Best way to backdoor Roth IRA

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teddytimtam
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Best way to backdoor Roth IRA

Post by teddytimtam » Tue Jan 01, 2019 7:51 pm

Planning to do a back door lump sum $6000 to my Roth IRA tomorrow. Which of the following option is the most practical way?

1) Buy $6000 of VMMXX (Vanguard Prime Money Market) in Traditional IRA -> then roll over to Roth IRA -> then exchange to VTSAX

OR

2) Buy $6000 of VTSAX (Vanguard Total Stock Market) in Traditional IRA -> then roll over to Roth IRA

Reason I'm leaning towards Option 1 is because it will avoid any +/- gains/loss from the fluctuating fund pricing between buying/rolling over. This will make filing tax Form 8606 cleaner.

Silk McCue
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Re: Best way to backdoor Roth IRA

Post by Silk McCue » Tue Jan 01, 2019 9:01 pm

From past posts most, if not all people, seem to go with option 1.

I assume you have read up on the process and know the ins and outs of this. If so then you are set.

Cheers

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SquawkIdent
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Re: Best way to backdoor Roth IRA

Post by SquawkIdent » Tue Jan 01, 2019 9:07 pm

teddytimtam wrote:
Tue Jan 01, 2019 7:51 pm
Planning to do a back door lump sum $6000 to my Roth IRA tomorrow. Which of the following option is the most practical way?

1) Buy $6000 of VMMXX (Vanguard Prime Money Market) in Traditional IRA -> then roll over to Roth IRA -> then exchange to VTSAX

OR

2) Buy $6000 of VTSAX (Vanguard Total Stock Market) in Traditional IRA -> then roll over to Roth IRA

Reason I'm leaning towards Option 1 is because it will avoid any +/- gains/loss from the fluctuating fund pricing between buying/rolling over. This will make filing tax Form 8606 cleaner.
#1

Topic Author
teddytimtam
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Re: Best way to backdoor Roth IRA

Post by teddytimtam » Wed Jan 02, 2019 8:56 am

Silk McCue wrote:
Tue Jan 01, 2019 9:01 pm
From past posts most, if not all people, seem to go with option 1.

I assume you have read up on the process and know the ins and outs of this. If so then you are set.

Cheers
Thanks for the input!

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Wed Jan 02, 2019 9:27 am

Option 1.

However, I would wait until I have received enough earned income to make the contribution. The conversion step cannot be reversed.

Topic Author
teddytimtam
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Re: Best way to backdoor Roth IRA

Post by teddytimtam » Wed Jan 02, 2019 9:33 am

nolesrule wrote:
Wed Jan 02, 2019 9:27 am
Option 1.

However, I would wait until I have received enough earned income to make the contribution. The conversion step cannot be reversed.
Correct me if I'm wrong, but I believe anyone (even those who are under the income limit) can do backdoor roth? I'm on the borderline, so I rather do a backdoor from the start and just file Form 8606 for my taxes.

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Wed Jan 02, 2019 9:45 am

teddytimtam wrote:
Wed Jan 02, 2019 9:33 am
nolesrule wrote:
Wed Jan 02, 2019 9:27 am
Option 1.

However, I would wait until I have received enough earned income to make the contribution. The conversion step cannot be reversed.
Correct me if I'm wrong, but I believe anyone (even those who are under the income limit) can do backdoor roth? I'm on the borderline, so I rather do a backdoor from the start and just file Form 8606 for my taxes.
You have to have earned income to do any kind of IRA contribution. Is this for 2018 or 2019?

Topic Author
teddytimtam
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Re: Best way to backdoor Roth IRA

Post by teddytimtam » Wed Jan 02, 2019 10:03 am

nolesrule wrote:
Wed Jan 02, 2019 9:45 am

You have to have earned income to do any kind of IRA contribution. Is this for 2018 or 2019?
This is for 2019.

My 2019 income is projected to be on the borderline of the maximum income limit for a Roth contribution. So in order to invest now, I believe I can go ahead and proceed with the backdoor roth method. Only downside is if I am actually within the limits, then I'll be filing tax Form 8606 could of have been avoided, but that shouldn't be a big deal. Please let me know if I'm mistaken.

