Will I be able to do a backdoor ROTH?

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bluelight
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Will I be able to do a backdoor ROTH?

Post by bluelight » Thu Mar 07, 2019 2:14 pm

I am retiring at the end of this month at age 62. DH is 72, already retired. He is currently taking SS and his pensions and RMDs. We have other investment income from our taxable accts. If it's possible for me to do a backdoor ROTH, I will hold off on taking my SS and pension in an attempt to lower our income, though it will still be about 115K this year and 75K next year.

My tax deferred accts have the following:
401k with current employer : 675 K
401K with past employer : 75 K

Traditional IRA at Fidelity : 55 K
Traditional IRA at Vanguard : 85 K
Roth IRA at Vanguard: 90 K

I'm a little confused about the order I would need to move the money around to convert the tIRAs and/ or the 401Ks to ROTH accts, or if it is even possible. I have read the wiki and am still confused.

bloom2708
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Re: Will I be able to do a backdoor ROTH?

Post by bloom2708 » Thu Mar 07, 2019 2:33 pm

With your Traditional IRAs, you will not be able to do a Back Door Roth.

There is often a mix up between a Back Door Roth and a Roth Conversion. I think you are also crossing between them.

Roth Conversions are when your "working" income is low (between work and SS). You convert Traditional IRA to Roth and create income up to the top of the 12% bracket (example). You purposefully create income by withdrawing from the Traditional IRA.

A Back Door Roth is when you are working and exceed the income limits for married filing jointly to do the front door/regular Roth.

You contribute to a non-deductible Traditional IRA and immediately convert it to Roth. The existence of your other Traditional IRAs will block you doing a Back Door Roth. The Pro-Rata rule dictates the ratios that you can convert.

What some do is move their Traditional IRAs into their current/active 401k. This frees them to again do the Back Door Roth.

If your husband is retired, might you just qualify for regular Roth IRA contributions? The income phase out starts at around $186k for married filing jointly.

Either that or you are thinking about Roth Conversions which you typically do not want to do when one or both are working. Your work income fills up the 0, 10, 12 brackets. Then you are paying 22% or 24% tax on the conversion. Best to do once done working and before SS for both.

Since husband is already taking SS, RMDs, it might not make sense unless you have large Traditional balances. Then converting up to the 22% top might make sense.
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Earl Lemongrab
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Re: Will I be able to do a backdoor ROTH?

Post by Earl Lemongrab » Thu Mar 07, 2019 4:56 pm

Given the income numbers, you should be able to make regular Roth contributions for both of you. Did you think you couldn't? Are you talking about regular Roth conversion of pretax IRAs? You mention next year when you wouldn't have earned income for any IRA contributions.
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bluelight
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Re: Will I be able to do a backdoor ROTH?

Post by bluelight » Thu Mar 07, 2019 5:49 pm

Thanks. I do believe I have been confusing the two and need to reread the wiki.

For either to occur I would need to roll the tIRAs into my current 401K. Is that correct?

For a ROTH conversion, I would need to wait until 2020 when I have no earned income and before I take SS or my pension. Would having a small ROTH already cause any issues?

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bluelight
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Re: Will I be able to do a backdoor ROTH?

Post by bluelight » Thu Mar 07, 2019 5:53 pm

Earl Lemongrab wrote:
Thu Mar 07, 2019 4:56 pm
Given the income numbers, you should be able to make regular Roth contributions for both of you. Did you think you couldn't? Are you talking about regular Roth conversion of pretax IRAs? You mention next year when you wouldn't have earned income for any IRA contributions.
My income has been too high for a number of years to make Roth contributions. This year as I'm only working part of the year I know that I can. I was just trying to see if it was possible with my accts to move them into ROTHs.

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Earl Lemongrab
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Re: Will I be able to do a backdoor ROTH?

Post by Earl Lemongrab » Thu Mar 07, 2019 7:53 pm

bluelight wrote:
Thu Mar 07, 2019 5:49 pm
Thanks. I do believe I have been confusing the two and need to reread the wiki.

For either to occur I would need to roll the tIRAs into my current 401K. Is that correct?

For a ROTH conversion, I would need to wait until 2020 when I have no earned income and before I take SS or my pension. Would having a small ROTH already cause any issues?
Either what? To do backdoor Roth, yes you need to clear out pretax IRA holdings before the end of the year. Have you made non-deductible contributions for past years, including 2018? You should need backdoor for this year.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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bluelight
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Re: Will I be able to do a backdoor ROTH?

