Back door Roth IRA

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Yelena
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Joined: Tue Jan 21, 2014 9:17 pm

Back door Roth IRA

Post by Yelena » Tue Jan 28, 2014 2:34 pm

Hi, I am a new member and have a question regarding back door Roth IRA.

My income does not allow me to contribute to Roth IRA and I would like to take advantage of the Back door IRA.

Here is my question: if I rollover my existing IRA
to the 401K plan this year (2014) can I still contribute into Back door IRA for 2013 and for 2014?

Thank you in advance for all the help you can give me.

Yelena

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

Re: Back door Roth IRA

Post by placeholder » Tue Jan 28, 2014 6:10 pm

Yes you can.

retiredjg
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Re: Back door Roth IRA

Post by retiredjg » Tue Jan 28, 2014 6:27 pm

Some clarification. You are allowed to do a back door contributions to Roth IRA no matter what you have in tIRA. But most people would not want to because that tIRA money would get pulled into the calculations for how much tax is owed.

As for your rollover, yes, that's "good" for all the following years as long as you do not put any more money into tIRA that you don't intend to convert to Roth. For example, another rollover into tIRA in a following year would mess things up.

retiredjg
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Re: Back door Roth IRA

Post by retiredjg » Tue Jan 28, 2014 6:30 pm

As for your 2013 back door contribution, that would have to be done before April 15. Then you can do the conversion any time you want. The critical thing would be to have your rollover moved to your 401k by 12/31 of the year you do the conversion (presumably 12/31/14).

sscritic
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Re: Back door Roth IRA

Post by sscritic » Tue Jan 28, 2014 6:35 pm

No you can't. There is no such thing as a contribution into a Back door IRA.

You can contribute to a tIRA for 2013 if you get moving. You can contribute to a tIRA for 2014 even if you are slow. You can convert some portion or all of your tIRA to a Roth in 2014. To see how this would work, get tax software for 2013 if you don't already have it and get in a time machine. Pretend you made contributions for 2012 and 2013 in 2013 and also rolled over your 401(k) in 2013. What do you see on your 8606?

bandoba
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Joined: Thu Apr 08, 2010 12:51 am

Re: Back door Roth IRA

Post by bandoba » Tue Jan 28, 2014 7:01 pm

I'm trying to open back door Roth IRA too. So in general, is it always recommended to fund tIRA in lump sum and then convert that to Roth IRA? Or can I DCA into tIRA for the whole year and then convert it to backdoor Roth IRA at the end of the year?

placeholder
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Re: Back door Roth IRA

Post by placeholder » Tue Jan 28, 2014 7:09 pm

Most do it lump sum to avoid any taxes due to growth of the money.

bandoba
Posts: 92
Joined: Thu Apr 08, 2010 12:51 am

Re: Back door Roth IRA

Post by bandoba » Tue Jan 28, 2014 7:23 pm

placeholder wrote:Most do it lump sum to avoid any taxes due to growth of the money.
Oh, right. I read it earlier but forgot about the growth when I posted the question. Thanks.

Saving$
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Re: Back door Roth IRA

Post by Saving$ » Tue Jan 28, 2014 7:36 pm

Not to be redundant, but seems worth clarifying:

1. You can contribute to a tIRA for 2013 before April 15, 2014. You can do this regardless of income, but as you know, your contribution will not be deductible due to your high income. Thus, your contribution to the tIRA will be POST Tax, giving you a basis in your tIRA, rather than PRE tax contribution to the tIRA, like a 401k rollover into a tIRA would be. You best bet to make this go smoothly is to open a totally new tIRA, and put your 2013 POST tax contribution into that.

2. THEN, you need to roll your existing tIRA that was funded with PRETAX money (that does NOT have basis) into your 401k.

3. Once you do the item 2 roll over, you no longer have any significant existing tIRA money without basis (there will be whatever the money in item 1 above earns, but depending upon how you invest and how fast you do item 2, it should not be much). Once all your tIRA money is POST tax, you roll that money into a ROTH.

