Backdoor Roth Question

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CVGCPA
Posts: 2
Joined: Tue Jun 07, 2016 12:08 pm

Backdoor Roth Question

Postby CVGCPA » Wed Jan 11, 2017 4:40 pm

I just recently learned about the backdoor Roth from this forum. In order to avoid the pro-rata rule, I had to roll my pre-tax IRA into my workplace 401k. I completed this in 2017.

Since I am still in the window to make a 2016 contribution ... my question is whether I can make that contribution now and then convert it to a Roth in 2017. My plan is to make both my 2016 and 2017 tIRA contributions now and then immediately convert to my Roth.

Here is my understanding of the tax reporting:
1. I would report a $5500 contribution on my 2016 8606.
2. I would report another $5500 contribution on my 2017 8606.
3. Since the conversion occurred in 2017, I would not show any conversion to Roth on my 2016 8606.
4. I would put all $11000 of the conversion on my 2017 8606.

At year-end 2017 I will have no pre-tax IRA balances, so I should not owe any pro-rata tax. Is that correct? My concern is whether the pre-tax IRA as of 12/31/16 creates any issue with making a 2016 tax year contribution.

Biglaw Investor
Posts: 89
Joined: Tue Oct 20, 2015 1:08 pm
Location: Brooklyn

Re: Backdoor Roth Question

Postby Biglaw Investor » Wed Jan 11, 2017 5:37 pm

I think your plan is fine, although I'm curious what the older Bogleheads will say who have been doing it for years.

My understanding is that you just can't have any pre-tax money in your IRAs during the calendar year when you do the conversion, which it sounds like you won't have.

Edit to Add: I believe the pro rata rule only applies when you make the conversion, so in fact you could be making non-deductible Traditional IRA contributions for many years in the past. So long as you cleared out all the pre-tax money in the IRAs before the conversion, then you could convert those non-deductible contributions, even if we're talking tens of thousands of dollars. Please someone correct me if I'm wrong.

DSInvestor
Posts: 10438
Joined: Sat Oct 04, 2008 11:42 am

Re: Backdoor Roth Question

Postby DSInvestor » Wed Jan 11, 2017 5:57 pm

CVGCPA wrote:I just recently learned about the backdoor Roth from this forum. In order to avoid the pro-rata rule, I had to roll my pre-tax IRA into my workplace 401k. I completed this in 2017.

Since I am still in the window to make a 2016 contribution ... my question is whether I can make that contribution now and then convert it to a Roth in 2017. My plan is to make both my 2016 and 2017 tIRA contributions now and then immediately convert to my Roth.

Here is my understanding of the tax reporting:
1. I would report a $5500 contribution on my 2016 8606.
2. I would report another $5500 contribution on my 2017 8606.
3. Since the conversion occurred in 2017, I would not show any conversion to Roth on my 2016 8606.
4. I would put all $11000 of the conversion on my 2017 8606.

At year-end 2017 I will have no pre-tax IRA balances, so I should not owe any pro-rata tax. Is that correct? My concern is whether the pre-tax IRA as of 12/31/16 creates any issue with making a 2016 tax year contribution.


You're good to go with the conversion of 11K in 2017. No prorata issue on the conversion as long as your IRA balances in TIRA, Rollover IRA, SEP-IRA, SIMPLE-IRA is zero on 12/31/2017. Watch out if you change jobs mid year and rollover a 401k into an IRA as this will result in a non-zero balance on 12/31/2017.

Make sure you tell your 2016 tax software or tax preparer that you contributed $5500 to TIRA for tax year 2016 and form 8606 for 2016 will be added to your 2016 tax return to track the non-deductible contribution (IRA basis). Since you did not convert in calendar 2016, that IRA basis will carry forward to line 2 of the 2017 8606 form.

When it comes time to prepare your 2017 tax return, that will show the $5500 basis carried forward plus the new $5500 basis added for 2017 tax year to give you total basis of 11K. The full conversion of 11K in calendar 2017 will be non-taxable and consume all of the IRA basis.

retiredjg
Posts: 29154
Joined: Thu Jan 10, 2008 12:56 pm

Re: Backdoor Roth Question

Postby retiredjg » Wed Jan 11, 2017 6:15 pm

CVGCPA wrote:At year-end 2017 I will have no pre-tax IRA balances, so I should not owe any pro-rata tax. Is that correct?

You're good except for this statement. I think what you meant is correct, but what you said is not entirely accurate.

If a person had (which you won't) a tIRA with non-deductible contributions at year end, it would not be "pre tax" but it would be pro-rated.

The key is to have nothing other than a few stray pennies in tIRA, rollover IRA, SEP IRA or SIMPLE IRA at year end.


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