RE: Backdoor roth with existing pretax IRA

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staythecourse
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RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 11:37 am

Hi all,

A bit confused on this issue I may be in for this year. I rolled over a previous 401k (employee and employer pretax money) into my Vanguard traditional IRA that usually sits there empty in 2019. This year trying to figure out how it will affect my backdoor roth IRA move for 2019?

As an example: Lets say I have 100k in my traditional IRA now all that his pretax including any gains. I want to add a nonded. trad. IRA for purposes of conversion of $6000. When it comes to backdoor of that $6000 how much taxes would I pay?

Excuse me if I am totally off, but tax prep is not my forte (as you can see :D ). Tried to read the wiki link but got more confused.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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David Jay
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Re: RE: Backdoor roth with existing pretax IRA

Post by David Jay » Wed Jan 30, 2019 11:51 am

To be blunt, you have a problem.

The pro-rata rule means you have to pay taxes on the average cost-basis of all of your tIRA accounts combined on each Roth conversion. Using your numbers, 100,000 out of 106,000 is pre-tax, or 94%. So every Roth conversion is 94% taxable. So you would pay taxes on $6000 * .94 = $5640. You are basically out of the backdoor Roth business.

Possible solution: Are you still employed? Does your employer allow you to roll your (former employer) funds into your current 410K? Roll the roll-over back into your current employer’s 401K to empty your tIRA.

[edit] Are you married? IRAs are individual, your holdings don’t affect your spouse’s holdings. Your spouse can do backdoor Roth transactions regardless of your tIRA cost basis.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 12:01 pm

David Jay wrote:
Wed Jan 30, 2019 11:51 am
To be blunt, you have a problem.

The pro-rata rule means you have to pay taxes on the average cost-basis of all of your tIRS accounts combined on each Roth conversion. Using your numbers, 100,000 out of 106,000 is pre-tax, or 94%. So every Roth conversion is 94% taxable. So you would pay taxes on 6000 * .94 = 5640.

Possible solution: Are you still employed? Does your employer allow you to roll your (former employer) funds into your current 410K? Roll the roll-over back into your current employer’s 401K to empty your tIRA.
Much thanks and that was what I was thinking. The question I have is if this money was going to be NONdeductible anyways ALL of the original $6000 would have bee taxed, no? In this situation I am in then I would only get 94% of that "advantage" correct since I only paying taxes upfront of $5640 vs $6000? Am I thinking this correct?

I'm self employed so could open a 401k somewhere else and then throw this in there, but that seems a lot of work just to get that last 6% of the advantage (so to speak). Does my thinking make any sense?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

nolesrule
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Re: RE: Backdoor roth with existing pretax IRA

Post by nolesrule » Wed Jan 30, 2019 12:55 pm

staythecourse wrote:
Wed Jan 30, 2019 12:01 pm
David Jay wrote:
Wed Jan 30, 2019 11:51 am
To be blunt, you have a problem.

The pro-rata rule means you have to pay taxes on the average cost-basis of all of your tIRS accounts combined on each Roth conversion. Using your numbers, 100,000 out of 106,000 is pre-tax, or 94%. So every Roth conversion is 94% taxable. So you would pay taxes on 6000 * .94 = 5640.

Possible solution: Are you still employed? Does your employer allow you to roll your (former employer) funds into your current 410K? Roll the roll-over back into your current employer’s 401K to empty your tIRA.
Much thanks and that was what I was thinking. The question I have is if this money was going to be NONdeductible anyways ALL of the original $6000 would have bee taxed, no? In this situation I am in then I would only get 94% of that "advantage" correct since I only paying taxes upfront of $5640 vs $6000? Am I thinking this correct?

I'm self employed so could open a 401k somewhere else and then throw this in there, but that seems a lot of work just to get that last 6% of the advantage (so to speak). Does my thinking make any sense?

Good luck.
Yes, all of the original $6000 has already been taxed. But 94% of the conversion would be pre-tax. You'd be paying taxes on $5640 of the conversion, where if you didn't have a TIRA balance you would be paying $0 additional taxes. You'd also be leaving $5640 of basis in the TIRA that will have to be dealt with in the future.

In the 22% bracket (as an example), you're paying an extra $1241 in taxes, and leaving basis in the TIRA meaning you'll be dealing with pro-rata until your IRA is empty (and if you do this every year, those taxes add up as forced Roth conversions in your current tax bracket). You'd rather pay those taxes and forever deal with pro-rata than just open a Solo 401k and do a one-time TIRA to 401k rollover?

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FiveK
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Re: RE: Backdoor roth with existing pretax IRA

Post by FiveK » Wed Jan 30, 2019 1:29 pm

staythecourse wrote:
Wed Jan 30, 2019 11:37 am
Excuse me if I am totally off, but tax prep is not my forte (as you can see :D ). Tried to read the wiki link but got more confused.
You might try filling Form 8606 now for how you expect it would look when you would do it for real next year. Either by hand, or putting your situation into the Form8606 tab of the personal finance toolbox spreadsheet.