Silk McCue
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Re: Best way to backdoor Roth IRA

Post by Silk McCue » Wed Jan 02, 2019 10:18 am

teddytimtam wrote:
Wed Jan 02, 2019 10:03 am
nolesrule wrote:
Wed Jan 02, 2019 9:45 am

You have to have earned income to do any kind of IRA contribution. Is this for 2018 or 2019?
This is for 2019.

My 2019 income is projected to be on the borderline of the maximum income limit for a Roth contribution. So in order to invest now, I believe I can go ahead and proceed with the backdoor roth method. Only downside is if I am actually within the limits, then I'll be filing tax Form 8606 could of have been avoided, but that shouldn't be a big deal. Please let me know if I'm mistaken.
nolesule is addressing the technical point that in a worst case scenario, you lost your job today and didn't get another job to generate enough earned income, you would have an issue with not being qualified to contribute to an IRA beyond your earned income amount. Not likely but anything is possible.

Cheers

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Wed Jan 02, 2019 10:29 am

Silk McCue wrote:
Wed Jan 02, 2019 10:18 am
teddytimtam wrote:
Wed Jan 02, 2019 10:03 am
nolesrule wrote:
Wed Jan 02, 2019 9:45 am

You have to have earned income to do any kind of IRA contribution. Is this for 2018 or 2019?
This is for 2019.

My 2019 income is projected to be on the borderline of the maximum income limit for a Roth contribution. So in order to invest now, I believe I can go ahead and proceed with the backdoor roth method. Only downside is if I am actually within the limits, then I'll be filing tax Form 8606 could of have been avoided, but that shouldn't be a big deal. Please let me know if I'm mistaken.
nolesule is addressing the technical point that in a worst case scenario, you lost your job today and didn't get another job to generate enough earned income, you would have an issue with not being qualified to contribute to an IRA beyond your earned income amount. Not likely but anything is possible.

Cheers
Correct. And if you do the Roth conversion step and end up not having enough earned income, you are really screwed.

Topic Author
teddytimtam
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Re: Best way to backdoor Roth IRA

Post by teddytimtam » Wed Jan 02, 2019 11:29 am

Silk McCue wrote:
Wed Jan 02, 2019 10:18 am

nolesule is addressing the technical point that in a worst case scenario, you lost your job today and didn't get another job to generate enough earned income, you would have an issue with not being qualified to contribute to an IRA beyond your earned income amount. Not likely but anything is possible.

Cheers
nolesrule wrote:
Wed Jan 02, 2019 10:29 am

Correct. And if you do the Roth conversion step and end up not having enough earned income, you are really screwed.
Silk McCue and nolesrule, thank you both for the reply and technical information. But in my case, I will have enough earned income ($6000+) to qualify for the max IRA contribution.

Since my projected income is shy of about $2000 from the maximum phase out income limit, I went ahead and put $6000 in money market in a traditional IRA and will convert this to a Roth once the transaction is complete. Bonus/other income may put me above the income limit so I don't want to deal with the hassle later on.

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Wed Jan 02, 2019 11:41 am

teddytimtam wrote:
Wed Jan 02, 2019 11:29 am

Silk McCue and nolesrule, thank you both for the reply and technical information. But in my case, I will have enough earned income ($6000+) to qualify for the max IRA contribution.
So will my wife and I, assuming we stay employed through mid-January, or one of us remains employed through the end of January. But today is the first workday of the month, not mid-January. As long as we make it till Friday and don't get laid off while on our two-week vacation that starts on Sunday, we'll be fine.

I may do the half of my wife's backdoor Roth after she gets paid on Friday.

Spirit Rider
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Re: Best way to backdoor Roth IRA

Post by Spirit Rider » Wed Jan 02, 2019 11:47 am

nolesrule wrote:
Wed Jan 02, 2019 9:27 am
However, I would wait until I have received enough earned income to make the contribution. The conversion step cannot be reversed.
nolesrule wrote:
Wed Jan 02, 2019 10:29 am
Correct. And if you do the Roth conversion step and end up not having enough earned income, you are really screwed.
This scenario is not really a problem and should not give anyone pause about doing this on January 2nd.

Yes, the roth conversion can not be undone, but the excess non-deductible traditional IRA contribution and earnings before and after the Roth conversion can simply be removed from the Roth IRA. This is essentially the same treatment a direct Roth IRA contribution would need if you didn't have sufficient compensation during the entire year for the contribution.

Edit: I corrected myself above because that earnings before the conversion are already taxed.
Last edited by Spirit Rider on Wed Jan 02, 2019 12:17 pm, edited 1 time in total.

