tIRA to backdoor Roth but missed 60 day conversion

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Topic Author
rippler
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tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 10:02 am

I already paid taxes on my tIRA investment that I think I should have converted in 60 days to backdoor Roth IRA. Am I in some jeopardy for not doing the conversion in 60 days? I already paid taxes on the initial tIRA investment that I set up just for the backdoor plan. What to do? I have no excuses.

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Wed Oct 09, 2019 10:06 am

If you made a non-deductible contribution to tIRA, there is no 60 days in which to convert that to Roth IRA. It can be converted to Roth the next day or a decade or more later. You will pay taxes on the earnings that occur before the conversion, so most people like to do it right away.

Did you/do you plan to fill out Form 8606 to document this non-deductible contribution?

lakpr
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by lakpr » Wed Oct 09, 2019 10:09 am

I am not sure where you get the idea that the non-deductible contributions to tIRA must be converted to Roth IRA within 60 days. You can do so at any time.

The only 60 day rule I am aware of is “indirect rollover” of IRA funds (traditional or Roth) from one custodian to another. Your post sounds like you made a contribution to n-d-tIRA at one custodian, and trying to convert to Roth at the same custodian. So this rule does not apply to you

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 10:17 am

retiredjg wrote:
Wed Oct 09, 2019 10:06 am
If you made a non-deductible contribution to tIRA, there is no 60 days in which to convert that to Roth IRA. It can be converted to Roth the next day or a decade or more later. You will pay taxes on the earnings that occur before the conversion, so most people like to do it right away.

Did you/do you plan to fill out Form 8606 to document this non-deductible contribution?
I'm ok then. I did not fill out an 8606. Is there a time issue to complete and submit that? And I'm guessing it's required because you asked.

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 10:21 am

lakpr wrote:
Wed Oct 09, 2019 10:09 am
I am not sure where you get the idea that the non-deductible contributions to tIRA must be converted to Roth IRA within 60 days. You can do so at any time.

The only 60 day rule I am aware of is “indirect rollover” of IRA funds (traditional or Roth) from one custodian to another. Your post sounds like you made a contribution to n-d-tIRA at one custodian, and trying to convert to Roth at the same custodian. So this rule does not apply to you
I am trying to use the same custodian for the n-d-tIRA to Roth. So from your response and the other person's response I see that the 60 day conversion does not apply. The other post asked about a form 8606 so I'm trying ascertain if that's something I should do and when I should do it. Thanks!

terran
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by terran » Wed Oct 09, 2019 10:23 am

Form 8606 should be filed with your taxes for the year in which you did the conversion.

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 10:28 am

terran wrote:
Wed Oct 09, 2019 10:23 am
Form 8606 should be filed with your taxes for the year in which you did the conversion.
Taxes are now being filed electronically by my CPA, today. Can I file it separate from that?

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 10:33 am

I just looked at my return. Form 8606 is in there so I guess I wasted everyone's time. But this sure is ridiculous to figure out.

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 10:34 am

Thanks for taking care of me. Where do I send the check? :D

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Wed Oct 09, 2019 10:34 am

rippler wrote:
Wed Oct 09, 2019 10:17 am
I'm ok then. I did not fill out an 8606. Is there a time issue to complete and submit that? And I'm guessing it's required because you asked.
If you made the non-deductible contribution in 2019, you will fill out that form 8606 with your 2019 taxes next spring. The front side of the form documents that the contribution was non-deductible. You show the Roth conversion on the back of the form. That is also where you calculate how much of the conversion (if any) is taxable.

If you do not do your own taxes, do not depend on your tax person to know how to handle this. Many do not.

The fact that you don't know about the form is very concerning. It shows you really are not sure what you are doing. You need to get educated on this NOW. Do not wait till tax time. In fact, find a form 8606 on the internet and work through it in pencil.

There is a wiki page that discusses the "back door". The link to the Wiki is above in the center.

Here is another good resource. https://thefinancebuff.com/the-backdoor ... ow-to.html


Do you have any other IRAs that are not Roth IRAs? If yes, this gets a lot more complicated.