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 1:45 pm

nolesrule wrote:
Wed Jan 30, 2019 12:55 pm
staythecourse wrote:
Wed Jan 30, 2019 12:01 pm
David Jay wrote:
Wed Jan 30, 2019 11:51 am
To be blunt, you have a problem.

The pro-rata rule means you have to pay taxes on the average cost-basis of all of your tIRS accounts combined on each Roth conversion. Using your numbers, 100,000 out of 106,000 is pre-tax, or 94%. So every Roth conversion is 94% taxable. So you would pay taxes on 6000 * .94 = 5640.

Possible solution: Are you still employed? Does your employer allow you to roll your (former employer) funds into your current 410K? Roll the roll-over back into your current employer’s 401K to empty your tIRA.
Much thanks and that was what I was thinking. The question I have is if this money was going to be NONdeductible anyways ALL of the original $6000 would have bee taxed, no? In this situation I am in then I would only get 94% of that "advantage" correct since I only paying taxes upfront of $5640 vs $6000? Am I thinking this correct?

I'm self employed so could open a 401k somewhere else and then throw this in there, but that seems a lot of work just to get that last 6% of the advantage (so to speak). Does my thinking make any sense?

Good luck.
Yes, all of the original $6000 has already been taxed. But 94% of the conversion would be pre-tax. You'd be paying taxes on $5640 of the conversion, where if you didn't have a TIRA balance you would be paying $0 additional taxes. You'd also be leaving $5640 of basis in the TIRA that will have to be dealt with in the future.

In the 22% bracket (as an example), you're paying an extra $1241 in taxes, and leaving basis in the TIRA meaning you'll be dealing with pro-rata until your IRA is empty (and if you do this every year, those taxes add up as forced Roth conversions in your current tax bracket). You'd rather pay those taxes and forever deal with pro-rata than just open a Solo 401k and do a one-time TIRA to 401k rollover?
Got it so I would be paying on an extra the $5640 that would be taxable on the conversion vs. 0% additional if the t- IRA was empty? That makes sense now. Thanks.

Now have to figure out what I want to do. Either way I will be dealing with prorata and taxes as I have a large amount pretaxed in that traditional IRA already from previous rolled over 401ks in past. Its not like I will be able to avoid handling the issue either way if I eventualy convert more of them to Roth on early retirement (for example). Am I right on this one? Seems like either way I will be dealing with it like anybody else doing a roth IRA conversion now or later.

Either way I don't do my taxes so either way it is not extra work for me on that aspect.

Good luck.

p.s. Just realized the difference is likely the tax bracket I would be in when making those conversions?
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

nolesrule
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Re: RE: Backdoor roth with existing pretax IRA

Post by nolesrule » Wed Jan 30, 2019 1:47 pm

staythecourse wrote:
Wed Jan 30, 2019 1:45 pm


p.s. Just realized the difference is likely the tax bracket I would be in when making those conversions?
Exactly.

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 2:14 pm

nolesrule wrote:
Wed Jan 30, 2019 1:47 pm
staythecourse wrote:
Wed Jan 30, 2019 1:45 pm


p.s. Just realized the difference is likely the tax bracket I would be in when making those conversions?
Exactly.
Make more sense now. Thanks. Will have to ponder either 1. Just leaving the nonded. traditional IRA contributions in each year going forward and deal with the whole issue when my tax bracket is lower in retirement OR 2. Set up another solo 401k this year to dump that monies into and then have no issue backdooring going forward.

Thanks for the clarifications.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Earl Lemongrab
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Re: RE: Backdoor roth with existing pretax IRA

Post by Earl Lemongrab » Wed Jan 30, 2019 3:14 pm

staythecourse wrote:
Wed Jan 30, 2019 2:14 pm
2. Set up another solo 401k this year to dump that monies into and then have no issue backdooring going forward.
Do you have qualifying self-employment income? You need that to start a solo plan.

deskjockey
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Re: RE: Backdoor roth with existing pretax IRA

Post by deskjockey » Wed Jan 30, 2019 3:30 pm

Definitely set up the solo 401k. Tracking the basis for the rest of the IRA's existence is annoying, will force you to pay taxes in a (probably) higher bracket if you want to do a backdoor Roth, and co-mingling pre and post tax monies in the same IRA will make it much harder to roll over the pretax portion into a 401k in the future. Basically, you're trying to avoid a small, finite amount of work now by creating more work and annoyance for you for a log time. And yes, this is true even if someone else does your taxes for you, since you'll have to double-check the math on the 8606 since a lot of CPAs are not very familiar with the backdoor--just look a many of the posts about that here.