4. As you can see from the above, the reason you can backdoor both your 2013 and 2014 contributions is that you don't roll from the tIRA to the ROTH IRA until after you get rid of all PRETAX money in the tIRA.

Yelena
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Joined: Tue Jan 21, 2014 9:17 pm

Re: Back door Roth IRA

Post by Yelena » Tue Jan 28, 2014 8:20 pm

Thank you all for very detailed and quick reply!

sscritic
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Joined: Thu Sep 06, 2007 8:36 am

Re: Back door Roth IRA

Post by sscritic » Tue Jan 28, 2014 8:34 pm

I still suggest you fill out an 8606 for two consecutive years. Saving$ told you to do things in a particular order, but this thread says it doesn't matter, at least some of it. A + B - C is the same as A - C + B if all that matters is the year end balance.

http://www.bogleheads.org/forum/viewtop ... 2&t=130204

I am no expert and admit to never ever doing this and I likely never will, but I don't see on form 8606 where they ask you for the dates when you did things, other than contributions in one year by April 15 for the previous year get counted in the previous year's year end balance. I think I have that right, but you won't know unless you fill out an 8606 yourself.

bandoba
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Re: Back door Roth IRA

Post by bandoba » Tue Jan 28, 2014 8:41 pm

I just called Vanguard to initiate rollover of my IRA in Vanguard to employer 401K. The person I talked to didn't really know the prorata rule. He was kind enough to get retirement specialist on line and she eventually understood the situation and explained it to me as well as him. Though after we finished talking, the specialist called back and told me that rolling over current IRA to employer 401K plan will generate 1099-R and I should confirm with tax accountant that having such 1099-R isn't going to cause any issues with tIRA to Roth conversion. Based on the reading and posts in this thread, I believe 1099-R wouldn't cause any issues. But just to confirm is there anything else I need to check? My situation is similar to OP except that, my existing IRA is already in Vanguard and after rolling it over to 401K at Fidelity, I would like to open new tIRA in Vanguard. TIA for your help.

sscritic
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Re: Back door Roth IRA

Post by sscritic » Tue Jan 28, 2014 8:48 pm

Read about isolating the basis. Know before you do.

Alan S.
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Location: Prescott, AZ

Re: Back door Roth IRA

Post by Alan S. » Tue Jan 28, 2014 11:10 pm

bandoba wrote:I just called Vanguard to initiate rollover of my IRA in Vanguard to employer 401K. The person I talked to didn't really know the prorata rule. He was kind enough to get retirement specialist on line and she eventually understood the situation and explained it to me as well as him. Though after we finished talking, the specialist called back and told me that rolling over current IRA to employer 401K plan will generate 1099-R and I should confirm with tax accountant that having such 1099-R isn't going to cause any issues with tIRA to Roth conversion. Based on the reading and posts in this thread, I believe 1099-R wouldn't cause any issues. But just to confirm is there anything else I need to check? My situation is similar to OP except that, my existing IRA is already in Vanguard and after rolling it over to 401K at Fidelity, I would like to open new tIRA in Vanguard. TIA for your help.
There is a special rule here that supercedes pro rating because an employer plan cannot accept basis from an IRA. This is the special rule from Pub 590:
Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.
Further, with respect to your 1099R, the rollover will be reported on lines 15a and 15b of Form 1040, but in particular you need to attach an explanatory statement with your return indicating what you did. This is because the employer plan does NOT issue a 5498 to report the rollover contribution and this leaves the IRS wondering if you really rolled it over or perhaps kept the money. The G coding should suffice for the IRS, but they don't seem to realize this and often contact taxpayers regarding IRA to employer plan rollovers. Attach the statement.

bandoba
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Re: Back door Roth IRA

