Backdoor Roth - did I mess this up?

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ge1
Posts: 387
Joined: Sat Apr 28, 2012 8:15 pm

Backdoor Roth - did I mess this up?

Post by ge1 » Wed Oct 31, 2018 5:21 am

In January I did my usual Backdoor Roth contribution. At the time I had no IRA balances...

Fast forward into October and I literally just rolled funds from my an old 401k into an IRA, as the fund choices in my 401k were not very good.

Soooo...., did I screw this up? Does it matter that at the time of the backdoor contribution I had no IRA balances or will this be view that in 2018 I did a backdoor roth contribution and at the end of 2018 I also had IRA balances?

If I did screw this up I would be curious to know what the tax consequences are, the balance in my old 401k / new IRA is material :oops:

ivk5
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Re: Backdoor Roth - did I mess this up?

Post by ivk5 » Wed Oct 31, 2018 5:44 am

Read the instructions for Form 8606 and prepare a pro forma one for 2018 and you’ll have your answer.

(Hint: look for the line that requires you to list your total IRA balances as of Dec 31.)

Your conversion will have prorated basis. If the rollover was large, most of the conversion may be taxable.

AllMostThere
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Re: Backdoor Roth - did I mess this up?

Post by AllMostThere » Wed Oct 31, 2018 5:53 am

Key is to have zero tIRA balance by end of CY2018. If left in current state with no additional actions, they YES, this is screwed up and you will owe taxes on prorata amounts. There is still time to correct. Assuming you have a 401k with current employer, see if you can roll the tIRA into your current 401k. Just get it done before year end and you should be okay. Again, key is to have zero tIRA balance by end of CY2018. Get moving and good luck. :)

ge1
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Re: Backdoor Roth - did I mess this up?

Post by ge1 » Wed Oct 31, 2018 5:53 am

Wow I can't believe I missed that... :oops: :oops: :oops:

I read up on White Coat Investors site on backdoor roth and it seems to me I have really 2 options to avoid a very substantial tax liability

- Convert the funds I just rolled into my IRA into the 401k of my new employer
- Convert the funds into an Individual 401k

Do people agree?

ge1
Posts: 387
Joined: Sat Apr 28, 2012 8:15 pm

Re: Backdoor Roth - did I mess this up?

Post by ge1 » Wed Oct 31, 2018 5:54 am

AllMostThere wrote:
Wed Oct 31, 2018 5:53 am
Key is to have zero tIRA balance by end of CY2018. If left in current state with no additional actions, they YES, this is screwed up and you will owe taxes on prorata amounts. There is still time to correct. Assuming you have a 401k with current employer, see if you can roll the tIRA into your current 401k. Just get it done before year end and you should be okay. Again, key is to have zero tIRA balance by end of CY2018. Get moving and good luck. :)
thanks

ivk5
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Re: Backdoor Roth - did I mess this up?

Post by ivk5 » Wed Oct 31, 2018 5:56 am

ge1 wrote:
Wed Oct 31, 2018 5:53 am
it seems to me I have really 2 options to avoid a very substantial tax liability

- Convert the funds I just rolled into my IRA into the 401k of my new employer
- Convert the funds into an Individual 401k

Do people agree?
Yes, although one quibble - the word you want is rollover, not convert

ge1
Posts: 387
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Re: Backdoor Roth - did I mess this up?

Post by ge1 » Wed Oct 31, 2018 6:31 am

ivk5 wrote:
Wed Oct 31, 2018 5:56 am


Yes, although one quibble - the word you want is rollover, not convert
Please keep the quibbles coming... Clearly I'm not paying enough attention to detail!

FoolMeOnce
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Re: Backdoor Roth - did I mess this up?