Edit--your first option also has one major drawback: your new contributions to the blended IRA will be post-tax, but all of the growth will be taxed when you take it out, whereas, if you clean things up by setting up a solo 401k, all of that growth will be tax-free. So being a bit lazy now will cost you money--possibly a lot of it.

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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Wed Jan 30, 2019 4:44 pm

staythecourse wrote:
Wed Jan 30, 2019 1:45 pm
Now have to figure out what I want to do. Either way I will be dealing with prorata and taxes as I have a large amount pretaxed in that traditional IRA already from previous rolled over 401ks in past.
If you already had a rollover IRA, this will have messed up all the back door contributions you have done in the past. I'm hoping that is not the case - that 2019 was supposed to be your first back door maneuver. If not, you have a bigger problem to fix.

Either way I don't do my taxes so either way it is not extra work for me on that aspect.
Even if someone else does the taxes, if you do not understand it, things are likely to get very messed up and hard to unwind.

deskjockey
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Re: RE: Backdoor roth with existing pretax IRA

Post by deskjockey » Wed Jan 30, 2019 4:53 pm

retiredjg wrote:
Wed Jan 30, 2019 4:44 pm
staythecourse wrote:
Wed Jan 30, 2019 1:45 pm
Now have to figure out what I want to do. Either way I will be dealing with prorata and taxes as I have a large amount pretaxed in that traditional IRA already from previous rolled over 401ks in past.
If you already had a rollover IRA, this will have messed up all the back door contributions you have done in the past. I'm hoping that is not the case - that 2019 was supposed to be your first back door maneuver. If not, you have a bigger problem to fix.
I somehow glossed over that bit--just to expand on what retiredjg hinted at, if you had other IRAs (doesn't matter where, doesn't matter if rollover or something else) and did any backdoor Roths in the past (2018 or earlier) while maintaining a balance in those IRAs, you either paid taxes on those backdoors (not ideal, but I hope your accountant did it right), or you owe back taxes, penalties, and interest for not reporting them properly. Depending on how much was in those IRAs on 31 Dec. of each year, you may owe enough to wipe out any benefits you thought you'd accrued by doing the backdoor and then some.

azianbob
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Re: RE: Backdoor roth with existing pretax IRA

Post by azianbob » Wed Jan 30, 2019 5:09 pm

You can either move the traditional IRA into a 401k, then do the backdoor of $6k and pay no taxes, or if you are in a relatively low tax rate (24% or less) you can just bite the bullet and convert the whole traditional IRA to Roth and pay tax on it now. 22-24% is a pretty low rate historically and will in most likelihood go up after the Trump tax cuts expire. I can't really see it going down anymore as the deficit will balloon even more out of control (unless they do something crazy like legalize drugs and hookers and get a bunch of tax revenue through it).

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 5:13 pm

deskjockey wrote:
Wed Jan 30, 2019 4:53 pm
retiredjg wrote:
Wed Jan 30, 2019 4:44 pm
staythecourse wrote:
Wed Jan 30, 2019 1:45 pm
Now have to figure out what I want to do. Either way I will be dealing with prorata and taxes as I have a large amount pretaxed in that traditional IRA already from previous rolled over 401ks in past.
If you already had a rollover IRA, this will have messed up all the back door contributions you have done in the past. I'm hoping that is not the case - that 2019 was supposed to be your first back door maneuver. If not, you have a bigger problem to fix.
I somehow glossed over that bit--just to expand on what retiredjg hinted at, if you had other IRAs (doesn't matter where, doesn't matter if rollover or something else) and did any backdoor Roths in the past (2018 or earlier) while maintaining a balance in those IRAs, you either paid taxes on those backdoors (not ideal, but I hope your accountant did it right), or you owe back taxes, penalties, and interest for not reporting them properly. Depending on how much was in those IRAs on 31 Dec. of each year, you may owe enough to wipe out any benefits you thought you'd accrued by doing the backdoor and then some.
Appreciate all the advice so far. To address this one... I have done backdoor roth IRA when all my previous traditional IRA's during those years were zero. So don't think have worsened it??

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 5:14 pm

deskjockey wrote:
Wed Jan 30, 2019 3:30 pm
Edit--your first option also has one major drawback: your new contributions to the blended IRA will be post-tax, but all of the growth will be taxed when you take it out, whereas, if you clean things up by setting up a solo 401k, all of that growth will be tax-free. So being a bit lazy now will cost you money--possibly a lot of it.
Agreed. Realized the same after some mental thinking. So that option is off the list. Thanks for pointing that out.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

nolesrule
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Re: RE: Backdoor roth with existing pretax IRA

Post by nolesrule » Wed Jan 30, 2019 5:15 pm

azianbob wrote:
Wed Jan 30, 2019 5:09 pm
You can either move the traditional IRA into a 401k, then do the backdoor of $6k and pay no taxes, or if you are in a relatively low tax rate (24% or less) you can just bite the bullet and convert the whole traditional IRA to Roth and pay tax on it now. 22-24% is a pretty low rate historically and will in most likelihood go up after the Trump tax cuts expire. I can't really see it going down anymore as the deficit will balloon even more out of control (unless they do something crazy like legalize drugs and hookers and get a bunch of tax revenue through it).
You need to stop giving out that blanket advice about paying 24% to get into Roth because it's "pretty low". The math doesn't support it in most cases, even if taxes return to the old brackets in a few years. You have to accumulate quite a lot in pre-tax money before it makes sense at those rates.

