Backdoor Roth - why does it make me feel dirty?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Locked
User avatar
DaftInvestor
Posts: 4084
Joined: Wed Feb 19, 2014 10:11 am

Backdoor Roth - why does it make me feel dirty?

Post by DaftInvestor » Thu Mar 13, 2014 8:33 am

After years focused on saving for kids college and simply maxing out a single 401K plan (and assuming that should be enough for retirement - ba-ha-ha-ha) I'm now focusing more on Retirement planning and looking at various strategies.
We have a single income (thus single 401K plan) as my wife stays home and does volunteer work and our income is too high for a spousal IRA or Roth IRA. Thus, to tax shelter more retirement savings I've been reading up on doing a Backdoor Roth - at least for my wife (I don't want to move my IRA to my 401K Nor take the tax-bite of a conversion right now). I understand I could get $11K sheltered right now ($5.5K for 2013 and $5.5K for 2014) - however - I feel "dirty" in doing this. Somehow it just feels wrong. If this is what the Government intended then they should leave the front-door open. I certainly feel I pay enough taxes (e.g. got whacked with AMT again this year) so feel I'm entitled to some additional benefits on saving for retirement but somehow this technique feels dirty to me (especially when I read things like "You should wait a few days between putting money into the non-deductable IRA and doing the conversion so it doesn't look like abuse").
Any advice to ease my feeling of guilt?? Am I the only one that is this naive in hesitating to take advantage of an obvious tax loop-hole?

User avatar
ERMD
Posts: 291
Joined: Thu Dec 26, 2013 11:26 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by ERMD » Thu Mar 13, 2014 8:36 am

people who advocate waiting a few days for the conversion are paranoid. the backdoor maneuver (now that sounds dirty) is not illegal, and converting the next day versus the next week has absolutely no bearing on public policy.

you can call it a loophole. there are a million of them. get on board while you still can.

there are also those who feel that it won't be closed any time soon, as cash-strapped governments would rather have the tax on the pro rata conversion now.
between scotch and nothing, i'll take scotch. -- faulkner

ChiefIllini
Posts: 64
Joined: Sun Mar 02, 2014 1:25 pm

Re: Backdoor Roth - why does it make me feel dirty?

Post by ChiefIllini » Thu Mar 13, 2014 8:41 am

If big time corporations squeeze out every last penny, why can't us common folk do the same?

Get on board! :sharebeer

JW-Retired
Posts: 6995
Joined: Sun Dec 16, 2007 12:25 pm

Re: Backdoor Roth - why does it make me feel dirty?

Post by JW-Retired » Thu Mar 13, 2014 9:20 am

DaftInvestor wrote: Any advice to ease my feeling of guilt?? Am I the only one that is this naive in hesitating to take advantage of an obvious tax loop-hole?
Guilt?? This is no tax loop-hole at all. It encourages high income people to convert some of their tIRA money to a Roth, which triggers immediate taxation/government income. This change wasn't made by some accident, they knew exactly what they were doing.

The fact that some of us can get a puny $5500/year into the Roth using this was just an unavoidable side effect.
JW
Retired at Last

IlliniDave
Posts: 2294
Joined: Fri May 17, 2013 7:09 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by IlliniDave » Thu Mar 13, 2014 9:37 am

I remember the first time I did it I asked the VG rep helping me through the process several times, "Are you sure this is legitimate?" Nevertheless, it is what it is, and after having felt a little weird the first time, I don't bat an eye anymore.
Don't do something. Just stand there!

User avatar
DaftInvestor
Posts: 4084
Joined: Wed Feb 19, 2014 10:11 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by DaftInvestor » Thu Mar 13, 2014 10:18 am

Thanks for all your responses - I'm starting to feel better :happy

It seems like a bit of work but quoting JW - I'll put in my "puny 5500/year".

User avatar
mhc
Posts: 3800
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: Backdoor Roth - why does it make me feel dirty?

Post by mhc » Thu Mar 13, 2014 10:48 am

If the Backdoor Roth makes you feel bad, then go read the history of the 401k.

Why do you think the government removed the income restrictions on allowing IRA conversions to a Roth? This happened several years ago. The Backdoor is a side affect of the governments decision. I would bet they new about this when they changed the law.

manwithnoname
Posts: 1584
Joined: Mon Jul 22, 2013 7:52 pm

Re: Backdoor Roth - why does it make me feel dirty?