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Wed Jan 02, 2019 11:53 am

Spirit Rider wrote:
Wed Jan 02, 2019 11:47 am
nolesrule wrote:
Wed Jan 02, 2019 9:27 am
However, I would wait until I have received enough earned income to make the contribution. The conversion step cannot be reversed.
nolesrule wrote:
Wed Jan 02, 2019 10:29 am
Correct. And if you do the Roth conversion step and end up not having enough earned income, you are really screwed.
This scenario is not really a problem and should not give anyone pause about doing this on January 2nd.

Yes, the roth conversion can not be undone, but the excess non-deductible traditional IRA contribution and earnings before and after the Roth conversion can simply be removed from the Roth IRA. This is essentially the same treatment a direct Roth IRA contribution would need if you didn't have sufficient compensation during the entire year for the contribution.
How does that work? And how would you deal with that on your taxes? Wouldn't that result in you reporting a conversion with no basis? Seems messy.

Spirit Rider
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Re: Best way to backdoor Roth IRA

Post by Spirit Rider » Wed Jan 02, 2019 12:11 pm

nolesrule wrote:
Wed Jan 02, 2019 11:53 am
Spirit Rider wrote:
Wed Jan 02, 2019 11:47 am
nolesrule wrote:
Wed Jan 02, 2019 9:27 am
However, I would wait until I have received enough earned income to make the contribution. The conversion step cannot be reversed.
nolesrule wrote:
Wed Jan 02, 2019 10:29 am
Correct. And if you do the Roth conversion step and end up not having enough earned income, you are really screwed.
This scenario is not really a problem and should not give anyone pause about doing this on January 2nd.

Yes, the roth conversion can not be undone, but the excess non-deductible traditional IRA contribution and earnings before and after the Roth conversion can simply be removed from the Roth IRA. This is essentially the same treatment a direct Roth IRA contribution would need if you didn't have sufficient compensation during the entire year for the contribution.
How does that work? And how would you deal with that on your taxes? Wouldn't that result in you reporting a conversion with no basis? Seems messy.
You would report the conversion as usual with little to no tax liability normally. you would report the excess contribution normally.

This is not much different than a standard Backdoor Roth itself. The Backdoor Roth is a non-deductible traditional IRA contribution followed by a Roth Conversion. This just adds the removal of the excess contribution from where it is now.

Edit: I corrected myself above because that earnings before the conversion are already taxed.
Last edited by Spirit Rider on Wed Jan 02, 2019 12:15 pm, edited 1 time in total.

Topic Author
teddytimtam
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Re: Best way to backdoor Roth IRA

Post by teddytimtam » Wed Jan 02, 2019 12:14 pm

Spirit Rider wrote:
Wed Jan 02, 2019 11:47 am
nolesrule wrote:
Wed Jan 02, 2019 9:27 am
However, I would wait until I have received enough earned income to make the contribution. The conversion step cannot be reversed.
nolesrule wrote:
Wed Jan 02, 2019 10:29 am
Correct. And if you do the Roth conversion step and end up not having enough earned income, you are really screwed.
This scenario is not really a problem and should not give anyone pause about doing this on January 2nd.

Yes, the roth conversion can not be undone, but the excess non-deductible traditional IRA contribution and earnings before and after the Roth conversion can simply be removed from the Roth IRA. This is essentially the same treatment a direct Roth IRA contribution would need if you didn't have sufficient compensation during the entire year for the contribution.
How does that work? And how would you deal with that on your taxes? Wouldn't that result in you reporting a conversion with no basis? Seems messy.
[/quote]

The alternative option was:
1) contribute directly to Roth IRA on Jan 2nd
2) re characterize in December IF income exceeds limit
3) rollover to Roth IRA
4) Report gains on Form 8606 and pay taxes on it

I figured since my income was so close to the limit and couldn't project a bonus amount, that the cleanest way "just in case" my income exceeds the maximum limit for a direct Roth IRA contribution, was to do a backdoor method. And IF my income is within the Roth limits, I would just have filed Form 8606 redundantly and have $0 as the basis/taxable amount. I hope I didn't mess up...