Post by bluelight » Thu Mar 07, 2019 10:20 pm

I meant either a backdoor Roth or Roth conversion.

I haven't made contributions to the tIRAs since 2014.

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Earl Lemongrab
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Re: Will I be able to do a backdoor ROTH?

Post by Earl Lemongrab » Fri Mar 08, 2019 12:46 am

Well, you don't roll out the TIRA if you want to do straight conversions. You also don't need to do backdoor Roth if you can make regular Roth contributions. Let's go over what is already in the IRA, and how much is pretax and how much non-deductible (and when any non-deductible contributions were made).
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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bluelight
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Re: Will I be able to do a backdoor ROTH?

Post by bluelight » Fri Mar 08, 2019 11:46 pm

I can make a roth contribution for 2019 as I will have 3 months of income.

For the tIRAs - the tIRA at Fidelity was a rollover from a prior company 401k done in 2012. There have been no other contributions. The pretax amount was 45,410. It now has a balance of 55K

The tIRA at Vanguard was a rollover from a Cash Balance retirement plan, also in 2012. Pretax amount was 48K, plus there were 2 additional post tax contributions. 2013 of 5,800 and 2015 of 6,500. current balance is 85k.

retiredjg
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Re: Will I be able to do a backdoor ROTH?

Post by retiredjg » Mon Mar 11, 2019 7:58 am

bluelight, a "backdoor Roth" is a procedure that allows people who make too much money to get money into Roth IRA. You do not need to use the back door because your income for 2019 is not going to be over the limit.

So, yes, you can go ahead and make direct contributions to Roth IRA for 2019 - 1 for you and 1 for your husband if you want. This assumes you make at least $14k this year.

You appear to have $140k in traditional IRA and $750 in 401k plans. The traditional IRA has $12,300 in basis (already taxed money). Do you have the Form 8606 that documents that $12,300 in basis?

Yes, you can convert the money in the IRAs and 401k plans to Roth. You would probably want to do some each year, not all at once to avoid paying taxes on all of it in one year. Going over certain income limits will affect other things you have to pay for.

Before you start doing Roth conversions, you need to look at all your family income (assuming you file jointly) and make a plan about how much to convert each year.

It appears that DH's SS is probably already taxed at the maximum amount (85% of his SS annuity) so increasing how much of his SS is taxed is not an issue.

The only other issue I know to look at is IRMAA - how much you and your husband pay for Medicare premiums. You may wish to convert only enough IRA/401k each year that allows you to stay under one of the IRMAA limits. Are you already familiar with IRMAA?

I realize you are not yet on Medicare, but your joint income affects what DH pays and your joint income when you are 63 will affect what you pay when you start at age 65.

Do you already have a plan for health insurance from retirement to age 65?

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Epsilon Delta
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Re: Will I be able to do a backdoor ROTH?

Post by Epsilon Delta » Mon Mar 11, 2019 12:41 pm

bluelight wrote:
Thu Mar 07, 2019 5:49 pm
Thanks. I do believe I have been confusing the two and need to reread the wiki.

For either to occur I would need to roll the tIRAs into my current 401K. Is that correct?

For a ROTH conversion, I would need to wait until 2020 when I have no earned income and before I take SS or my pension. Would having a small ROTH already cause any issues?
There are no income limits on Roth conversions. Earned income in particular is irrelevant. Anybody with a tIRA who is willing to pay the taxes can do a conversion. However since the conversions is taxed as ordinary income people with a lot of taxable income (not just earned income) will find that the taxes are high and they are not willing to pay them. So typically people should convert in low income years.

Since you retired in 2019 you should probably do a pro forma tax return to see whether 2019 will be a low income year or if it is best to wait for 2020.

Having an existing Roth IRA has no effect on contributions, conversion or, incidentally, on backdoor Roth contribution (since a backdoor Roth is a contribution followed by a conversion).

Doing a conversion requires having a tIRA. With no tIRA there is nothing to convert. If you are doing a taxable conversion to take advantage of a low tax year you do not need to roll the tIRA into a 401(k).

Xrayman69
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Re: Will I be able to do a backdoor ROTH?

Post by Xrayman69 » Mon Mar 11, 2019 4:19 pm

If the current employer has a 401k plan and permits roll over of prior employers IRAs into current 401k would this be permitted?

For example: Original employer 401k was rolled over to IRA when leaving job. New employer has 401k which current employee contributes and current plans would accept roll over

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Re: Will I be able to do a backdoor ROTH?