Post by FoolMeOnce » Wed Oct 31, 2018 6:40 am

ge1 wrote:
Wed Oct 31, 2018 5:53 am
Wow I can't believe I missed that... :oops: :oops: :oops:

I read up on White Coat Investors site on backdoor roth and it seems to me I have really 2 options to avoid a very substantial tax liability
To be clear, you will only owe taxes on a portion of the amount you moved into your Roth, which I presume was $5,500.

ge1
Posts: 387
Joined: Sat Apr 28, 2012 8:15 pm

Re: Backdoor Roth - did I mess this up?

Post by ge1 » Wed Oct 31, 2018 7:59 am

FoolMeOnce wrote:
Wed Oct 31, 2018 6:40 am
ge1 wrote:
Wed Oct 31, 2018 5:53 am
Wow I can't believe I missed that... :oops: :oops: :oops:

I read up on White Coat Investors site on backdoor roth and it seems to me I have really 2 options to avoid a very substantial tax liability
To be clear, you will only owe taxes on a portion of the amount you moved into your Roth, which I presume was $5,500.
That would be a great answer but I doubt that is true. I will fill out form 8606 later today when I have time.

If anybody else could confirm that would be great. Backdoor Roth is $5,500 and assume $500,000 for IRA YE 2018 balance.

Lafder
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Re: Backdoor Roth - did I mess this up?

Post by Lafder » Wed Oct 31, 2018 8:11 am

Move your rollover IRA to your new 401k.

You can't have a solo401k unless you are self employed. If you are, it depends on the available funds.

Get started as the 12/31 IRA balance is what matters.

Hopefully you have some nice low cost options!

Back door Roths require an advanced level of investment knowledge that you now have !

lafder

retiredjg
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Re: Backdoor Roth - did I mess this up?

Post by retiredjg » Wed Oct 31, 2018 8:20 am

Yes, you did mess it up. :(

You have 2 choices that I can see.

1) Get the money out of your tIRA before the end of the year (by rolling it into a 401k)

2) Prorating your back door contribution with the new IRA. Since your new IRA is sizable, almost all of the $5,500 will be taxable. And this will go on each year until you are at a point where you can fix it (separate out your pre-tax money).

This is what everybody tries to avoid, but it is actually not going to ruin your life or portfolio if you must go this route.


You can use a Solo 401k if you actually have a side job or business, but if you go that route, do not use Vanguard as their plan will not accept a rollover from IRA. Fidelity does though.

The Wizard
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Re: Backdoor Roth - did I mess this up?

Post by The Wizard » Wed Oct 31, 2018 8:21 am

ge1 wrote:
Wed Oct 31, 2018 7:59 am
FoolMeOnce wrote:
Wed Oct 31, 2018 6:40 am
ge1 wrote:
Wed Oct 31, 2018 5:53 am
Wow I can't believe I missed that... :oops: :oops: :oops:

I read up on White Coat Investors site on backdoor roth and it seems to me I have really 2 options to avoid a very substantial tax liability
To be clear, you will only owe taxes on a portion of the amount you moved into your Roth, which I presume was $5,500.
That would be a great answer but I doubt that is true. I will fill out form 8606 later today when I have time...
That's correct.
If you are in the 24% marginal Federal tax bracket, for instance, you would owe an additional $1320 to the IRS, hardly Very Substantial.
Still, if you can move the funds in your tIRA before New Year's, that will be good...
Attempted new signature...

ivk5
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Re: Backdoor Roth - did I mess this up?

Post by ivk5 » Wed Oct 31, 2018 8:26 am

ge1 wrote:
Wed Oct 31, 2018 7:59 am
FoolMeOnce wrote:
Wed Oct 31, 2018 6:40 am
ge1 wrote:
Wed Oct 31, 2018 5:53 am
Wow I can't believe I missed that... :oops: :oops: :oops:

I read up on White Coat Investors site on backdoor roth and it seems to me I have really 2 options to avoid a very substantial tax liability
To be clear, you will only owe taxes on a portion of the amount you moved into your Roth, which I presume was $5,500.
That would be a great answer but I doubt that is true. I will fill out form 8606 later today when I have time.

