Wiki page UPGRADE: Backdoor Roth

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Wiki page UPGRADE: Backdoor Roth

Post by celia » Sat Dec 08, 2018 7:40 am

The upgrade to the referenced wiki page has been completed.
To jump over earlier comments and read the upgraded page, click here.
celia



In another thread, the OP had a question that referenced the Backdoor Roth IRA wiki page. I think there is something wrong with the formula shown there but first want comments from others.

C = Amount to Convert to Roth

B = Balances of all pre-tax IRAs

TF = The percentage of the amount you're computing this would be tax-free

TF = 100 * [ C / (C + B)]
If you convert over multiple years with some non-deductible contributions remaining from a previous year Roth conversion, that appears to not be reflected in this formula. I think the formula should be:
ND = Amount of Non-Deductible dollars in all the non-Roth IRAs, including contributions made for the year
SB = Sum of the Balances of all the non-Roth IRAs at year-end, including the amount converted
TF = The percentage of the amount you're computing that would be tax-free

TF = 100 * ND/SB
What do others say? (Feel free to confirm my math, but that doesn't change my claim that the formula is wrong.)


For example, assume you contributed $5,000 non-deductible to a new tIRA and already had a pre-tax $15,000 IRA and converted $4,000 in the first year. To keep this example simple, suppose there are no more contributions in the following years and no growth. You want to convert half of the remaining IRAs in the second year and the rest in the third year. So $8,000 is projected to be converted in the second and third year.

A. Using the current formula gives:
first year:
TF = 100 * [ C / (C + B)]
TF = 100 * [4,000 / (4,000 + 15,000)] = 21% = $842 of the $4,000 conversion leaving $3,158 to be taxed

That leaves behind $16,000 in the IRAs, of which $4,158 (5,000-842) is basis (non-deductible dollars) and 11,842 is pre-tax.

second year:
TF = 100 * [ C / (C + B)]
TF = 100 * [8,000 / (8,000 + 11,842)] = 40% = $3,225 of the $8,000 conversion leaving $4,775 to be taxed

That leaves behind $8,000 in the IRAs, of which $933 (4,158-3,225) is basis (non-deductible dollars) and $7,067 is pre-tax.

third year:
TF = 100 * [ C / (C + B)]
TF = 100 * [8,000 / (8,000 +7,067)] = 53% = $4,247 of the $8,000 conversion leaving $3,753 to be taxed

But something's wrong since we converted and had untaxed amounts over the three years of $842 + 3,225 + 4,247 = $8,314 when our original basis was only $5,000.


B. Using the "new" formula gives:
first year:
TF = 100 * ND/SB
TF = 100 * 5,000 / 20,000 = 25% = $1,000 of the $4,000 conversion was tax-free leaving $3,000 to be taxed

That leaves behind $16,000 in the IRAs, of which $4,000 (5,000-1,000) is basis (non-deductible dollars) and $12,000 is pre-tax.

second year:
TF = 100 * ND/SB
TF = 100 * 4,000/16,000 = 25% = $2,000 of the $8,000 conversion was tax-free leaving $6,000 to be taxed.

That leaves behind $8,000 in the IRAs, of which $2,000 (4,000-2,000) is basis (non-deductible dollars) and $6,000 is pre-tax.

third year:
TF = 100 * ND/SB
TF = 100 * 2,000/8,000 = 25% = $2,000 of the $8,000 conversion was tax-free leaving $6,000 to be taxed.

In this case, the untaxed amount over the three years is $1,000 + $2,000 + $2,000 = $5,000 which equals the total basis.


The first sentence of the wiki page also references a "nondeductible traditional IRA". There is no such thing. The contribution is deductible or nondeductible, not the IRA. (The term is also implied in the section titled "Mechanics".)
Last edited by celia on Wed Dec 26, 2018 4:40 pm, edited 1 time in total.

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by kaneohe » Sat Dec 08, 2018 9:25 am

Celia...........nice catch. Perhaps consider some minor rewording:

ND = Amount of Non-Deductible dollars in all the non-Roth IRAs at start of year, plus contributions made for the year
SB = Sum of the Balances of all the non-Roth IRAs at year-end, plus the amount converted

Valuation of amounts implies at a specified time so that time should be given. The word "included" is a bit confusing since balances at the specified times do not include the contribution for the yr or the amount converted.....so change to "plus"

The way I like to think about these conversions..........if I add antifreeze (non-deductible) to water (deductible) so that the mixture is 25%, when I remove an amount to convert, that mixture will always be 25% (assuming no more antifreeze added) which is what your new formula shows.

Of course in the real world, account amounts generally do not remain constant since there can be appreciation/depreciation so the F8606 works better there than the assumptions here.
Last edited by kaneohe on Sat Dec 08, 2018 12:21 pm, edited 1 time in total.

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by LadyGeek » Sat Dec 08, 2018 9:54 am

This thread is now in the Personal Finance (Not Investing) forum (Roth IRA).