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 5:20 pm

So it seems by best options with info. I have given is...

Reverse rollover this IRA back into the same individual 401k I used in the past.

Now my follow up questions are:
1. Do I contribute non. ded. this year and go ahead backdoor it this year
OR
2. Do I contribute non ded. this year and wait to backdoor next year
OR
3. Do I do no non. ded. IRA for this year. Wait until next year to start non ded. conribution and then backdoor it.

Just trying to find out the proper sequence to "right the ship" AFTER reverse rollover back to the original solo401k is complete.

Thanks.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

retiredjg
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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Wed Jan 30, 2019 5:23 pm

staythecourse wrote:
Wed Jan 30, 2019 5:13 pm
To address this one... I have done backdoor roth IRA when all my previous traditional IRA's during those years were zero. So don't think have worsened it??
If you mean the IRAs were zero at the end of the years in which you used the back door, you should be fine.

nolesrule
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Re: RE: Backdoor roth with existing pretax IRA

Post by nolesrule » Wed Jan 30, 2019 5:25 pm

staythecourse wrote:
Wed Jan 30, 2019 5:20 pm
So it seems by best options with info. I have given is...

Reverse rollover this IRA back into the same individual 401k I used in the past.

Now my follow up questions are:
1. Do I contribute non. ded. this year and go ahead backdoor it this year
OR
2. Do I contribute non ded. this year and wait to backdoor next year
OR
3. Do I do no non. ded. IRA for this year. Wait until next year to start non ded. conribution and then backdoor it.

Just trying to find out the proper sequence to "right the ship" AFTER reverse rollover back to the original solo401k is complete.

Thanks.
Since it's a solo 401k, you can do the rollover as you have complete control over the account. Worst case is if you are at Vanguard, you move to a custodian such as Fidelity to enable the rollover. You have till Dec 31, not that you should wait that long. If it was an employer 401k, I'd be more hesitant to ensure you could do the rollover.

Don't lose out on a contribution opportunity, and don't wait too long to convert, because you'll pay taxes on the growth in the TIRA.

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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Wed Jan 30, 2019 5:27 pm

azianbob wrote:
Wed Jan 30, 2019 5:09 pm
22-24% is a pretty low rate historically and will in most likelihood go up after the Trump tax cuts expire.
22% - 24% is only a low rate for single people in retirement. It is NOT a low rate for married people in retirement.

It is quite common for married people, even wealthy ones, to be in the 12%/15% rate in retirement.

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 5:30 pm

retiredjg wrote:
Wed Jan 30, 2019 5:23 pm
staythecourse wrote:
Wed Jan 30, 2019 5:13 pm
To address this one... I have done backdoor roth IRA when all my previous traditional IRA's during those years were zero. So don't think have worsened it??
If you mean the IRAs were zero at the end of the years in which you used the back door, you should be fine.
yes. Prior I only used the trad. IRA to do backdoor roths each year so the ending balance each year was zero. Thanks for thinking about that.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

retiredjg
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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Wed Jan 30, 2019 5:33 pm

staythecourse wrote:
Wed Jan 30, 2019 5:20 pm
So it seems by best options with info. I have given is...

Reverse rollover this IRA and the other rollover IRA you mentioned back into the same individual 401k I used in the past.

Now my follow up questions are: 1. Do I contribute non. ded. this year and go ahead backdoor it this year
If you get all your traditional IRAs out of the way, you could do both the contribution and conversion step this year.

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Wed Jan 30, 2019 6:41 pm

retiredjg wrote:
Wed Jan 30, 2019 5:33 pm
staythecourse wrote:
Wed Jan 30, 2019 5:20 pm
So it seems by best options with info. I have given is...

Reverse rollover this IRA and the other rollover IRA you mentioned back into the same individual 401k I used in the past.

Now my follow up questions are: 1. Do I contribute non. ded. this year and go ahead backdoor it this year
If you get all your traditional IRAs out of the way, you could do both the contribution and conversion step this year.
Okay. Will reverse roll over back to original i401k. Then will contribute to my then empty trad. IRA with usual nonded. contribution and then immediately rollover to roth ira (like I do every year).

