Yet another Backdoor Roth question

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Topic Author
wwsdt
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Joined: Wed Apr 18, 2018 6:31 pm

Yet another Backdoor Roth question

Post by wwsdt » Sat Aug 10, 2019 6:44 pm

First-time poster. I have learned a tremendous amount from reading this forum over the years. My apologies if this question is too basic, but I am about to attempt the Backdoor Roth for the first time and want to make sure I have the correct understanding of how to do this.

Some background information:

--I max out 403b contributions at 19K.
--Wife maxes out 403b and 457 contributions at 19K each.
--Our MAGI is too high to qualify for Roth IRA contributions.
--I own a tIRA with $160K balance.
--Wife does not own a tIRA.
--We both own Roth IRAs.
--We are in our 40s.

My understanding is that:

(1) The Backdoor Roth for my wife would be fairly simple. She should open a tIRA, contribute the $6K after taxes, and then transfer this to her Roth IRA. Is this correct? Is 6K the limit?

(2) Because I already have a tIRA, I’d have to convert the whole tIRA to a Roth in order to get the full benefit of the Backdoor Roth. Is that correct? (If so, it’s probably not worthwhile given the large balance of the tIRA).

Thank you in advance for your help and suggestions.

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Duckie
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Re: Yet another Backdoor Roth question

Post by Duckie » Sat Aug 10, 2019 6:52 pm

wwsdt wrote:Because I already have a tIRA, I’d have to convert the whole tIRA to a Roth in order to get the full benefit of the Backdoor Roth. Is that correct? (If so, it’s probably not worthwhile given the large balance of the tIRA).
That would be one way to avoid the pro-rata rule, but it's too expensive. A better option would be to roll your TIRA into your 403b if allowed and if the 403b options are decent. Or you could just forgo your backdoor Roth and contribute to taxable instead.

Topic Author
wwsdt
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Re: Yet another Backdoor Roth question

Post by wwsdt » Sat Aug 10, 2019 6:55 pm

Thank you. Yes, that could be a good option. I need to check if that's allowed. My 403b options are very good. Currently have most of that in FXAIX. If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?

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Duckie
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Re: Yet another Backdoor Roth question

Post by Duckie » Sat Aug 10, 2019 7:00 pm

wwsdt wrote:The Backdoor Roth for my wife would be fairly simple. She should open a tIRA, contribute the $6K after taxes, and then transfer this to her Roth IRA. Is this correct?
Yes. She should take a look at IRS Form 8606 so she'll be familiar with it for tax season.
Is 6K the limit?
Yes, if under age 50.
If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?
Yes. Because there is no longer a do-over (you can't recharacterize conversions anymore) you have to do the rollover first just in case there is a glitch.

HomeStretch
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Re: Yet another Backdoor Roth question

Post by HomeStretch » Sat Aug 10, 2019 8:09 pm

Have all contributions to your traditional IRA been pretax contributions or do you have any basis (due to non-deductible contributions)?

Edited for typo
Last edited by HomeStretch on Sun Aug 11, 2019 9:13 am, edited 1 time in total.

Topic Author
wwsdt
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Joined: Wed Apr 18, 2018 6:31 pm

Re: Yet another Backdoor Roth question

Post by wwsdt » Sun Aug 11, 2019 8:33 am

HomeStretch wrote:
Sat Aug 10, 2019 8:09 pm
Have all contributions to your traditional IRA been pretax contributions or do you have any basis (due to non-deductiblle contributions)?
Yes, they have all been pre-tax. Thanks!

