Traditional IRA No use for me?

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FamilyOfFour
Posts: 12
Joined: Mon Jan 15, 2018 11:10 am

Traditional IRA No use for me?

Post by FamilyOfFour » Sat Jan 20, 2018 10:02 am

Me - 132k/y | Wife 109k/y === TOTAL Family income 241k
Both our employers provide 401k plans (Mine - if I put 6%, company put 9%, Hers - around 6%/6% match)

Here are my questions.
1. Based on our salaries, I do not think we can get Tax deductions by contributing to TIRA. Is that correct?
2. If the answer to above #1 is TRUE - The only option for us to contribute to IRA is ROTH (via BackDoor). Is that correct?

Thanks in advance,

sailaway
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Joined: Fri May 12, 2017 1:11 pm

Re: Traditional IRA No use for me?

Post by sailaway » Sat Jan 20, 2018 10:23 am

You are correct that your contributions will not be deductible.

On the other hand, the backdoor Roth is exactly why a traditional IRA is not useless. It is the entrance to the backdoor. You make a non deductible contribution to the traditional, then move it to the Roth.

FamilyOfFour
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Joined: Mon Jan 15, 2018 11:10 am

Re: Traditional IRA No use for me?

Post by FamilyOfFour » Sat Jan 20, 2018 10:39 am

Thank you very much.

One more question pls.

So if I back door, that is completely seamless for my Tax filing right?

Thanks,
FoF

nolesrule
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Re: Traditional IRA No use for me?

Post by nolesrule » Sat Jan 20, 2018 11:44 am

FamilyOfFour wrote:
Sat Jan 20, 2018 10:39 am
Thank you very much.

One more question pls.

So if I back door, that is completely seamless for my Tax filing right?

Thanks,
FoF
It will require an additional Form 8606. If you use tax software, you'll need to answer all the questions correctly to produce the correct results. The form is the part where people tend to make the most mistakes.

FamilyOfFour
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Joined: Mon Jan 15, 2018 11:10 am

Re: Traditional IRA No use for me?

Post by FamilyOfFour » Sat Jan 20, 2018 1:41 pm

Thank you.

So for 2017, I have not contributed to IRA yet. Do I have to the backdoor step completed before filing tax?

thx1138
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Re: Traditional IRA No use for me?

Post by thx1138 » Sat Jan 20, 2018 2:19 pm

FamilyOfFour wrote:
Sat Jan 20, 2018 1:41 pm
Thank you.

So for 2017, I have not contributed to IRA yet. Do I have to the backdoor step completed before filing tax?
You need to make the non-deductible contribution to the traditional IRA before April 15th. You can convert it to Roth anytime you want. Most people convert it very shortly after making the contribution to minimize taxable gains at the time of conversion.

On your 2017 taxes you will file a 8606 noting the non-deductible contribution to track its basis. Since you will be converting this amount in the 2018 tax year the conversion won't show up on your 2017 taxes, it will show up on your 2018 taxes. You need the 8606 on your 2017 filing to show the 2017 contribution though so you have the proper basis for a tax free conversion to appear on your 2018 taxes. For the year 2018 taxes you will get a 1099-R showing your conversion. It is the 8606 non-deductible basis offset against that 1099-R that makes the "Backdoor Roth". In your case you'll file the 8606 in 2017 and the 1099-R in 2018.

If you contributed and converted in 2017 this would all show up on one year's tax forms - the 8606 and 1099-R would be part of the same tax year. Because your contribution is a 2017 contribution but the conversion will be in 2018 it spans two tax year filings. This is no big deal and is perfectly fine (I've done it a variety of times) but the gotcha can be figuring out how to answer the tax software's cryptic questions to make sure it files a proper 8606 this year and then subsequently answer the questions in 2018 so it handles the 1099-R properly. It seems to be one of those things where the forms and the IRS instructions are way more clear than the "interview questions" most tax software uses.

So I'd strongly recommend you observe what is happening on the 8606 in this year's taxes. The software should be generating one of those forms and showing a non-deductible contribution to a traditional IRA. One year I didn't double check this and pay attention and there was no 8606 so lucky me I got to amend my taxes when I discovered the error the following year when the tax software was trying to tax my conversion because there was no basis and 8606 from the previous year!

It is all very straight forward if you look at the forms and read a bit on the web. It is just the tax software that makes it unnecessarily confusing.

TwstdSista
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Re: Traditional IRA No use for me?

Post by TwstdSista » Sat Jan 20, 2018 2:36 pm

Be aware that if you have any other traditional-type IRAs (including SEP and SIMPLE IRAs) with balances there are additional considerations to take into account re: a Backdoor Roth.