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Wed Jan 02, 2019 12:15 pm

Spirit Rider wrote:
Wed Jan 02, 2019 12:11 pm
nolesrule wrote:
Wed Jan 02, 2019 11:53 am
Spirit Rider wrote:
Wed Jan 02, 2019 11:47 am
nolesrule wrote:
Wed Jan 02, 2019 9:27 am
However, I would wait until I have received enough earned income to make the contribution. The conversion step cannot be reversed.
nolesrule wrote:
Wed Jan 02, 2019 10:29 am
Correct. And if you do the Roth conversion step and end up not having enough earned income, you are really screwed.
This scenario is not really a problem and should not give anyone pause about doing this on January 2nd.

Yes, the roth conversion can not be undone, but the excess non-deductible traditional IRA contribution and earnings before and after the Roth conversion can simply be removed from the Roth IRA. This is essentially the same treatment a direct Roth IRA contribution would need if you didn't have sufficient compensation during the entire year for the contribution.
How does that work? And how would you deal with that on your taxes? Wouldn't that result in you reporting a conversion with no basis? Seems messy.
You would report the conversion as usual with little to no tax liability normally. you would report the excess contribution normally.

This is not much different than a standard Backdoor Roth itself. The Backdoor Roth is a non-deductible traditional IRA contribution followed by a Roth Conversion. This just adds the removal of the excess contribution from where it is now.
Interesting. Thanks for the information.

logiclife
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Re: Best way to backdoor Roth IRA

Post by logiclife » Fri May 24, 2019 7:16 am

Since we are not eligible for Roth, two years ago I was hit with a tax penalty for doing this back door roth (may be I screwed my taxes up) :confused

I opened a traditional IRA brokerage with vanguard, put $5000 in Money mkt
converted the whole amount to Roth IRA in VG after 2 weeks.
While filing for taxes I think my tax liability went up I believe.

After this experience, I felt that this was complicated until I was researching again yesterday and ran into this..seems like a simple and st. fwd scenario.

we max out our 401k;s and based on what I have learned roth would be a good complement to 401k. So I want to do roth again.

thoughts please?dont want to screw up again..:-)

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Fri May 24, 2019 7:19 am

logiclife wrote:
Fri May 24, 2019 7:16 am
Since we are not eligible for Roth, two years ago I was hit with a tax penalty for doing this back door roth (may be I screwed my taxes up) :confused

I opened a traditional IRA brokerage with vanguard, put $5000 in Money mkt
converted the whole amount to Roth IRA in VG after 2 weeks.
While filing for taxes I think my tax liability went up I believe.

After this experience, I felt that this was complicated until I was researching again yesterday and ran into this..seems like a simple and st. fwd scenario.

thoughts please?dont want to screw up again..:-)
You probably did not (correctly) complete the Form 8606.

logiclife
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Re: Best way to backdoor Roth IRA

Post by logiclife » Fri May 24, 2019 7:20 am

nolesrule wrote:
Fri May 24, 2019 7:19 am
logiclife wrote:
Fri May 24, 2019 7:16 am
Since we are not eligible for Roth, two years ago I was hit with a tax penalty for doing this back door roth (may be I screwed my taxes up) :confused

I opened a traditional IRA brokerage with vanguard, put $5000 in Money mkt
converted the whole amount to Roth IRA in VG after 2 weeks.
While filing for taxes I think my tax liability went up I believe.

After this experience, I felt that this was complicated until I was researching again yesterday and ran into this..seems like a simple and st. fwd scenario.

thoughts please?dont want to screw up again..:-)
You probably did not (correctly) complete the Form 8606.
you are probably right, based on what I read so far here I suspect that. I believe I used turbo for filing taxes that year.

and THANKS for taking time respond

rai
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Re: Best way to backdoor Roth IRA

Post by rai » Fri May 24, 2019 7:42 am

I’m planning to do the same thing.

I just don’t understand why there is a looks hole or back door, why can’t the law be adjusted to allow direct Roth contribution?
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair

The Wizard
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Re: Best way to backdoor Roth IRA

Post by The Wizard » Fri May 24, 2019 7:49 am

rai wrote:
Fri May 24, 2019 7:42 am
I’m planning to do the same thing.

I just don’t understand why there is a looks hole or back door, why can’t the law be adjusted to allow direct Roth contribution?
Loophole, not looks hole.
My guess is that Congress doesn't want to make it easy for high income earners to shelter $$ in a Roth...
Attempted new signature...