Topic Author
wwsdt
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Re: Yet another Backdoor Roth question

Post by wwsdt » Sun Aug 11, 2019 8:34 am

Duckie wrote:
Sat Aug 10, 2019 7:00 pm
wwsdt wrote:The Backdoor Roth for my wife would be fairly simple. She should open a tIRA, contribute the $6K after taxes, and then transfer this to her Roth IRA. Is this correct?
Yes. She should take a look at IRS Form 8606 so she'll be familiar with it for tax season.
Is 6K the limit?
Yes, if under age 50.
If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?
Yes. Because there is no longer a do-over (you can't recharacterize conversions anymore) you have to do the rollover first just in case there is a glitch.
Thank you so much. This was very helpful!

panhead
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Re: Yet another Backdoor Roth question

Post by panhead » Mon Aug 12, 2019 6:31 am

wwsdt wrote:
Sat Aug 10, 2019 6:55 pm
Thank you. Yes, that could be a good option. I need to check if that's allowed. My 403b options are very good. Currently have most of that in FXAIX. If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?
Just a quick comment that the order you do these things does not matter. All that matters is that your tIRA balance is -0- at years end. If you want clarificaiton, just look at form 8606.

cherijoh
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Location: Charlotte NC

Re: Yet another Backdoor Roth question

Post by cherijoh » Mon Aug 12, 2019 6:46 am

wwsdt wrote:
Sat Aug 10, 2019 6:55 pm
Thank you. Yes, that could be a good option. I need to check if that's allowed. My 403b options are very good. Currently have most of that in FXAIX. If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?
Please don't use the word "transfer" - it is a Roth conversion. Yes, if you can roll your current tIRA balance into a workplace plan, you could make a 2019 after-tax contribution and convert it to a Roth IRA. Somtimes, the tIRA will earn a few pennies of interest/dividends before your conversion is complete. Convert the entire balance of the tIRA ($6000.xx) - you would only owe taxes on the $0.xx.

retiredjg
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Re: Yet another Backdoor Roth question

Post by retiredjg » Mon Aug 12, 2019 6:49 am

wwsdt wrote:
Sat Aug 10, 2019 6:55 pm
If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?
This is the suggested order, but you are not prohibited from doing it in the other order.

The problem is that 403b plans are allowed to be picky about what they accept. Occasionally, there can be a last minute glitch and they may not accept the rollover or it may happen later than expected (in the next tax year). If either of those happen, you don't want to have already done the "back door" on your $6k.

So it is wiser to do the rollover into 403b first.

We are assuming your "whole existing tIRA balance" is made up of only pre-tax money. If that is incorrect, this conversation needs to start over at the beginning.

Topic Author
wwsdt
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Re: Yet another Backdoor Roth question

Post by wwsdt » Mon Aug 12, 2019 5:32 pm

cherijoh wrote:
Mon Aug 12, 2019 6:46 am
wwsdt wrote:
Sat Aug 10, 2019 6:55 pm
Thank you. Yes, that could be a good option. I need to check if that's allowed. My 403b options are very good. Currently have most of that in FXAIX. If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?
Please don't use the word "transfer" - it is a Roth conversion. Yes, if you can roll your current tIRA balance into a workplace plan, you could make a 2019 after-tax contribution and convert it to a Roth IRA. Somtimes, the tIRA will earn a few pennies of interest/dividends before your conversion is complete. Convert the entire balance of the tIRA ($6000.xx) - you would only owe taxes on the $0.xx.
Thank you for your help. I'm afraid your comment made me a bit confused again, with the fault for this lying entirely on my end. Would you mind helping me clarify?

Let's focus on my wife's case, which may be simpler. She has no tIRA and has a Roth IRA. My understanding is that she should (1) open a tIRA; (2) contribute $6k to the tIRA; and then (3) move those funds to her Roth IRA. That "move" is what I previously referred to as a "transfer (except that in the quoted I was referring to my case).

Is step (3) what you're referring to as a conversion? Does the conversion mean the funds stay in the tIRA and that the tIRA is converted to a Roth IRA or does the conversion mean that the funds that were in the tIRA will now be in the Roth IRA? Thank you in advance.

