Help With Backdoor Roth

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justsomeguy2018
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Joined: Wed Oct 03, 2018 8:11 pm

Help With Backdoor Roth

Post by justsomeguy2018 » Sun Nov 04, 2018 10:41 am

Hello - thinking of doing 2 backdoor Roths (1 for me, 1 for spouse) before end of this year.

I have no IRAs (just 401k).
She has 1 Trad IRA, current value around $7.8k.

Our tax bracket is 24%, MAGI under $250k this year (possibly not next year though).

Reading the Backdoor Wiki, seems like having a traditional IRA can create complications with backdoor Roth for my spouse. Is best course of action to convert her trad IRA to a Roth first this year? Or what is best way to handle? Should I just do backdoor Roth for me and not her? Seems like it may be beneficial to handle now before tax rates go up (expire) or our income increases into the next bracket.

Few other questions:
(1) Any recommendations on best company to open IRA? Was thinking Fidelity since that's where our 401ks and taxable account are. They also have some new zero fee funds. But also like the idea of commission free Vanguard funds using Vanguard. Have a 401k with Vanguard, not sure if that matters. Any other drawbacks/fees I should be aware of to Vanguard or Fidelity?
(2) If you do a backdoor Roth every year, how exactly does that work - does it create mutliple Roth accounts you have to manage, or do they just accumulate into a single account? I'm a little confused on that part.

I skimmed the webpage below and was planning to follow it to do the steps for the backdoor Roth. Let me know if anyone sees any issues with the info on that page? Or has another page they recommend to walk me thru the steps.

https://www.whitecoatinvestor.com/17-wa ... -roth-ira/

Thank you for your help.

BanquetBeer
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Re: Help With Backdoor Roth

Post by BanquetBeer » Sun Nov 04, 2018 10:50 am

Her amount will cause tax. Once you add in after tax amounts for conversion they become mixed. Any conversion to Roth will no longer be any pure amounts but the mixed amount (7.8+5.5 = 13.3k mix, all of it being 5.5/13.3=~59% taxable)

So no matter what you rollover to an IRA this year, she will be paying ~59% tax on that amount (your and her accounts are separate). This isnt a large $ value since you only have 8k in there now but you will pay tax on that at your top rate.

Edit: just one roth account, roll convert funds into it every year and fill out for 8606 (if you want to see tax impact, this is a simple form). Dunno fees for Fidelity vs Vanguard (closing account fees?)

ExitStageLeft
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Re: Help With Backdoor Roth

Post by ExitStageLeft » Sun Nov 04, 2018 11:19 am

Many commenters recommend filling out the Form 8606 as the first thing, to make sure you fully understand the process and the tax implications.

Her traditional IRA is an impediment to a backdoor Roth for her. Do a Roth conversion on it and pay $1.9k in taxes and then it's out of the way. Or roll it into a future retirement plan if that's on the horizon. If self-employed she could open a solo 401k and roll in the tIRA.

justsomeguy2018
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Re: Help With Backdoor Roth

Post by justsomeguy2018 » Sun Nov 04, 2018 11:41 am

ExitStageLeft wrote:
Sun Nov 04, 2018 11:19 am
Many commenters recommend filling out the Form 8606 as the first thing, to make sure you fully understand the process and the tax implications.

Her traditional IRA is an impediment to a backdoor Roth for her. Do a Roth conversion on it and pay $1.9k in taxes and then it's out of the way. Or roll it into a future retirement plan if that's on the horizon. If self-employed she could open a solo 401k and roll in the tIRA.
Thanks - do commenters recommend converting hers now, paying the taxes, and getting it out of the way, to make it easier to do annual backdoor Roth's going forward? Or is there anything else we should consider before converting? Should she/can she roll it into her existing company's 401k plan?

Edit: Does the strategy below make the most sense for us from a simplicity perspective?

Me: Put $5500 in trad IRA, do backdoor Roth this year.
Her: Don't do a backdoor Roth this year for her, but convert her existing trad IRA to a Roth. Do backdoor Roth going forward in future years. Alternative option - roll her trad IRA into her company 401k plan (not sure if that is even an option, or if it is even a good option).

