Roth IRA Contribrution - am I stuck?

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Iowa David
Posts: 57
Joined: Mon Dec 18, 2017 9:53 pm

Roth IRA Contribrution - am I stuck?

Post by Iowa David » Sun Oct 21, 2018 8:30 am

My wife and I would like to make a 2018 contribution to our individual Roth IRAs, however, our income (filing jointly) for this year will exceed the Modified AGI eligibility limit.

*Please note - I have had a call with Vanguard's PAS to discuss this, but I'd like to enlist the community because there are a few curve balls that touch on tax implications that the PAS team could not discuss.*

Let me split this between her and I's contribution.

For her:
I was thinking that we could do a back door Roth IRA conversion.

She currently has a 403B and no Traditional IRA.

My understanding of the process is:

1. Open a new Traditional IRA account (in this case with Vanguard)
2. Make the $5,500 contribution before December 31st, 2018
3. Within a few days of the contribution (and before December 31st), roll over the $5,500 from her TIRA to her existing Roth Account (also with Vanguard and currently under PAS). This would result in her new TIRA having a balance of $0 - basically becoming a shell account.

Is my understanding of the process & timing correct?

For me: (This is where it get tricky and I need help)

I currently have a 401K (VITLX - Institutional Target Retirement 2045 Fund) through my employer and a Traditional IRA with Vanguard (managed under PAS). I opened the Vanguard TIRA earlier this when I rolled over from a previous TIRA at another financial provider.

Questions:

1. It's my understanding from speaking with Vanguard's PAS that I cannot perform the back door Roth since I have an existing Traditional IRA. Is this accurate?
2. Should I consider rolling over my TIRA to my 401K account in order to perform the back door Roth contribution?
3. Am I eligible to rollover the Vanguard IRA to my 401K due to the IRS https://www.irs.gov/retirement-plans/pl ... tributions one-rollover-per-year rule?
4. In speaking with the Vanguard PAS, I cannot make after-tax contributions to my TIRA because it will create tax implications from mixing pre & post contributions and I should potentially consider an annuity. Is creating an annuity a sound financial decision? (I currently have a whole life insurance policy that I've considered doing a 1035 exchange with. I realize this question could be a whole different thread in itself and can separate it if you think it would be helpful to do so.)

Other financial back ground:

Emergency funds: Six months of expenses (Not part of our asset allocation, online bank generating a 1.9% APY)
Debt: Mortgage, 3.625%
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal, 5.7% State (This is normally where we are, but due to some variability in our income this year we exceeded this.)
Age: 38
Desired Asset allocation: 80/20
Desired International allocation: 40%
He is maxing out the annual 401K & Roth IRA (when eligible)
She is contributing $14K towards annual 403B & Maximum towards Roth IRA (when eligible)
We do not have an HSA (but will likely consider this during the next open enrollment)

I feel "stuck" and would appreciate any validation or additional options from the questions I outlined above. Thank you!
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

ExitStageLeft
Posts: 981
Joined: Sat Jan 20, 2018 4:02 pm

Re: Roth IRA Contribrution - am I stuck?

Post by ExitStageLeft » Sun Oct 21, 2018 11:03 am

Iowa David wrote:
Sun Oct 21, 2018 8:30 am
...
1. Open a new Traditional IRA account (in this case with Vanguard)
2. Make the $5,500 contribution before December 31st, 2018
3. Within a few days of the contribution (and before December 31st), roll over the $5,500 from her TIRA to her existing Roth Account (also with Vanguard and currently under PAS). This would result in her new TIRA having a balance of $0 - basically becoming a shell account.

Is my understanding of the process & timing correct?
Yes, you have it correct. Before doing anything more though, be sure to fill out the Form 8606 in advance to make certain you have every I dotted and T crossed.
Iowa David wrote:
Sun Oct 21, 2018 8:30 am
For me: (This is where it get tricky and I need help)

I currently have a 401K (VITLX - Institutional Target Retirement 2045 Fund) through my employer and a Traditional IRA with Vanguard (managed under PAS). I opened the Vanguard TIRA earlier this when I rolled over from a previous TIRA at another financial provider.