Post by bandoba » Tue Jan 28, 2014 11:33 pm

Alan S. wrote: There is a special rule here that supercedes pro rating because an employer plan cannot accept basis from an IRA. This is the special rule from Pub 590:
Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.
Sorry for the confusion. My existing IRA in Vanguard is a rollover IRA. It only has pretax money from past employer 401K. It appears that the above rule doesn't apply to my situation as it talks about rolling over traditional IRA to employer 401K. Would you agree?
Alan S. wrote: Further, with respect to your 1099R, the rollover will be reported on lines 15a and 15b of Form 1040, but in particular you need to attach an explanatory statement with your return indicating what you did. This is because the employer plan does NOT issue a 5498 to report the rollover contribution and this leaves the IRS wondering if you really rolled it over or perhaps kept the money. The G coding should suffice for the IRS, but they don't seem to realize this and often contact taxpayers regarding IRA to employer plan rollovers. Attach the statement.
I have always used TurboTax and filed taxes electronically. If I need to send the statement, do I need to file paperwork instead of filing it electronically? Or is there other way to do it? Thanks for your help Alan.

Alan S.
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Location: Prescott, AZ

Re: Back door Roth IRA

Post by Alan S. » Tue Jan 28, 2014 11:50 pm

If all your traditional IRAs hold only pre tax amounts, the special rule does not apply. It only applies if you have basis in your non Roth IRAs (any of them) as documented on Form 8606.

Otherwise, TTax should support your inclusion of the explanatory statement. But perhaps someone who has the software can be more specific how you would do this. If by chance it did not, it's not a disaster, but your chances of an IRS inquiry regarding the rollover is fairly high.

bandoba
Posts: 92
Joined: Thu Apr 08, 2010 12:51 am

Re: Back door Roth IRA

Post by bandoba » Wed Jan 29, 2014 12:00 am

Thanks for confirming.

BTW, one basic question about my IRA at Vanguard. I used to think that my account at Vanguard is Rollover IRA which is different than traditional IRA. But when I talked to Vanguard they were saying it is same as traditional IRA and now in your earlier post seem to suggest same thing. So is there any difference between IRA v/s Rollover IRA which was created by rolling over earlier 401K plan?

maxim81
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Re: Back door Roth IRA

Post by maxim81 » Tue Mar 04, 2014 9:10 am

Sorry for responding to an older thread.. but i have a similar question:

a) I have about $19K in TIRA, spouse has about $30K in rollover IRA (from previous employer's 401K)
b) When I contributed to my TIRA , my income was high (and still high for current year). I was not able to deduct the contributions with my tax return.


Questions:

a) Since I have POST TAX money in TIRA, can I backdoor the existing $19K + $5500 (contribution for 2013) with minimal tax implications?

b) Since my wife's money was PRE TAX (401k to rollover IRA), I'm assuming she will get hit with a tax bill. What are the options here? Rollover the rollover IRA to her new 401k provider and then open a new TIRA and do a backdoor? or simply open a 2nd TIRA account and contribution for 2013 and do a rollover? (I'm not sure if one can open a 2nd TIRA)


Thanks...

JW-Retired
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Re: Back door Roth IRA

Post by JW-Retired » Tue Mar 04, 2014 11:01 am

All tIRAs, SEP IRAs, SIMPLE IRAs, rollover IRAs are lumped together for Roth conversion taxation purposes. You simply must look at IRS form 8606 and understand how to fill it out before you do anything.
JW
Retired at Last

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

Re: Back door Roth IRA

Post by placeholder » Tue Mar 04, 2014 1:21 pm

With your IRA how much did you put in versus the 19k it's worth because that will be the taxable amount there.

maxim81
Posts: 47
Joined: Sat Apr 19, 2008 7:03 pm

Re: Back door Roth IRA

Post by maxim81 » Tue Mar 04, 2014 5:18 pm

placeholder wrote:With your IRA how much did you put in versus the 19k it's worth because that will be the taxable amount there.
$5000 for 2010, $5000 for 2011.

In 2009, I had to re-characterize Roth IRA contributions (total was around $9000).