Post by manwithnoname » Thu Mar 13, 2014 1:40 pm

DaftInvestor wrote:After years focused on saving for kids college and simply maxing out a single 401K plan (and assuming that should be enough for retirement - ba-ha-ha-ha) I'm now focusing more on Retirement planning and looking at various strategies.
We have a single income (thus single 401K plan) as my wife stays home and does volunteer work and our income is too high for a spousal IRA or Roth IRA. Thus, to tax shelter more retirement savings I've been reading up on doing a Backdoor Roth - at least for my wife (I don't want to move my IRA to my 401K Nor take the tax-bite of a conversion right now). I understand I could get $11K sheltered right now ($5.5K for 2013 and $5.5K for 2014) - however - I feel "dirty" in doing this. Somehow it just feels wrong. If this is what the Government intended then they should leave the front-door open. I certainly feel I pay enough taxes (e.g. got whacked with AMT again this year) so feel I'm entitled to some additional benefits on saving for retirement but somehow this technique feels dirty to me (especially when I read things like "You should wait a few days between putting money into the non-deductable IRA and doing the conversion so it doesn't look like abuse").
Any advice to ease my feeling of guilt?? Am I the only one that is this naive in hesitating to take advantage of an obvious tax loop-hole?
Never let guilt get in the way of taking a perfectly legal tax benefit that the IRS has approved because there is no legal obligation to overpay taxes.

As Judge Learned Hand opined in a tax case 60 years ago:

"Anyone may arrange his affairs so that his taxes shall be as low as
possible; he is not bound to choose that pattern which best pays the
treasury. There is not even a patriotic duty to increase one's taxes.
Over and over again the Courts have said that there is nothing sinister
in so arranging affairs as to keep taxes as low as possible. Everyone
does it, rich and poor alike and all do right, for nobody owes any
public duty to pay more than the law demands."

User avatar
honkeoki
Posts: 317
Joined: Thu Feb 12, 2009 2:39 pm
Contact:

Re: Backdoor Roth - why does it make me feel dirty?

Post by honkeoki » Thu Mar 13, 2014 1:54 pm

One more thought: the word "backdoor" has a dirty connotation to me -- whether in reference to business, family, or more intimate topics.
Be smug when others are fearful; be fearful when others are smug.

User avatar
DaftInvestor
Posts: 4084
Joined: Wed Feb 19, 2014 10:11 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by DaftInvestor » Thu Mar 13, 2014 2:00 pm

honkeoki wrote:One more thought: the word "backdoor" has a dirty connotation to me -- whether in reference to business, family, or more intimate topics.
Maybe we should call it a "Quick-conversion Roth" or something instead of backdoor.

manwithnoname: Thanks for the quote! I'm feeling better about this with each post!

I'm thinking Vanguard or Fidelity or Schwab should set up a special program for this that makes it easier for us. I transfer the 5.5K each year and they do the rest (e.g. open a deductible IRA then convert into to Roth on the next day). If you guys are listening - first one to do this gets an extra 5.5K of my money every year! I'm all for the Easy-button....

placeholder
Posts: 3958
Joined: Tue Aug 06, 2013 12:43 pm

Re: Backdoor Roth - why does it make me feel dirty?

Post by placeholder » Thu Mar 13, 2014 2:01 pm

If you think this is bad how about those of us pouring after tax contributions into 401ks and then rolling them out to Roth IRAs to add thousands extra to Roth each year (but I don't feel guilty)?

User avatar
frugaltype
Posts: 1952
Joined: Wed Apr 24, 2013 9:07 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by frugaltype » Thu Mar 13, 2014 2:29 pm

ChiefIllini wrote:If big time corporations squeeze out every last penny, why can't us common folk do the same?

Get on board! :sharebeer
Plus, look at what the government does with those tax dollars. I won't get specific, since it would get deleted, but I'm sure people all over the political spectrum could point to things they consider wastes of their tax money.

User avatar
Quidnam
Posts: 443
Joined: Fri Jun 22, 2007 10:11 am
Location: New York, NY

Re: Backdoor Roth - why does it make me feel dirty?

Post by Quidnam » Thu Mar 13, 2014 2:31 pm

Just call it a Roth conversion -- because that's all it is.

Calm Man
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by Calm Man » Thu Mar 13, 2014 9:01 pm

Only our miraculous system would require a backdoor ROTH conversion to achieve the same results that a simple initial contribution to an IRA without income limits would accomplish. I cannot conceive of the rationale of maintaining this system. The tax reporting and paperwork and forms is a waste of time. Or am I missing something?

Streptococcus
Posts: 252
Joined: Thu Jan 03, 2013 12:17 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by Streptococcus » Thu Mar 13, 2014 9:09 pm

A colleague of mine too felt dirty when she learned about the backdoor roth; she held off for a whole year before considering it, then she made up her mind and went for it. It is not a straight forward process, which makes it questionable but it is perfectly legal, the IRS is aware of it and if they did not want us to do it they would have a law prohibiting tIRA conversion to roth if you have a certain income.