JW-Retired
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Re: Help With Backdoor Roth

Post by JW-Retired » Sun Nov 04, 2018 11:57 am

justsomeguy2018 wrote:
Sun Nov 04, 2018 10:41 am
(2) If you do a backdoor Roth every year, how exactly does that work - does it create multiple Roth accounts you have to manage, or do they just accumulate into a single account? I'm a little confused on that part.
I have IRAs at Vanguard but only a taxable account at Fidelity, so don't know what Fido does. Vanguard will automatically let you convert the tIRA funds into the same single ROTH account year after year. They also keep the empty tIRA account in existence for repeating the process the next year.

It's been a while now, but I think I always just did everything on line.
JW
ps: if you are going to convert her tIRA to Roth this year, then put an annual (non-deductible) $5500 contribution in first and then convert the whole thing. The tax cost will be the same. Dry run it in the 8606!
Last edited by JW-Retired on Sun Nov 04, 2018 11:59 am, edited 1 time in total.
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Wolfpack2463
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Re: Help With Backdoor Roth

Post by Wolfpack2463 » Sun Nov 04, 2018 11:59 am

We were in a similar situation earlier this year with my wife having an existing tIRA of $11k. We found it easiest to rollover that tIRA to her 401k then once that was competed, we both did a non-deductible tIRA contribution and then a few days later converted it to a roth.

I believe that route is the easiest (as long as her 401k options are reasonable) rather than paying taxes on the conversion now. Also, if you decide on the rollover, make sure that is fully competed before initiating her tIRA contribution.

JW-Retired
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Re: Help With Backdoor Roth

Post by JW-Retired » Sun Nov 04, 2018 12:14 pm

justsomeguy2018 wrote:
Sun Nov 04, 2018 10:41 am
Our tax bracket is 24%, MAGI under $250k this year (possibly not next year though).
The married MAGI limit for any direct Roth contribution in 2018 is $199k.
JW
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retiredjg
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Re: Help With Backdoor Roth

Post by retiredjg » Sun Nov 04, 2018 3:07 pm

justsomeguy2018 wrote:
Sun Nov 04, 2018 11:41 am
Should she/can she roll it into her existing company's 401k plan?
This should be the first thing to consider unless that 401k is poor (high cost). If the 401k will not accept the incoming rollover, the amount is small enough and she is young enough that just converting to Roth and paying the tax is a reasonable choice to clear the decks for many years of back door Roth contributions.

This assumes that Her IRA is all pre-tax. If the IRA contains any non-deductible contributions, your solution will be different.

Lafder
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Re: Help With Backdoor Roth

Post by Lafder » Sun Nov 04, 2018 3:35 pm

I would convert her existing IRA to a Roth and just pay the income tax on it This allows you to do back door Roths for both of you every year you can afford to going forward. I believe the tax advantages of annual Roths for her outweighs the tax cost to convert her IRA this year.

I would then do back door Roths for both of you every year you can afford to do so.

If she has a 401k, sure you can roll the IRA into it, rather than converting to a Roth. But, if you convert to a Roth, you never pay tax on it again.

lafder

justsomeguy2018
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Re: Help With Backdoor Roth

Post by justsomeguy2018 » Thu Nov 15, 2018 11:19 pm

retiredjg wrote:
Sun Nov 04, 2018 3:07 pm
justsomeguy2018 wrote:
Sun Nov 04, 2018 11:41 am
Should she/can she roll it into her existing company's 401k plan?
This should be the first thing to consider unless that 401k is poor (high cost). If the 401k will not accept the incoming rollover, the amount is small enough and she is young enough that just converting to Roth and paying the tax is a reasonable choice to clear the decks for many years of back door Roth contributions.

This assumes that Her IRA is all pre-tax. If the IRA contains any non-deductible contributions, your solution will be different.
OP here - if I roll my wife's tIRA into her t401k this year, can she still do the backdoor Roth this calendar year, or would we need to wait until 2019 to avoid any complications?

