Backdoor Roth?

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plasma800
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Backdoor Roth?

Post by plasma800 » Wed Jul 19, 2017 4:51 pm

Can anyone enlighten me about the what's and hows of a "backdoor" roth?

I'm not that familiar with the rules of engagement with IRA's, seeking to learn something new.

Apparently, I make too much money for a Roth, and I guess my wife would be included in that as we file jointly?

Either way, I'm curious to know if there is a path for either of us to get into a ROTH.

jebmke
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Re: Backdoor Roth?

Post by jebmke » Wed Jul 19, 2017 4:59 pm

Do you have an existing Traditional IRA funded with pre-tax contributions in prior years?
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TomatoTomahto
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Re: Backdoor Roth?

Post by TomatoTomahto » Wed Jul 19, 2017 5:23 pm

jebmke wrote:Do you have an existing Traditional IRA funded with pre-tax contributions in prior years?
... that you can't roll into an existing employer's 401k?

Read https://www.bogleheads.org/wiki/Backdoor_Roth_IRA for a start

Thesaints
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Re: Backdoor Roth?

Post by Thesaints » Wed Jul 19, 2017 5:26 pm

Contribute to a non-deductible IRA (no income limit) and convert to a Roth (no income limit).
Problems arise when you already have a traditional IRA because the amount converted into a Roth will be pro rated amongst all of your IRA accounts and, likely, generate taxable income.

indexonlyplease
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Re: Backdoor Roth?

Post by indexonlyplease » Wed Jul 19, 2017 5:38 pm

I did it last year for the first time. It was easy. Got help from Vanguard. I don't have a Traditional IRA like Thesaints states

plasma800
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Re: Backdoor Roth?

Post by plasma800 » Wed Jul 19, 2017 5:48 pm

Ok so,

I have a traditional IRA. I just fired my adviser firm and am moving the entire thing to Vanguard tomorrow.

Same for my Wife's ira, which is partly made up of money moved from her SEP IRA at another employer.

I'm self-employed with 100% ownership of an S Corp, my wife works for the business on a small W-2, and also does some medical billing on the side (where her sep IRA comes from)

I take no W-2 at all at the moment, but draws instead.

I've been working on setting up a safe harbor 401 for us, but it's a mess getting it all straight and we're a small company compared to other groups setting up 401's. It's been difficult to get anyone to want to even bother with it. Vanguard will do it for us, but their minimum in fees is $3,000 per year to administrate.

So there I am... wondering what to do..

plasma800
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Re: Backdoor Roth?

Post by plasma800 » Wed Jul 19, 2017 5:49 pm

AND I just contributed the max for both her and myself into the vanguard traditional IRA's I just opened last week.

Thesaints
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Re: Backdoor Roth?

Post by Thesaints » Wed Jul 19, 2017 9:01 pm

plasma800 wrote:AND I just contributed the max for both her and myself into the vanguard traditional IRA's I just opened last week.
That's ok. An IRA becomes "traditional" or "non-deductible" only after you file your 2017 taxes and take the deduction, or file Form 8606.
You can convert to a Roth any time you like at this point, just remember to add Form 8606 (and equivalent State form) to your taxes next year.

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TomatoTomahto
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Re: Backdoor Roth?

Post by TomatoTomahto » Wed Jul 19, 2017 9:56 pm

Thesaints wrote:
plasma800 wrote:AND I just contributed the max for both her and myself into the vanguard traditional IRA's I just opened last week.
That's ok. An IRA becomes "traditional" or "non-deductible" only after you file your 2017 taxes and take the deduction, or file Form 8606.
You can convert to a Roth any time you like at this point, just remember to add Form 8606 (and equivalent State form) to your taxes next year.
Wait. It sounds as though you and your wife have traditional IRAs from years past. True or not?

Do you have earned income this year sufficient to fund an IRA? Does your wife?

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Earl Lemongrab
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Re: Backdoor Roth?

Post by Earl Lemongrab » Thu Jul 20, 2017 11:17 am

Just to clarify, your S-corp has other employees?
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plasma800
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Re: Backdoor Roth?

Post by plasma800 » Thu Jul 20, 2017 8:10 pm

TomatoTomahto wrote:
Thesaints wrote:
plasma800 wrote:AND I just contributed the max for both her and myself into the vanguard traditional IRA's I just opened last week.
That's ok. An IRA becomes "traditional" or "non-deductible" only after you file your 2017 taxes and take the deduction, or file Form 8606.
You can convert to a Roth any time you like at this point, just remember to add Form 8606 (and equivalent State form) to your taxes next year.
Wait. It sounds as though you and your wife have traditional IRAs from years past. True or not?

Do you have earned income this year sufficient to fund an IRA? Does your wife?
Oh yeah, we are currently moving both of our IRA's from another brokerage to Vanguard.

We have more income than the IRA can hold, thinking about a safe harbor 401 in the future.

plasma800
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Re: Backdoor Roth?

Post by plasma800 » Thu Jul 20, 2017 8:11 pm

Earl Lemongrab wrote:Just to clarify, your S-corp has other employees?

S-Corp absolutely has employees.

plasma800
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Re: Backdoor Roth?

Post by plasma800 » Thu Jul 20, 2017 8:12 pm

Thesaints wrote:
plasma800 wrote:AND I just contributed the max for both her and myself into the vanguard traditional IRA's I just opened last week.
That's ok. An IRA becomes "traditional" or "non-deductible" only after you file your 2017 taxes and take the deduction, or file Form 8606.
You can convert to a Roth any time you like at this point, just remember to add Form 8606 (and equivalent State form) to your taxes next year.
This makes total sense. I hand't yet thought of it that way, Thanks.

I'll be sure to make a note to my CPA on the form if I decide to do this. I'm just not sure HOW to decide if it's right for us.

plasma800
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Re: Backdoor Roth?

Post by plasma800 » Thu Jul 20, 2017 9:04 pm

I guess one big question I haven't answered is:

Can you convert only new contributions, or can you convert past contributions too.

I understand that if my balance was say 22900, and I contribute 5500 for 17, and I want to convert the 5500 then the math is

22900 + 5550 = 28400

5500 / 28400 = .19

Tax would be due on 5500 * .81 = 4455

and the 5500 would be moved to a roth, leaving the previous 22900 inside the previous ira growing for eternity until I redo the math in '18 replacing 22900 with the IRA then current holdings, paying tax, moving 5500 to roth, rinse repeat for '19? etc...

Beth*
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Re: Backdoor Roth?

Post by Beth* » Thu Jul 20, 2017 10:06 pm

You can convert the entire balance of your traditional IRA to a Roth IRA as long as you pay tax on any portion that was not previously taxed. If your traditional IRA includes any post tax contributions, and you have documented that, you don't need to pay tax on those post-tax contributions.

FinancialDave
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Re: Backdoor Roth?

Post by FinancialDave » Thu Jul 20, 2017 11:56 pm

The question really is do you want to file an 8606 form with your taxes every year from now until you die, or all your IRA's are empty whichever comes first OR:

Do you want a cleaner tax filing season for you and your heirs?

If the later is your choice then just do a conversion on some of your IRA money and get it cleanly into a Roth - no messy strings attached, otherwise to the backdoor Roth which leaves a forever portion of after-tax money in your IRA that you have to track forever on an 8606.

Personally, I choose simple, but some people don't seem to mind the paper-work. Completely your choice.

Dave
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