First Time Roth Questions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

First Time Roth Questions

Post by WoodSprite »

First time Roth questions:

2022 was the first year I’ve had any kind of IRA, so I am very new at all of this. My household makes over the ROTH limit, so I created a TIRA in Schwab with the intention of backdooring it to a ROTH.

I finish funding 2022 just last week (Jan 20th 2023) and now I want to backdoor it. (I know I could have & should have transferred it sooner, at least in parts, but my attention was taken up by two seriously ill parents I am caring for in addition to working full time, and I did not keep on top of this like I should have).

Here are my questions:

For 2022:

1. As I understand it, my maximum contribution for 2022 was $6,000 (I am under 50). My investments (overall) went up, so now the money I contributed in 2022 is over $6,000. Can I still only roll $6K of it to the Roth for 2022, or can I roll the whole thing (about $6,200) to the 2022 Roth? I was on the phone to a customer service at Schwab and they did not know the answer.

For 2023:

2. I have now contributed $550 to my 2023 TIRA. Should I go ahead and backdoor this, or wait until I have more in the account to move it to the Roth? What kind of increments can I or should I convert to Roth during the year? I hope to put about $500-ish in my account each month (do I backdoor each little bit as soon as I put it in the TIRA account?)

3. Does dividing up my $6,500 total contribution for 2023 into monthly contributions during the year (versus one lump sum contribution) create extra hassle tax wise? I could possibly do one lump sum in 2023 if it saves aggravation/time on taxes. (I don’t know if it does or not). I understand the benefits of dollar cost averaging, but IRAs are not a particularly large sum of money, so I’m wondering if it is worth it if it creates extra headache come tax time.


Thank you for your time.
User avatar
FiveK
Posts: 13641
Joined: Sun Mar 16, 2014 2:43 pm

Re: First Time Roth Questions

Post by FiveK »

1. You may always convert as much as you want. It is annual contributions that are limited. The $200 will be taxable for 2023 (on the return you do in 2024). No need to think of your Roth IRA as a "2022 Roth".

2. Up to you. The faster you convert each contribution, the less time it has to grow and be taxable when converted, instead of growing tax-free in the Roth.

3. No. You get one 1099-R telling you and the IRS how much you converted (assuming you do convert) regardless of whether the conversion was done piecemeal or all at once.
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

Re: First Time Roth Questions

Post by WoodSprite »

Thank you @FiveK.

Can you explain your answer to question #1 a little more for me. (Sorry, I'm very new at all this and you're going to need to spell it out for me in very simple terms).

If I convert the whole $6,200 to a Roth, then will the extra $200 (above the $6K limit for last year) still be considered as part of my Roth contributions for last year? Or will it be considered part of this year's contributions?

I also don't understand this part of what you said "The $200 will be taxable for 2023 (on the return you do in 2024)". How do you mean taxable, as in I can't subtract it from my income for last year? I was under the assumption that I wouldn't be able to subtract any of these contributions from my income. (Or do you mean taxable in a different way, such as being considered capital gains?)

Thanks
User avatar
Wiggums
Posts: 5641
Joined: Thu Jan 31, 2019 8:02 am

Re: First Time Roth Questions

Post by Wiggums »

When you make a Roth conversion, you will pay taxes on the conversion amount ($6,200). Additionally, this conversion is taxed at your ordinary income tax rate rather than the more tax-friendly long-term capital gains rate.
"I started with nothing and I still have most of it left."
User avatar
FiveK
Posts: 13641
Joined: Sun Mar 16, 2014 2:43 pm

Re: First Time Roth Questions

Post by FiveK »

WoodSprite wrote: Tue Jan 24, 2023 8:39 pm If I convert the whole $6,200 to a Roth, then will the extra $200 (above the $6K limit for last year) still be considered as part of my Roth contributions for last year? Or will it be considered part of this year's contributions?
Two similar words but one has to keep them separate: contributions and conversions. Conversions never count as contributions, and the IRS limits are on contributions. Does that make sense?
I also don't understand this part of what you said "The $200 will be taxable for 2023 (on the return you do in 2024)". How do you mean taxable, as in I can't subtract it from my income for last year?
Taxable as in that amount will be added to your other taxable income on Form 1040, via Form 8606. Have you filled a draft version of 8606 to see how it works?
I was under the assumption that I wouldn't be able to subtract any of these contributions from my income.
Correct, you make too much (per your OP) to subtract your $6K contribution, so when you convert that from traditional to Roth you pay no tax on that amount. You do pay tax on the $200 gains. Again, see Form 8606.
User avatar
FiveK
Posts: 13641
Joined: Sun Mar 16, 2014 2:43 pm

