Backdoor Roth: How Long To Wait For Conversion?

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powermega
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Backdoor Roth: How Long To Wait For Conversion?

Post by powermega » Fri Aug 14, 2015 9:45 am

I'm just curious what others here do for this, something like a poll...

When doing a backdoor Roth conversion, how long do you wait to perform the conversion from the traditional IRA to the Roth IRA? A day or a few days? A week or a few weeks? Do you wait for one "statement cycle" to pass? Do you wait months or even until the next calendar year? If you work with an adviser (I know, pretty rare around here), what do they recommend?

To answer my own question, in the past I have done this within a day or two and one time even on the same day. I recently updated my IPS to indicate that I will wait "three complete business days" (ex: deposit on Monday, convert on Friday), which I will do starting in 2016. I generally agree with the discussion about the Step Transaction Doctrine laid out by the WhiteCoatInvestor here.
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Big Dutch
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Big Dutch » Fri Aug 14, 2015 9:50 am

I wait several days, one week at most.

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Go Blue 99
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Go Blue 99 » Fri Aug 14, 2015 9:57 am

I put the traditional in a Vanguard Money Market Fund. I convert to Total Stock Market in Roth on a day when the market is down. It's usually within 1-2 weeks.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by tfb » Fri Aug 14, 2015 10:34 am

powermega wrote:Do you wait months or even until the next calendar year? If you work with an adviser (I know, pretty rare around here), what do they recommend?

I wait months but within the same calendar year. The money is invested from day one, not left in a money market fund. Michael Kitces, an advisor, recommended waiting a year.

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JW-Retired
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by JW-Retired » Fri Aug 14, 2015 10:48 am

If you have the slightest worry about sequence of events wait a month or more. It really doesn't matter. If you wait weeks/months and then you convert it all, you will either, (1) owe some small sum in tax on gains at the conversion, or (2) if there was a loss you will convert less than your basis so the small remainder gets carried forward to next year on the 8606 form.

IMO, either of these things are trivial consequences.
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barnaclebob
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by barnaclebob » Fri Aug 14, 2015 10:50 am

I do it the next day. Do you really think 3 business days will give you additional safety?

Iorek
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Iorek » Fri Aug 14, 2015 5:28 pm

I wait at least a month, sometimes several of I am waiting to sell on a dip.

I freely admit that there is a de minimis risk the IRS will start enforcing step transaction doctrine retroactively against individuals. That said, I like having a month because that's how long the IRS says to wait to avoid a wash sale so it seems like a good benchmark for separating the transaction into two parts.

(I have a lot of respect for emergdoc but I don't think the question of whether you ultimately intended to convert is as central to the step transaction doctrine as that discussion suggests; on the other hand I think in a practical sense it's not worth debating or worrying about.)

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by mhalley » Fri Aug 14, 2015 8:35 pm

The government can always decide at any point that the backdoor roth is not legal. Waiting a day, a week, even a year might not completely absolve you if the irs decides that you are violating the step transaction doctrine. It has been 5 years and no one has been audited and told they couldn't do the backdoor roth. So as they say, you pays your money and takes your chance. For now it is legal, and it is up to you to decide if you really want to wait that year and pay the small amount of taxes on any gains vs doing it in a couple days. I did it as soon as the money was available to transfer before I retired. If you do a backdoor roth every year for many years, but wait a year each time, how is that not showing intent to do a backdoor roth all along?
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powermega
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by powermega » Fri Aug 14, 2015 9:20 pm

barnaclebob wrote:I do it the next day. Do you really think 3 business days will give you additional safety?

No, not really. I just wanted to define a rule to go by.
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by letsgobobby » Fri Aug 14, 2015 9:56 pm

I wait one day. This is clearly a permitted move. I don't feel any anxiety about it at all.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by tyler_cracker » Sat Aug 15, 2015 1:27 am

i do not wait. i queue up the money before the first of the year to avoid the delay between my bank and my ira custodian. i contribute to the traditional ira on the first trading day of the year. i convert to roth the second trading day of the year.

i'm surprised at how many people mentioned trying to time the market in their answer!

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by sesq » Mon Aug 17, 2015 10:36 am

letsgobobby wrote:I wait one day. This is clearly a permitted move. I don't feel any anxiety about it at all.


Same here.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by 2tall4economy » Mon Aug 17, 2015 12:47 pm

Roughly 20 seconds, or the time it takes me to click the buttons (vanguard regular backdoor) or make the ph e call (fidelity mega backdoor)
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Bracket
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Bracket » Mon Aug 17, 2015 3:26 pm

1 or 2 days.

