Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

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S4C5
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Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by S4C5 » Tue Feb 05, 2019 5:51 pm

For the life of me, I can't understand this.

Today is February 5th, 2019.

I currently have a ~$9500 balance (as of 12/31/18) in a traditional IRA that is pre-tax.

I would like to make a $5,500 non-deductible (i.e., post-tax) contribution now FOR 2018 (deadline April 15th) to this traditional IRA.
I would then like to make a $6,000 contribution for 2019 to this traditional IRA.

I would then like to convert the whole thing into my pre-exsiting Roth IRA (which has around a $30k balance now).
Does this mean I only have to pay tax on the $9500? Or will I have to pay tax on a portion of the $5,500? (which would suck because then I would be paying tax twice)?

Is this is all Kosher, I will go ahead and do it.

And now a second question.

I have a side business as an S-corp (I'm the only employee). I would like to set up a solo-401(k) now and maximally fund it. Is there any reason I can't convert this balance once maximally funded to Roth IRA (so-called mega backdoor roth) this year? I have heard something about it being problematic to do an IRA roth conversion and a 401(k) roth conversion the same year because the 401(k) balance can get added to the pro rata rule, when it otherwise wouldn't. I don't understand this at all.

Additional information: I have a 457(b) plan at my employer that I am contributing $19,000 this year to, pre-tax. Does this affect anything?

Help!

retiringwhen
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by retiringwhen » Tue Feb 05, 2019 5:59 pm

S4C5 wrote:
Tue Feb 05, 2019 5:51 pm
For the life of me, I can't understand this.

Today is February 5th, 2019.

I currently have a ~$9500 balance (as of 12/31/18) in a traditional IRA that is pre-tax.

I would like to make a $5,500 non-deductible (i.e., post-tax) contribution now FOR 2018 (deadline April 15th) to this traditional IRA.
I would then like to make a $6,000 contribution for 2019 to this traditional IRA.

I would then like to convert the whole thing into my pre-exsiting Roth IRA (which has around a $30k balance now).
Does this mean I only have to pay tax on the $9500? Or will I have to pay tax on a portion of the $5,500? (which would suck because then I would be paying tax twice)?\

Help!
I Can't answer the questions related to the 401(K), but I can take a stab at the first part.

First off, the conversion will happen in 2019 regardless of the source of the money. But you can make 2018 and 2019 contributions to the tIRA.

Doing the conversion now would only have taxes to pay on the existing $9,500 pre-tax dollars and earnings (if-any) of the after-tax contributions made for 2018 and 2019. the after-tax contributions are not-taxed as part of the conversion. Make sure you carefully fill out the 8606 form as this sounds like it could be a bit tricky.

The key thing to do is make sure you show the 2018 and 2019 as after-tax contributions on the 8606.

Topic Author
S4C5
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by S4C5 » Tue Feb 05, 2019 6:04 pm

So basically I am just going to be a doing a backdoor roth conversion in 2019 on $11,500, whereas most people will be limited to a backdoor roth conversion of $6,000. This makes sense, and I will proceed then. If there is any problem with this, let me know.

The next question is, can I also do a mega-back door roth for 2019 by setting up a solo 401(k), and if so, how do I do this, and what is the maximum I can contribute to the solo 401k and convert this way? Will the mega backdoor roth screw up my regular backdoor roth conversion for 2019 or vice versa?


My goal is to get as much as I can into my roth account this year. I will be going up to the top tax bracket next year when I start a new job.

retiringwhen
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by retiringwhen » Tue Feb 05, 2019 6:09 pm

S4C5 wrote:
Tue Feb 05, 2019 6:04 pm
So basically I am just going to be a doing a backdoor roth conversion in 2019 on $11,500, whereas most people will be limited to a backdoor roth conversion of $6,000. This makes sense, and I will proceed then. If there is any problem with this, let me know.

The next question is, can I also do a mega-back door roth for 2019 by setting up a solo 401(k), and if so, how do I do this, and what is the maximum I can contribute to the solo 401k and convert this way? Will the mega backdoor roth screw up my regular backdoor roth conversion for 2019 or vice versa?


My goal is to get as much as I can into my roth account this year. I will be going up to the top tax bracket next year when I start a new job.
there are no annual limitations on conversions, only on contributions.