Re: First Time Roth Questions

Post by FiveK »

Wiggums wrote: Tue Jan 24, 2023 8:57 pm When you make a Roth conversion, you will pay taxes on the conversion amount ($6,200). Additionally, this conversion is taxed at your ordinary income tax rate rather than the more tax-friendly long-term capital gains rate.
Based on the OP, the $6000 was not deducted, so only $200 of the conversion would be taxable.
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

Re: First Time Roth Questions

Post by WoodSprite »

Again, many thanks FiveK!
Have you filled a draft version of 8606 to see how it works?
No, but I will find one tomorrow and do a draft. Do you recommend I do this before I begin converting?
User avatar
FiveK
Posts: 13641
Joined: Sun Mar 16, 2014 2:43 pm

Re: First Time Roth Questions

Post by FiveK »

WoodSprite wrote: Tue Jan 24, 2023 9:44 pm Again, many thanks FiveK!
Have you filled a draft version of 8606 to see how it works?
No, but I will find one tomorrow and do a draft. Do you recommend I do this before I begin converting?
Yes. It's not strictly necessary, but probably a good idea. See Form 8606. Several examples are in the Backdoor Roth wiki article.
User avatar
Duckie
Posts: 9120
Joined: Thu Mar 08, 2007 2:55 pm

Re: First Time Roth Questions

Post by Duckie »

WoodSprite wrote: Tue Jan 24, 2023 9:44 pm
FiveK wrote: Tue Jan 24, 2023 9:12 pm Have you filled a draft version of 8606 to see how it works?
No, but I will find one tomorrow and do a draft.
2022 Form 8606
  • Part I
    Line 1 -- 6000 (non-deductible contributions for 2022)
    Line 2 -- 0 (previous basis)
    Line 3 -- 6000
    Line 14 -- 6000 (current basis, goes on line 2 next year)
That's it for 2022. Next year it will be more complicated.
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

Re: First Time Roth Questions

Post by WoodSprite »

Thanks @Duckie and @FiveK, much appreciated!

I am reading over your answers and also the many pages of IRS instruction documents and have more questions.

1. I'm married, and we file our taxes jointly. Do each of us have to submit a separate 8606 (we are both doing a TIRA to Roth conversion) or do we submit one combined 8606?

2. I don’t make a lot of money, but my spouse does. Combined, we are usually over the Roth limit (our incomes vary year-to-year). I assumed that my contributions to a TIRA would NOT be deductible because our combined income this past year was about $230K and because my spouse contributed about $25,000 to a 401K, (I don’t have a 401K). Am I correct to assume my TIRA contributes are NOT deductible? As I read over the IRA instruction pages, I get more and more confused because the language seems to shift back and forth, and I can’t tell when it is referring to our joint/combined household income (and contributions to my husband’s 401K counting for the household), or when/if it is referring to my income separately (and my lack of 401K).

3. Because both my husband’s and my incomes vary, occasionally we are below the Roth income limit. However, we don’t know until the very end of the year whether we are above or below (unless we’ve had a really good year and cross the threshold early). What should be our strategy be in future years for IRAs? Is it okay to contribute to TIRAs and covert to Roths even for years that we end up not being above the Roth limit and could have just funded them directly? Or should we only contribute to IRAs AFTER the end of the year when we know whether we crossed the threshold or not for the previous year? Are there consequences for doing it one way or the other?

Many thanks to you both and all who are taking the time to help me get my financial ducks in a row.
User avatar
Duckie
Posts: 9120
Joined: Thu Mar 08, 2007 2:55 pm

Re: First Time Roth Questions

Post by Duckie »

WoodSprite wrote: Wed Jan 25, 2023 6:07 pm 1. I'm married, and we file our taxes jointly. Do each of us have to submit a separate 8606 (we are both doing a TIRA to Roth conversion) or do we submit one combined 8606?
You each submit a separate Form 8606. Your IRAs are individual and so are the forms.
2. I don’t make a lot of money, but my spouse does. Combined, we are usually over the Roth limit (our incomes vary year-to-year). I assumed that my contributions to a TIRA would NOT be deductible because our combined income this past year was about $230K and because my spouse contributed about $25,000 to a 401K, (I don’t have a 401K). Am I correct to assume my TIRA contributes are NOT deductible?
Per this, if you are married filing jointly, do not have a work retirement plan but your spouse does, you CAN deduct at least part of your contribution if your joint modified AGI is under $214,000 for 2022. If your joint MAGI is $230,000 you CANNOT.