Beth*
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Beth* » Mon Aug 17, 2015 4:51 pm

I wait until the money posts in my tIRA and then I transfer it that day or as soon as I can access a secure computer. I travel a lot for work and I don't like to do financial transactions over hotel networks, so if I am not home when the money posts in the tIRA I might get delayed transferring it for a couple of days. I don't see any point in artificially waiting for a set number of days to go by.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by vikings » Sun Jan 22, 2017 1:52 pm

Thanks all for the helpful replies. One more question related to conversion. Does it matter that the money in Traditional IRA is invested in some fund? Eg: One transfer the money from his saving account to traditional IRA account. Once the money is posted, let it sit for a couple of days and then convert to Roth.

Also, do we have to keep some documents related to the transaction for the tax returns?

Thanks!

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by retiredjg » Sun Jan 22, 2017 1:59 pm

vikings wrote:Thanks all for the helpful replies. One more question related to conversion. Does it matter that the money in Traditional IRA is invested in some fund? Eg: One transfer the money from his saving account to traditional IRA account. Once the money is posted, let it sit for a couple of days and then convert to Roth.

Also, do we have to keep some documents related to the transaction for the tax returns?

Thanks!

If the money is in some kind of investment, it can gain or lose value before it gets converted. A small gain in value is not a big problem - you just pay tax on the gain. A loss is more of a paperwork issue because you are left with some unused basis that you have to keep up with from year to year.

Yes, there is paperwork and you should understand it before you even consider using the back door. Lots of people mess this up and it is time consuming and frustrating to get it straight. Suggest you watch over the next 4 months for all the "how do I fix this back door problem" threads. It might save you some aggravation. Also download some Forms 8606 and work through it in pencil. If you can't get it to come out right, don't do the back door.
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by island » Sun Jan 22, 2017 2:01 pm

Bracket wrote:1 or 2 days.

+1. Soon as the money transfer clears.

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Dendritic Tree
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Dendritic Tree » Sun Jan 22, 2017 9:36 pm

ASAP. Keeps it simple. Show me one instance of the "step doctrine" ever coming back to bite someone after a backdoor Roth conversion and I'll let the money simmer in my tIRA a little longer. But there's no real (codified in law) legal difference between waiting one day and one month.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by PhysicianOnFIRE » Sun Jan 22, 2017 9:48 pm

I convert the next day. I haven't heard of anyone having issues doing so.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Biglaw Investor » Mon Jan 23, 2017 7:02 am

I convert the next day. I'm skeptical that waiting any length of time will protect you from the step transaction doctrine should the IRS decide that backdoor Roth IRA contributions are not allowed.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by The Wizard » Mon Jan 23, 2017 8:59 am

Biglaw Investor wrote:I convert the next day. I'm skeptical that waiting any length of time will protect you from the step transaction doctrine should the IRS decide that backdoor Roth IRA contributions are not allowed.

It's not the IRS, it's Congress that determines if backdoor Roths are permissible or not.
If law is enacted making them not permissible, the IRS will be on top of it going forward...
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Biglaw Investor » Mon Jan 23, 2017 10:13 am

The Wizard wrote:
Biglaw Investor wrote:I convert the next day. I'm skeptical that waiting any length of time will protect you from the step transaction doctrine should the IRS decide that backdoor Roth IRA contributions are not allowed.

It's not the IRS, it's Congress that determines if backdoor Roths are permissible or not.
If law is enacted making them not permissible, the IRS will be on top of it going forward...


That's the point of the conversation though. It's not a law that makes the Backdoor Roth IRA not permissible. Non-deductible contributions are allowed. Conversions are allowed. People are worried that the IRS would initiate a challenge against an individual taxpayer seeking to invalidate such taxpayer's Backdoor Roth contribution. To support this position, the IRS would point to the step transaction doctrine to convince a tax court to collapse the series of steps into a single transaction, given that such single transaction is not permitted by law. I've never heard of this happening.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Deamon615 » Thu Oct 05, 2017 10:23 am

I'm a little late to the party, but I just learned about the Backdoor Roth and want to take advantage of it asap. This thread has been helpful, so first off thanks for everyone's prior input. I have a somewhat related question on timing.

Since Roth IRA contributions have to be established by the tax-filing deadline (April 15, 2018 for the 2017 tax year), am I able to effectuate a Backdoor Roth right now for the 2017 tax year, and then as another commenter posted above, do it again during the first trading days of 2018 (and establish a yearly cycle)? Or would I have to wait until after the tax-filing deadline? I do not currently have an IRA, just a 401K.

Thanks in advance for any input!

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Duckie » Thu Oct 05, 2017 2:34 pm

Deamon615, welcome to the forum.
Deamon615 wrote:Since Roth IRA contributions have to be established by the tax-filing deadline (April 15, 2018 for the 2017 tax year), am I able to effectuate a Backdoor Roth right now for the 2017 tax year, and then as another commenter posted above, do it again during the first trading days of 2018 (and establish a yearly cycle)?
Yes. But to be specific, you'll be making a TIRA contribution, not a Roth IRA contribution. The deadline is the same either way.
Or would I have to wait until after the tax-filing deadline?
You do not have to wait until after the tax-filing deadline. You can set it up for January 2nd.

retiredjg
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by retiredjg » Thu Oct 05, 2017 5:05 pm

In fact, it is better (easier to understand the paperwork) to do the two steps in one calendar year. This puts the contribution on the front side of Form 8606 and the conversion on the back side of the same form.