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Wed Oct 09, 2019 10:35 am

terran wrote:
Wed Oct 09, 2019 10:23 am
Form 8606 should be filed with your taxes for the year in which you did the conversion.
And the year for which you made the contribution (if both not in the same year).

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Wed Oct 09, 2019 10:37 am

rippler wrote:
Wed Oct 09, 2019 10:33 am
I just looked at my return. Form 8606 is in there so I guess I wasted everyone's time. But this sure is ridiculous to figure out.
Did you do this contribution and conversion all in 2018?

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 10:40 am

retiredjg wrote:
Wed Oct 09, 2019 10:37 am
rippler wrote:
Wed Oct 09, 2019 10:33 am
I just looked at my return. Form 8606 is in there so I guess I wasted everyone's time. But this sure is ridiculous to figure out.
Did you do this contribution and conversion all in 2018?
I set up the n-d-tIRA 4/2019 for tax year 2018. I haven't converted it yet.

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Wed Oct 09, 2019 11:13 am

rippler wrote:
Wed Oct 09, 2019 10:40 am
retiredjg wrote:
Wed Oct 09, 2019 10:37 am
rippler wrote:
Wed Oct 09, 2019 10:33 am
I just looked at my return. Form 8606 is in there so I guess I wasted everyone's time. But this sure is ridiculous to figure out.
Did you do this contribution and conversion all in 2018?
I set up the n-d-tIRA 4/2019 for tax year 2018. I haven't converted it yet.
Ok. Your 2018 Form 8606 should document that 2018 contribution. If lines 1, 3, and 14 say $6k/$7k then you are OK for now.

What about other IRAs? Do you have any?

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 11:29 am

retiredjg wrote:
Wed Oct 09, 2019 11:13 am
rippler wrote:
Wed Oct 09, 2019 10:40 am
retiredjg wrote:
Wed Oct 09, 2019 10:37 am
rippler wrote:
Wed Oct 09, 2019 10:33 am
I just looked at my return. Form 8606 is in there so I guess I wasted everyone's time. But this sure is ridiculous to figure out.
Did you do this contribution and conversion all in 2018?
I set up the n-d-tIRA 4/2019 for tax year 2018. I haven't converted it yet.
Ok. Your 2018 Form 8606 should document that 2018 contribution. If lines 1, 3, and 14 say $6k/$7k then you are OK for now.

What about other IRAs? Do you have any?
I just set up a SEP-IRA. That's all I have.

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 11:36 am

I just converted the n-d-tIRA to a Roth IRA for $6500. Should I close the n-d-tIRA acct or leave it to fund again for 2019?

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David Jay
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by David Jay » Wed Oct 09, 2019 11:45 am

The holdings in the SEP-IRA will create a cost basis for the Roth conversion. You may wish to consider a Simple-401K (if you are eligible) instead of the SEP-IRA.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 12:49 pm

David Jay wrote:
Wed Oct 09, 2019 11:45 am
The holdings in the SEP-IRA will create a cost basis for the Roth conversion. You may wish to consider a Simple-401K (if you are eligible) instead of the SEP-IRA.
I'll look into the simple 401k.

lakpr
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by lakpr » Wed Oct 09, 2019 12:59 pm

rippler wrote:
Wed Oct 09, 2019 11:29 am
I just set up a SEP-IRA. That's all I have.
Hope you have not contributed anything to this SEP-IRA. At least not as traditional contributions. If you did, then the pro-rata rule will apply on your Roth conversion you said you made today, if you don't remove or convert-to-Roth those contributions prior to December 31, 2019.

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rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 1:09 pm

David Jay wrote:
Wed Oct 09, 2019 11:45 am
The holdings in the SEP-IRA will create a cost basis for the Roth conversion. You may wish to consider a Simple-401K (if you are eligible) instead of the SEP-IRA.
Back to the question about the accrued income in the n-d-tIRA ($58.40), should I just close out the n-d-tIRA and pay taxes on that $58.40 in 2019? Do I need to close the tIRA acct that I set up and just open another one for the same play as I did for 2018 (contribute to n-d-tIRA and then backdoor convert)?

