Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

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Topic Author
am61175
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Joined: Thu May 02, 2019 8:47 am

Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by am61175 » Sat Nov 16, 2019 1:57 pm

Hello Everyone,

I want to maximize my Roth contribution this year, so using estimated numbers if I have already contributed 2500 to Roth, can I open a Traditional IRA, contribute 3500 to it, then immediately convert to a Roth through the backdoor method in January 2020, but for the year 2019. I am in that transitional MAGI area where I can only directly contribute the 2500 to Roth.

So basically:
2500 is already in my Vanguard Roth IRA.
Open new Traditional IRA at Vanguard in Jan 2020, immediately fund with 3500 in a Money Market Fund.
As soon as it is established, convert/roll it over to my existing Roth IRA to cap out the 2019 Roth Contribution.

I am trying to minimize the taxes on the traditional contribution by putting it into a money market, and then rolling it over immediately.

Is this something that is allowed? Or is there another way for me to do a back door Roth IRA while I have already contributed my max directly to it.

Thank you for all the reads and responses.

retiredjg
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by retiredjg » Sat Nov 16, 2019 2:17 pm

If you are in the transitional MAGI area, are you sure the $2500 that you have already contributed will actually be eligible?

The easiest way to fix this is to have Vanguard re-characterize your $2500 to a traditional IRA, contribute the remaining $3500, and then convert all of it to Roth as soon as you can. You will pay tax on anything over $6k.

If you are positive that the $2500 is eligible but unsure about the remaining $3,500, just contribute the remaining $3,500 to traditional IRA now and convert it to Roth as soon as possible. There is no reason to wait till next year.

You should keep some notes about what you did because in a few years it may not make a lot of sense. YOu also need a permanent record of how and when any money gets into Roth IRA (in case you want to withdraw some early).

lakpr
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by lakpr » Sat Nov 16, 2019 2:22 pm

retiredjg wrote:
Sat Nov 16, 2019 2:17 pm
The easiest way to fix this is to have Vanguard re-characterize your $2500 to a traditional IRA, contribute the remaining $3500, and then convert all of it to Roth as soon as you can. You will pay tax on anything over $6k.
Given that the stock market (and the bond market) are up double digit percentages this year, this may cause the OP to pay more taxes than necessary. Best to wait until next year, then contribute exact amounts of Roth IRA / traditional IRA next year.

Just my opinion of course.

retiredjg
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by retiredjg » Sat Nov 16, 2019 2:24 pm

But that would mean only a $2,500 contribution for 2019.

Topic Author
am61175
Posts: 11
Joined: Thu May 02, 2019 8:47 am

Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by am61175 » Sat Nov 16, 2019 2:31 pm

retiredjg wrote:
Sat Nov 16, 2019 2:17 pm
If you are in the transitional MAGI area, are you sure the $2500 that you have already contributed will actually be eligible?

The easiest way to fix this is to have Vanguard re-characterize your $2500 to a traditional IRA, contribute the remaining $3500, and then convert all of it to Roth as soon as you can. You will pay tax on anything over $6k.

If you are positive that the $2500 is eligible but unsure about the remaining $3,500, just contribute the remaining $3,500 to traditional IRA now and convert it to Roth as soon as possible. There is no reason to wait till next year.

You should keep some notes about what you did because in a few years it may not make a lot of sense. YOu also need a permanent record of how and when any money gets into Roth IRA (in case you want to withdraw some early).
Hello,

I was using the non exact numbers, I won't know how much I can put into the Roth until a bonus comes in on the 29th of November, and I made the mistake of keeping my auto Roth contribution going early in 2019. I stopped it in June, but I never imagined my bonuses this year would push me higher than the contribution income limit (blessed I am). It is possible that I over contributed by a few dollars (my tracking spreadsheet says anywhere from You are Good to you are over by like 12 dollars) depending on the bonus.

If that is the case, in the case of simplicity, do I just recharacterize all of the Roth IRA contributions from 2019 right now, open a Traditional IRA and drop enough in to get up to 6k, then pop it over to Roth immediately, and pay any taxes on the Roth earnings from earlier in 2019/recharacterization penalties?

I suppose this is something that Vanguard has experience with, and if I call them will they be able to walk me through the steps?

lakpr
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by lakpr » Sat Nov 16, 2019 3:07 pm

retiredjg wrote:
Sat Nov 16, 2019 2:24 pm
But that would mean only a $2,500 contribution for 2019.
No, that's not what I intended to convey. OP is worried that he'd exceed the $193k income threshold, where the phaseout begins. Let's say that, from the phaseout tables, based on his final income, he can only contribute $2800 for Roth IRA.

Since he has until April 15, 2020 to finish the Roth IRA contribution, he can make $300 additional contribution ( = $2800 - $2500)in 2020, and also additional $3200 (= $6000 - $2800) to Traditional IRA as a non-deductible contribution and immediate conversion to Roth.

If, let's say the table says he is allowed to contribute only $2000 to Roth IRA, then he'd have to ask Vanguard to recharacterize only $500 of the original contribution and its earnings into Traditional IRA, contribute the remaining $4000 to the same traditional IRA, and convert the $4500 sum to Roth immediately.

Point being, he can fine tune the amounts to be contributed to Roth or Traditional IRA next year, and on the Roth portion he gets to keep the growth tax free instead of having to pay tax on it (if he recharacterizes the entire $2500 right now).

lakpr
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by lakpr » Sat Nov 16, 2019 3:12 pm

am61175 wrote:
Sat Nov 16, 2019 2:31 pm
If that is the case, in the case of simplicity, do I just recharacterize all of the Roth IRA contributions from 2019 right now, open a Traditional IRA and drop enough in to get up to 6k, then pop it over to Roth immediately, and pay any taxes on the Roth earnings from earlier in 2019/recharacterization penalties?