DSInvestor
Posts: 10901
Joined: Sat Oct 04, 2008 11:42 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by DSInvestor » Thu Mar 13, 2014 9:13 pm

Streptococcus wrote:A colleague of mine too felt dirty when she learned about the backdoor roth; she held off for a whole year before considering it, then she made up her mind and went for it. It is not a straight forward process, which makes it questionable but it is perfectly legal, the IRS is aware of it and if they did not want us to do it they would have a law prohibiting tIRA conversion to roth if you have a certain income.
Before 2010, Roth conversion was not permitted if MAGI exceeded 100K.
Wiki

User avatar
villars
Posts: 200
Joined: Sat Jan 18, 2014 11:07 pm

Re: Backdoor Roth - why does it make me feel dirty?

Post by villars » Thu Mar 13, 2014 9:18 pm

Go for it if you can.

When i did it for myself this year, it felt like a loophole . But when we tried it for my wife, we realized we'll owe oodles of tax on the conversion because of an old Rollover ira she has. Now it does not feel "illegal" but rather expensive.

MnD
Posts: 3805
Joined: Mon Jan 14, 2008 12:41 pm

Re: Backdoor Roth - why does it make me feel dirty?

Post by MnD » Thu Mar 13, 2014 9:20 pm

No backdoor Roth for me but I am engaging regularly in the 529 "In and Out". 8-)

http://www.finaid.org/savings/state529d ... l#loophole

User avatar
CMartel2
Posts: 224
Joined: Fri Feb 20, 2009 10:46 pm

Re: Backdoor Roth - why does it make me feel dirty?

Post by CMartel2 » Fri Mar 14, 2014 12:04 am

I would argue you're morally obligated to pay the least amout of taxes you should owe and no more and no less.

That said, if you still feel dirty, take some of your savings and donate them to charity. But don't forget to deduct those charitable contributions from your taxes. 8-)

User avatar
indexfundfan
Posts: 2346
Joined: Tue Feb 20, 2007 11:21 am
Contact:

Re: Backdoor Roth - why does it make me feel dirty?

Post by indexfundfan » Fri Mar 14, 2014 12:50 am

Who coined the phrase "backdoor Roth"?
My signature has been deleted.

mhalley
Posts: 6302
Joined: Tue Nov 20, 2007 6:02 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by mhalley » Fri Mar 14, 2014 2:19 am

[OT comments removed by admin LadyGeek]

maitrina
Posts: 30
Joined: Thu Aug 02, 2012 8:20 pm

Re: Backdoor Roth - why does it make me feel dirty?

Post by maitrina » Fri Mar 14, 2014 3:06 am

Two years ago, after reading about the backdoor Roth conversion here, I took the plunge into the mud pit. While doing my taxes that year, my CPA wagged his finger at me and said to "be careful about such tax avoidance schemes found on the internet" (to protect our cover, I hadn't told him where I had read about it). Last year, he sent me a fancy newsletter that touted the joys of the backdoor Roth. :happy
"I'd like to live like a poor man with lots of money." - Pablo Picasso

User avatar
DaftInvestor
Posts: 4084
Joined: Wed Feb 19, 2014 10:11 am

Re: Backdoor Roth - why does it make me feel dirty?

Post by DaftInvestor » Fri Mar 14, 2014 6:52 am

maitrina wrote: my CPA wagged his finger at me and said to "be careful about such tax avoidance schemes found on the internet"
Funny Story - I picked up Kiplinger's Personal Finance yesterday after starting this thread. (I know what some of you are thinking. I certainly don't always like these mag's since they tout the latest trends in stocks and funds - but sometimes worth a glance through to see what folks are thinking). Anyway - As I glanced through I wondered "Why don't these money-fad magazines ever talk about Backdoor Roth" and there it was on Page 59: when they talk about income limits on traditional Roth they mention "though there's no income limit if you make after-tax contributions to a traditional IRA and convert to a Roth". They didn't use the word "Backdoor".

User avatar
LadyGeek
Site Admin
Posts: 49155
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Backdoor Roth - why does it make me feel dirty?

Post by LadyGeek » Fri Mar 14, 2014 11:22 am

I removed an off-topic comment. This thread has run its course and is locked (general comment, going off-topic). See: Forum Policy
UNACCEPTABLE TOPICS

Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed laws or regulations are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
Non-actionable (Trolling) Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:
  • US or world economic, political, tax, health care and climate policies
  • conspiracy theories of any type including oil price manipulation
  • discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Locked