I read that this process can be done every year but I didn't read if I use the same accoutns or if they have to be new tIRA and new Roth accounts.

lakpr
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by lakpr » Wed Oct 09, 2019 1:12 pm

rippler wrote:
Wed Oct 09, 2019 1:09 pm
David Jay wrote:
Wed Oct 09, 2019 11:45 am
The holdings in the SEP-IRA will create a cost basis for the Roth conversion. You may wish to consider a Simple-401K (if you are eligible) instead of the SEP-IRA.
Back to the question about the accrued income in the n-d-tIRA ($58.40), should I just close out the n-d-tIRA and pay taxes on that $58.40 in 2019? Do I need to close the tIRA acct that I set up and just open another one for the same play as I did for 2018 (contribute to n-d-tIRA and then backdoor convert)?

I read that this process can be done every year but I didn't read if I use the same accoutns or if they have to be new tIRA and new Roth accounts.
Yes, you must convert that $58.40 also to Roth. You can leave the n-d-tIRA account open, even with zero balance. No need to "close" it out and reopen every year. Vanguard, at least, has left the t-IRA that I use for backdoor purposes for 3 years now with 0 balance. Still appears on my home page when I login to Vanguard.

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 1:28 pm

Back to the question about the accrued income in the n-d-tIRA ($58.40), should I just close out the n-d-tIRA and pay taxes on that $58.40 in 2019? Do I need to close the tIRA acct that I set up and just open another one for the same play as I did for 2018 (contribute to n-d-tIRA and then backdoor convert)?

I read that this process can be done every year but I didn't read if I use the same accoutns or if they have to be new tIRA and new Roth accounts.
[/quote]
Yes, you must convert that $58.40 also to Roth. You can leave the n-d-tIRA account open, even with zero balance. No need to "close" it out and reopen every year. Vanguard, at least, has left the t-IRA that I use for backdoor purposes for 3 years now with 0 balance. Still appears on my home page when I login to Vanguard.
[/quote]


Ok, I don't need to close the tIRA acct, maybe, but do I ever use it again?

Why couldn't I just take my $58.40 out of the tIRA acct and cash it? I'll pay taxes on it but no big deal. If you still say roll it into another Roth then it seems like I still should pay taxes on that.

TropikThunder
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by TropikThunder » Wed Oct 09, 2019 1:38 pm

I think we need to step back a little and clarify to OP what the purpose of Form 8606 is and how this fits in with doing backdoor Roth conversions.

If you make a contribution to a Traditional IRA, the IRS assumes the cost basis for the contribution is zero and all of the eventual withdrawal (contribution plus earnings) will be eventually taxed as regular income. If you didn’t deduct the contribution, then only the earnings count as regular income upon withdrawal, but the contribution will not since you already paid taxes on it. Form 8606 is how you report that the contribution was non-deductible and exclude it from income when you eventually withdraw it, and it is filed for the tax year which corresponds to the IRA contribution (2018 in your case).

If you convert a Traditional IRA to a Roth IRA, the (contribution + earnings) are added back to your regular income if you originally deducted the contribution. If you didn’t originally deduct the contribution, then only the earnings are included as income (and if you do the conversion quickly enough the earnings will be small). Form 8606 is how you account for the conversion and for whether the contribution that is being converted was deducted (and therefor now taxed). The 8606 for the conversion is filed for the calendar year in which you did the conversion (2019 in this case).

[Someone please correct me if I’m wrong about the last part. It’s my understanding that you can make a contribution to an IRA up to the filing deadline the next April, but a conversion has to be done by Dec 31 to be reported on that tax year]

TropikThunder
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by TropikThunder » Wed Oct 09, 2019 1:41 pm

rippler wrote:
Wed Oct 09, 2019 1:28 pm
Ok, I don't need to close the tIRA acct, maybe, but do I ever use it again?

Why couldn't I just take my $58.40 out of the tIRA acct and cash it? I'll pay taxes on it but no big deal. If you still say roll it into another Roth then it seems like I still should pay taxes on that.
You can use the same tIRA account to do the same backdoor Roth contribution for 2019.