It's a mess.. sigh and I had to get Form 5498 from Vanguard for all years to figure it out.

All were non-deductible contributions so that is why i am thinking my TIRA (worth $19K now) can be converted to Roth with minimal tax implications.

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

Re: Back door Roth IRA

Post by JW-Retired » Tue Mar 04, 2014 7:47 pm

maxim81 wrote:
placeholder wrote:With your IRA how much did you put in versus the 19k it's worth because that will be the taxable amount there.
$5000 for 2010, $5000 for 2011.

In 2009, I had to re-characterize Roth IRA contributions (total was around $9000).

It's a mess.. sigh and I had to get Form 5498 from Vanguard for all years to figure it out.

All were non-deductible contributions so that is why i am thinking my TIRA (worth $19K now) can be converted to Roth with minimal tax implications.
If you haven't done so, you need to fill out the 8606 forms for all these years and send them to IRS to document what your IRA basis is. Start with 2009 and work through them. Then in April 2015 file an 8606 for the conversion this year. Or, you could also put in $5500 non-deductible contributions for 2013 & 2014 before converting at no extra tax cost. That would make it two more 8606 forms, one for the 2013 tax year and one for 2014.

It would be unusual if the taxes will be "minimal" since all the earnings generated over the years will be taxed when you convert. Only the contribution amounts count in the basis.
JW
Retired at Last

maxim81
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Joined: Sat Apr 19, 2008 7:03 pm

Re: Back door Roth IRA

Post by maxim81 » Wed Mar 05, 2014 9:16 am

JW Nearly Retired wrote:
maxim81 wrote:
placeholder wrote:With your IRA how much did you put in versus the 19k it's worth because that will be the taxable amount there.
$5000 for 2010, $5000 for 2011.

In 2009, I had to re-characterize Roth IRA contributions (total was around $9000).

It's a mess.. sigh and I had to get Form 5498 from Vanguard for all years to figure it out.

All were non-deductible contributions so that is why i am thinking my TIRA (worth $19K now) can be converted to Roth with minimal tax implications.
If you haven't done so, you need to fill out the 8606 forms for all these years and send them to IRS to document what your IRA basis is. Start with 2009 and work through them. Then in April 2015 file an 8606 for the conversion this year. Or, you could also put in $5500 non-deductible contributions for 2013 & 2014 before converting at no extra tax cost. That would make it two more 8606 forms, one for the 2013 tax year and one for 2014.

It would be unusual if the taxes will be "minimal" since all the earnings generated over the years will be taxed when you convert. Only the contribution amounts count in the basis.
JW
Ugh. Will it just be easier if I rollover the $19K in my TIRA to my 401k? This option sounds a lot easier..

retiredjg
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Re: Back door Roth IRA

Post by retiredjg » Wed Mar 05, 2014 10:13 am

Easier than what?

If you have not filled out the Forms 8606 for each year, you have to do that anyway, no matter what you decide to do with the money. It is the only thing that documents that you have already paid tax on that money. It is the Form 8606 that keeps you from getting taxed a second time on the money.

Do you have the Forms done already? If not, people can help you find them and fill them out. It's actually pretty easy.

It is unclear to me how much already taxed money you have contributed. $5k for 2010 and $5 for 2011 is clear, but what about 2009? You mentioned $9k - was that for you alone or the two of you? If some of that was for your spouse, you'll need a Form 8606 for your spouse that year if the money went into tIRA.

I'm not sure if you can roll the $19k into your 401k or not. It used to be that you could not roll basis (already taxed money) into a 401k, but that may have changed recently. But even if you can, why would you when it can go to Roth IRA instead?

For your wife, the best option is to roll it into her new 401k provider if the choices in that plan are pretty good. That would clear the way for her to use the back door contribution method in the future. However, don't roll any already taxed money into her 401k. That could go to Roth IRA.

