward. However, I think I'm running into a possible IRA Aggregation rule issue and I can't figure out what my next steps are.

Back in 2012 (I didn't know about Bogleaheads back then), I started a new job that didn't allow new employees a 401k, so my new colleagues suggested I open a traditional IRA as a substitute for a 401k. I opened a Fidelity Traditional IRA with $5000 and it's now valued at $9600. Since then, I have not done any contributions as I just let the dividends reinvest itself (pretty good return for just letting $5000 sit for 6 years). I'm not sure if it makes a difference, but my wife had a 401k back then also.

The first mistake I just realized is that the $5000 IRA contribution was non-deductible because my wife and I exceeded the MAGI that year and I did find a form 8606 for the 2012 tax year. The purpose at the time was to open a traditional IRA to be tax deductible (like a 401k to lower our taxable income), but I didn't know about the income limits, so now I feel like I just basically opened up a regular taxable account. This entire time I thought it lowered my taxable income that year.

The second mistake was opening a traditional IRA, not a Roth IRA. That's what I get for listening to colleagues who don't have Bogleheads experience.

I now want to correct these mistakes so I can do annual backdoor Roth IRA conversions, but I think the events back in 2012 with the Traditional IRA is going to cause issues with the IRA Aggregation rule. I've been searching and searching and can't find anything similar to my situation.

Questions (we're in CA with a high tax bracket):
1. Based on the info above, do I fall under the IRA Aggregation rule?
2. Do I need to get rid of this Fidelity Traditional IRA first before I can start a new backdoor Roth IRA conversion with Vanguard?
3. Please provide additional advice as I'm sure I'm missing something. Thanks.

PFInterest
Posts: 2113
Joined: Sun Jan 08, 2017 12:25 pm

Re: Backdoor Roth IRA Conversion with Possible IRA Aggregation Rule

Post by PFInterest » Sun Aug 19, 2018 11:26 am

yes. but easy.
you rollover the earnings to a 401k.
you add 5500 this year, and convert all the non-deducible basis to a rIRA.

now your tIRA is gone for future years of backdoor rIRA.

Compound
Posts: 609
Joined: Mon May 26, 2014 1:32 pm

Re: Backdoor Roth IRA Conversion with Possible IRA Aggregation Rule

Post by Compound » Sun Aug 19, 2018 12:19 pm

So it seems you contributed $5000 after tax dollars to a traditional IRA in 2012 and have $4600 of earnings in that account and now you’d like to perennially contribute to a backdoor Roth. If you don’t have a employer sponsored plan to roll those earnings into or if you don’t mind paying tax on the $4600, you can start with the backdoor Roth right now. You can contribute non-deductible money to an IRA and convert your traditional IRAs to Roth IRAs. If you have an employee sponsored plan that accepts rollovers, do the rollover of the earnings and you shouldn’t have to pay any tax. If you do end up needing to pay tax, seems a small price to pay to open the backdoor Roth pathway for years to come.

In case you haven’t read it, tfb has an amazingly good primer on the backdoor Roth:
https://thefinancebuff.com/the-backdoor ... ow-to.html

california1977
Posts: 13
Joined: Tue Aug 23, 2016 7:39 pm

Re: Backdoor Roth IRA Conversion with Possible IRA Aggregation Rule

Post by california1977 » Sun Aug 19, 2018 6:50 pm

Thanks for the guidance so far. I think I have a better idea. Here's what I plan on doing:

1. Rollover the $4600 earnings to my employee 401k assuming they accept Traditional IRA rollovers. If they don't accept rollovers, pay the tax on the $4600 earnings and go to step 2.
2. Contribute new $5500 to my existing Traditional IRA so now the after tax dollars is $10,500 ($5000 from 2012 and $5500 from 2018). If I'm not able to rollover the $4600 earnings, then then total value is around $15,100.
3. Convert the Traditional IRA to a Roth IRA

Questions:
1. Before step 1, do I need to (or should I) sell my shares so all that is left is cash to prevent fluctuating value?
2. I'm leaning towards skipping the 401k rollover portion and just pay the tax during this upcoming tax season on the $4600 earnings as it seems like it will save time by avoiding dealing with my 401k company. I do our taxes via TurboTax, so when it's time pay taxes, I don't need to do anything special as Fidelity will just send me the forms and I just import them into TurboTax, correct?
3. The end goal is to leave Fidelity and go with Vanguard. Is moving my Fidelity Roth IRA to Vanguard simple? If so, do I need to sell my shares so all that is left is cash value?
4. My wife can do a backdoor Roth IRA conversion as what I'm going through shouldn't affect her either, correct?

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FiveK
Posts: 5389
Joined: Sun Mar 16, 2014 2:43 pm

Re: Backdoor Roth IRA Conversion with Possible IRA Aggregation Rule

Post by FiveK » Sun Aug 19, 2018 9:50 pm

california1977 wrote:
Sun Aug 19, 2018 6:50 pm
Thanks for the guidance so far. I think I have a better idea. Here's what I plan on doing:

1. Rollover the $4600 earnings to my employee 401k assuming they accept Traditional IRA rollovers. If they don't accept rollovers, pay the tax on the $4600 earnings and go to step 2.
2. Contribute new $5500 to my existing Traditional IRA so now the after tax dollars is $10,500 ($5000 from 2012 and $5500 from 2018). If I'm not able to rollover the $4600 earnings, then then total value is around $15,100.
3. Convert the Traditional IRA to a Roth IRA

Questions:
1. Before step 1, do I need to (or should I) sell my shares so all that is left is cash to prevent fluctuating value?
2. I'm leaning towards skipping the 401k rollover portion and just pay the tax during this upcoming tax season on the $4600 earnings as it seems like it will save time by avoiding dealing with my 401k company. I do our taxes via TurboTax, so when it's time pay taxes, I don't need to do anything special as Fidelity will just send me the forms and I just import them into TurboTax, correct?
3. The end goal is to leave Fidelity and go with Vanguard. Is moving my Fidelity Roth IRA to Vanguard simple? If so, do I need to sell my shares so all that is left is cash value?
4. My wife can do a backdoor Roth IRA conversion as what I'm going through shouldn't affect her either, correct?
1. Unless the 401k has the exact fund(s) you have in the IRA, you will have to do a cash rollover. The 401k may require it in any case.
2. Yes. Do be sure you can fill out form 8606 yourself (either by hand or with help from something like the 'Form8606' tab in the personal finance toolbox spreadsheet. The reason is that TurboTax's Q&A has confused many, leading to incorrect filing. Compare what TT generates for 8606 with your by-hand numbers to ensure you are filing what you mean to file.
3a. Yes.
3b. No - but you may want to if selling at Fidelity is less expensive than selling at Vanguard.
4. Yes

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