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Duckie
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Re: Yet another Backdoor Roth question

Post by Duckie » Mon Aug 12, 2019 5:46 pm

wwsdt wrote:Is step (3) what you're referring to as a conversion?
Yes.
Does the conversion mean the funds stay in the tIRA and that the tIRA is converted to a Roth IRA or does the conversion mean that the funds that were in the tIRA will now be in the Roth IRA?
The funds move from the TIRA to the Roth IRA. The TIRA stays the way it was. Conversion is the correct term for this type of transfer because you aren't just moving from one account to another, you are changing the status of the assets. You are "converting" them from pre-tax and/or after-tax to Roth. The IRS labels this change of status a conversion.

Topic Author
wwsdt
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Re: Yet another Backdoor Roth question

Post by wwsdt » Mon Aug 12, 2019 5:48 pm

Duckie wrote:
Mon Aug 12, 2019 5:46 pm
wwsdt wrote:Is step (3) what you're referring to as a conversion?
Yes.
Does the conversion mean the funds stay in the tIRA and that the tIRA is converted to a Roth IRA or does the conversion mean that the funds that were in the tIRA will now be in the Roth IRA?
The funds move from the TIRA to the Roth IRA. The TIRA stays the way it was. Conversion is the correct term for this type of transfer because you aren't just moving from one account to another, you are changing the status of the assets. You are "converting" them from pre-tax and/or after-tax to Roth. The IRS labels this change of status a conversion.
Thank you so much. This confirms what I thought, but wanted to double-check.

cherijoh
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Location: Charlotte NC

Re: Yet another Backdoor Roth question

Post by cherijoh » Mon Aug 12, 2019 6:16 pm

wwsdt wrote:
Mon Aug 12, 2019 5:32 pm
cherijoh wrote:
Mon Aug 12, 2019 6:46 am
wwsdt wrote:
Sat Aug 10, 2019 6:55 pm
Thank you. Yes, that could be a good option. I need to check if that's allowed. My 403b options are very good. Currently have most of that in FXAIX. If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?
Please don't use the word "transfer" - it is a Roth conversion. Yes, if you can roll your current tIRA balance into a workplace plan, you could make a 2019 after-tax contribution and convert it to a Roth IRA. Somtimes, the tIRA will earn a few pennies of interest/dividends before your conversion is complete. Convert the entire balance of the tIRA ($6000.xx) - you would only owe taxes on the $0.xx.
Thank you for your help. I'm afraid your comment made me a bit confused again, with the fault for this lying entirely on my end. Would you mind helping me clarify?

Let's focus on my wife's case, which may be simpler. She has no tIRA and has a Roth IRA. My understanding is that she should (1) open a tIRA; (2) contribute $6k to the tIRA; and then (3) move those funds to her Roth IRA. That "move" is what I previously referred to as a "transfer (except that in the quoted I was referring to my case).

Is step (3) what you're referring to as a conversion? Does the conversion mean the funds stay in the tIRA and that the tIRA is converted to a Roth IRA or does the conversion mean that the funds that were in the tIRA will now be in the Roth IRA? Thank you in advance.
The accounts are just containers to hold different types of funds by tax treatment (i.e., taxable, traditional and Roth). Once you open an account the account type will NOT change.

The funds themselves are converted from traditional tax treatment (i.e., before tax) to Roth and will then show up in your Roth IRA. The conversion process is needed to make the funds eligible to be moved into a Roth.

My point was that if you use the wrong terminology you may get results that you don't expect. But if you told a CSR that you wanted to do a Roth conversion they would know exactly what you wanted. If you say transfer they might think you want to move the money from one tIRA to another custodian or between a mutual fund account and a brokerage account.

On a related note, people have gotten tripped up because they think there is a PRODUCT called a Backdoor Roth IRA that they can open up and fund. It is simply a nickname for the two step process of (1) making a non-deductible tIRA contribution and turning around and (2) doing a Roth conversion on these same funds. If you don't have a balance in a tIRA, your basis for the conversion will be the total amount of the contribution (absent any earnings in the tIRA) so you wouldn't pay any additional taxes on the converted amount. In other words, it is a "back door" way to put money in a Roth when you earn too much to do it directly.