You’ll pay taxes plus penalty on the withdrawn earnings if you withdraw it now, not just taxes.

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Wed Oct 09, 2019 1:56 pm

rippler wrote:
Wed Oct 09, 2019 1:09 pm
Back to the question about the accrued income in the n-d-tIRA ($58.40), should I just close out the n-d-tIRA and pay taxes on that $58.40 in 2019?
No. You need to convert that $58.40 to Roth as well. Just do another conversion. You will pay tax on the $58.40 with your 2019 taxes.

If you leave it there, your Roth conversion will be pro-rated with it. You don't want that. You want your IRA balance (including SEP IRA) to be $0 at the end of the year.

If you just take that money out, you will not only pay tax on the $58.40, you will also pay a 10% penalty for early withdrawal if you are not yet 59.5 years old. Of course, $5.80 penalty is not a lot but you don't accomplish much by doing that since you pay the same amount of tax anyway.

You can leave the account open to use it again. You can also use the same Roth IRA year after year.

However, all of this is going to be messed up by your SEP IRA. When did you open it? Is there any money in there?

Where did you get this idea to do all this?

KingRiggs
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by KingRiggs » Wed Oct 09, 2019 2:08 pm

Man, I wish people would read up on the backdoor Roth process before they take the plunge...

So many good resources out there that spell out all the required steps and pitfalls to avoid...

And such a mess to untangle if done improperly!
Advice = noun | Advise = verb | | Roth, not ROTH

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 2:59 pm

retiredjg wrote:
Wed Oct 09, 2019 1:56 pm
rippler wrote:
Wed Oct 09, 2019 1:09 pm
Back to the question about the accrued income in the n-d-tIRA ($58.40), should I just close out the n-d-tIRA and pay taxes on that $58.40 in 2019?
No. You need to convert that $58.40 to Roth as well. Just do another conversion. You will pay tax on the $58.40 with your 2019 taxes.

If you leave it there, your Roth conversion will be pro-rated with it. You don't want that. You want your IRA balance (including SEP IRA) to be $0 at the end of the year.

If you just take that money out, you will not only pay tax on the $58.40, you will also pay a 10% penalty for early withdrawal if you are not yet 59.5 years old. Of course, $5.80 penalty is not a lot but you don't accomplish much by doing that since you pay the same amount of tax anyway.

You can leave the account open to use it again. You can also use the same Roth IRA year after year.

However, all of this is going to be messed up by your SEP IRA. When did you open it? Is there any money in there?

Where did you get this idea to do all this?
I got the idea from a phone call with a Money Guy Show rep and my CPA. In your view what would be the drawback? The reason why I did this maybe because of my particular situation. I could answer any questions you might have about that to clear it up or disprove what I was told.

For the $58.40, do I convert that into a new backdoor Roth conversion? 'Cuz otherwise I'm not supposed to put in more than $6500 for 2018 and that's the amount I opened up the Roth IRA for.

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Wed Oct 09, 2019 3:23 pm

rippler wrote:
Wed Oct 09, 2019 2:59 pm
I got the idea from a phone call with a Money Guy Show rep and my CPA. In your view what would be the drawback? The reason why I did this maybe because of my particular situation. I could answer any questions you might have about that to clear it up or disprove what I was told.
The back door method of "contributing" to Roth IRA is a great and wonderful thing for people who understand what they are doing.

It can also become a royal pain in the rear for people who do not know what they are doing. I'm afraid you are in this second category at this point. :( It is going to take some work on your part and probably some help from people here to get you into the first category.

Doing the procedure is simple - a few clicks of a mouse and an easy form on tax day. The problem is that people either mess up the form or they have an IRA on the side which they do not realize is going to be pro-rated with the Roth conversion step of the "back door".

We don't know if your Form is messed up because you have not told us what is on it. And because you have not done the second step yet (which will be on next year's form). However, it is a hopeful sign that you actually have the Form 8606 in your tax packet.

We do know you have messed up the other thing - you've set up a SEP IRA. We don't know when you set up the SEP IRA and we don't know if there is any money in it yet. So the extent of what you have to fix is unknown at this point.