If you could be more clear about how much money is in each account and how much has been taxed and whether you have already done the 8606 forms for each year, it would be a little easier to help you straighten this out.

maxim81
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Re: Back door Roth IRA

Post by maxim81 » Wed Mar 05, 2014 10:56 am

retiredjg wrote:Easier than what?

If you have not filled out the Forms 8606 for each year, you have to do that anyway, no matter what you decide to do with the money. It is the only thing that documents that you have already paid tax on that money. It is the Form 8606 that keeps you from getting taxed a second time on the money.

Do you have the Forms done already? If not, people can help you find them and fill them out. It's actually pretty easy.

It is unclear to me how much already taxed money you have contributed. $5k for 2010 and $5 for 2011 is clear, but what about 2009? You mentioned $9k - was that for you alone or the two of you? If some of that was for your spouse, you'll need a Form 8606 for your spouse that year if the money went into tIRA.

I'm not sure if you can roll the $19k into your 401k or not. It used to be that you could not roll basis (already taxed money) into a 401k, but that may have changed recently. But even if you can, why would you when it can go to Roth IRA instead?

For your wife, the best option is to roll it into her new 401k provider if the choices in that plan are pretty good. That would clear the way for her to use the back door contribution method in the future. However, don't roll any already taxed money into her 401k. That could go to Roth IRA.

If you could be more clear about how much money is in each account and how much has been taxed and whether you have already done the 8606 forms for each year, it would be a little easier to help you straighten this out.

Sure - I will check TurboTax and post back.

For 2009, it was a Roth recharacterization (me only, not spouse). I can't remember what I did. I dont know if I re-characterized 2008 and 2009 Roth IRA contributions when I found out my income was above the Roth limits or if I re-characterized 2009 Roth IRA contributions (but included 2008 Roth IRA even though I was below the income limit). I'll check 8606 again

placeholder
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Re: Back door Roth IRA

Post by placeholder » Wed Mar 05, 2014 1:27 pm

maxim81 wrote:Ugh. Will it just be easier if I rollover the $19K in my TIRA to my 401k? This option sounds a lot easier..
Only taxable money can be rolled from an IRA to qualified plan which means that if you did this you would convert non-taxable to taxable and pay taxes on it again in the future so just fill out the 8606 forms and send them in.

maxim81
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Re: Back door Roth IRA

Post by maxim81 » Wed Mar 05, 2014 6:36 pm

Ok, checked turbotax records.

I filled out Form 8606 for 2008, 2009, 2010, and 2011.

Looks I contributed to Roth in 2008 and 2009, later re-alized I was above the income limit and recharacterize to TIRA in 2009.

It's confusing because on Form 5498 it says i contributed $3412 to Roth but on Form 8606 for 2008 total IRA contributions (line 14, total basis) is $3412

Then in 2010, I converted $9966 from TIRA to Roth IRA (2010 was when that law was removed). Tax bill ($3838) was split between 2011 and 2012.

Form 8606:


2008:
Line 1: $3412
Line 14 ( your total basis in traditional IRAs for 2008 and earlier years): $3412

2009:

Line 1: $716
Line 2: 3412
Line 3: $4128
Line 14: $4128

2010:

Line 1; 5000
Line 2: 4128
Line 3: 9128
LIne 4 (Enter those contributions included on line 1 that were made from January 1, 2011, through April 18, 2011): 3000 (looks like I put in $2000 in 2010 and $3000 in 2011 for tax year 2010)
Line 8 (Enter the net amount you converted from traditional, SEP, and SIMPLE IRAs
to Roth IRAs in 2010. Do notinclude amounts converted that you later
recharacterized (see instructions). Also enter this amount on line 16)"
$9966

Line 11 (Multiply line 8 by line 10. This is the nontaxable portion of the amount you
converted to Roth IRAs. Also enter this amount on line 17):
$6128

Line 13: 6128
Line 14 (Subtract line 13 from line 3. This is your total basis in traditional IRAs for 2010 and earlier years): $3000

2011:

Line 1: $5000
Line 2: $3000
LIne 3: 8000
Line 14 (your total basis in traditional IRAs for 2011 and earlier years): $8000

FYI, total value of TIRA is $15K (not $19K as i previously said)


So am I "ok" in converting to Roth IRA considering i filled out 8606 ??