(The thread was formerly in the Local Chapters and Bogleheads Community forum, which includes the wiki as a community effort. The discussion is more appropriate here.)
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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by Alan S. » Sat Dec 08, 2018 12:29 pm

The wiki article apparently attempts to simplify the Form 8606 mechanics. However, this might be a challenging pursuit when the illustrated formula only works in very limited situations. Celia has exposed at least one of those situations.

A more frequent transaction is a ND contribution converted along with limited gains on that contribution. Since the wiki formula does not include a specific dollar basis, it would fail to show that the gains in such a conversion would be taxable.

Yet another situation where simple formulas would not work is when there is also a non converted distribution (Form 8606 line 7) in addition to the conversion and the other distribution receives a share of basis depending on the relative amounts of the conversion and the other distribution.

Since Form 8606 is tricky, most people do not understand it, and many in the IRS do not understand it either, simplification is a noble endeavor but would come with a bunch of footnotes and qualifications limiting it's use. However, the current wiki can certainly be improved.

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by celia » Sat Dec 08, 2018 3:11 pm

This is one of the wiki pages I put on my "To-Do" list a long time ago. It needs a major overhaul, which I was planning on doing, so keep the comments coming.

Another big problem is that there is no such thing as a "Backdoor Roth IRA" (which impacts all the wiki pages that link to that page--I will let someone else find and fix those). The "Backdoor Roth" is a process, not an IRA. To emphasize that, I was going to give the primary example of a non-deductible contribution going into the same IRA as deductible contributions. However, I also want to warn readers not to "contaminate" a Rollover IRA, since if they may want to roll that money back to a 401K in the future, some 401K custodians will not accept rollovers that have been co-mingled with direct-contribution IRAs. (Is there a better term for that?) Alan S., can you confirm this last concept?
LadyGeek wrote: This thread...
This is just to get the admin's attention that the title of the page needs to be changed as well as links to it. Or maybe we can leave the page there, but empty, and auto-forward to the correct page as forum pages will then have broken links.

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by FiveK » Sat Dec 08, 2018 3:25 pm

celia wrote:
Sat Dec 08, 2018 7:40 am
In another thread, the OP had a question that referenced the Backdoor Roth IRA wiki page. I think there is something wrong with the formula shown there but first want comments from others.
C = Amount to Convert to Roth

B = Balances of all pre-tax IRAs

TF = The percentage of the amount you're computing this would be tax-free

TF = 100 * [ C / (C + B)]
Using the word "traditional" instead of "pre-tax" and adding "at the end of the tax year" for the definition of "B" would make the wiki correct, and be consistent with form 8606's line 6 "value of all your traditional, SEP, and SIMPLE IRAs as of December 31."

For example,
Image

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by celia » Sat Dec 08, 2018 4:34 pm

FiveK wrote:
Sat Dec 08, 2018 3:25 pm
Using the word "traditional" instead of "pre-tax" and adding "at the end of the tax year" for the definition of "B" would make the wiki correct, and be consistent with form 8606's line 6 "value of all your traditional, SEP, and SIMPLE IRAs as of December 31."
FiveK, That would fix the denominator, but not the numerator. The problem still is with "C" (the numerator). That should not be "the amount converted", but "the amount of basis" (pre-tax) in both the remainder and the amount withdrawn. Note that the IRS worksheet doesn't reference the "amount converted".
25% of ANY AMOUNT converted in the first year would be tax-free, so the amount converted is irrelevant to the equation.

To make it more obvious, what if the account owner converted half of the tIRAs in the first year. Under the existing formula, the amount that is tax-free would be:
TF = 100 * [ C / (C + B)]
TF = 100 * [10,000 / (10,000 + 10,000)] = 50%
when it should be 25%.

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by Alan S. » Sat Dec 08, 2018 5:09 pm

celia wrote:
Sat Dec 08, 2018 3:11 pm
I was going to give the primary example of a non-deductible contribution going into the same IRA as deductible contributions. However, I also want to warn readers not to "contaminate" a Rollover IRA, since if they may want to roll that money back to a 401K in the future, some 401K custodians will not accept rollovers that have been co-mingled with direct-contribution IRAs. (Is there a better term for that?) Alan S., can you confirm this last concept?

Yes, some custodians will not accept rollovers from contributory IRA accounts, although the number of such custodians is decreasing. "Contributory" IRA accounts is a better term to denote an IRA account that has received regular IRA contributions regardless of deductibility. Contributory IRAs would also include IRA accounts which received a rollover from an IRA account that itself received regular IRA contributions.

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by LadyGeek » Sat Dec 08, 2018 5:16 pm

I have created a draft page: User:Celia/Backdoor Roth

Wiki editors can make changes there and get a consensus without affecting the "live" content.

Members who wish to update the content can post here and an editor will update the draft page for you.

(This follows Wikipedia policy - draft changes are placed under the editor's user page. When ready, the content is moved to the "live" page. All editors are welcome to edit the page.)