Longdog
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Re: Best way to backdoor Roth IRA

Post by Longdog » Fri May 24, 2019 7:58 am

rai wrote:
Fri May 24, 2019 7:42 am
I’m planning to do the same thing.

I just don’t understand why there is a looks hole or back door, why can’t the law be adjusted to allow direct Roth contribution?
As part of tax reform they did explicitly call this procedure out as being allowed, but chose not to eliminate the income limitation on direct Roth contributions.
Steve

Spirit Rider
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Re: Best way to backdoor Roth IRA

Post by Spirit Rider » Fri May 24, 2019 8:56 am

There was clear legislative intent when the Roth conversion income limit was removed beginning in 2010, and the Roth contribution income limit was retained. Congress actively discussed, relied on and continues to rely on to this day the revenue generated by the Roth conversion pro-rata taxation of non-deductible and pre-tax IRA balances.

We often have Boglehead myopia on this forum and fail to understand that we are a tiny fraction of the population. Most people who are income limited from making direct Roth contributions are not even aware they can make non-deductable traditional IRA contributions let alone do a Backdoor Roth.

Then many of those who do Backdoor Roths do so with significant pre-tax IRA balances. They dutifully make their non-deductible traditional IRA contributions, do Roth conversions of the contribution amount and pay pro-rata taxation on the vast majority of the conversion. This may even be true if they are using an FP and/or CPA.

I have met several such people, including one who has been making non-deductivle traditional IRA contributions since 1998 and was overjoyed when he could start do Roth conversions in 2010. He was shocked to learn he could rollover his pre-tax balance to a 401k and make Backdoor Roths with little to no tax liability. Then he was furious at his FP and CPA for not telling him.

Sorry to say I have met and we have seen on this forum many financial professionals who do not have clue when it comes to retirement plan/account issues. Meanwhile Uncle Sam continues to reap the benefits of increased tax revenues. I see no possibility that the law will be changed.

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Earl Lemongrab
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Re: Best way to backdoor Roth IRA

Post by Earl Lemongrab » Fri May 24, 2019 1:16 pm

rai wrote:
Fri May 24, 2019 7:42 am
I’m planning to do the same thing.

I just don’t understand why there is a looks hole or back door, why can’t the law be adjusted to allow direct Roth contribution?
Because that's not the purpose of the law. It's an unintended side-effect. If Congress does anything, it's more likely to be closing the backdoor than opening the front.

logiclife
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Re: Best way to backdoor Roth IRA

Post by logiclife » Fri May 24, 2019 2:54 pm

Silly question but when the funds are settled and available in the traditional ira Vanguard account, would you get an option or a button, convert and then yiu can hit that and convert to roth Ira!?

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MP123
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Re: Best way to backdoor Roth IRA

Post by MP123 » Fri May 24, 2019 8:48 pm

logiclife wrote:
Fri May 24, 2019 2:54 pm
Silly question but when the funds are settled and available in the traditional ira Vanguard account, would you get an option or a button, convert and then yiu can hit that and convert to roth Ira!?
I don't know about Vanguard but at Schwab it is truly that simple. They even keep the contributory IRA open with a zero balance so you can use it again next year.

The (very slightly) tricky part is form 8606, but you can get plenty of help here.

logiclife
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Re: Best way to backdoor Roth IRA

Post by logiclife » Fri May 24, 2019 8:54 pm

Thanks

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Sat May 25, 2019 7:13 am

logiclife wrote:
Fri May 24, 2019 2:54 pm
Silly question but when the funds are settled and available in the traditional ira Vanguard account, would you get an option or a button, convert and then yiu can hit that and convert to roth Ira!?
In My Accounts > Balances & Holdings view, there will be a "Convert to Roth IRA" link. It's there all the time, but you can't convert until the funds settle.

logiclife
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Re: Best way to backdoor Roth IRA

Post by logiclife » Tue May 28, 2019 9:09 am

nolesrule wrote:
Sat May 25, 2019 7:13 am
logiclife wrote:
Fri May 24, 2019 2:54 pm
Silly question but when the funds are settled and available in the traditional ira Vanguard account, would you get an option or a button, convert and then yiu can hit that and convert to roth Ira!?
In My Accounts > Balances & Holdings view, there will be a "Convert to Roth IRA" link. It's there all the time, but you can't convert until the funds settle.