The rub of course is that it you have other funds in your tIRA (or any other tIRA) you have to calculate your taxes using the pro rata rules and will be converting a mixture of pre-tax and after tax funds. The remaining after-tax basis stays in your tIRA.

Hope this clears some of this up.
Last edited by cherijoh on Mon Aug 12, 2019 6:50 pm, edited 1 time in total.

Topic Author
wwsdt
Posts: 8
Joined: Wed Apr 18, 2018 6:31 pm

Re: Yet another Backdoor Roth question

Post by wwsdt » Mon Aug 12, 2019 6:18 pm

cherijoh wrote:
Mon Aug 12, 2019 6:16 pm
wwsdt wrote:
Mon Aug 12, 2019 5:32 pm
cherijoh wrote:
Mon Aug 12, 2019 6:46 am
wwsdt wrote:
Sat Aug 10, 2019 6:55 pm
Thank you. Yes, that could be a good option. I need to check if that's allowed. My 403b options are very good. Currently have most of that in FXAIX. If I go down this route, would I first roll the whole existing tIRA balance into the 403b, then contribute 6K to the tIRA, then transfer that to the Roth IRA?
Please don't use the word "transfer" - it is a Roth conversion. Yes, if you can roll your current tIRA balance into a workplace plan, you could make a 2019 after-tax contribution and convert it to a Roth IRA. Somtimes, the tIRA will earn a few pennies of interest/dividends before your conversion is complete. Convert the entire balance of the tIRA ($6000.xx) - you would only owe taxes on the $0.xx.
Thank you for your help. I'm afraid your comment made me a bit confused again, with the fault for this lying entirely on my end. Would you mind helping me clarify?

Let's focus on my wife's case, which may be simpler. She has no tIRA and has a Roth IRA. My understanding is that she should (1) open a tIRA; (2) contribute $6k to the tIRA; and then (3) move those funds to her Roth IRA. That "move" is what I previously referred to as a "transfer (except that in the quoted I was referring to my case).

Is step (3) what you're referring to as a conversion? Does the conversion mean the funds stay in the tIRA and that the tIRA is converted to a Roth IRA or does the conversion mean that the funds that were in the tIRA will now be in the Roth IRA? Thank you in advance.
The accounts are just containers to hold different types of funds by tax treatment (i.e., taxable, traditional and Roth). Once you open an account the account type will NOT change.

The funds themselves are converted from traditional tax treatment (i.e., before tax) to Roth and will then show up in your Roth IRA. The conversion process is needed to make the funds eligible to be moved into a Roth.

My point was that if you use the wrong terminology you may get results that you don't expect. But if you told a CSR that you wanted to do a Roth conversion they would know exactly what you wanted. If you say transfer they might think you want to move the money from one tIRA to another custodian or between a mutual fund account and a brokerage account.

On a related note, people have gotten tripped up because they think there is a PRODUCT called a Backdoor Roth IRA that they can open up and fund. It is simply a nickname for the two step process of (1) making a non-deductible tIRA contribution and turning around and (2) doing a Roth conversion on these same funds. If you don't have a balance in a tIRA, your basis for the conversion will be the total amount of the contribution (absent any earnings in the tIRA) so you would't pay any additional taxes on the converted amount. In other words, it is a "back door" way to put money in a Roth when you earn too much to do it directly.

The rub of course is that it you have other funds in your tIRA (or any other tIRA) you have to calculate your taxes using the pro rata rules and will be converting a mixture of pre-tax and after tax funds. The remaining after-tax basis stays in your tIRA.

Hope this clears some of this up.
It does. Thank you!

rkhusky
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Re: Yet another Backdoor Roth question

Post by rkhusky » Mon Aug 12, 2019 7:39 pm

wwsdt wrote:
Sat Aug 10, 2019 6:44 pm

(1) The Backdoor Roth for my wife would be fairly simple. She should open a tIRA, contribute the $6K after taxes, and then transfer this to her Roth IRA.
Make sure that you don't deduct the tIRA contribution on your taxes.