JW-Retired
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Re: Back door Roth IRA

Post by JW-Retired » Wed Mar 05, 2014 7:00 pm

maxim81 wrote:So am I "ok" in converting to Roth IRA considering i filled out 8606 ??
Looks like you are good to go. :beer
JW
Retired at Last

maxim81
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Re: Back door Roth IRA

Post by maxim81 » Wed Mar 05, 2014 7:36 pm

JW Nearly Retired wrote:
maxim81 wrote:So am I "ok" in converting to Roth IRA considering i filled out 8606 ??
Looks like you are good to go. :beer
JW
One last question.. read somethign today that confused me even more.

Will tax filing be complicated if I contribute to 2013 TIRA (and convert to ROTH via backdoor) in calendar year 2014? Will I have to then worry about the conversion for 2014 taxes?

Source: http://thefinancebuff.com/backdoor-roth ... -easy.html
For example they contributed $5,000 to traditional IRA for 2012 in 2013 and then converted it to Roth in 2013. They are planning to contribute $5,500 for 2013, again in 2014 before April 15, before converting it to Roth. Although it’s OK to do so, it just gets very confusing at tax time when they do it this way.

The tax law requires that you report your traditional IRA contribution *for* that year and your converting to Roth *in* that year.

In the example above, the $5,000 contribution made *for* 2012 in 2013 goes on the 2012 tax return. It has to carry over $5,000 tax basis to the 2013 return. Its conversion to Roth *in* 2013 goes on the 2013 tax return. The $5,500 contribution *for* 2013 to be made in 2014 again goes on the 2013 tax return but the conversion *in* 2014 must wait for the 2014 tax return.

The 2013 tax return ends up having a $5,000 basis carried over from the previous year, a $5,000 conversion, a $5,500 contribution (to be made in 2014), and a $5,500 basis carried forward to the next year. That’s very confusing.

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

Re: Back door Roth IRA

Post by JW-Retired » Wed Mar 05, 2014 8:37 pm

maxim81 wrote:
JW Nearly Retired wrote:
maxim81 wrote:So am I "ok" in converting to Roth IRA considering i filled out 8606 ??
Looks like you are good to go. :beer
JW
One last question.. read something today that confused me even more.

Will tax filing be complicated if I contribute to 2013 TIRA (and convert to ROTH via backdoor) in calendar year 2014? Will I have to then worry about the conversion for 2014 taxes?
It's just two more 8606 forms, one per year. I would do as follows: Make a 2013 tIRA contribution to your IRA now before April 15. That gets documented with another 8606 now with your 2013 1040 return. At the same time I would make another contribution to your tIRA for 2014. This one will be reported on the 8606 next year with your 2014 1040 return. A short time after these two non-deductible contributions do one Roth conversion of all your tiRA funds. That will also be taken care of in your 2014 tax return. You will owe some taxes on this one. The 2014 8606 will end up showing a basis of zero in your tIRA on line 14.

If you continue with the backdoor Roth 2-step maneuver you are going to need 8606s forever but no more taxes owed on any of them.
JW
Retired at Last

retiredjg
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Re: Back door Roth IRA

Post by retiredjg » Thu Mar 06, 2014 11:38 am

maxim81 wrote:Line 14 (your total basis in traditional IRAs for 2011 and earlier years): $8000

FYI, total value of TIRA is $15K (not $19K as i previously said)


So am I "ok" in converting to Roth IRA considering i filled out 8606 ??
You are OK doing the conversion if you are prepared to pay tax on the $7k that has not yet been taxed. That money needs to come out of your savings, not the tIRA.

But are you sure that your money has almost doubled in this time period? Are you sure there is not one more contribution in there - say from 2012?

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