Update: The draft page has been renamed, see below.
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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by FiveK » Sat Dec 08, 2018 5:46 pm

celia wrote:
Sat Dec 08, 2018 4:34 pm
FiveK wrote:
Sat Dec 08, 2018 3:25 pm
Using the word "traditional" instead of "pre-tax" and adding "at the end of the tax year" for the definition of "B" would make the wiki correct, and be consistent with form 8606's line 6 "value of all your traditional, SEP, and SIMPLE IRAs as of December 31."
FiveK, That would fix the denominator, but not the numerator. The problem still is with "C" (the numerator). That should not be "the amount converted", but "the amount of basis" (pre-tax) in both the remainder and the amount withdrawn. Note that the IRS worksheet doesn't reference the "amount converted".
25% of ANY AMOUNT converted in the first year would be tax-free, so the amount converted is irrelevant to the equation.

To make it more obvious, what if the account owner converted half of the tIRAs in the first year. Under the existing formula, the amount that is tax-free would be:
TF = 100 * [ C / (C + B)]
TF = 100 * [10,000 / (10,000 + 10,000)] = 50%
when it should be 25%.
Right you are!

So other than being incorrect/misleading on both the numerator and denominator, the current wiki isn't too bad? ;)

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by celia » Sat Dec 08, 2018 5:54 pm

FiveK wrote:
Sat Dec 08, 2018 5:46 pm
So other than being incorrect/misleading on both the numerator and denominator, the current wiki isn't too bad? ;)
LOL, I guess it depends on what "too bad" means to you. I see lots of little things that contribute to fuzzy thinking that I hope to fix.
For example, there's no such thing as a "Backdoor Roth IRA" nor a "nondeductible Traditional IRA".

We get in trouble too easily if we don't use the correct terminology!

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by LadyGeek » Sat Dec 08, 2018 5:58 pm

I have renamed the draft page: User:Celia/Backdoor Roth

If we want to change the name of the "live" page to just "Backdoor Roth", we can do that.* Links to the old title "Backdoor Roth IRA" won't be broken.

FYI - Any wiki editor can rename (move) the page.

* Wiki editors - we just need to use a redirect from the old page to the new page. Any editor can do this, but I can take care of it after the changes have been made.
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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by celia » Sat Dec 08, 2018 6:10 pm

Thanks, LadyGeek.

There was a thread from several years ago that also commented on this wiki page. So I will also read that and make sure the concerns were taken care of. The current footnote #2 references a post in that thread that doesn't sound like an authoritative footnote source. So this is a reminder to look at that too.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia » Wed Dec 26, 2018 4:33 pm

The new and vastly improved (temporary) wiki page is at Backdoor Roth.
Its content will take the place of the previous wiki page at Backdoor Roth IRA.

Note that since the wiki pages have different titles, both will exist in the wiki since each will have existing forum pages and other wiki pages that link to them. We don't want to change the context of past discussions. The old wiki page will have a warning at the top that its information has been updated and link to the new wiki page.

Before the new wiki page can become active, we need comments from you, particularly on things that are not clear, sound awkward, are wrong, or should be added to the page.

Major improvements include:
* clearer terminology (when talking to a custodian or IRS, we should learn to use the correct words, else they will act on what we said instead of what we meant)
* correct formula, based off of Form 8606 (even the formula I proposed above was incomplete)
* several examples, with diagrams to illustrate the pro rata rule
* Form 8606 entries for each of the examples

Although I edited most of the content, I incorporated comments from Alan S. and suggestions from the wiki discussion page referenced above. Formatting was improved by LadyGeek, Barry Barnitz, and Peculiar Investor. Thanks to everyone who helped in any way.
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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek » Wed Dec 26, 2018 5:06 pm

celia wrote:
Wed Dec 26, 2018 4:33 pm
Note that since the wiki pages have different titles, both will exist in the wiki since each will have existing forum pages and other wiki pages that link to them. We don't want to change the context of past discussions. The old wiki page will have a warning at the top that its information has been updated and link to the new wiki page.
The current page is here: Backdoor Roth IRA

celia is asking for review of the "new and improved" draft page here: User:Celia/Backdoor Roth (same link formatted to show where the draft page is in the wiki)

Once we have a consensus, we'll replace the current page with the "new and improved" content and rename the page title to "Backdoor Roth".

Wiki editors will adjust what's necessary to ensure anything that links to the current page will automatically be redirected to the new page.

====================================================================
We use the same software as Wikipedia. For those interested in the gory details, here's how:

1. Copy the content of the draft page into the current page.
2. Rename (move) the current page to the new name, be sure all the boxes are checked (leave a redirect behind, move the associated talk page).
3. Check that the move didn't drop any links - Double redirects has no results.
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Re: Wiki page UPGRADE: Backdoor Roth

Post by JamesSFO » Thu Dec 27, 2018 2:56 pm

Very cool revamp nice job. Thanks for the work!

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Re: Wiki page UPGRADE: Backdoor Roth

Post by tfb » Thu Dec 27, 2018 7:01 pm

celia wrote:
Wed Dec 26, 2018 4:33 pm
Before the new wiki page can become active, we need comments from you, particularly on things that are not clear, sound awkward, are wrong, or should be added to the page.
"Everyone with earned income (ie, wages) is eligible to do a Backdoor Roth" isn't entirely correct. Those who will reach 70-1/2 by the end of the year can't contribute to a traditional IRA.
Harry Sit, taking a break from the forums.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by ssel » Sat Dec 29, 2018 9:02 pm

"Backdoor Roth" is perfectly fine shorthand, and normally I wouldn't nitpick, but since you've gone to some trouble to be careful with terminology...