If you will at least occasionally need to use the backdoor Roth IRA method you should not make deductible contributions. They will mess up things because of the dreaded pro-rata rule.
3. Because both my husband’s and my incomes vary, occasionally we are below the Roth income limit. However, we don’t know until the very end of the year whether we are above or below (unless we’ve had a really good year and cross the threshold early). What should be our strategy be in future years for IRAs? Is it okay to contribute to TIRAs and covert to Roths even for years that we end up not being above the Roth limit and could have just funded them directly?
Yes, it is okay to use the method even if not needed.
Or should we only contribute to IRAs AFTER the end of the year when we know whether we crossed the threshold or not for the previous year?
I wouldn't wait. Using the backdoor Roth IRA method even if not needed is just a little more paperwork.
Are there consequences for doing it one way or the other?
Contributing/converting early means the assets have more time to grow, plus you get both the contribution and conversion on the same Form 8606.

Contributing after the end of the year might mean less paperwork if you find you can contribute to a Roth IRA directly.
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

Re: First Time Roth Questions

Post by WoodSprite »

Thank you!
If you will at least occasionally need to use the backdoor Roth IRA method you should not make deductible contributions. They will mess up things because of the dreaded pro-rata rule.
I read the link and the language is complicated for a newbie like me, but I think I get the gist. So, because of the rule, and because my husband and I expect to be over the limit for the Roth more years than not, your advice is to NOT deduct any of my contributions to my TIRA, even if I am able to do so? (I'm not sure if I able to do so or not yet because I haven't calculated our MAGI yet, the $230,000 I listed above, is our roughly calculated AGI. I don't know yet how much our MAGI will be different from our AGI since this is the first year I'm doing any of this.)

Thank you!
User avatar
FiveK
Posts: 13641
Joined: Sun Mar 16, 2014 2:43 pm

Re: First Time Roth Questions

Post by FiveK »

WoodSprite wrote: Wed Jan 25, 2023 8:44 pm
...the dreaded pro-rata rule.
I read the link and the language is complicated for a newbie like me, but I think I get the gist -- if I deduct a percentage one year, then I'll always have to do that same percentage, or something like that?

So, because of the rule, and because my husband and I expect to be over the limit for the Roth more years than not, your advice is to NOT deduct any of my contributions to my TIRA even if I am able to do so? (I'm not sure if I able to do so or not yet because I haven't calculated our MAGI yet, the $230,000 I listed above, is our roughly calculated AGI. I have no idea how much our MAGI will be different from our AGI since this is the first year I'm doing any of this.
It is most justifiably dreaded by those with a large traditional IRA balance already. Otherwise, when you have some non-deductible contributions, form 8606 has to be filled out whether you have deductible contributions or not.

You could play with something like the 'Form8606' tab in the personal finance toolbox spreadsheet to see what different choices over several years would do to, or for, you.
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

Re: First Time Roth Questions

Post by WoodSprite »

One more question.

In the future, can I just convert cash from my TIRA to my Roth? Am I allowed to contribute cash into one and then convert it to the other without having to buy something first? I just read that I could, but wanted to double check because that seems too easy! :oops: Gosh I feel so stupid!
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

Re: First Time Roth Questions

Post by WoodSprite »

You could play with something like the 'Form8606' tab in the personal finance toolbox spreadsheet to see what different choices over several years would do to, or for, you.
Wow, this looks very useful. Thanks for the link!
User avatar
FiveK
Posts: 13641
Joined: Sun Mar 16, 2014 2:43 pm

Re: First Time Roth Questions

Post by FiveK »

WoodSprite wrote: Wed Jan 25, 2023 9:44 pm One more question.