BarDownHockey
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Re: Yet another Backdoor Roth question

Post by BarDownHockey » Mon Aug 12, 2019 9:27 pm

rkhusky wrote:
Mon Aug 12, 2019 7:39 pm
Make sure that you don't deduct the tIRA contribution on your taxes.
When people say, “make a non-deductible contribution to your tIRA”, practically speaking is this what they mean? Forgive the newbie question, but I’m trying to do a Backdoor Roth too and didn’t know how to contribute the funds to my tIRA in a non-deductable manner.

abyan
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Re: Yet another Backdoor Roth question

Post by abyan » Mon Aug 12, 2019 9:32 pm

Take this with a grain of salt, but the folks at Vanguard told me, when I asked the same question, there is no difference in the way you contribute it. It’s more a matter of your record keeping and what you file with the IRS a tax time.

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MP123
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Re: Yet another Backdoor Roth question

Post by MP123 » Mon Aug 12, 2019 9:58 pm

BarDownHockey wrote:
Mon Aug 12, 2019 9:27 pm
rkhusky wrote:
Mon Aug 12, 2019 7:39 pm
Make sure that you don't deduct the tIRA contribution on your taxes.
When people say, “make a non-deductible contribution to your tIRA”, practically speaking is this what they mean? Forgive the newbie question, but I’m trying to do a Backdoor Roth too and didn’t know how to contribute the funds to my tIRA in a non-deductable manner.
That's right, you won't deduct it on your taxes.

Instead you'll file a form 8606 with your taxes which records the fact that you've made a non-deductible contribution.

The actual contribution itself is the same either way. Just send your check or transfer online, you don't need to (and can't) designate whether the contribution is deductible or not at that point.

lakpr
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Re: Yet another Backdoor Roth question

Post by lakpr » Mon Aug 12, 2019 10:19 pm

abyan wrote:
Mon Aug 12, 2019 9:32 pm
Take this with a grain of salt, but the folks at Vanguard told me, when I asked the same question, there is no difference in the way you contribute it. It’s more a matter of your record keeping and what you file with the IRS a tax time.
This is exactly true, nothing “grain of salt” involved here. The deductibility of the IRA contributions or not, is between you and the IRS. Not sure how Vanguard can or should know it.

retiredjg
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Re: Yet another Backdoor Roth question

Post by retiredjg » Tue Aug 13, 2019 5:51 am

rkhusky wrote:
Mon Aug 12, 2019 7:39 pm
wwsdt wrote:
Sat Aug 10, 2019 6:44 pm

(1) The Backdoor Roth for my wife would be fairly simple. She should open a tIRA, contribute the $6K after taxes, and then transfer this to her Roth IRA.
Make sure that you don't deduct the tIRA contribution on your taxes.
Even if a person did deduct this on their taxes, the result would be the same if they do a Roth conversion. It is either "taken off the top" and then taxed because of the conversion or not taken off the top and not taxed because of the conversion.

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Yet another Backdoor Roth question

Post by rkhusky » Tue Aug 13, 2019 7:53 am

retiredjg wrote:
Tue Aug 13, 2019 5:51 am
rkhusky wrote:
Mon Aug 12, 2019 7:39 pm
wwsdt wrote:
Sat Aug 10, 2019 6:44 pm

(1) The Backdoor Roth for my wife would be fairly simple. She should open a tIRA, contribute the $6K after taxes, and then transfer this to her Roth IRA.
Make sure that you don't deduct the tIRA contribution on your taxes.
Even if a person did deduct this on their taxes, the result would be the same if they do a Roth conversion. It is either "taken off the top" and then taxed because of the conversion or not taken off the top and not taxed because of the conversion.
Right. You have to make sure you are consistent. I imagine though if you have to do a Backdoor Roth, that you would be ineligible to deduct the tIRA contribution in the first place, which tax programs and accountants should catch.

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