Questions:

1. It's my understanding from speaking with Vanguard's PAS that I cannot perform the back door Roth since I have an existing Traditional IRA. Is this accurate?
2. Should I consider rolling over my TIRA to my 401K account in order to perform the back door Roth contribution?
3. Am I eligible to rollover the Vanguard IRA to my 401K due to the IRS https://www.irs.gov/retirement-plans/pl ... tributions one-rollover-per-year rule?
4. In speaking with the Vanguard PAS, I cannot make after-tax contributions to my TIRA because it will create tax implications from mixing pre & post contributions and I should potentially consider an annuity. Is creating an annuity a sound financial decision? (I currently have a whole life insurance policy that I've considered doing a 1035 exchange with. I realize this question could be a whole different thread in itself and can separate it if you think it would be helpful to do so.)
...
1) Yes
2) Yes
3) No, that rule applies to a "rollover" whereby you receive the funds as a check in your name, then deposit it in the receiving account. You want to transfer from Vanguard to your 401k without you ever receiving the funds. That is a custodian to custodian transfer. That should not fall under the one rollover a year rule.
4) You can always make an after-tax contribution to a tIRA, up to the annual limit. Whether you should is a whole other kettle of fish. I would avoid any complication such as an annuity (???) and instead resolve to roll the tIRA into the 401k.

Iowa David
Posts: 57
Joined: Mon Dec 18, 2017 9:53 pm

Re: Roth IRA Contribrution - am I stuck?

Post by Iowa David » Sun Oct 21, 2018 12:02 pm

ExitStageLeft wrote:
Sun Oct 21, 2018 11:03 am
Iowa David wrote:
Sun Oct 21, 2018 8:30 am
...
1. Open a new Traditional IRA account (in this case with Vanguard)
2. Make the $5,500 contribution before December 31st, 2018
3. Within a few days of the contribution (and before December 31st), roll over the $5,500 from her TIRA to her existing Roth Account (also with Vanguard and currently under PAS). This would result in her new TIRA having a balance of $0 - basically becoming a shell account.

Is my understanding of the process & timing correct?
Yes, you have it correct. Before doing anything more though, be sure to fill out the Form 8606 in advance to make certain you have every I dotted and T crossed.
Thank you, ExitStageLeft.

Follow up question. In March of 2018, my wife and I both contributed to our Roth IRA for Tax Year - 2017.

If we make 2018 Roth Contributions (assuming I get my TIRA rolled over to my 401K) - can you think of any tax implications if we make two Roth Contributions in the same calendar year?
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

User avatar
FiveK
Posts: 5735
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth IRA Contribrution - am I stuck?

Post by FiveK » Sun Oct 21, 2018 1:59 pm

Iowa David wrote:
Sun Oct 21, 2018 12:02 pm
In March of 2018, my wife and I both contributed to our Roth IRA for Tax Year - 2017.

If we make 2018 Roth Contributions (assuming I get my TIRA rolled over to my 401K) - can you think of any tax implications if we make two Roth Contributions in the same calendar year?
No.

There is no problem making two maximum allowable contributions in the same year but for two different years.

User avatar
Duckie
Posts: 6016
Joined: Thu Mar 08, 2007 2:55 pm

Re: Roth IRA Contribrution - am I stuck?

Post by Duckie » Sun Oct 21, 2018 4:10 pm

Iowa David wrote:Within a few days of the contribution (and before December 31st), roll over the $5,500 from her TIRA to her existing Roth Account (also with Vanguard and currently under PAS).
When converting the TIRA to the Roth IRA she needs to convert 100%, not a dollar amount. Account values shift.
It's my understanding from speaking with Vanguard's PAS that I cannot perform the back door Roth since I have an existing Traditional IRA. Is this accurate?
You're allowed to do it, but it'll cost you because of the pro-rata rule and so it is not recommended.
Should I consider rolling over my TIRA to my 401K account in order to perform the back door Roth contribution?
Yes, assuming your 401k has decent options.
Am I eligible to rollover the Vanguard IRA to my 401K due to the IRS https://www.irs.gov/retirement-plans/pl ... tributions one-rollover-per-year rule?
Rollovers between 401k plans and IRAs are not covered by this rule.
In speaking with the Vanguard PAS, I cannot make after-tax contributions to my TIRA because it will create tax implications from mixing pre & post contributions and I should potentially consider an annuity. Is creating an annuity a sound financial decision?
No, an annuity is not a good idea. You can make after-tax contributions, you just have to track them with Form 8606. If you're not going to convert then it may not be the best idea. Contributing to a taxable account is better than an annuity.

Iowa David
Posts: 57
Joined: Mon Dec 18, 2017 9:53 pm

Re: Roth IRA Contribrution - am I stuck?

Post by Iowa David » Tue Oct 23, 2018 6:01 pm

Thank you, Duckie!
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

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