Thanks for the clarification. Just wish I would have realized it before making the mistake, but as another poster mentioned just a few pieces of extra paperwork makes it easy. I called my previous custodian (td ameritrade) and they said they will just keep the original account open so even easier paperwork wise.
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Epsilon Delta
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Re: RE: Backdoor roth with existing pretax IRA

Post by Epsilon Delta » Wed Jan 30, 2019 8:07 pm

retiredjg wrote:
Wed Jan 30, 2019 5:27 pm
azianbob wrote:
Wed Jan 30, 2019 5:09 pm
22-24% is a pretty low rate historically and will in most likelihood go up after the Trump tax cuts expire.
22% - 24% is only a low rate for single people in retirement. It is NOT a low rate for married people in retirement.

It is quite common for married people, even wealthy ones, to be in the 12%/15% rate in retirement.
It is quite common for married people, even wealthy ones, to become single people in retirement.

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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Thu Jan 31, 2019 7:20 am

Epsilon Delta wrote:
Wed Jan 30, 2019 8:07 pm
retiredjg wrote:
Wed Jan 30, 2019 5:27 pm
azianbob wrote:
Wed Jan 30, 2019 5:09 pm
22-24% is a pretty low rate historically and will in most likelihood go up after the Trump tax cuts expire.
22% - 24% is only a low rate for single people in retirement. It is NOT a low rate for married people in retirement.

It is quite common for married people, even wealthy ones, to be in the 12%/15% rate in retirement.
It is quite common for married people, even wealthy ones, to become single people in retirement.
This is true. :happy

To be more precise, I was thinking of newly retired couples who are able to do Roth conversions at 12%/15% for several years before one of them becomes a single person. This is quite common and is not necessarily tied to total wealth. And it is why I don't consider 22% to 24% as "a pretty low rate historically" for a couple doing or wanting to do Roth conversions.

I do agree with azianbob that 22% - 24% is a low rate for singles.

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Re: RE: Backdoor roth with existing pretax IRA

Post by goodenyou » Thu Jan 31, 2019 9:44 am

I posted a similar question just a few days ago. It is a real PIA to get all of your tIRA out of the IRA space and into 401k space. All of it is TIMES TWO for a spouse and me. If you don't have a 401k that accepts tIRA rollovers, or if it's a high cost plan, you have to create an i401(k). That requires finding a side business that creates at least a minimum of income. If you have an existing i401(k) at Vanguard, they don't allow rollovers. So, if you open a i401(k) at Fidelity, you have to get an EIN, set up the i401(k), then liquidate your IRA (by check because Fidelity doesn't accept electronic funds transfers), send Fidelity the check(s). THEN, you can open a tIRA (more paperwork) only to fund it and immediately roll it over to a Roth IRA. ALSO, be sure you properly fill out the IRS Form 8606 every year that you fund and rollover. I really wanted to do this, but I can't get enough energy to go through all these steps. I am really wondering if I should just convert all my IRA to Roth and pay the (highest) marginal rates today. Shame on the IRS for making it so difficult.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: RE: Backdoor roth with existing pretax IRA

Post by goodenyou » Thu Jan 31, 2019 9:47 am

Epsilon Delta wrote:
Wed Jan 30, 2019 8:07 pm
retiredjg wrote:
Wed Jan 30, 2019 5:27 pm
azianbob wrote:
Wed Jan 30, 2019 5:09 pm
22-24% is a pretty low rate historically and will in most likelihood go up after the Trump tax cuts expire.
22% - 24% is only a low rate for single people in retirement. It is NOT a low rate for married people in retirement.

It is quite common for married people, even wealthy ones, to be in the 12%/15% rate in retirement.
It is quite common for married people, even wealthy ones, to become single people in retirement.
All of them become single at some point.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: RE: Backdoor roth with existing pretax IRA

Post by nolesrule » Thu Jan 31, 2019 10:00 am

goodenyou wrote:
Thu Jan 31, 2019 9:44 am
I posted a similar question just a few days ago. It is a real PIA to get all of your tIRA out of the IRA space and into 401k space. All of it is TIMES TWO for a spouse and me. If you don't have a 401k that accepts tIRA rollovers, or if it's a high cost plan, you have to create an i401(k). That requires finding a side business that creates at least a minimum of income. If you have an existing i401(k) at Vanguard, they don't allow rollovers. So, if you open a i401(k) at Fidelity, you have to get an EIN, set up the i401(k), then liquidate your IRA (by check because Fidelity doesn't accept electronic funds transfers), send Fidelity the check(s). THEN, you can open a tIRA (more paperwork) only to fund it and immediately roll it over to a Roth IRA. ALSO, be sure you properly fill out the IRS Form 8606 every year that you fund and rollover. I really wanted to do this, but I can't get enough energy to go through all these steps. I am really wondering if I should just convert all my IRA to Roth and pay the (highest) marginal rates today. Shame on the IRS for making it so difficult.
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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Thu Jan 31, 2019 10:24 am

goodenyou wrote:
Thu Jan 31, 2019 9:44 am
I really wanted to do this, but I can't get enough energy to go through all these steps. I am really wondering if I should just convert all my IRA to Roth and pay the (highest) marginal rates today. Shame on the IRS for making it so difficult.
It has always amazed me how many people actually are willing to do all this just to get $5,500 or thereabouts into a Roth IRA instead of a taxable account each year. I think Roth is a great and wonderful thing, but I think some people think it is an absolute necessity or that it is magical in some way. Roth IRA isn't either of those things.

