My "simple" Backdoor Roth Conversion

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Topic Author
cognovimus
Posts: 79
Joined: Sat Aug 10, 2019 1:07 pm

My "simple" Backdoor Roth Conversion

Post by cognovimus » Mon Sep 23, 2019 4:12 am

Both my spouse and I have modest amounts in "nondeductible" IRAs accumulated over the years 2013-2019. My spouse's situation is far more complex, so I'm trying to address my "simple" conversion first.

If I retire as of the end of this year as planned, I will not be making further contributions to the nondeductible IRA.

Current cost basis: $46,000. Current total gain: approx. $9600

I also have two rollover IRAs (one at Fidelity, one elsewhere) which were originally made with pretax (deductible) money. I would like to move these rollover IRAs to my 401K account (Fidelity is custodian) so all the tax privileged money is in the 401K before the end of 2019.

Once the rollover money is in the 401K:

In 2020 (when I am 63) to convert the nondeductible IRA $ to a Roth IRA:

1. Open a Roth
2. Move the nondeductible IRA $ into the Roth (some may be in kind, but the one from outside Fidelity will likely have to be in new funds)
3. Pay taxes on the $9600 or whatever the gain is as of the conversion date. (What if the recession comes and it's a loss by then?)

In this case, no need to calculate a pro-ration ratio or anything?

As long as these are prior year conversions, it seems 2020 would be the ideal time to do the conversion because in 2021-2023, we may be managing income for ACA purposes.

Will Turbo Tax lead me through this at tax time?

Thank you for the input.

HomeStretch
Posts: 2916
Joined: Thu Dec 27, 2018 3:06 pm

Re: My "simple" Backdoor Roth Conversion

Post by HomeStretch » Mon Sep 23, 2019 5:06 am

The steps you listed are correct.

As long as you have $0 pretax IRA balance at December 31, your conversion is not subject to the pro rata rule. Confirm that your 401k plan accepts rollovers in. Start the process soon to allow time for the rollovers to be completed prior to your year-end retirement date especially if your non-Fidelity IRA rollover cannot be done as a direct trustee-to-trustee transfer.

The $9,600 earnings on the non-deductible IRA contributions are subject to tax as you noted. If the value of the IRA declined, a loss is not deductible and goes away after the conversion of the IRA balance.

Assuming your 401k rollovers are completed by 12/31/19, why wait until 2020 to do the conversion? Is it to recognize the $9,600 earnings as income in a lower tax year after retirement?

Yes, TurboTax will walk you through reporting the conversion in your tax return. Did you file Forms 8606 in in years you made non-deductible IRA contributions?

Topic Author
cognovimus
Posts: 79
Joined: Sat Aug 10, 2019 1:07 pm

Re: My "simple" Backdoor Roth Conversion

Post by cognovimus » Mon Sep 23, 2019 5:21 pm

HomeStretch wrote:
Mon Sep 23, 2019 5:06 am
The steps you listed are correct.

As long as you have $0 pretax IRA balance at December 31, your conversion is not subject to the pro rata rule. Confirm that your 401k plan accepts rollovers in. Start the process soon to allow time for the rollovers to be completed prior to your year-end retirement date especially if your non-Fidelity IRA rollover cannot be done as a direct trustee-to-trustee transfer.

The $9,600 earnings on the non-deductible IRA contributions are subject to tax as you noted. If the value of the IRA declined, a loss is not deductible and goes away after the conversion of the IRA balance.

Assuming your 401k rollovers are completed by 12/31/19, why wait until 2020 to do the conversion? Is it to recognize the $9,600 earnings as income in a lower tax year after retirement?

Yes, TurboTax will walk you through reporting the conversion in your tax return. Did you file Forms 8606 in in years you made non-deductible IRA contributions?
Thank you.

Yes, I already confirmed the 401K will accept transfers in. Hope both "roll ins" will be trustee to trustee. We have Fidelity's instructions for how to make out the check to facilitate that.

Yes, my W2 income will stop in January, so in 2020 we will be in a lower tax bracket.

Since I have used Turbo Tax during the filing years referenced, I believethe 8606 was included in my filing. It prints out as part of my tax forms (which are filed electronically).

cherijoh
Posts: 6357
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: My "simple" Backdoor Roth Conversion

Post by cherijoh » Mon Sep 23, 2019 5:46 pm

cognovimus wrote:
Mon Sep 23, 2019 4:12 am
Both my spouse and I have modest amounts in "nondeductible" IRAs accumulated over the years 2013-2019. My spouse's situation is far more complex, so I'm trying to address my "simple" conversion first.

If I retire as of the end of this year as planned, I will not be making further contributions to the nondeductible IRA.

Current cost basis: $46,000. Current total gain: approx. $9600

I also have two rollover IRAs (one at Fidelity, one elsewhere) which were originally made with pretax (deductible) money. I would like to move these rollover IRAs to my 401K account (Fidelity is custodian) so all the tax privileged money is in the 401K before the end of 2019.

Once the rollover money is in the 401K:

In 2020 (when I am 63) to convert the nondeductible IRA $ to a Roth IRA:

1. Open a Roth
2. Move the nondeductible IRA $ into the Roth (some may be in kind, but the one from outside Fidelity will likely have to be in new funds)
3. Pay taxes on the $9600 or whatever the gain is as of the conversion date. (What if the recession comes and it's a loss by then?)

In this case, no need to calculate a pro-ration ratio or anything?

As long as these are prior year conversions, it seems 2020 would be the ideal time to do the conversion because in 2021-2023, we may be managing income for ACA purposes.

Will Turbo Tax lead me through this at tax time?

Thank you for the input.
Everyone who does a Roth Conversion has to fill out a form 8606. Hopefully, you have been filling out the part that tracks your non-deductible contributions all along. If not, you can go back , fill them out and send them to the IRS.

Technically, you will be calculating the taxable portion of the conversion in the exact same way you would with the the pro-rata calculation that is used when you only convert part of your balance (or have other traditional IRAs). The only difference is that you don't have to track the remaining basis since you would be bringing the IRA balance to zero.

If the market tanks, I think you want to leave a little amount in the account so that it stays open and you can maintain the left over basis. But I'm not an expert in this area and may be wrong. If it looks like that might happen, I'd post a separate thread with a more descriptive title. Alan S. is very good about weighing in on thorny IRA questions.

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FiveK
Posts: 7841
Joined: Sun Mar 16, 2014 2:43 pm

Re: My "simple" Backdoor Roth Conversion

Post by FiveK » Mon Sep 23, 2019 9:51 pm

Does your plan also allow you to roll the $9600 into the 401k? Some plans will - don't know if it is by choice or by rule that you aren't doing so.

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