RE: the Solo 401(K) why don't you just after-tax (aka Roth) contributions to the account? you can do them all as employee unless you are trying to do more than the $19,000 annual limit. Vanguard at least allows Roth employee contributions.

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S4C5
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by S4C5 » Tue Feb 05, 2019 6:55 pm

Well my 457(b) I invest now allows me to invest post-tax (I think). Maybe I should change that.

Regardless of my 457(b), if I open up a solo 401(k), I can still invest up to the limits, right?

I copied this from a blog:
In 2018, the combined salary deferral limit for pre-tax and Roth salary deferrals to Solo 401(k) plans is $18,500. In 2019, the combined limit increased by $500 to $19,000. There is a lesser known rule called the “overall 415 limit.” The overall 415 limit for 401(k) plans including solo 401k plans for 2018 is $55,000, or 100% of compensation, whichever is less. For the 2019, the overall limit is $56,000.

Regarding "compensation" is this my salary from the S-corp, or my total pass-through income?
My salary from the S-corp is $24,000 per year ($2000 paid monthly). My total pass-through income is around $100,000
What's the max I could contribute after-tax to the solo 401(k)? Is it $24,000 or $56,000?

My new job starts in October, and I will have access to a 403(a) and a supplemental 457(b). Will the amount I can contribute to these depend on what I contribute to my current 457(b) and my solo 401(k) at all? Trying to plan ahead...

retiringwhen
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by retiringwhen » Tue Feb 05, 2019 6:58 pm

There are other folks who can answer those questions, outside my wheel house, sorry.

nolesrule
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by nolesrule » Tue Feb 05, 2019 7:14 pm

You are asking a lot of questions at once, and whether you can and should do some things are two different questions.

For the conversions, if you have a pre-tax balance in your IRA, then you will be subject to the pro-rata rule on any Roth conversions meaning they will be a mix of pre-tax and after-tax from the non-deductible contributions.

Since you have an S-Corp, you could open a Solo 401k at a provider that allows incoming rollovers from IRAs, which would enable you to roll the pre-tax balance into the Solo 401k and avoid paying tax on the conversion of pre-tax money. This would have to be done before the end of the year in which you do Roth conversions.

Or you can convert everything including the pre-tax balance, and you'd have to pay taxes on the entire pre-tax balance.

Since you have an S-Corp, with a Salary of $24k (which seems low considering you have $100k in total income, but that's just my opinion), your combination of pre-tax and after-tax contributions can only be $24k less employee paid SS and Medicare taxes (you pay these out of salary so the money is not available for employee contribution), but you must open a Solo 401k that allows after-tax employee contributions, and there are generally additional costs involved compared to a normal Solo 401k plan. You can also make an employer contributions equal to 25% of your salary, which is always pre-tax. The sum of all contributions cannot exceed $56k, but due to the other limits involved based on your salary, you'd be limited to about $30k less SS/Medicare taxes.

I'm sure Spirit Rider will be along to be even more specific and correct any mistakes in my post.

mark1623
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by mark1623 » Tue Feb 05, 2019 7:20 pm

S4C5 wrote:
Tue Feb 05, 2019 6:55 pm
Well my 457(b) I invest now allows me to invest post-tax (I think). Maybe I should change that.

Regardless of my 457(b), if I open up a solo 401(k), I can still invest up to the limits, right?

I copied this from a blog:
In 2018, the combined salary deferral limit for pre-tax and Roth salary deferrals to Solo 401(k) plans is $18,500. In 2019, the combined limit increased by $500 to $19,000. There is a lesser known rule called the “overall 415 limit.” The overall 415 limit for 401(k) plans including solo 401k plans for 2018 is $55,000, or 100% of compensation, whichever is less. For the 2019, the overall limit is $56,000.

Regarding "compensation" is this my salary from the S-corp, or my total pass-through income?
My salary from the S-corp is $24,000 per year ($2000 paid monthly). My total pass-through income is around $100,000
What's the max I could contribute after-tax to the solo 401(k)? Is it $24,000 or $56,000?

My new job starts in October, and I will have access to a 403(a) and a supplemental 457(b). Will the amount I can contribute to these depend on what I contribute to my current 457(b) and my solo 401(k) at all? Trying to plan ahead...
Contributions to the 457 will not be affected by the 401(k) or 403(b). Your employee contributions to the 401(k) and 403(b) cannot exceed 19K (if under 50) in the aggregate. You could put 19K in the solo 401(k) and then another 19K in the 457.