I suppose this is something that Vanguard has experience with, and if I call them will they be able to walk me through the steps?
Please see my reply above to @retiredjg. Yes, Vanguard does have experience with and can help re-characterizations of Roth IRA contributions to Traditional IRA, but it might help once you know the exact amount after you receive the bonus. Or better yet, wait until February or so after you have received the W-2 forms for 2019, and you EXACTLY the amount you are allowed to contribute to the Roth IRA.

Simply recharacterizing everything to a Traditional IRA contribution right now means that the gains accumulated so far on your contribution are ALSO taxable income to you. Which might push you even more higher along the phaseout range.

retiredjg
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by retiredjg » Sat Nov 16, 2019 3:36 pm

am61175 wrote:
Sat Nov 16, 2019 2:31 pm
If that is the case, in the case of simplicity, do I just recharacterize all of the Roth IRA contributions from 2019 right now, open a Traditional IRA and drop enough in to get up to 6k, then pop it over to Roth immediately, and pay any taxes on the Roth earnings from earlier in 2019/recharacterization penalties?
That is one way to do it - have them re-characterize every contribution for 2019 to traditional IRA. It will be like the contributions went in tIRA from the get-go. Add the rest of your $6k and convert it all. Or convert, add the rest of the $6k and convert a second time.

If you are really confident that you will be within or just $12 over, you could re-characterize only the last contribution (assuming it is over $12), add the rest and do a Roth conversion then.


Either of these approaches should work and get the money into Roth within a week or two....unless you are mistaken about how much you are eligible to contribute.

There are no recharacterization penalties.
I suppose this is something that Vanguard has experience with, and if I call them will they be able to walk me through the steps?
Yes. Make sure they understand you want to re-characterize it, not withdraw or get a return of your contribution. They may refer you to some online form - be sure the form makes sense to you. (As you may know, sometimes their customer service is sketchy.).

retiredjg
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by retiredjg » Sat Nov 16, 2019 3:53 pm

lakpr wrote:
Sat Nov 16, 2019 3:12 pm
Simply recharacterizing everything to a Traditional IRA contribution right now means that the gains accumulated so far on your contribution are ALSO taxable income to you. Which might push you even more higher along the phaseout range.
lakpr, I agree with your first sentence. But if everything is recharacterized, the phaseout range no longer exists making that a non-issue.

am61755, I made this suggestion because it is clean and easy and gets the matter taken care of immediately no matter what your income turns out to be. That would be my personal preference. Others may choose something else.

Trying to titrate the recharacterization may take things into 2020 and may split your contribution and conversion steps onto two different tax year forms. Once you've got the back door figured out, this is not a big deal, but it appears this is your first time. It's a potential stumbling block. Even with no stumbling blocks, a good number of people mess this up.

Yes, if you recharacterize everything now, the earnings on the $2,500 will become taxable and maybe you would prefer to avoid that. If so, you can leave most of the $2,500 in there and take out only enough to make it good. If you get the rest of your 2019 contribution and the conversion done by the end of the year, you can do it all on your 2019 tax return instead of splitting it between two returns.

Whichever you decide, keep (forever) a record of how each dollar gets into Roth IRA. The withdrawal rules for a direct contribution are different from the withdrawal rules of a back door "contribution".

retiredjg
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by retiredjg » Sat Nov 16, 2019 4:03 pm

One other thing....let's say you re-characterize $50 to traditional IRA and do the Roth conversion in 2019 to make your taxes simpler and then find out you should have re-characterized $75 instead of $50. Uh-oh. :shock:

You cannot undo that Roth conversion any more. You'll have an excess contribution and have to go through all the steps to fix that.

So your choice is to wait until 2020 to do the conversion step (pushing that part of the documentation onto your 2020 taxes) or make sure you do not make a mistake in your MAGI estimations.

I always leave a $1k buffer in my MAGI estimations because making a little mistake is pretty easy. A few dollars of income can float in unexpectedly. That is the main reason I suggested just re-characterizing everything and paying the tax on those earnings ...because it makes your MAGI moot.

Whichever you do, people will help you with the paperwork. But back door questions become a complete zoo in March and April...my approach would be to avoid that.

Topic Author
am61175
Posts: 11
Joined: Thu May 02, 2019 8:47 am

Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by am61175 » Fri Nov 29, 2019 11:25 am

Follow up to this post. Thank you for all of the advice. I decided to take the easy (but more tax expensive) lesson and recharacterize all in 2019. I was willing to pay the stupid tax this year, just to make the 2019 / 2020 tax forms easier.

I decided to recharacterize the Roth IRA Contribution (3282.80 in 2019) w/ $716.89 dollars worth of earnings to a Traditional IRA on 11.27.2019. I then contributed my remaining 2717.20 today on the 29th. Hopefully the recharacterization will be done early to mid next week, and I can convert all of it to Roth then.

I have spent the morning playing around with TurboTax Deluxe 2019, with some guesses as to what the 1099-R from Vanguard will have on it, and it was a little bit of a mess, but I think I got it figured out. Ended up owing like ~120 dollars on the earnings (took my refund from 540ish to 320ish), which makes sense.

Thanks for all the help, hopefully in late January when I get all the forms it will go smooth, but having gone through it today, I am feeling much more confident.

retiredjg
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Re: Roth IRA Partial / Rest Traditional IRA to Backdoor Roth all in 2019 Tax Year

Post by retiredjg » Fri Nov 29, 2019 4:35 pm

Thanks for the update. :happy

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