At least once the full phrase "Backdoor Roth IRA contribution" should be spelled out. The process we're talking about is not a backdoor to a Roth IRA, but rather a backdoor to a Roth IRA contribution. When you don't meet the requirements for making a contribution in the usual way--and thus cannot enter through the front door--you go around through the back door and wind up in the same place (the equivalent of a Roth contribution, though not technically one).

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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek » Sat Dec 29, 2018 9:29 pm

tfb - I have added a note to the introductory paragraph. See: User:Celia/Backdoor Roth

ssel, Welcome! The introduction describes the process as a Roth IRA contribution. What is unclear to you? Provide a suggested wording, if possible.
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Re: Wiki page UPGRADE: Backdoor Roth

Post by ssel » Sun Dec 30, 2018 12:15 am

OK, suggested wording for paragraph 1:

A Backdoor Roth IRA contribution is a two-step process for contributing...

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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia » Sun Dec 30, 2018 4:02 am

ssel wrote:
Sat Dec 29, 2018 9:02 pm
"Backdoor Roth" is perfectly fine shorthand, and normally I wouldn't nitpick, but since you've gone to some trouble to be careful with terminology...

At least once the full phrase "Backdoor Roth IRA contribution" should be spelled out. The process we're talking about is not a backdoor to a Roth IRA, but rather a backdoor to a Roth IRA contribution. When you don't meet the requirements for making a contribution in the usual way--and thus cannot enter through the front door--you go around through the back door and wind up in the same place (the equivalent of a Roth contribution, though not technically one).
I respectfully disagree. The "(Backdoor Roth IRA) contribution" would be a contribution to a Backdoor Roth IRA, which doesn't exist. (There is no IRA called that.)
The phrase "Backdoor (Roth IRA contribution)" implies an alternate way to make a contribution to a Roth IRA.
But the Backdoor Roth is not just making a contribution. It is a combination of a contribution AND a Roth conversion.

One person could make a nondeductible contribution to a Traditional IRA (or a Roth). Another person could do a Roth conversion. Neither of these people would have done a Backdoor Roth because they did not do both steps in the Backdoor Roth process.

So if we were to use "Backdoor Roth IRA contribution", I think we would also have to say "Backdoor Roth IRA conversion". Then readers may get lost in all the verbage. And we have then emphasized the non-existent account: "Backdoor Roth IRA".
:oops:

Ssel, I'm glad you signed up to post. This can be a complicated topic if you have existing Traditional IRAs for which the pro rata rule applies. Is the rest of the page clear to you?

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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Sun Dec 30, 2018 9:09 am

LadyGeek wrote:
Sat Dec 29, 2018 9:29 pm
tfb - I have added a note to the introductory paragraph. See: User:Celia/Backdoor Roth

ssel, Welcome! The introduction describes the process as a Roth IRA contribution. What is unclear to you? Provide a suggested wording, if possible.
I don't think adding a note at the bottom is sufficient.

There is still a line in the disucssion that says "Everyone with earned income (ie, wages) is eligible to do a Backdoor Roth" and many people will not read beyond that.

There is also a difference between what the note at the bottom says and what tfb says (about reaching 70.5 years in that calendar year). I believe tfb's description is the accurate one.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Sun Dec 30, 2018 9:12 am

4th paragraph in the Cautions sections starts with Before you start the Rollover Roth,. I suspect this should be backdoor instead of rollover.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Sun Dec 30, 2018 9:20 am

celia wrote:
Sun Dec 30, 2018 4:02 am
ssel wrote:
Sat Dec 29, 2018 9:02 pm
"Backdoor Roth" is perfectly fine shorthand, and normally I wouldn't nitpick, but since you've gone to some trouble to be careful with terminology...

At least once the full phrase "Backdoor Roth IRA contribution" should be spelled out. The process we're talking about is not a backdoor to a Roth IRA, but rather a backdoor to a Roth IRA contribution. When you don't meet the requirements for making a contribution in the usual way--and thus cannot enter through the front door--you go around through the back door and wind up in the same place (the equivalent of a Roth contribution, though not technically one).
I respectfully disagree. The "(Backdoor Roth IRA) contribution" would be a contribution to a Backdoor Roth IRA, which doesn't exist. (There is no IRA called that.)
The phrase "Backdoor (Roth IRA contribution)" implies an alternate way to make a contribution to a Roth IRA.
But the Backdoor Roth is not just making a contribution. It is a combination of a contribution AND a Roth conversion.

"Backdoor Roth IRA contribution" is not necessarily a contribution to a Backdoor Roth IRA although I agree some would interpret it this way. It is also a backdoor contribution to Roth IRA. I've used this phrase myself many times because it is less likely to be interpreted incorrectly. I've also referred to the whole thing as the back door Roth IRA maneuver.