If you pay yourself via W-2 then your W-2 wage is the max you can get in to your solo 401k.

Topic Author
S4C5
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by S4C5 » Wed Feb 06, 2019 1:39 am

So since I'll be starting a new job in October that has a 403(a) plan, and a supplemental 457(b) plan, there is no point to funding a solo 401(k) because the investments limits are for a combination of the 403(a) and 401(k) plan?

In other words, I can't invest $19k in my new 403(a) at the end of the year and $24k + $6k employer match into my solo 401(k)?

The goal is to get as much money as I can into Roth accounts this year because my tax bracket will be going to 39% next year.
I could rollover my tIRA into my 457(b) plan now, but I'd rather convert it and pay taxes. I'm on the fence whether I should convert my old 401(k) with about $50k in it to roth this year as well. I should have done it last year, or really, years ago.

retiringwhen
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by retiringwhen » Wed Feb 06, 2019 5:38 am

S4C5 wrote:
Wed Feb 06, 2019 1:39 am
So since I'll be starting a new job in October that has a 403(a) plan, and a supplemental 457(b) plan, there is no point to funding a solo 401(k) because the investments limits are for a combination of the 403(a) and 401(k) plan?

In other words, I can't invest $19k in my new 403(a) at the end of the year and $24k + $6k employer match into my solo 401(k)?

The goal is to get as much money as I can into Roth accounts this year because my tax bracket will be going to 39% next year.
I could rollover my tIRA into my 457(b) plan now, but I'd rather convert it and pay taxes. I'm on the fence whether I should convert my old 401(k) with about $50k in it to roth this year as well. I should have done it last year, or really, years ago.
Seems like you just need to decide how much of your current pre-tax dollars you want to convert this year from existing sources. If you want to keep your overall income down though, it seems like you could use the pre-tax employer dollars of the Solo 401(K) to reduce this year's income to make room for more conversions from the other sources (IRA, old 401(K), etc. It may not be practical to do a back door conversion with those $ this year, not sure of the rules.

nolesrule
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by nolesrule » Wed Feb 06, 2019 7:40 am

S4C5 wrote:
Wed Feb 06, 2019 1:39 am
So since I'll be starting a new job in October that has a 403(a) plan, and a supplemental 457(b) plan, there is no point to funding a solo 401(k) because the investments limits are for a combination of the 403(a) and 401(k) plan?

In other words, I can't invest $19k in my new 403(a) at the end of the year and $24k + $6k employer match into my solo 401(k)?

The goal is to get as much money as I can into Roth accounts this year because my tax bracket will be going to 39% next year.
I could rollover my tIRA into my 457(b) plan now, but I'd rather convert it and pay taxes. I'm on the fence whether I should convert my old 401(k) with about $50k in it to roth this year as well. I should have done it last year, or really, years ago.
The limit for employee deferrals to Traditional or Roth is $19k. If you did a solo 401k that included after-tax, you could still do the $19k at work and after-tax for all of your S-Corp salary. The employer contribution to a Solo 401k is not a match, it is profit-sharing. So you can make that contribution (up to 25% of the W-2 salary for your S-Corp) whether you do employee contributions or not.

I'm not recommending after-tax, because it's more complicated and more costly, but it's possible.

You could also increase your S-Corp salary in order to increase the dollars you put in the Solo 401k via employer contributions.

Topic Author
S4C5
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by S4C5 » Wed Feb 06, 2019 10:16 am

Just to be clear, does this sound like a reasonable plan for 2018? Am I wrong at any point?

Timeframe:

February: Invest $5,500 for 2018 and $6,000 for $2019 into tIRA. Total balance is now around $20,000. Then convert entire tIRA into Roth IRA.


March: Continue to invest in current employer 457(b) plan. Switch contributions from pre-tax to Roth. Convert existing balance to Roth in-plan (allowed)


June: Contract at current jobs ends. Total in 457(b) is around $11,000 for 2019, most of which is Roth.


July: Set up Solo 401(k). Invest $31,000 into solo 401(k) as post-tax employee contributions. Employer contributes 25% of salary, so $6,000. This leaves a total balance of $37,000 in the solo 401(k). Then do a roth conversion on all of this (mega backdoor roth).


October: Start new job. Maximally fund 403(b) plan to $19,000 as a roth contribution.