Excellent...thank you!!!

logiclife
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Re: Best way to backdoor Roth IRA

Post by logiclife » Tue May 28, 2019 9:13 am

Its been a while since I converted, when I start the process this is what I see on Vanguard

IMPORTANT INFORMATION ABOUT YOUR ROTH CONVERSION: A conversion is a taxable event that can't be reversed. If you choose to convert to a Roth IRA, it will be final. That's because 2018 tax reform regulations no longer allow you to undo, or recharacterize, conversions made in 2018 or later.

Generally, you'll owe taxes on the amount you convert from any eligible retirement account into a Roth IRA for that calendar year.

Moving money out of a retirement account is a distribution, and all or a portion of your distribution may be subject to federal and state tax. You're liable for any taxes due. Penalties may apply if your estimated tax payments or withholding is insufficient under federal or state rules.

You're not required to have federal income tax withheld from this distribution. However, if you elect to have us withhold federal income tax, you must withhold at least 10% of the total distribution amount.

You may maximize the benefit of the conversion if you pay taxes from a separate nonretirement account instead of withholding during the transaction. If you choose not to have taxes withheld you'll remain liable for any applicable taxes.

If you've ever made a nondeductible contribution or after-tax rollover to an IRA, you may owe tax on only a portion of this conversion. See IRS form 8606 for more information.


We encourage you to consult a tax advisor about your individual situation



I am not sure I follow the ones in the red above. If anyone could shed some light, thanks

nolesrule
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Re: Best way to backdoor Roth IRA

Post by nolesrule » Tue May 28, 2019 10:49 am

logiclife wrote:
Tue May 28, 2019 9:13 am
Its been a while since I converted, when I start the process this is what I see on Vanguard



You may maximize the benefit of the conversion if you pay taxes from a separate nonretirement account instead of withholding during the transaction. If you choose not to have taxes withheld you'll remain liable for any applicable taxes.
You should pay any taxes owed from outside sources, because withholding tax is considered a withdrawal and may be subject to penalties.
If you've ever made a nondeductible contribution or after-tax rollover to an IRA, you may owe tax on only a portion of this conversion. See IRS form 8606 for more information.


Any conversion will be a pro-rated mix of after-tax and pre-tax balances. Pre-tax includes any earnings on after-tax contributions.

logiclife
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Re: Best way to backdoor Roth IRA

Post by logiclife » Tue May 28, 2019 12:04 pm

nolesrule wrote:
Tue May 28, 2019 10:49 am
logiclife wrote:
Tue May 28, 2019 9:13 am
Its been a while since I converted, when I start the process this is what I see on Vanguard



You may maximize the benefit of the conversion if you pay taxes from a separate nonretirement account instead of withholding during the transaction. If you choose not to have taxes withheld you'll remain liable for any applicable taxes.
You should pay any taxes owed from outside sources, because withholding tax is considered a withdrawal and may be subject to penalties.

BUT, if the traditional IRA is funded by after tax money and nothing from pre-tax, then the above doesnt apply correct? B'coz I funded my IRA with after tax money.


If you've ever made a nondeductible contribution or after-tax rollover to an IRA, you may owe tax on only a portion of this conversion. See IRS form 8606 for more information.

Any conversion will be a pro-rated mix of after-tax and pre-tax balances. Pre-tax includes any earnings on after-tax contributions.

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FiveK
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Re: Best way to backdoor Roth IRA

Post by FiveK » Tue May 28, 2019 2:37 pm

logiclife wrote:
Tue May 28, 2019 9:13 am
You may maximize the benefit of the conversion if you pay taxes from a separate nonretirement account instead of withholding during the transaction. If you choose not to have taxes withheld you'll remain liable for any applicable taxes.
Even if not subject to penalty, if taxes are paid from cash on hand then the full traditional balance can go into the Roth. Better to have money in Roth instead of in taxable. If you have minimal (or no) tax to pay then there will be minimal (or no) benefit to choosing the optimal source of money for the tax.
If you've ever made a nondeductible contribution or after-tax rollover to an IRA, you may owe tax on only a portion of this conversion. See IRS form 8606 for more information.
What does your form 8606 tell you?

logiclife
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Re: Best way to backdoor Roth IRA

Post by logiclife » Tue May 28, 2019 3:15 pm

FiveK wrote:
Tue May 28, 2019 2:37 pm
logiclife wrote:
Tue May 28, 2019 9:13 am
You may maximize the benefit of the conversion if you pay taxes from a separate nonretirement account instead of withholding during the transaction. If you choose not to have taxes withheld you'll remain liable for any applicable taxes.
Even if not subject to penalty, if taxes are paid from cash on hand then the full traditional balance can go into the Roth. Better to have money in Roth instead of in taxable. If you have minimal (or no) tax to pay then there will be minimal (or no) benefit to choosing the optimal source of money for the tax.

