Another Pro Rata Question

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waffleandtimbit
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Joined: Mon Sep 10, 2018 4:24 pm

Another Pro Rata Question

Post by waffleandtimbit » Mon Sep 10, 2018 4:32 pm

Hello!

I've searched around and seen relatively similar circumstances but didn't see one that completely matched mine; excuse the duplicity.

Earlier this year, I did two 5,500 non-deductible contributions to a traditional IRA followed by conversions to Roth IRAs (one for me, one for spouse). At the time, I wasn't aware of any other IRA balances. Today, I realized my spouse has a traditional IRA with about $1,000 in it from at least 5 years ago. She had completely forgotten its existence and its balance hasn't been reported on any tax returns for the past few years.

What is the least-hassle way of dealing with this? This is the first year we have done a backdoor Roth so I don't think the pro rata issue is an issue for previous years, but in this year, I believe my options are to roll this IRA over into an employment plan (in this case, traditional TSP), or convert it into the same Roth and pay income taxes on the 1,000? I am not too concerned about the cost of doing this, and am mostly looking for whatever is the simplest option.

sport
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Re: Another Pro Rata Question

Post by sport » Mon Sep 10, 2018 4:44 pm

The simplest thing would be to roll the extra 1000 into the Roth. It would be a one-time event and you could do back-door Roth's in future years without any complications. It would also put this money into an account you have already selected.

Topic Author
waffleandtimbit
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Joined: Mon Sep 10, 2018 4:24 pm

Re: Another Pro Rata Question

Post by waffleandtimbit » Mon Sep 10, 2018 5:18 pm

Ok, thanks. This would mean paying normal income tax on the 1,000, but otherwise as long as I do this before December 31st there shouldn't be any other complications?

Thanks for the quick response!

gostars
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Re: Another Pro Rata Question

Post by gostars » Mon Sep 10, 2018 8:51 pm

As long as either is done before December 31 it will be fine. Rolling the money into the TSP isn't exactly a difficult process either, especially if the TIRA is at a different brokerage and you'll have to do a transfer anyway.

Alan S.
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Re: Another Pro Rata Question

Post by Alan S. » Mon Sep 10, 2018 9:29 pm

You really do not have to do anything else. You will have to file an 8606 anyway to report the ND contribution and the conversion for 2018 and the same for 2019.

If you do nothing further this year the 5500 conversion will be 15.4% taxable (847 taxable). Any tax software handles this easily and completes your 8606. You will also have 847 of basis remaining for next year.

Then next year you make your 5500 contribution and convert the entire balance of both TIRAs. If that balance is 6500, your 2019 conversion will have a taxable amount of 153. After that everything will be clean.

If you convert the other 1,000 this year, your taxable income will be 1000 instead of 847, and your taxable income next year will be 0 instead of 153. So the only difference is which year you pay taxes on that 153.

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