I'm not aware of confusion when using either of those terms.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Sun Dec 30, 2018 10:20 am

Everyone with earned income (ie, wages) is eligible
This is frequently stated, but I believe the correct term is "compensation".

A small grammatical comment..... there is no such thing as ie. I'm sure that is supposed to be i.e. (meaning "that is"). However I'm not sure it is even needed.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek » Sun Dec 30, 2018 10:29 am

I have incorporated retiredjg's suggestions-

- Go by tfb's suggestion for age limit.
- Corrected "Rollover Roth" to "Backdoor Roth"
- Grammar fix "ie" to "i.e."

Additionally, I was confused on which accounts a backdoor Roth was intended for. This conversion process is intended for Traditional IRA --> Roth IRA.

I have a 401(k) that allows in-service withdrawals and do After-tax 401(k) direct rollovers. The alternative name (informal name used in this forum) is "mega backdoor Roth IRA".

I have revised the introduction to suggest using your 401(k) if in-service withdrawals are permitted. Otherwise, readers may not be aware of this option.

See: User:Celia/Backdoor Roth
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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Sun Dec 30, 2018 10:50 am

LadyGeek wrote:
Sun Dec 30, 2018 10:29 am
I have revised the introduction to suggest using your 401(k) if in-service withdrawals are permitted. Otherwise, readers may not be aware of this option.
I would not include this at all. That is something else. Backdoor Roth only refers to traditional IRA to Roth IRA.

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Re: Wiki: Backdoor Roth IRA (conversion formula)

Post by bsteiner » Sun Dec 30, 2018 10:57 am

kaneohe wrote:
Sat Dec 08, 2018 9:25 am
...
The way I like to think about these conversions..........if I add antifreeze (non-deductible) to water (deductible) so that the mixture is 25%, when I remove an amount to convert, that mixture will always be 25% (assuming no more antifreeze added) which is what your new formula shows.

Of course in the real world, account amounts generally do not remain constant since there can be appreciation/depreciation so the F8606 works better there than the assumptions here.
Ed Slott calls this the cream in the coffee rule.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek » Sun Dec 30, 2018 11:54 am

retiredjg wrote:
Sun Dec 30, 2018 10:50 am
LadyGeek wrote:
Sun Dec 30, 2018 10:29 am
I have revised the introduction to suggest using your 401(k) if in-service withdrawals are permitted. Otherwise, readers may not be aware of this option.
I would not include this at all. That is something else. Backdoor Roth only refers to traditional IRA to Roth IRA.
OK, it's gone. I added a link to After-tax 401(k) in the "See also" section so readers can find it.

See: User:Celia/Backdoor Roth
retiredjg wrote:
Sun Dec 30, 2018 10:20 am
Everyone with earned income (ie, wages) is eligible
This is frequently stated, but I believe the correct term is "compensation".

A small grammatical comment..... there is no such thing as ie. I'm sure that is supposed to be i.e. (meaning "that is"). However I'm not sure it is even needed.
When I first started to learn about IRAs, the concept of "earned income" was not clear. For example, I thought that interest from a CD was "earned income". It was in a bank earning interest, which seemed OK to me. The IRS takes a different perspective, however. :)

Would "salary" be a better term than "wages"? "Compensation" may still be a bit ambiguous in the given example.

(The "i.e." has already been fixed.)
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Re: Wiki page UPGRADE: Backdoor Roth

Post by Ben Mathew » Sun Dec 30, 2018 11:58 am

celia wrote:
Sun Dec 30, 2018 4:02 am
ssel wrote:
Sat Dec 29, 2018 9:02 pm
"Backdoor Roth" is perfectly fine shorthand, and normally I wouldn't nitpick, but since you've gone to some trouble to be careful with terminology...

At least once the full phrase "Backdoor Roth IRA contribution" should be spelled out. The process we're talking about is not a backdoor to a Roth IRA, but rather a backdoor to a Roth IRA contribution. When you don't meet the requirements for making a contribution in the usual way--and thus cannot enter through the front door--you go around through the back door and wind up in the same place (the equivalent of a Roth contribution, though not technically one).
I respectfully disagree. The "(Backdoor Roth IRA) contribution" would be a contribution to a Backdoor Roth IRA, which doesn't exist. (There is no IRA called that.)
The phrase "Backdoor (Roth IRA contribution)" implies an alternate way to make a contribution to a Roth IRA.
But the Backdoor Roth is not just making a contribution. It is a combination of a contribution AND a Roth conversion.

One person could make a nondeductible contribution to a Traditional IRA (or a Roth). Another person could do a Roth conversion. Neither of these people would have done a Backdoor Roth because they did not do both steps in the Backdoor Roth process.