I'd suggest you download and pencil through form 8606 before trying this. The steps to do the back door are easy - few clicks of the mouse. The paperwork and accidentally having another IRA are the things that people mess up on. If you can't figure out the paperwork by hand, do not do the back door and don't expect a tax-preparer to be able to help.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by birdog » Thu Oct 05, 2017 9:06 pm

Next day.
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by roamin survivor » Mon Nov 13, 2017 2:11 pm

Does this change if conversion fees are involved? Fidelity is charging $15 for after-tax 401K conversion to RothIRA. So $390 in fees if doing immediately for bi-monthly paycheck, but half for each double delay (12 months - $180, 6 months $90, etc.). Unfortunately, no way to split contribution investments for asset allocation.

By the looks of it, $390 in fees would be small in terms of overall potential Roth growth, but best strategy to compare income taxes to potential after-tax gains for reduced costs?

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by retiredjg » Mon Nov 13, 2017 3:21 pm

roamin survivor wrote:
Mon Nov 13, 2017 2:11 pm
Does this change if conversion fees are involved? Fidelity is charging $15 for after-tax 401K conversion to RothIRA. So $390 in fees if doing immediately for bi-monthly paycheck, but half for each double delay (12 months - $180, 6 months $90, etc.). Unfortunately, no way to split contribution investments for asset allocation.

By the looks of it, $390 in fees would be small in terms of overall potential Roth growth, but best strategy to compare income taxes to potential after-tax gains for reduced costs?
What you are doing is not a "back door Roth" which is what this thread is about. What you are doing goes by the name of "mega back door Roth" instead. They are similar, but not the same.

There is no reason to roll your after-tax account more than once or twice a year. In fact, with a fee, I'd probably do it once a year.

Yes, if you roll the earnings (which are pre-tax) into the Roth IRA, you may pay some tax on that. But wouldn't you rather pay tax on earnings than pay $390 a year in fees?

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Duckie
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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by Duckie » Mon Nov 13, 2017 3:25 pm

roamin survivor wrote:Does this change if conversion fees are involved? Fidelity is charging $15 for after-tax 401K conversion to RothIRA. So $390 in fees if doing immediately for bi-monthly paycheck, but half for each double delay (12 months - $180, 6 months $90, etc.).
$390? Yuck! I'd still do it, but yuck.
Unfortunately, no way to split contribution investments for asset allocation.
Does this mean you have to contribute after-tax each pay period? You can't only do it once a month or even once a quarter? Or does this mean whatever your AA is in your pre-tax sub-account has to be the same in after-tax sub-account?

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by roamin survivor » Mon Nov 13, 2017 4:43 pm

Gotcha, but yeah, it's just a concern about tax rates and assuming a 35% income tax rate and 5% return, estimating to come out equal to doing the rollover once a year. Maybe do two if it's doing explosively well.
Duckie wrote:
Mon Nov 13, 2017 3:25 pm
Unfortunately, no way to split contribution investments for asset allocation.
Does this mean you have to contribute after-tax each pay period? You can't only do it once a month or even once a quarter? Or does this mean whatever your AA is in your pre-tax sub-account has to be the same in after-tax sub-account?
The latter. For some reason, they bulk it all together so doing a 60-40 split will result in both the pre-tax and after-tax pots being split 60-40 each.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by retiredjg » Mon Nov 13, 2017 4:58 pm

roamin survivor wrote:
Mon Nov 13, 2017 4:43 pm
Gotcha, but yeah, it's just a concern about tax rates and assuming a 35% income tax rate and 5% return, estimating to come out equal to doing the rollover once a year. Maybe do two if it's doing explosively well.
Well "equal" is not really "equal" if one represents tax on money you get to keep. The fees just go away with nothing to show for it. :happy

You are allowed to roll your pre-tax money into tIRA and the after-tax money into Roth IRA if you want. Some people do not find this helpful because they are also doing the ordinary back door. Others what are also doing the ordinary back door will roll that tIRA back into the 401k before the end of the year.

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Re: Backdoor Roth: How Long To Wait For Conversion?

Post by birdog » Mon Nov 13, 2017 7:19 pm

letsgobobby wrote:
Fri Aug 14, 2015 9:56 pm
I wait one day. This is clearly a permitted move. I don't feel any anxiety about it at all.
Same here.
The height of cultivation always runs to simplicity -Bruce Lee

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