Excellent sum up. thank you. I think iam on the right track now. Iam juust waiting for my funds to settle in the trad. IRA to move them to Roth.

lkar
Posts: 109
Joined: Sat May 04, 2019 4:02 pm

Re: Best way to backdoor Roth IRA

Post by lkar » Tue May 28, 2019 3:49 pm

Spirit Rider wrote:
Fri May 24, 2019 8:56 am
There was clear legislative intent when the Roth conversion income limit was removed beginning in 2010, and the Roth contribution income limit was retained. Congress actively discussed, relied on and continues to rely on to this day the revenue generated by the Roth conversion pro-rata taxation of non-deductible and pre-tax IRA balances.

We often have Boglehead myopia on this forum and fail to understand that we are a tiny fraction of the population. Most people who are income limited from making direct Roth contributions are not even aware they can make non-deductable traditional IRA contributions let alone do a Backdoor Roth.

Then many of those who do Backdoor Roths do so with significant pre-tax IRA balances. They dutifully make their non-deductible traditional IRA contributions, do Roth conversions of the contribution amount and pay pro-rata taxation on the vast majority of the conversion. This may even be true if they are using an FP and/or CPA.

I have met several such people, including one who has been making non-deductivle traditional IRA contributions since 1998 and was overjoyed when he could start do Roth conversions in 2010. He was shocked to learn he could rollover his pre-tax balance to a 401k and make Backdoor Roths with little to no tax liability. Then he was furious at his FP and CPA for not telling him.

Sorry to say I have met and we have seen on this forum many financial professionals who do not have clue when it comes to retirement plan/account issues. Meanwhile Uncle Sam continues to reap the benefits of increased tax revenues. I see no possibility that the law will be changed.
Spirit Rider -- thanks for all the helpful guidance on these issues. I have a question about the bolded.

What you're talking about here is a timing issue only, right? Those who do Roth conversions even though they have pre-tax IRA balances are making themselves subject to tax now that they could avoid under pro-rata/aggregation rules if they did not have IRAs. But, they are getting a corresponding benefit in the sense that they are turning a significant portion of their pre-tax contributions from those IRAs into post-tax assets, right? Or, in other words, they are at least getting the benefit of increasing their basis and making fewer of their formerly pre-tax IRA dollars taxable in the future.

I get that this comes at a significant cost for many. They may get taxed at a higher rate than in the future and they are also undermining much of what they were trying to achieve with a backdoor Roth. I get all that. But is there more?

The reason I'm asking is that I have an IRA that I cannot roll into a 401k but I have decided to do some Roth conversions this year, and I'm also making a $7k (I'm over 50) IRA contribution and converting it. I understand that I will pay tax on most of the conversion, but at least once converted the upside is that my basis is higher and the pre-tax amounts that I converted have now been converted to after-tax Roth.

Or am I just completely screwing it up?

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FiveK
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Re: Best way to backdoor Roth IRA

Post by FiveK » Tue May 28, 2019 4:05 pm

lkar wrote:
Tue May 28, 2019 3:49 pm
I get that this comes at a significant cost for many. They may get taxed at a higher rate than in the future and they are also undermining much of what they were trying to achieve with a backdoor Roth. I get all that.
That's it.

Probably not a good idea to convert at, say, 22% tax now if one can convert later at, say, 12%.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Best way to backdoor Roth IRA

Post by Spirit Rider » Tue May 28, 2019 11:19 pm

lkar wrote:
Tue May 28, 2019 3:49 pm
Or am I just completely screwing it up?
Yes, the goal to make Backdoor Roths with little to no tax liability assumes you can rollover any substantial pre-tax IRA balances.

If your goal is to do Roth conversions of some of those substantial pre-tax balances, making non-deductible traditional IRA contributions will reduce the pre-tax pro-rata taxation increasingly over time.

To plagiarizer and completely change the meaning; "From each according to his ability, to each according to his needs."

As long as you understand the trade offs, it is certainly a viable strategy.

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