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FiveK
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Re: Help With Backdoor Roth

Post by FiveK » Thu Nov 15, 2018 11:29 pm

justsomeguy2018 wrote:
Thu Nov 15, 2018 11:19 pm
OP here - if I roll my wife's tIRA into her t401k this year, can she still do the backdoor Roth this calendar year, or would we need to wait until 2019 to avoid any complications?
This calendar year will be ok. The important date is 31-Dec-2018. See form 8606 for details.

justsomeguy2018
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Re: Help With Backdoor Roth

Post by justsomeguy2018 » Thu Nov 15, 2018 11:34 pm

FiveK wrote:
Thu Nov 15, 2018 11:29 pm
justsomeguy2018 wrote:
Thu Nov 15, 2018 11:19 pm
OP here - if I roll my wife's tIRA into her t401k this year, can she still do the backdoor Roth this calendar year, or would we need to wait until 2019 to avoid any complications?
This calendar year will be ok. The important date is 31-Dec-2018. See form 8606 for details.
Thanks. So sounds like I can transfer the tIRA into her 401k before the end of the year then do the Roth conversion before Dec 31st 2018 once the Traditional IRA is zeroed out without any issues?

Only thing I am trying to decide is if that would be a better option then just doing a straight up Roth conversion and paying the $1900 in taxes (24% bracket). Unsure if our tax rate will be lower or higher in retirement at this point. :? But I am sure it will be higher after the current tax cuts expire, so if I was going to convert this would seem like a year to do it, maybe.

Let's say I did convert her tIRA to the Roth - another poster above recommended contribution $5500 into the tIRA before I do the conversion? And this would effectively function as the backdoor Roth for this year. Is that right? Any issues with that approach?

tony_roach
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Re: Help With Backdoor Roth

Post by tony_roach » Thu Nov 15, 2018 11:36 pm

justsomeguy2018 wrote:
Sun Nov 04, 2018 10:41 am

(2) If you do a backdoor Roth every year, how exactly does that work - does it create mutliple Roth accounts you have to manage, or do they just accumulate into a single account? I'm a little confused on that part.
OP,

I can speak for Fidelity which is who I use. I have one traditional IRA account and one Roth IRA account. All I do is deposit my 5,500 into my Trad. IRA once the deposit clears. I can do a conversion from my Traditional to my Roth IRA account. The conversion is completed and the dollars are moved by Fidelity from one to the next. I keep both accounts opened and repeat the following year etc.

My traditional remains at $0 with the exception of a day or two when I deposit and convert. All my deposits keep adding up in my one Roth IRA account.

Hope this helps.

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FiveK
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Re: Help With Backdoor Roth

Post by FiveK » Thu Nov 15, 2018 11:44 pm

justsomeguy2018 wrote:
Thu Nov 15, 2018 11:34 pm
Thanks. So sounds like I can transfer the tIRA into her 401k before the end of the year then do the Roth conversion before Dec 31st 2018 once the Traditional IRA is zeroed out without any issues?
Yes, if that is the only IRA she has with a pre-tax balance.
Only thing I am trying to decide is if that would be a better option then just doing a straight up Roth conversion and paying the $1900 in taxes (24% bracket). Unsure if our tax rate will be lower or higher in retirement at this point. :?
Yes, that is the question. ;)
Have you done a pretend tax return for an early retirement year (i.e., perhaps prior to starting SS and pension)?
Let's say I did convert her tIRA to the Roth - another poster above recommended contribution $5500 into the tIRA before I do the conversion? And this would effectively function as the backdoor Roth for this year. Is that right? Any issues with that approach?
If you want to pay tax now on the conversion, that approach is fine.

justsomeguy2018
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Re: Help With Backdoor Roth

Post by justsomeguy2018 » Thu Nov 15, 2018 11:45 pm

tony_roach wrote:
Thu Nov 15, 2018 11:36 pm
justsomeguy2018 wrote:
Sun Nov 04, 2018 10:41 am

(2) If you do a backdoor Roth every year, how exactly does that work - does it create mutliple Roth accounts you have to manage, or do they just accumulate into a single account? I'm a little confused on that part.
OP,

I can speak for Fidelity which is who I use. I have one traditional IRA account and one Roth IRA account. All I do is deposit my 5,500 into my Trad. IRA once the deposit clears. I can do a conversion from my Traditional to my Roth IRA account. The conversion is completed and the dollars are moved by Fidelity from one to the next. I keep both accounts opened and repeat the following year etc.

My traditional remains at $0 with the exception of a day or two when I deposit and convert. All my deposits keep adding up in my one Roth IRA account.

Hope this helps.
Thanks, Fidelity is who I used as well. I just completed this. Only downside is it took 5 to 6 days for the funds to be available to convert.