Post by Earl Lemongrab » Mon Mar 11, 2019 4:44 pm

Xrayman69 wrote:
Mon Mar 11, 2019 4:19 pm
If the current employer has a 401k plan and permits roll over of prior employers IRAs into current 401k would this be permitted?

For example: Original employer 401k was rolled over to IRA when leaving job. New employer has 401k which current employee contributes and current plans would accept roll over
Any pretax IRA amounts can be rolled into a qualified plan if the plan permits.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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bluelight
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Re: Will I be able to do a backdoor ROTH?

Post by bluelight » Mon Mar 11, 2019 6:32 pm

retiredjg wrote:
Mon Mar 11, 2019 7:58 am

You appear to have $140k in traditional IRA and $750 in 401k plans. The traditional IRA has $12,300 in basis (already taxed money). Do you have the Form 8606 that documents that $12,300 in basis?
Yes, I have an 8606 that shows 12k in basis. Somehow when I gave the figures to MIL's CPA who did our taxes the last year that I made tIRA contributions, the $300 got lost. I didn't realize the significance of the 8606 at that time.
Yes, you can convert the money in the IRAs and 401k plans to Roth. You would probably want to do some each year, not all at once to avoid paying taxes on all of it in one year. Going over certain income limits will affect other things you have to pay for.

Before you start doing Roth conversions, you need to look at all your family income (assuming you file jointly) and make a plan about how much to convert each year.

It appears that DH's SS is probably already taxed at the maximum amount (85% of his SS annuity) so increasing how much of his SS is taxed is not an issue.
I've been better at saving and LBYM than planning for retirement. I believe that if I hold off on taking SS and my pension and use our taxable savings accounts to augment his SS and pension, that I can keep our tax bracket low(er) for the next few years. I'm already at 50K income through the end of March, so I'll just have to use this year to set the accounts up and add to our Roths.
The only other issue I know to look at is IRMAA - how much you and your husband pay for Medicare premiums. You may wish to convert only enough IRA/401k each year that allows you to stay under one of the IRMAA limits. Are you already familiar with IRMAA?
I have never heard of IRMAA, but will look that up.
I realize you are not yet on Medicare, but your joint income affects what DH pays and your joint income when you are 63 will affect what you pay when you start at age 65.
Thank you, I did not know that.
Do you already have a plan for health insurance from retirement to age 65?
For this year I'll continue Cobra. I switched to an HSA plan in Jan. and am almost at my out of pocket for this year. Compared to decent plans on the exchange, I think I am getting more for less on Cobra.

Thank you again for your input retiredg. You have given me excellent advice in the past and are a true asset to this community.

retiredjg
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Re: Will I be able to do a backdoor ROTH?

Post by retiredjg » Tue Mar 12, 2019 10:18 am

bluelight wrote:
Mon Mar 11, 2019 6:32 pm
Yes, I have an 8606 that shows 12k in basis. Somehow when I gave the figures to MIL's CPA who did our taxes the last year that I made tIRA contributions, the $300 got lost. I didn't realize the significance of the 8606 at that time.
You can correct that last year's 8606 just by sending in a hand written corrected form to the IRS if you want. You'll have to let your CPA know so that can be updated in their software records.

When you take money out of IRA to use or to convert to Roth, the amount of tax you pay on the amount withdrawn is pro-rated across your entire IRA with the $12k basis. In other words, just a little bit will be untaxed each time because you have already paid tax on that $12k. As an example, if you take out $10k you may only pay tax on $9,750 (made up numbers).
I believe that if I hold off on taking SS and my pension and use our taxable savings accounts to augment his SS and pension, that I can keep our tax bracket low(er) for the next few years. I'm already at 50K income through the end of March, so I'll just have to use this year to set the accounts up and add to our Roths.
As you get a feeling for your future tax bracket, you can use that to help determine how much/if to do any Roth conversions. For example, if your income puts you in the 22% bracket, consider converting up to the top of the 22% bracket or to the next IRMAA tier (whichever is lower - usually the IRMAA tier I think).

I have never heard of IRMAA, but will look that up.
IRMAA means " income-related monthly adjustment amount". Essentially, it's a system where people with lower income pay less for Medicare. People with higher income pay more for Medicare.

This thread has a pretty good discussion of things to consider when you are doing Roth conversions. It will get you started on IRMAA.

viewtopic.php?t=170477

Topic Author
bluelight
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Re: Will I be able to do a backdoor ROTH?

Post by bluelight » Wed Mar 13, 2019 4:11 pm

Thank you. I will review the Roth conversion topics.

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