If you go ahead and convert at the highest rates today just, you will pay a lot in taxes to accomplish that. But it will give you an opportunity to put more into Roth. And earnings in Roth are tax free. At some point, it should be a wash.

Since the only difference is the tax one pays on Roth earnings vs the tax one pays for the opportunity to have tax free earnings, I would think it would be a waste of money for more people than it helps. But maybe I have it wrong. Someone should do the math. :happy

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Re: RE: Backdoor roth with existing pretax IRA

Post by goodenyou » Thu Jan 31, 2019 10:31 am

retiredjg wrote:
Thu Jan 31, 2019 10:24 am
goodenyou wrote:
Thu Jan 31, 2019 9:44 am
I really wanted to do this, but I can't get enough energy to go through all these steps. I am really wondering if I should just convert all my IRA to Roth and pay the (highest) marginal rates today. Shame on the IRS for making it so difficult.
It has always amazed me how many people actually are willing to do all this just to get $5,500 or thereabouts into a Roth IRA instead of a taxable account each year. I think Roth is a great and wonderful thing, but I think some people think it is an absolute necessity or that it is magical in some way. Roth IRA isn't either of those things.

If you go ahead and convert at the highest rates today just, you will pay a lot in taxes to accomplish that. But it will give you an opportunity to put more into Roth. And earnings in Roth are tax free. At some point, it should be a wash.

Since the only difference is the tax one pays on Roth earnings vs the tax one pays for the opportunity to have tax free earnings, I would think it would be a waste of money for more people than it helps. But maybe I have it wrong. Someone should do the math. :happy
I agree. I am looking at the opportunity to put $14,000 per year away in a Roth for the next 10-15 years potentially. It also has some advantages in asset protection, which is important in my line of work. I am still not yet convinced that it is worth all the hassle. It requires a lot of moving parts in the beginning and some record keeping with more IRS forms in the future. All of which has potential screw ups. The financial benefit I am still trying to decipher. I look at the possibility of a Roth like my 529 Plan. I got a tremendous benefit from tax free growth over 10 years. I saved tens of thousands of dollars in taxes because of it. Maybe I am looking at it the wrong way.
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Re: RE: Backdoor roth with existing pretax IRA

Post by changingtimes » Thu Jan 31, 2019 10:53 am

retiredjg wrote:
Thu Jan 31, 2019 10:24 am
It has always amazed me how many people actually are willing to do all this just to get $5,500 or thereabouts into a Roth IRA instead of a taxable account each year. I think Roth is a great and wonderful thing, but I think some people think it is an absolute necessity or that it is magical in some way. Roth IRA isn't either of those things.
I'm actually about to put the energy into doing this mainly to move my rollover IRA ($35k) somewhere where I stop being tempted to convert it to Roth while I'm still working. :)

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Epsilon Delta
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Re: RE: Backdoor roth with existing pretax IRA

Post by Epsilon Delta » Thu Jan 31, 2019 11:15 am

goodenyou wrote:
Thu Jan 31, 2019 9:47 am
Epsilon Delta wrote:
Wed Jan 30, 2019 8:07 pm
retiredjg wrote:
Wed Jan 30, 2019 5:27 pm
azianbob wrote:
Wed Jan 30, 2019 5:09 pm
22-24% is a pretty low rate historically and will in most likelihood go up after the Trump tax cuts expire.
22% - 24% is only a low rate for single people in retirement. It is NOT a low rate for married people in retirement.

It is quite common for married people, even wealthy ones, to be in the 12%/15% rate in retirement.
It is quite common for married people, even wealthy ones, to become single people in retirement.
All of them become single at some point.
Depends how you count. I'd put it at about half.

My point is that a retirement plan should deal with the death of one spouse. This can make it reasonable for a married couple to do conversions in a tax bracket that does not make sense if you consider just the married tax rates.

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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Thu Jan 31, 2019 11:21 am

Epsilon Delta wrote:
Thu Jan 31, 2019 11:15 am
My point is that a retirement plan should deal with the death of one spouse. This can make it reasonable for a married couple to do conversions in a tax bracket that does not make sense if you consider just the married tax rates.
I agree. If the couple is not going to get a big chunk converted before RMDs start, they should consider going into the next tax bracket to do conversions (keeping the other limits like IRMAA in mind). Because that is most likely where the survivor is going to be when one dies.