So if we were to use "Backdoor Roth IRA contribution", I think we would also have to say "Backdoor Roth IRA conversion". Then readers may get lost in all the verbage. And we have then emphasized the non-existent account: "Backdoor Roth IRA".
:oops:

Ssel, I'm glad you signed up to post. This can be a complicated topic if you have existing Traditional IRAs for which the pro rata rule applies. Is the rest of the page clear to you?
The first sentence in the wiki is clear:
A Backdoor Roth is a two-step process for contributing to a Roth IRA when your income exceeds the income eligibility limit for Roths.
But for the title, I agree with ssel that the term "Backdoor Roth IRA contribution" is clearer than "Backdoor Roth". The goal is indeed an indirect contribution to a Roth IRA when a direct contribution is not possible. It's true that the contribution is to the traditional followed by a conversion to Roth, so there wasn't a direct contribution to Roth. But the net effect, and the desired outcome, of the two step process is simply a contribution to Roth. So the second interpretation "Backdoor (Roth IRA contribution)" is a good description. To avoid the "(Backdoor Roth IRA) contribution" interpretation, one could go with:

"The Backdoor Method of Contributing to a Roth IRA"

Wordy, maybe. But might be worth the clarity.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek » Sun Dec 30, 2018 12:13 pm

How about "Backdoor Roth process"?
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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Sun Dec 30, 2018 12:42 pm

LadyGeek wrote:
Sun Dec 30, 2018 11:54 am
Everyone with earned income (ie, wages) is eligible
This is frequently stated, but I believe the correct term is "compensation".

A small grammatical comment..... there is no such thing as ie. I'm sure that is supposed to be i.e. (meaning "that is"). However I'm not sure it is even needed.
When I first started to learn about IRAs, the concept of "earned income" was not clear. For example, I thought that interest from a CD was "earned income". It was in a bank earning interest, which seemed OK to me. The IRS takes a different perspective, however. :)

Would "salary" be a better term than "wages"? "Compensation" may still be a bit ambiguous in the given example.

(The "i.e." has already been fixed.)
The IRS uses the word "compensation", not "earned income" or "salary" or "wages". Then it defines what is and what is not compensation.

https://www.irs.gov/pub/irs-pdf/p590a.pdf See pages 5 and 6.

In this case i.e. would not be correct since there is more than one thing that can be compensation. Maybe just leave that out?

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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Sun Dec 30, 2018 12:51 pm

LadyGeek wrote:
Sun Dec 30, 2018 12:13 pm
How about "Backdoor Roth process"?
I think it depends on exactly which sentence is being discussed.

I agree with ssel that it needs to be spelled out with fair precision early in the discussion. After that, perhaps "backdoor Roth" is good shorthand.

I would suggest "back door method of contributing to Roth IRA" rather than "The Backdoor Method of Contributing to a Roth IRA" - the capital letters make it sound like the name of a thing rather than a two step process. But again, what sentence is being discussed?

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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek » Sun Dec 30, 2018 1:05 pm

retiredjg wrote:
Sun Dec 30, 2018 12:42 pm
...The IRS uses the word "compensation", not "earned income" or "salary" or "wages". Then it defines what is and what is not compensation.

https://www.irs.gov/pub/irs-pdf/p590a.pdf See pages 5 and 6.

In this case i.e. would not be correct since there is more than one thing that can be compensation. Maybe just leave that out?
I have incorporated your suggestions and agree that "i.e." can be removed.

See: User:Celia/Backdoor Roth
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Re: Wiki page UPGRADE: Backdoor Roth

Post by Rose » Sun Dec 30, 2018 1:50 pm

celia wrote:
Wed Dec 26, 2018 4:33 pm
The new and vastly improved (temporary) wiki page is at Backdoor Roth.
Its content will take the place of the previous wiki page at Backdoor Roth IRA.

....
Thank you, it is really good read.
One small suggestion, the last example on inheritance IRA is quite confusing. None of the above section talks about inheritance IRA. While I can appreciate learning about it, can inheritance IRA and its conversion be in its own wiki page? I actually looking for what happen in the year two for some of the examples.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by Ben Mathew » Sun Dec 30, 2018 2:26 pm

retiredjg wrote:
Sun Dec 30, 2018 12:51 pm
LadyGeek wrote:
Sun Dec 30, 2018 12:13 pm
How about "Backdoor Roth process"?
I think it depends on exactly which sentence is being discussed.

I agree with ssel that it needs to be spelled out with fair precision early in the discussion. After that, perhaps "backdoor Roth" is good shorthand.

I would suggest "back door method of contributing to Roth IRA" rather than "The Backdoor Method of Contributing to a Roth IRA" - the capital letters make it sound like the name of a thing rather than a two step process. But again, what sentence is being discussed?
I was referring to the title (hence the title case), and I think LadyGeek is as well.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Sun Dec 30, 2018 2:43 pm

Ben Mathew wrote:
Sun Dec 30, 2018 2:26 pm
retiredjg wrote:
Sun Dec 30, 2018 12:51 pm
LadyGeek wrote:
Sun Dec 30, 2018 12:13 pm
How about "Backdoor Roth process"?
I think it depends on exactly which sentence is being discussed.

I agree with ssel that it needs to be spelled out with fair precision early in the discussion. After that, perhaps "backdoor Roth" is good shorthand.