In the future, can I just convert cash from my TIRA to my Roth? Am I allowed to contribute cash into one and then convert it to the other without having to buy something first? I just read that I could, but wanted to double check because that seems too easy! :oops: Gosh I feel so stupid!
Not only can you, but it's the simplest way to proceed. :)
placeholder
Posts: 6580
Joined: Tue Aug 06, 2013 12:43 pm

Re: First Time Roth Questions

Post by placeholder »

I'm not sure your other question was answered but yes convert whatever amount of 2023 that you have made so far to keep its value from changing and to make it easier because you can just convert the entire balance then deal with the rest of 2023 down the line.
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

Re: First Time Roth Questions

Post by WoodSprite »

FiveK wrote: Wed Jan 25, 2023 9:57 pm
WoodSprite wrote: Wed Jan 25, 2023 9:44 pm One more question.

In the future, can I just convert cash from my TIRA to my Roth? Am I allowed to contribute cash into one and then convert it to the other without having to buy something first? I just read that I could, but wanted to double check because that seems too easy! :oops: Gosh I feel so stupid!
Not only can you, but it's the simplest way to proceed. :)
Thank you! Yes, that is how I will proceed in the future. (Doh! I'm learning!)
Topic Author
WoodSprite
Posts: 12
Joined: Sun Dec 11, 2022 10:52 am

Re: First Time Roth Questions

Post by WoodSprite »

placeholder wrote: Thu Jan 26, 2023 1:17 am I'm not sure your other question was answered but yes convert whatever amount of 2023 that you have made so far to keep its value from changing and to make it easier because you can just convert the entire balance then deal with the rest of 2023 down the line.
Thank you! Yes, thanks to the guidance from all of you on this thread, I did it this morning! (Whew, its a relief having it done, and understanding better what I'm doing for the future.)

Thanks so much to everyone!
little_star
Posts: 365
Joined: Tue Jun 16, 2020 5:08 pm

Re: First Time Roth Questions

Post by little_star »

WoodSprite wrote: Wed Jan 25, 2023 8:44 pm Thank you!
If you will at least occasionally need to use the backdoor Roth IRA method you should not make deductible contributions. They will mess up things because of the dreaded pro-rata rule.
I read the link and the language is complicated for a newbie like me, but I think I get the gist. So, because of the rule, and because my husband and I expect to be over the limit for the Roth more years than not, your advice is to NOT deduct any of my contributions to my TIRA, even if I am able to do so? (I'm not sure if I able to do so or not yet because I haven't calculated our MAGI yet, the $230,000 I listed above, is our roughly calculated AGI. I don't know yet how much our MAGI will be different from our AGI since this is the first year I'm doing any of this.)

Thank you!
I concur with @Duckie's advice not to make deductible tIRA contributions if you are planning to use the backdoor Roth process in future years. To provide some context, consider the following situation: you have a low income year so you are eligible to make a deductible contribution. You contribute $6k to a traditional IRA and take a tax deduction when you are in (say) the 12% marginal tax bracket. Hurray! you have saved $720! However, the very next year you have a booming year and make too much to contribute directly to a Roth IRA and choose to use the backdoor Roth process. Now you are subject to the pro-rata rule and whether you convert part or all, you now will be taxed at your current marginal tax rate. If you convert it all and are in the 32% tax bracket, you now owe $1920 on that original $6k. In other words, you would have paid less taxes had you chosen to contribute directly to a Roth IRA in the low income year and skipped the deductible tIRA contribution. Deductible contributions are great if you expect to withdraw/convert in the future when you will be in a lower marginal tax bracket. However, if you need to use the backdoor Roth process, you are, almost by definition, doing the conversion in a year in which you are in a higher marginal tax bracket.

I think it is fine to proceed with the backdoor Roth process if you think you will be close to the MAGI limits. While it is possible to recharacterize a Roth contribution if you exceed the income limits, it is pretty straightforward to do the backdoor Roth process (provided you do not have $$ in a traditional IRA on December 31 of the year in which you do the Roth conversion). There are some minor differences in terms of accessing the Roth funds that were converted rather than contributed, but they only apply if you are trying to withdraw before you are 59.5 years old.

You should fill out a draft version of IRS Form 8606 before you make the Roth conversion so that you can see the potential tax implications if you have $$ in a traditional IRA on Dec 31. The form is not complicated, but it can be difficult to get tax software (and even some human tax preparers) to understand the proper sequence of events. If you fill out a form 8606 by hand yourself, you can check their work.
Post Reply