For the $58.40, do I convert that into a new backdoor Roth conversion? 'Cuz otherwise I'm not supposed to put in more than $6500 for 2018 and that's the amount I opened up the Roth IRA for.
The $6,500 is the limit for your IRA contribution - either traditional or Roth or a combination. You have not exceeded that limit. What you are doing is a Roth conversion and there is no limit on Roth conversions.

Just do another Roth conversion. Select "all" rather than the amount of $58.40. Check back in a month or so to be sure your tIRA is empty.

Tell us about your SEP IRA.

It is unclear at this point if your CPA knows what s/he is doing with this back door issue or not. Many otherwise decent CPAs are uninformed on this isuse and not helpful. Maybe you need to have another conversation and bring up the SEP IRA. Does the CPA know about the SEP IRA?

Where did you get the idea that you had to do this Roth conversion within 60 days?


Please answer all the questions, not just one or two. Without these answers, it is difficult to know just how to help you.

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David Jay
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by David Jay » Wed Oct 09, 2019 3:58 pm

rippler wrote:
Wed Oct 09, 2019 2:59 pm
retiredjg wrote:
Wed Oct 09, 2019 1:56 pm
...
However, all of this is going to be messed up by your SEP IRA. When did you open it? Is there any money in there?

Where did you get this idea to do all this?
I got the idea from a phone call with a Money Guy Show rep and my CPA. In your view what would be the drawback?
A SEP-IRA is a type of IRA. The pre-tax balance in ALL of your IRA accounts to is used to calculate your pro-rata percentage. For example, if you put $18,000 (I used this amount only for easy calculation, I don’t know the SEP limits) in your SEP-IRA In 2019 and put $6000 post-tax into a traditional IRA, then converted the tIRA to Roth, the amount of the conversion that is taxable is $4500, or 75% of taxable balance (75% of all your IRA money - 18,000 of the 24,000 - is pre-tax and so taxes must be paid on 75% of your conversion).

So in just a few years the SEP-IRA balance will grow such that essentially all (95%, 98%, 99%, etc.) of your conversion will be taxable, eliminating the advantage of the backdoor Roth.
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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rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 6:57 pm

I made a mistake. I should have opened up a solo 401K. The Money Guy person said that months ago and when my CPA told me I could set up a SEP IRA and the amount I had forgotten what the Money Guy person told me. Now I need tog et out of the SEP IRA.

lakpr
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by lakpr » Wed Oct 09, 2019 7:11 pm

rippler wrote:
Wed Oct 09, 2019 6:57 pm
I made a mistake. I should have opened up a solo 401K. The Money Guy person said that months ago and when my CPA told me I could set up a SEP IRA and the amount I had forgotten what the Money Guy person told me. Now I need tog et out of the SEP IRA.
How much do you have in that SEP IRA? That is the most critical question you haven't answered yet.

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rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 7:20 pm

lakpr wrote:
Wed Oct 09, 2019 7:11 pm
rippler wrote:
Wed Oct 09, 2019 6:57 pm
I made a mistake. I should have opened up a solo 401K. The Money Guy person said that months ago and when my CPA told me I could set up a SEP IRA and the amount I had forgotten what the Money Guy person told me. Now I need tog et out of the SEP IRA.
How much do you have in that SEP IRA? That is the most critical question you haven't answered yet.
11,918

lakpr
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by lakpr » Wed Oct 09, 2019 7:23 pm

Not that bad, then. Relatively a minor amount.

Can you convert it all to Roth, and absorb the tax hit?
If you can, problem solved. Next year, you migrate to a Solo 401k plan and close the SEP IRA.

Conversion to Roth, or closing the SEP and rolling over to a Roth IRA, must take place by December 31.

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Wed Oct 09, 2019 7:53 pm

lakpr wrote:
Wed Oct 09, 2019 7:23 pm
Not that bad, then. Relatively a minor amount.

Can you convert it all to Roth, and absorb the tax hit?
If you can, problem solved. Next year, you migrate to a Solo 401k plan and close the SEP IRA.