I would suggest "back door method of contributing to Roth IRA" rather than "The Backdoor Method of Contributing to a Roth IRA" - the capital letters make it sound like the name of a thing rather than a two step process. But again, what sentence is being discussed?
I was referring to the title (hence the title case), and I think LadyGeek is as well.
Sorry. I see now you did say "title". I would leave the title exactly as it is because those are the words that people are going to look up.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia » Sun Dec 30, 2018 3:15 pm

Rose wrote:
Sun Dec 30, 2018 1:50 pm
One small suggestion, the last example on inheritance IRA is quite confusing. None of the above section talks about inheritance IRA. While I can appreciate learning about it, can inheritance IRA and its conversion be in its own wiki page? I actually looking for what happen in the year two for some of the examples.
Rose, Ben's example spans two years. (That's partly why I added some growth at the end of the first year, after the original conversion was done.) And the Inherited IRA with existing basis can be in the middle of a multi-year withdrawal process. What other second (or third) year example would you suggest that is different than what is shown?

I want to think about the terminology comments before replying to them.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by ssel » Sun Dec 30, 2018 3:39 pm

retiredjg wrote:
Sun Dec 30, 2018 9:20 am
celia wrote:
Sun Dec 30, 2018 4:02 am
I respectfully disagree. The "(Backdoor Roth IRA) contribution" would be a contribution to a Backdoor Roth IRA, which doesn't exist. (There is no IRA called that.)
The phrase "Backdoor (Roth IRA contribution)" implies an alternate way to make a contribution to a Roth IRA.
But the Backdoor Roth is not just making a contribution. It is a combination of a contribution AND a Roth conversion.
"Backdoor Roth IRA contribution" is not necessarily a contribution to a Backdoor Roth IRA although I agree some would interpret it this way. It is also a backdoor contribution to Roth IRA [emphasis added]. I've used this phrase myself many times because it is less likely to be interpreted incorrectly. I've also referred to the whole thing as the back door Roth IRA maneuver.
Thanks, retiredjg. "Backdoor contribution to a Roth IRA" says precisely what I was getting at, without the parsing ambiguity. I like it best.

The term backdoor as used for this process is a modifier of the word contribution. It does not modify conversion or Roth or IRA or anything else. A backdoor contribution is not an actual contribution, but it has nearly the same effect and that is exactly what the word backdoor is intended to suggest.

That said... it's a great wiki post.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia » Sun Dec 30, 2018 6:22 pm

I just edited the wiki page to:
* qualify the age restriction (70.5) as tfb pointed out
* removed earned income in favor of compensation while adding the IRS definition of it to the Definitions section
* In the intro, "Before proceeding with a conversion," was changed to "Before proceeding with a backdoor Roth,"

ssel wrote:
Sun Dec 30, 2018 3:39 pm
Thanks, retiredjg. "Backdoor contribution to a Roth IRA" says precisely what I was getting at, without the parsing ambiguity. I like it best.

The term backdoor as used for this process is a modifier of the word contribution. It does not modify conversion or Roth or IRA or anything else. A backdoor contribution is not an actual contribution, but it has nearly the same effect and that is exactly what the word backdoor is intended to suggest.
If we changed the opening sentence from:
A Backdoor Roth is a two-step process for contributing to a Roth IRA when your income exceeds the income eligibility limit for Roths.
to
A Backdoor Roth is a two-step process for contributing to a Roth IRA when your income exceeds the income eligibility limit for contributing to a Roth IRA directly.
would that cover the point you are making? (I think of "directly" as being the front door.)

I agree the concept needs to be at the top. If my suggestion is not the best, please quote the text to be removed and what to replace it with.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by FiveK » Sun Dec 30, 2018 11:02 pm

How about
The Backdoor Roth process is a two-step method for contributing to a Roth IRA when your income exceeds the income eligibility limit for contributing to a Roth IRA directly.
?

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Re: Wiki page UPGRADE: Backdoor Roth

Post by Rose » Mon Dec 31, 2018 9:15 am

celia wrote:
Sun Dec 30, 2018 3:15 pm
Rose wrote:
Sun Dec 30, 2018 1:50 pm
One small suggestion, the last example on inheritance IRA is quite confusing. None of the above section talks about inheritance IRA. While I can appreciate learning about it, can inheritance IRA and its conversion be in its own wiki page? I actually looking for what happen in the year two for some of the examples.
Rose, Ben's example spans two years. (That's partly why I added some growth at the end of the first year, after the original conversion was done.) And the Inherited IRA with existing basis can be in the middle of a multi-year withdrawal process. What other second (or third) year example would you suggest that is different than what is shown?

I want to think about the terminology comments before replying to them.
My bad about example for second and third year. I missed Ben's.

Looks like there are some explanations about Inherited IRA now (or I might miss them before, apologize for the oversight). Can you please add how the beneficiary can determine the basis of the IRA? (The last 8606 of the deceased, how would it be different if it is from the spousal IRA?)

Thank you again for this major undertaking!

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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek » Mon Dec 31, 2018 10:51 am

Is your question answered in any of these wiki pages?