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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Thu Jan 31, 2019 11:22 am

Epsilon Delta wrote:
Thu Jan 31, 2019 11:15 am
Depends how you count. I'd put it at about half.
ED, you are one very funny person. :D

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Re: RE: Backdoor roth with existing pretax IRA

Post by Earl Lemongrab » Thu Jan 31, 2019 12:17 pm

goodenyou wrote:
Thu Jan 31, 2019 9:44 am
It is a real PIA to get all of your tIRA out of the IRA space and into 401k space.
Not really. I mean, it you already have non-deductible contributions it's difficult to get it precisely right due to earnings during the process, but that's pretty minor. Otherwise, if you do the rollover out before the ND contribution then it's pretty easy. Exact complexity will depend on the custodians involved.

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Re: RE: Backdoor roth with existing pretax IRA

Post by goodenyou » Thu Jan 31, 2019 12:31 pm

Earl Lemongrab wrote:
Thu Jan 31, 2019 12:17 pm
goodenyou wrote:
Thu Jan 31, 2019 9:44 am
It is a real PIA to get all of your tIRA out of the IRA space and into 401k space.
Not really. I mean, it you already have non-deductible contributions it's difficult to get it precisely right due to earnings during the process, but that's pretty minor. Otherwise, if you do the rollover out before the ND contribution then it's pretty easy. Exact complexity will depend on the custodians involved.
For me it is. I have 2 separate IRAs and no 401(k) that I would put them in (high cost). My wife has 2 IRAs and an i401(k) at Vanguard that has to be moved. There is significant paperwork to do get all of them ready to do a Backdoor Roth. Doable but aggravating. You have to have the right 401k at the right place to do it.
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Re: RE: Backdoor roth with existing pretax IRA

Post by Earl Lemongrab » Thu Jan 31, 2019 3:47 pm

goodenyou wrote:
Thu Jan 31, 2019 12:31 pm
I have 2 separate IRAs and no 401(k) that I would put them in (high cost). My wife has 2 IRAs and an i401(k) at Vanguard that has to be moved. There is significant paperwork to do get all of them ready to do a Backdoor Roth. Doable but aggravating. You have to have the right 401k at the right place to do it.
Well, not having a good 401(k) doesn't really have much to do with how difficult it is. I've done a few rollovers in and a number out of MegaCorp's plan. Yes, you have to fill out forms, but how difficult is that really?

At the end of the day, you're the one to determine how much effort it's worth.

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Re: RE: Backdoor roth with existing pretax IRA

Post by nolesrule » Thu Jan 31, 2019 3:58 pm

goodenyou wrote:
Thu Jan 31, 2019 12:31 pm
Earl Lemongrab wrote:
Thu Jan 31, 2019 12:17 pm
goodenyou wrote:
Thu Jan 31, 2019 9:44 am
It is a real PIA to get all of your tIRA out of the IRA space and into 401k space.
Not really. I mean, it you already have non-deductible contributions it's difficult to get it precisely right due to earnings during the process, but that's pretty minor. Otherwise, if you do the rollover out before the ND contribution then it's pretty easy. Exact complexity will depend on the custodians involved.
For me it is. I have 2 separate IRAs and no 401(k) that I would put them in (high cost). My wife has 2 IRAs and an i401(k) at Vanguard that has to be moved. There is significant paperwork to do get all of them ready to do a Backdoor Roth. Doable but aggravating. You have to have the right 401k at the right place to do it.
Moving a Solo 401k from Vanguard to Fidelity was pretty painless. I think I spent 10 minutes on the phone with Fidelity as they walked me through filling out the paperwork, and 10 minutes on the phone with Vanguard requesting the rollover distribution. I spent more time trying to find a stamp to mail in the forms and distribution checks to Fidelity.

Someone having no 401k is a different story. The abbr for that is SOL.

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Re: RE: Backdoor roth with existing pretax IRA

Post by pward » Thu Jan 31, 2019 4:15 pm

retiredjg wrote:
Thu Jan 31, 2019 10:24 am
goodenyou wrote:
Thu Jan 31, 2019 9:44 am
I really wanted to do this, but I can't get enough energy to go through all these steps. I am really wondering if I should just convert all my IRA to Roth and pay the (highest) marginal rates today. Shame on the IRS for making it so difficult.
It has always amazed me how many people actually are willing to do all this just to get $5,500 or thereabouts into a Roth IRA instead of a taxable account each year. I think Roth is a great and wonderful thing, but I think some people think it is an absolute necessity or that it is magical in some way. Roth IRA isn't either of those things.

If you go ahead and convert at the highest rates today just, you will pay a lot in taxes to accomplish that. But it will give you an opportunity to put more into Roth. And earnings in Roth are tax free. At some point, it should be a wash.