Wondering if I should also use Fidelity for my wife's for simplicity and their assortment of low fee funds (newly reduced fees/rollouts), or if I should use Vanguard for my wife's, for some kind of diversification in case Fidelity raises their fees over time? Have been happy with Fidelity customer service so not sure. They have the zero ER funds but unsure how well they track compared to Vanguard funds.

retiredjg
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Re: Help With Backdoor Roth

Post by retiredjg » Fri Nov 16, 2018 8:15 am

justsomeguy2018 wrote:
Thu Nov 15, 2018 11:19 pm
OP here - if I roll my wife's tIRA into her t401k this year, can she still do the backdoor Roth this calendar year, or would we need to wait until 2019 to avoid any complications?
I'm going to give you a different answer. I don't disagree with FiveK, but there are only 5 weeks left in this year and things move very slowly once holiday season starts (meaning starting today). Don't stress out over whether this gets done by a certain time or not. Just start the rollover process and see what happens. She will not miss a contribution. Here's why.

You are thinking of the back door as a thing tied to a calendar year. It is not. Only the contribution part is attached to a calendar year and the 2018 contribution can be made any time between now and April 15. So go ahead and make that contribution now if you want.

It is only the conversion step that cannot occur before the other IRA is empty. The conversion step is not tied to a certain calendar year can be done any time after the other IRA is empty....including some time next year. The paperwork will be a little different but that is all.

Bottom line is that no matter when the IRA to 401k transfer gets finished, your wife will get her 2018 contribution.


The alternative is to just put $5,500 into an IRA and convert all of it to Roth and pay taxes on all of it, not just the $5,500 2018 contribution. Either approach will work. You just pay more taxes with this second approach.

justsomeguy2018
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Re: Help With Backdoor Roth

Post by justsomeguy2018 » Fri Nov 16, 2018 10:11 am

Sorry, now I have another question.

So I did the backdoor Roth - now I have a tIRA with $0 and Roth with $5500.

Let's say I lost my job before the end of the year and wanted to roll over my employer 401k into a tIRA. Will this be an issue, since the rollover to tIRA happened after the previous $5500 contribution and Roth conversion? Or in other words, does it matter if a tIRA is in existence, if the funds in it are a rollover that happens after a Roth conversion (but in the same calendar year)?

JW-Retired
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Re: Help With Backdoor Roth

Post by JW-Retired » Fri Nov 16, 2018 10:35 am

FiveK wrote:
Thu Nov 15, 2018 11:44 pm
justsomeguy2018 wrote:
Thu Nov 15, 2018 11:34 pm
Let's say I did convert her tIRA to the Roth - another poster above recommended contribution $5500 into the tIRA before I do the conversion? And this would effectively function as the backdoor Roth for this year. Is that right? Any issues with that approach?
If you want to pay tax now on the conversion, that approach is fine.
OP,
I'm that "other poster", but now I'm getting worried because I can't see any hint in this thread that you have looked at the 8606 form yet? If that's true I suspend my recommendation. That form is frequently misunderstood but vital to get right.
JW
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retiredjg
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Re: Help With Backdoor Roth

Post by retiredjg » Fri Nov 16, 2018 5:47 pm

justsomeguy2018 wrote:
Fri Nov 16, 2018 10:11 am
Sorry, now I have another question.

So I did the backdoor Roth - now I have a tIRA with $0 and Roth with $5500.

Let's say I lost my job before the end of the year and wanted to roll over my employer 401k into a tIRA. Will this be an issue, since the rollover to tIRA happened after the previous $5500 contribution and Roth conversion?
Yes it is an issue. You would have to enter that IRA on line 6 of Form 8606 and your back door contribution would have to be pro-rated with the rollover from the 401k.

Or in other words, does it matter if a tIRA is in existence, if the funds in it are a rollover that happens after a Roth conversion (but in the same calendar year)?
Whatever you have in any tIRA (including rollover, SEP IRA and SIMPLE IRA) on 12/31 of any year you do a Roth conversion will have to be pro-rated with your Roth conversion.

It does not matter what you have in IRA when you do your conversion. It only matters what you have in IRA on the last day of the year. I think this is because that is the only day of the year that the IRS knows what you have in IRA.

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