Conversion to Roth, or closing the SEP and rolling over to a Roth IRA, must take place by December 31.
Well, I've made bigger mistakes, probably.

I called FIdelity and they say they can't stop the transaction and recommended I call my bank. I called my bank, they don't see a request for funds and put a stop payment if it shows up but that might work due to the stop payment needing 3 days to take effect.

So, I'll see what happens.

I should have set up the solo 401k and not have listened to my CPA.

I'll get back here when I figure out what happens but thanks for your thoughts. I read about a lot of this 6 months ago but didn't look back to check what I did and just took my CPA's word for it to set up the SEP IRA. They may have even submitted something for that in my return so I've asked (emailed) if they already efiled and haven't heard back,

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 7:16 am

rippler wrote:
Wed Oct 09, 2019 6:57 pm
...and when my CPA told me I could set up a SEP IRA and the amount...
Depending on what the CPA knew at that point, this might indicate that s/he does not understand the 'back door".

Now I need tog et out of the SEP IRA.
Yes.

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 7:24 am

rippler wrote:
Wed Oct 09, 2019 7:53 pm
lakpr wrote:
Wed Oct 09, 2019 7:23 pm
Not that bad, then. Relatively a minor amount.

Can you convert it all to Roth, and absorb the tax hit?
If you can, problem solved. Next year, you migrate to a Solo 401k plan and close the SEP IRA.

Conversion to Roth, or closing the SEP and rolling over to a Roth IRA, must take place by December 31.
. :(
Well, I've made bigger mistakes, probably.

I called FIdelity and they say they can't stop the transaction....
Can't stop what transaction?

I called my bank, they don't see a request for funds and put a stop payment if it shows up but that might work due to the stop payment needing 3 days to take effect.
What did you put a stop payment on?

I hope you are not digging this hole deeper :(

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 7:41 am

lakpr wrote:
Wed Oct 09, 2019 7:23 pm
Conversion to Roth, or closing the SEP and rolling over to a Roth IRA, must take place by December 31.
lakpr, I know you understand this, but our original poster may misunderstand what you meant.

Nothing MUST happen to the SEP IRA by December 31.

Something must happen to the SEP IRA by December 31 to avoid pro-rating the SEP IRA with the conversion of the $6,558.40.

Pro-rating is not the end of the world. It can be dealt with. It will do 2 things. First, some of the $6,558.40 will be taxed in 2019. Second, some basis will be left in the SEP IRA.

The pre-tax money left in the SEP IRA can be drained off into the Solo 401k set up for 2020. Then the remaining basis can be converted to Roth and it is all taken care of.


But first, let's find out if you can open a Solo 401k for 2019 and transfer the funds before 12/31. I'm not sure how that works. You cannot have both the SEP and the Solo 401k active at the same time, but I'm not sure you have to wait till next year to do this.

Pay attention to this - not all Solo 401ks allow you to roll in money from an IRA. Don't bother to ask Vanguard because theirs does not. Fidelity is the place I would start - theirs does. Or wherever your SEP is right now - ask them.

lakpr
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by lakpr » Thu Oct 10, 2019 7:52 am

retiredjg wrote:
Thu Oct 10, 2019 7:41 am
lakpr, I know you understand this, but our original poster may misunderstand what you meant.

Nothing MUST happen to the SEP IRA by December 31.

Something must happen to the SEP IRA by December 31 to avoid pro-rating the SEP IRA with the conversion of the $6,558.40.

Pro-rating is not the end of the world. It can be dealt with. It will do 2 things. First, some of the $6,558.40 will be taxed in 2019. Second, some basis will be left in the SEP IRA.

The pre-tax money left in the SEP IRA can be drained off into the Solo 401k set up for 2020. Then the remaining basis can be converted to Roth and it is all taken care of.


But first, let's find out if you can open a Solo 401k for 2019 and transfer the funds before 12/31. I'm not sure how that works. You cannot have both the SEP and the Solo 401k active at the same time, but I'm not sure you have to wait till next year to do this.

