Backdoor Roth [Deductible or Non-Deductible Contribution?]

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northstar22
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Backdoor Roth [Deductible or Non-Deductible Contribution?]

Post by northstar22 » Sat Mar 02, 2013 10:47 am

I make too much to contribute to a Roth, but was not yet eligible for my employer plan in 2012. Normally I would just contribute to a Traditional IRA, but I plan on doing backdoor Roth contributions in 2013 and future years (when I am eligible for my employer plan) so I don't want money in a tIRA (I know another alternative is to roll this into my employer plan once I have that account, but I didn't do that). I did a standard tIRA contribution in December, followed by a conversion to a Roth a few days later.

The question is, when doing my taxes, does it matter if I record the original contribution as a deductible or non-deductible contribution? It seems to me the end result is the same (I'm paying taxes on the money now), but Turbotax seemed a little confused by this and initially wanted to recharacterize (instead of convert) this contribution as a Roth since it was done in the same year. I don't want to recharacterize since I'm not eligible for a direct Roth. I think I got turbotax to handle it correctly, but it got me thinking and I want to make sure I'm not screwing it up.

Thanks.

Alan S.
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Re: Backdoor Roth

Post by Alan S. » Sat Mar 02, 2013 3:42 pm

Since you converted in 2012, the end result will be the same whether you deduct the contribution or not. If you deduct it, the value of the deduction is erased by the taxable income for the conversion. If you don't deduct it, then your conversion is tax free. However, not deducting it is the better choice because your conversion will then be non taxable, and if you need to tap the conversion money in the Roth in the next 5 years, you can without penalty, ie you effectively have NO 5 year holding period. Conversely, if you deducted the contribution, your conversion would be taxable and then you WOULD have a 5 year holding period in the Roth.

Note that if you hadn't converted in 2012, then the deduction choice would give you the opportunity to shift income as follows:
1) Deduct in 2012. you reduce taxable income by the amount of the contribution in 2012 and shift it to 2013 when you convert.
2) Report non deductible contribution on Form 8606, and your income in 2012 would be higher than in 1) above, and in 2013 would be less.

Changing the year of income through TIRA deductions is normally not a big deal. However, in your case if it WAS a big deal, you could recharacterize the 2012 conversion and then after a 30 day waiting period you could reconvert in 2013. Of course, earnings generated after your first conversion would then become taxable in the second conversion.

Lots of options if you can deduct your TIRA contribution, because everyone also has the option NOT to deduct it. With respect to Turbotax, be sure the output is logical. Many tax programs seem to infer that if you can deduct the contribution, you WILL. But that is not always the case.

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Re: Backdoor Roth [Deductible or Non-Deductible Contribution

Post by LadyGeek » Sat Mar 02, 2013 3:50 pm

This thread is now in the Personal Finance (Not Investing) forum (Roth tax question). I also retitled the thread.
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Epsilon Delta
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Re: Backdoor Roth [Deductible or Non-Deductible Contribution

Post by Epsilon Delta » Sat Mar 02, 2013 5:25 pm

State taxes may make a difference. Sometimes a Roth conversion is state tax free. This would favor making a deductible contribution.

See the following threads:
http://www.bogleheads.org/forum/viewtop ... 10&t=86262
http://www.bogleheads.org/forum/viewtop ... 0&t=106132

northstar22
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Re: Backdoor Roth [Deductible or Non-Deductible Contribution

Post by northstar22 » Sat Mar 02, 2013 11:43 pm

I am in Illinois, so it looks like in my case it's better for me to deduct it so I can get a state tax break out of it, though it's interesting to see all the different options there are. I sure had no idea about the state tax break before, and am going to make sure turbotax gets that right. Thanks to Alan and Epsilon, your advice is very much appreciated.

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