Backdoor Roth- how long do I wait before converting?

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climber2020
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Backdoor Roth- how long do I wait before converting?

Post by climber2020 » Tue May 08, 2012 1:59 pm

First time backdoor Roth newbie here.

I opened a money market account in a traditional IRA at Vanguard and made my 2012 non-deductible contribution.

How long do I need to wait before converting the funds over to the Roth IRA? I've read articles advising anywhere from one day to six months.

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mhc
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Re: Backdoor Roth- how long do I wait before converting?

Post by mhc » Tue May 08, 2012 2:26 pm

I do mine as soon as possible.

Alan S.
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Re: Backdoor Roth- how long do I wait before converting?

Post by Alan S. » Tue May 08, 2012 2:27 pm

You don't have to wait at all.

Even those few that recommended waiting for a period of time admit that the IRS would be extremely unlikely to disallow the conversion when this procedure is fully supported by the current tax code and there is no mention of any waiting period to do a conversion other than a reconversion. If you wait you will either generate some gains that will be taxable or you will have a loss that could result in the loss of unused basis in the conversion.

I am assuming here that this non deductible TIRA contribution will be your only TIRA, SEP IRA or SIMPLE IRA balance. If not, your conversion will be mostly taxable.

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serbeer
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Re: Backdoor Roth- how long do I wait before converting?

Post by serbeer » Tue May 08, 2012 2:31 pm

I convert the next day, done it since 2010.

investor1
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Re: Backdoor Roth- how long do I wait before converting?

Post by investor1 » Tue May 08, 2012 2:33 pm

You don't wait.

If you do, your investments can grow, and you will have to pay taxes on the growth at the time of conversion.

Backdoor Roths involve converting ASAP. This is limited by the number of days it takes the bank to transfer the money and how well you have automated the process.

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climber2020
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Re: Backdoor Roth- how long do I wait before converting?

Post by climber2020 » Tue May 08, 2012 2:42 pm

Thanks for the input.
Alan S. wrote:I am assuming here that this non deductible TIRA contribution will be your only TIRA, SEP IRA or SIMPLE IRA balance. If not, your conversion will be mostly taxable.
I did have a small amount in my t-IRA that I deducted from my taxes years back, but I already converted that over to a Roth earlier this month knowing that I would take a tax hit this year. I will likely be in a higher tax bracket in the next few years, so I thought now would be a good time to do that. Future backdoor contributions shouldn't be a problem.
investor1 wrote:If you do, your investments can grow, and you will have to pay taxes on the growth at the time of conversion.
I put my funds in a money market account to prevent this from being a problem, but since the money won't be in the t-IRA for long, I guess it doesn't really matter.

Alan S.
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Re: Backdoor Roth- how long do I wait before converting?

Post by Alan S. » Tue May 08, 2012 5:50 pm

Well, you DID have a pre tax TIRA balance this year that you just converted. What will happen if you add the back door Roth conversion to this is that you will report on Form 8606 a combined conversion and the taxable amount will be averaged because the form treats all your separate conversions as one combined conversion.

In other words, your first conversion you expected to be fully taxable and your second conversion to be tax free. Instead, you will report the total amount converted and the total taxable amount will be the amount in excess of your basis of 5,000 for the 2012 regular non deductible contribution.

The fact that you did a conversion a few days before your next conversion is immaterial. There is no limit on the number of conversions you can do.

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