Pay attention to this - not all Solo 401ks allow you to roll in money from an IRA. Don't bother to ask Vanguard because theirs does not. Fidelity is the place I would start - theirs does. Or wherever your SEP is right now - ask them.
@retiredjg,

Yes, I meant that the amount in SEP-IRA should be converted to Roth by 12/31/2019, IF the poster wishes to avoid pro-rata rule.

Secondly, it's my understanding that you cannot have two retirement plans for the same tax year for the same employer/business. Since the poster already contributed to SEP-IRA for 2019 (or at least attempted to, there was a mention of trying to put a stop payment on the checks) -- he cannot create a Solo 401k for 2019. Yes he can create one for 2020, roll off any balances left in SEP-IRA to that Solo 401k, and close the SEP-IRA next year.

I would not recommend Fidelity either for Solo 401k, I was told Fidelity would not allow Roth contributions. May be that would become important to the poster in future years for tax planning purposes. The most often recommended providers are TD-Ameritrade and E-Trade.

Thinking about this -- can the contribution to SEP-IRA, be "recharacterized" as a Roth contribution instead of a Traditional contribution? With regular 401k contributions that's not possible at all, once the contribution is made its type is set in stone. Not sure if the same rules govern self-employed folks, or if they allow flexibility to re-characterize the contribution as a Roth (it has the name 'IRA' in it after all, so perhaps IRA related rules apply?)

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 8:04 am

lakpr wrote:
Thu Oct 10, 2019 7:52 am
Thinking about this -- can the contribution to SEP-IRA, be "recharacterized" as a Roth contribution instead of a Traditional contribution?
I doubt it. I don't think it is possible to have a Roth SEP IRA. Remember that SEP contributions are made by the employer. How can the employer make a Roth contribution?

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Thu Oct 10, 2019 8:29 am

From my ignorant perspective, it seems like I could just defund that accidental SEP IRA that I set up, move the the money to a cash account and then open up the solo 401K for 2019. Is that not possible?

I read that Fidelity allows the backdoor Roth conversion if that's what you were wondering about. And indeed I did roll over the n-d-tIRA into a Roth acct.

So today it looks like the transaction from my bank did go thru which was the EFT transfer I had set up to fund the accidental SEP IRA. Fidelity said last night that nothing funds overnight. Well, that doesn't seem to be true based on what my bank did last night.

Is my plan to defund the SEP IRA and move the funds to a cash acct and then open up the solo 401K not seen as a quick response to this error and won't cause any irreparable harm to the backdoor maneuver?

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 8:45 am

Where is the SEP IRA located? The bank or Fidelity?

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 8:48 am

I do not know if you can get this money returned as an accident or not. It might be considered a withdrawal which would mean the $11k+ is taxed along with an additional 10% penalty. You might get around the penalty if you meet an exception (like education expenses or medical bills).

Was this $11k contribution for 2018 or 2019?

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 8:53 am

OK, different approach here. :D

It appears the SEP contribution was for 2018. I think you can still open a Solo 401k for 2019. Transfer the SEP IRA into the Solo 401k before the end of the year. You're done with fixing the mess.

Go back to your original post in March 2019 and read what Spirit Rider said to do. I think that is what I'm telling you to do above.

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Thu Oct 10, 2019 9:11 am

retiredjg wrote:
Thu Oct 10, 2019 8:45 am
Where is the SEP IRA located? The bank or Fidelity?
Fidelity

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Thu Oct 10, 2019 9:12 am

retiredjg wrote:
Thu Oct 10, 2019 8:48 am
I do not know if you can get this money returned as an accident or not. It might be considered a withdrawal which would mean the $11k+ is taxed along with an additional 10% penalty. You might get around the penalty if you meet an exception (like education expenses or medical bills).

Was this $11k contribution for 2018 or 2019?
The CPA put it on the 2018 return

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Thu Oct 10, 2019 9:14 am

retiredjg wrote:
Thu Oct 10, 2019 8:53 am
OK, different approach here. :D

It appears the SEP contribution was for 2018. I think you can still open a Solo 401k for 2019. Transfer the SEP IRA into the Solo 401k before the end of the year. You're done with fixing the mess.