(I'm not completely aware of what these considerations are, I just haven't seen anyone mention it and didn't want you to be unaware in case it is an issue)

ccieemeritus
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Re: Traditional IRA No use for me?

Post by ccieemeritus » Sat Jan 20, 2018 2:53 pm

One thing you _dont_ want is to open a post-tax traditional IRA and fail to backdoor it over to a roth IRA.

DW and I each have $4k in a post-tax traditional IRA, in addition to a bunch of other IRAs. So we can't execute a backdoor Roth without major headaches (we'd have to roll the other IRAs into 401k's so our only remaining IRA was the traditional).

The problem is the paperwork, keeping track of that $4k that is post-tax over decades. And what does it get us? The gain is (eventually) taxable at income tax rates. With post-tax money I'd rather buy a low-cost mutual fund and have the gain taxed at capital gain rates. Meanwhile pre-tax money goes into 401k's up to the max.

FamilyOfFour
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Re: Traditional IRA No use for me?

Post by FamilyOfFour » Sat Jan 20, 2018 6:51 pm

Thank you all for the responses.

ccieemeritus you are bringing up an interesting point for me. I will explain how I was going to contribute to TIRA.

I do not have any pre tax method to contribute toe TIRA (means, my employer does not offer any IRA plans). So, what I to do is take $5500 from my Checking account and fund my TIRA account in TD ameritrade. Is that considered as post tax IRA? Please kindly clarify this to me. (when filing tax, I will say =Yes, I did contribute to an TIRA.

Thanks a lot.

FoF

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Duckie
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Re: Traditional IRA No use for me?

Post by Duckie » Sat Jan 20, 2018 7:05 pm

FamilyOfFour wrote:I do not have any pre tax method to contribute toe TIRA (means, my employer does not offer any IRA plans). So, what I to do is take $5500 from my Checking account and fund my TIRA account in TD ameritrade. Is that considered as post tax IRA? Please kindly clarify this to me. (when filing tax, I will say =Yes, I did contribute to an TIRA.
In this case "post tax" = "after tax" = "non-deductible". They all mean an already-taxed basis in the TIRA. So yes, by making non-deductible contributions to a TIRA those contributions could be considered "post tax".

FamilyOfFour
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Joined: Mon Jan 15, 2018 11:10 am

Re: Traditional IRA No use for me?

Post by FamilyOfFour » Sat Jan 20, 2018 8:40 pm

Thanks Duckie.

I just want to make sure I am not doing any missing anything as ccieemerituas said "One thing you _dont_ want is to open a post-tax traditional IRA and fail to backdoor it over to a roth IRA"

Just curious what ccieemerituas meant by above.

Thanks,
FoF

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Duckie
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Re: Traditional IRA No use for me?

Post by Duckie » Sat Jan 20, 2018 10:38 pm

FamilyOfFour wrote:Just curious what ccieemerituas meant by above.
ccieemeritus and his wife each made $4K non-deductible contributions to TIRAs which is the first step of the backdoor method, but since they have a bunch of other non-Roth IRAs they can't do the second step, the conversion, without paying a bunch of taxes because of the pro-rata rule. So now they each have a $4K basis in their non-Roth IRAs which they will need to track once they start taking distributions. It's a small paperwork hassle.

If you're going to make non-deductible contributions, first make sure you don't have any non-Roth IRAs to get in the way. Then convert ASAP.

rkhusky
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Re: Traditional IRA No use for me?

Post by rkhusky » Sat Jan 20, 2018 11:01 pm

FamilyOfFour wrote:
Sat Jan 20, 2018 6:51 pm
Thank you all for the responses.

ccieemeritus you are bringing up an interesting point for me. I will explain how I was going to contribute to TIRA.

I do not have any pre tax method to contribute toe TIRA (means, my employer does not offer any IRA plans). So, what I to do is take $5500 from my Checking account and fund my TIRA account in TD ameritrade. Is that considered as post tax IRA? Please kindly clarify this to me. (when filing tax, I will say =Yes, I did contribute to an TIRA.

Thanks a lot.

FoF
It is considered post-tax (or after-tax or non-deductible) if you don't deduct it on line 32 of your 1040. It is pre-tax if you do deduct it on line 32.

Your employer has nothing to do with IRA's. To create an IRA, you contact a company like TD Ameritrade (or Vanguard or Fidelity or Schwab) and open an IRA account. For the backdoor, you will need to create a Traditional account and a Roth account. You fund the tIRA by transferring money from your checking to TD Ameritrade (either directly to the tIRA account or to a sweep account. If the latter, move the funds to the tIRA, shortly thereafter). After the money has been in the tIRA a day or two, transfer it to the Roth account. Make sure you don't enter the amount in line 32 of your 1040.

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