November. Now that 403(b) is maximally funded, I can invest in the new supplemental 457(b). Invest $8,000 in this. Also as a roth contribution.


Summary of 2019 investments:
Roth IRA: $6,000 (backdoor)
457(b) plans: $11,000 at first job. $8,000 at second job. Roth
403(b) plans: $19,000. Roth
401(k) plans: $31,000 post-tax additional via employee, $6,000 employer contribution. Converted to Roth in-plan.


Total in 457(b) + 401(k) plans: $56,000
Total in 403(b) plans: $19,000
Total in Roth IRA: $6,000
Total Roth investments in 2019: $81,000


Is this all ok? Did I screw up anywhere? The only part I'm a little fishy on is the contributions to the solo 401-k plan. Can employer still contribute 25% of salary if I am only doing additional elective contributions and no salary deferred pre-tax or roth contributions?

MotoTrojan
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by MotoTrojan » Wed Feb 06, 2019 10:37 am

Your plan makes sense to me with regards to the IRAs at-least. If done correctly you'll only pay tax (for the first time) on the $9500, with the $11500 having already been taxed prior to contribution of course. Be careful with your taxes though as I believe you'll need to fill out an 8606 for the 2018 contributions, but because the conversion takes place in 2019 that will be shown on your return next year (due 4/15/20). If you do not fill out 8606 properly for the post-tax IRA contributions though, then you'll have to amend that return.

Moving forward it is best to do the conversion and contribution in the same year so you are never carrying a non-deductible tIRA basis.

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S4C5
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by S4C5 » Wed Feb 06, 2019 11:10 am

Thanks, I feel confident about the IRA plan now. It's just the mess of the different 457, 401, and 403 plans I will encounter this year that I want to make sure I am handling right as outlined above at this point.

nolesrule
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by nolesrule » Wed Feb 06, 2019 2:00 pm

July: Set up Solo 401(k). Invest $31,000 into solo 401(k) as post-tax employee contributions. Employer contributes 25% of salary, so $6,000. This leaves a total balance of $37,000 in the solo 401(k). Then do a roth conversion on all of this (mega backdoor roth).
Your total employee Pre-tax, Roth and after-tax contributions must come out of your S-Corp salary... and it must come out of your pay as a payroll deduction. You said your salary is $25k.

You can only contribute after-tax to your solo 401k if you open a solo 401k plan that supports this. You can only do the mega backdoor Roth if your plan allows rollovers of after-tax money to a Roth. In general, Solo 401k plans do not do this out of the box and will require a customized 401k plan and the hiring of a third party administrator which will cost additional money. There are threads about this floating around on Bogleheads. This may be something you aren't ready to tackle.

The employer contribution to the solo 401k is a business expense (reduces your business profits) and thus is always pre-tax but can be no larger than 25% of your salary.

The sum of all contributions to the Solo 401k from all sources + 403(b) employee contributions cannot exceed $56k.

Topic Author
S4C5
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by S4C5 » Wed Feb 06, 2019 7:42 pm

So the max I can contribute to my solo 401(k) after-tax would be 100% of my salary ($24k), then I could get another 25% of this as an employer contribution (so, $30k).

Your comment about it coming out as a payroll deduction concerns me.
Is it allowed to just keep the monthly $2,000-withholding-FICA salary transfers from the business bank accout to my personal account and then just make a $24,000 transfer at once some point during the year to my solo 401(k)? Or do I have to do a transfer each time I pay myself?

And I guess the max I could contribute would be less than $24,000 because I would have to take off withholding and FICA first, right?

nolesrule
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Re: Can I do a late 2018 backdoor roth if I currently have a pre-tax tIRA balance?

Post by nolesrule » Wed Feb 06, 2019 8:05 pm

The money must be segregated at the time your paycheck is cut. It should never reach your personal bank account, as only your net pay gets deposited. It works just like with a paycheck from a separate employer. You only receive the net, and you probably should generate a pay stub for yourself.

And yes, it's less than your total salary, because you still have to withhold taxes from your pay as well.

You could always give yourself a pay raise to increase the amount you can contribute.

All that said, you seem to be glossing over something I've already stated twice... that a Solo 401k that allows after-tax employee contributions and Roth rollovers (either to Roth 401k or Roth IRA) is rather uncommon because it requires a custom plan and a third party administrator, requiring additional paperwork and additional costs. You haven't even asked any questions on how to do that. The sooner you get started, the better.

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