Since the only difference is the tax one pays on Roth earnings vs the tax one pays for the opportunity to have tax free earnings, I would think it would be a waste of money for more people than it helps. But maybe I have it wrong. Someone should do the math. :happy
Yeah I've been struggling with this as well. I rolled over past work 401k's into a rollover IRA before I knew any better (and before I made enough to need to backdoor). For the last couple of years I've been mentally back and forth over whether I want to go through the hassle of rolling it over in to my 401k and paying the 60bps 401k fees on those funds just to be able to do a backdoor Roth. I'm just not sold that it's totally worth it. I'm also afraid that the market will shoot up in the week or two I'm out of the market because the companies always drag their feet on transferring the funds on rollovers. Maybe I should just do it, if for no other reason than so I will stop stressing about whether or not I should do it, haha.

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Re: RE: Backdoor roth with existing pretax IRA

Post by retiredjg » Thu Jan 31, 2019 5:23 pm

pward wrote:
Thu Jan 31, 2019 4:15 pm
Yeah I've been struggling with this as well. I rolled over past work 401k's into a rollover IRA before I knew any better (and before I made enough to need to backdoor). For the last couple of years I've been mentally back and forth over whether I want to go through the hassle of rolling it over in to my 401k and paying the 60bps 401k fees on those funds just to be able to do a backdoor Roth. I'm just not sold that it's totally worth it. I'm also afraid that the market will shoot up in the week or two I'm out of the market because the companies always drag their feet on transferring the funds on rollovers. Maybe I should just do it, if for no other reason than so I will stop stressing about whether or not I should do it, haha.
60 bp is a lot. If the IRA is small, it may not matter. But if the IRA is small, you could probably convert it to Roth cheaper than paying an extra 60 bp year after year.

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Re: RE: Backdoor roth with existing pretax IRA

Post by Epsilon Delta » Thu Jan 31, 2019 5:31 pm

pward wrote:
Thu Jan 31, 2019 4:15 pm
I'm also afraid that the market will shoot up in the week or two I'm out of the market because the companies always drag their feet on transferring the funds on rollovers.
No one ever worries that the market will crater during the week or two they are out of the market.

In fact the chances of gains or losses are almost equal. The expected cost of being out of the market for a week or two is less than 0.5%, with a standard deviation of, uh, quite a lot.

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Re: RE: Backdoor roth with existing pretax IRA

Post by goodenyou » Thu Jan 31, 2019 6:02 pm

nolesrule wrote:
Thu Jan 31, 2019 3:58 pm
goodenyou wrote:
Thu Jan 31, 2019 12:31 pm
Earl Lemongrab wrote:
Thu Jan 31, 2019 12:17 pm
goodenyou wrote:
Thu Jan 31, 2019 9:44 am
It is a real PIA to get all of your tIRA out of the IRA space and into 401k space.
Not really. I mean, it you already have non-deductible contributions it's difficult to get it precisely right due to earnings during the process, but that's pretty minor. Otherwise, if you do the rollover out before the ND contribution then it's pretty easy. Exact complexity will depend on the custodians involved.
For me it is. I have 2 separate IRAs and no 401(k) that I would put them in (high cost). My wife has 2 IRAs and an i401(k) at Vanguard that has to be moved. There is significant paperwork to do get all of them ready to do a Backdoor Roth. Doable but aggravating. You have to have the right 401k at the right place to do it.
Moving a Solo 401k from Vanguard to Fidelity was pretty painless. I think I spent 10 minutes on the phone with Fidelity as they walked me through filling out the paperwork, and 10 minutes on the phone with Vanguard requesting the rollover distribution. I spent more time trying to find a stamp to mail in the forms and distribution checks to Fidelity.

Someone having no 401k is a different story. The abbr for that is SOL.
Moving my wife's solo 401(k) from Vanguard to Fidelity and funding it is one issue. Starting a solo 401(k) because my work 401 (k) is o crappy is the other hurtle. Finding a nonsense side job to justify the solo 401(k) is the next task. I have a few options on the nonsense "jobs".
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: RE: Backdoor roth with existing pretax IRA

Post by mhalley » Thu Jan 31, 2019 6:07 pm

On my phone so difficult to post links, but physician on fire has a couple of posts on the marginal benefits of back door Roth. Google to see the exact benefits.

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staythecourse
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Re: RE: Backdoor roth with existing pretax IRA

Post by staythecourse » Sun Feb 10, 2019 10:28 am

goodenyou wrote:
Thu Jan 31, 2019 6:02 pm
Moving my wife's solo 401(k) from Vanguard to Fidelity and funding it is one issue. Starting a solo 401(k) because my work 401 (k) is o crappy is the other hurtle. Finding a nonsense side job to justify the solo 401(k) is the next task. I have a few options on the nonsense "jobs".
Easiest is just be an uber driver for 6 months. Do one hour each weekend day for 6 months.

If you want to be a bit more legitimate as a physician: Give a couple of talks, do some part time medical record review, or best would be just do some physician surveys. Maybe 1/ month for 6 months? That would likely be the easiest way.

The uber driver move has to be the EASIEST way for everyone in the country to set up an I-401k if their employer 401k is a no go.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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