Go back to your original post in March 2019 and read what Spirit Rider said to do. I think that is what I'm telling you to do above.
ok, I'll go back and see what was said about doing that. The 2018 return could be amended so this won't look like an early withdrawal I hope

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 9:19 am

rippler wrote:
Thu Oct 10, 2019 9:14 am
retiredjg wrote:
Thu Oct 10, 2019 8:53 am
OK, different approach here. :D

It appears the SEP contribution was for 2018. I think you can still open a Solo 401k for 2019. Transfer the SEP IRA into the Solo 401k before the end of the year. You're done with fixing the mess.

Go back to your original post in March 2019 and read what Spirit Rider said to do. I think that is what I'm telling you to do above.
ok, I'll go back and see what was said about doing that. The 2018 return could be amended so this won't look like an early withdrawal I hope
You are NOT going to do a withdrawal.

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 10:08 am

Let me summarize.

1) The "accidental" SEP IRA is OK because it was for your 2018 income. In fact, since it was late in 2019 when you opened it, that was probably the only kind of account you would be able to open for 2018 income.

The only thing you need to do now is transfer the money in the SEP IRA to a Solo 401k before the end of the year. That should not be difficult.

Since you have not used any work plan for your 2019 income, you are still allowed to open a Solo 401k now with the starting date being last January 1, 2019. This is noted in Spirit Rider's comment last March.

Apparently you can open that online (using Spirit Rider's instructions) or you can call them if you prefer. Have Spirit Rider's instructions handy if you call them.

After the account is open, call Fidelity and tell them to transfer the money in the SEP IRA into the Solo 401k. This will be a direct transfer. Do this before the end of the year. When the SEP IRA is empty, close it.

Start contributing to the Solo 401k as you wish. You can put as much as $19k + $6k in "catch up contributions" in as your employee contribution for 2019 (just as if it were an ordinary 401k). You can also put in employer contributions but I know little about that so I won't make suggestions about how much or how to do that. Your CPA should be able to figure this out.


2) About the tIRA you still have (and maybe there is another IRA with $900 in it?), convert all of this to Roth before the end of the year. You can use the same Roth IRA you already have. Just do a conversion just like you did with the $6,500. You want your tIRA balance to be $0 at the end of the year.


3) Next year, you will report all the conversions on Form 8606. You may need help with how to do that. It is unclear if your CPA understands this part or not.

I hope I have not forgotten anything. Maybe someone can check this to be sure it is right and nothing left out?

retiredjg
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by retiredjg » Thu Oct 10, 2019 10:18 am

Rippler, you need to decide what to do in future years.

I think it might be a good idea for you to stop doing "back door" contributions to Roth IRA. You have not understood it well so far and you have said that you don't really understand the terminology of all this and that reading about it has not helped you get it figured out.

If your CPA fully understood it, your CPA could give you good instructions. However, it is not clear at this point if your CPA actually does understand it and we won't know that until the conversions are entered on your 2019 income.

It is possible that the best thing for you to do is to save all your money in the Solo 401k and in an ordinary taxable account. At the very least, I would not do a "back door" for 2019. Let all this settle out and start it again in 2020 if you feel you really want to do it.


Another possibility is after you get your Solo 401k all set up at Fidelity, move it the following year to a company that allows Roth 401k contributions. Then you could contribute some traditional (tax-deferred) money and some Roth to the Solo 401k each year.

Let me know if you have any questions about what I'm talking about.

Topic Author
rippler
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Re: tIRA to backdoor Roth but missed 60 day conversion

Post by rippler » Thu Oct 10, 2019 10:22 am

Thanks for hanging in there with me.

I'm looking into and doing what you and Spirit Rider suggested.

Here's an email I just got from my CPA. I don't know if they are right or not but I thought I'd post it anyway.

"You can have more than one type of IRA. Because the deduction you made to your traditional IRA is not deductible, it does not affect the amount that you can contribute to your SEP IRA.

To make contributions to a solo 401(k) for 2018, the plan would have to have been established by 12/31/18. If you want to set up a solo 401(k) for 2019, you can do that."

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