- Inheriting an IRA (Inherited IRA with a basis)
- Inheriting a Roth IRA (Qualified distributions)
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Re: Wiki page UPGRADE: Backdoor Roth

Post by retiredjg » Mon Dec 31, 2018 2:54 pm

celia wrote:
Sun Dec 30, 2018 6:22 pm
A Backdoor Roth is a two-step process for contributing to a Roth IRA when your income exceeds the income eligibility limit for contributing to a Roth IRA directly.
Celia, to me this is the better wording.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia » Mon Dec 31, 2018 3:22 pm

Rose wrote:
Mon Dec 31, 2018 9:15 am
Can you please add how the beneficiary can determine the basis of the IRA? (The last 8606 of the deceased, how would it be different if it is from the spousal IRA?)
Keep in mind that the custodian has no idea if you made nondeductible contributions or not over the years. That is between you and the IRS. So any basis is found in past tax returns. I would ask the executor or trustee to look through at least 3 years of past tax returns as the basis may not show up if the deceased hadn't yet started RMDs or changed tax preparers--who didn't pick up the remaining basis. But also remember that the only people likely to have a basis in their IRAs are those who have/had high income that made them ineligible to contribute directly to a Roth.

I edited the section in the first link LadyGeek referenced:
- Inheriting an IRA (Inherited IRA with a basis)

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Re: Wiki page UPGRADE: Backdoor Roth

Post by crit » Mon Dec 31, 2018 5:57 pm

I'd like to edit my own contribution, which was "To report a full backdoor in Turbo Tax (at least, and possibly in other software), it is often helpful to skip the tax software's suggested order of entry, which is income first, and IRAs later. Instead, use the software's index of topics to report wages, then the contribution to the traditional IRA. Then go back to the income section to enter the 1099R that reports the distribution, aka Roth conversion". It wasn't quite as precise as it could have been:

To report a full backdoor Roth procedure in Turbo Tax (at least, and possibly in other software), it is often helpful to skip the tax software's default order of data entry, which asks you about income first, and IRA contributions later. Enter your other income and wages as usual, but do NOT enter the 1099R from your IRA distribution on your first pass. Instead, after entering other income, navigate manually to the IRA contribution section. You can do this by clicking on the tabs for 'Federal Taxes', then scroll down under 'Deductions and Credits' to the 'Retirement and Investments' section, and click on the 'Start' button for contributions. As noted above, in the Backdoor process, you made a contribution to a traditional IRA, so that's what you report -- not a Roth contribution. Once you've completed the contributions section, use the manual navigation again to go back to the income section, and now enter the information from the 1099R that reports the distribution from that tIRA. This step reports the conversion of the traditional IRA to Roth IRA. Be careful to enter exactly which boxes were checked for the distribution. Once you're done with both the contribution and the 1099R steps, use the 'Forms' view to check that your Form 8606 has been created correctly.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia » Tue Jan 01, 2019 5:27 am

Crit, I updated your text in the wiki page. It looks more complete, now.

I also referenced tfb's blog where he shows how to do the data entry for 4 popular tax software programs. Some of these pages were just updated by him to match the revised software needed for the 2018 tax law changes and some of rest may be updated soon.

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Re: Wiki page UPGRADE: Backdoor Roth

Post by Rose » Tue Jan 01, 2019 10:20 am

Ladygeek and celia,
thanks, all of my questions are answered.

Can a link be established at the Inherited IRA wiki to alert readers that a Roth conversion is possible and direct them to the new Backdoor Roth?

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Re: Wiki page UPGRADE: Backdoor Roth

Post by LadyGeek » Tue Jan 01, 2019 10:42 am

Rose wrote:
Tue Jan 01, 2019 10:20 am
Can a link be established at the Inherited IRA wiki to alert readers that a Roth conversion is possible and direct them to the new Backdoor Roth?
Sure, but let's wait until the draft has been completed and moved into the "live" space. We don't want to mislead readers with a "draft" version.

I broke crit's update into several paragraphs, as it was hard to read. See: User:Celia/Backdoor Roth (Using tax software)
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Re: Wiki page UPGRADE: Backdoor Roth

Post by celia » Tue Jan 01, 2019 2:49 pm

Rose wrote:
Tue Jan 01, 2019 10:20 am
Can a link be established at the Inherited IRA wiki to alert readers that a Roth conversion is possible and direct them to the new Backdoor Roth?
LadyGeek wrote:
Tue Jan 01, 2019 10:42 am
Sure, but let's wait until the draft has been completed and moved into the "live" space. We don't want to mislead readers with a "draft" version.
No. A beneficiary may not contribute to an Inherited (Traditional) IRA nor convert from it. After death, the IRS wants the taxes that were deferred during the deceased's lifetime but allows them to be spread out over many years to avoid a spike in the beneficiary's income. The taxes can't be deferred from generation to generation. Even when the beneficiary dies, the next beneficiary needs to continue the drawdown rate the first beneficiary was using.

This is why the draw-down on an Inherited IRA is faster than on your own IRA. Beneficiaries who are age 0 have until they are age 82 to empty out the IRA (traditional or Roth) while a beneficiary who is 70 has until age 87 to empty it. Meanwhile the original owner could stretch out their RMDs until age 115.

Rose, I just edited the last example to tell where to find the basis on an Inherited IRA.

LadyGeek, your last link to the wiki page is broken.

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