If anybody else could confirm that would be great. Backdoor Roth is $5,500 and assume $500,000 for IRA YE 2018 balance.
FoolMeOnce is correct. 99% of your $5,500 conversion will be taxable. The amounts remaining in your IRA remain 99% tax-deferred.

ge1
Posts: 387
Joined: Sat Apr 28, 2012 8:15 pm

Re: Backdoor Roth - did I mess this up?

Post by ge1 » Wed Oct 31, 2018 8:37 am

Thanks so much everybody, you are giving me hope! It's annoying but if the "damage" is limited to paying taxes on the $5,500 (approx $2,000 in the highest tax bracket), that's way better than I thought it would be.

So just to double and triple check...

1. This year 99% of my $5,500 backdoor roth conversion is taxable
2. Every year where I do another backdoor roth, the same logic applies (I was aware of that and was not planning on doing additional conversions)
3. If I don't do backdoor roth conversions in the future, there is no further negative taxable impact beyond the point #1 above

Thanks so much for all the responses, you guys (and girls) rock!

ivk5
Posts: 479
Joined: Thu Sep 22, 2016 9:05 am

Re: Backdoor Roth - did I mess this up?

Post by ivk5 » Wed Oct 31, 2018 8:47 am

ge1 wrote:
Wed Oct 31, 2018 8:37 am
Thanks so much everybody, you are giving me hope! It's annoying but if the "damage" is limited to paying taxes on the $5,500 (approx $2,000 in the highest tax bracket), that's way better than I thought it would be.

So just to double and triple check...

1. This year 99% of my $5,500 backdoor roth conversion is taxable
2. Every year where I do another backdoor roth, the same logic applies (I was aware of that and was not planning on doing additional conversions)
3. If I don't do backdoor roth conversions in the future, there is no further negative taxable impact beyond the point #1 above

Thanks so much for all the responses, you guys (and girls) rock!
Right.

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

Re: Backdoor Roth - did I mess this up?

Post by retiredjg » Wed Oct 31, 2018 9:07 am

ge1 wrote:
Wed Oct 31, 2018 8:37 am
3. If I don't do backdoor roth conversions in the future, there is no further negative taxable impact beyond the point #1 above

Thanks so much for all the responses, you guys (and girls) rock!
Well, you will be left with some basis (line 14 on from 8606) in the IRA. It will be small. Every year you withdraw from the IRA, your withdrawal will be pro-rated with that tiny amount of basis.

Some people would just abandon it rather than do the pro-rating every year and the IRS is almost certainly not going to contact you about that.

ge1
Posts: 387
Joined: Sat Apr 28, 2012 8:15 pm

Re: Backdoor Roth - did I mess this up?

Post by ge1 » Wed Oct 31, 2018 9:58 am

retiredjg wrote:
Wed Oct 31, 2018 9:07 am
ge1 wrote:
Wed Oct 31, 2018 8:37 am
3. If I don't do backdoor roth conversions in the future, there is no further negative taxable impact beyond the point #1 above

Thanks so much for all the responses, you guys (and girls) rock!
Well, you will be left with some basis (line 14 on from 8606) in the IRA. It will be small. Every year you withdraw from the IRA, your withdrawal will be pro-rated with that tiny amount of basis.

Some people would just abandon it rather than do the pro-rating every year and the IRS is almost certainly not going to contact you about that.
Thanks retiredjg.

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Earl Lemongrab
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Re: Backdoor Roth - did I mess this up?

Post by Earl Lemongrab » Wed Oct 31, 2018 1:39 pm

The large rollover IRA will effectively prevent backdoor Roth for years unless you do something with it.

Do you have a new job with a 401(k) or similar that will take a rollover? It might be better to get it done now before there's any problem with pro-rating. You still have a fair amount of time left in the year, but you'd need to get going.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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