2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help!

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Topic Author
TaxableEvent
Posts: 4
Joined: Thu Jan 10, 2019 6:57 pm

2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help!

Post by TaxableEvent » Thu Jan 10, 2019 7:49 pm

Hello there,

I have a complicated scenario that I can't seem to figure out. I've done a solid 5-6 hours of online reading here and other sources, but can't figure it out.

Details:

I made 3 separate Roth IRA contributions in 2018, starting 2/9/2018. I maxed out contributions for a total of $5,500 for 2018 tax year.

Due to income phase-out (good problem to have, all things considered), I realize now that I'm not eligible to have made these direct contributions to the Roth IRA last year.

Fortunately, the IRS allows one to "recharacterize an IRA contribution" up until the 2018 Tax Year filing deadline (April 15th, 2019).

I initiated the following via my Account Trustee/Custodian:

1/10/2019, the 2018 tax year Roth Contribution was recharacterized to a Traditional IRA contribution. Balance now shows as: $6,727 in a Traditional IRA.
The reason that the balance is not $5,500, is because over the course of 2018 calendar year, the contributions made some gains.

1/03/2019, I completed a new Roth Contribution for tax year 2019. This was a single contribution of the maximum amount $6,000 for 2019 tax year.

Since I discovered my ineligibility for Roth contributions after-the-fact, I initiated another "recharacterization of contribution." This time it is for the 2019 tax-year contribution. Again, I asked the Trustee to move funds from the Roth IRA to the Traditional IRA, to make it as if the contribution had been that way originally.

So now I'm looking at $12,727 total in my Traditional IRA ($6,727 + $6,000).

Importantly, I'll be filing IRS form 8606 to document the fact that the $5,500 2018 contribution is non-deductible (a.k.a. "after-tax").
My inelegibility to claim a deduction on the Traditional IRA contribution is what makes this "after-tax".
The recharacterization of the 2018 contribution is what allowed this to happen.

Next year in 2020, I'll file IRS form 8606 to document the fact that the $6,000 2019 contribution is also non-deductible (a.k.a. "after-tax).

Backdoor Roth Conversion:
I am planning to make a Traditional to Roth "Backdoor" conversion next week so as to satisfy the step transaction test.

Therefore, I'm thinking I won't be taxed on my basis of $11,500 when I perform the Backdoor Roth Conversion ($5,500 + $6,000).

It seems I can't avoid owing taxes on the conversion amount total above my basis.
I've calculated this as: $12,727 - $11,500 = $1,227 gain, which will be taxed at my marginal rate (24%).

Is this correct?

For the Conversion, I'm prepared to use other cash sources to pay the taxes on the above Roth backdoor Conversion so as to avoid triggering an early withdrawal penalty. That happens when you use a portion of conversion funds to pay taxes on said conversion (don't do that!). Of course, the conversion will be part of my 2019 tax-year income, so I will pay that tax in April 2020.

If I haven't lost you so far, and you're still with me, then you are a true Boglehead and have made it to Final Jeopardy :mrgreen: :

For the Backdoor Roth Conversion, I'm trying to achieve this using an In-Kind transfer method. This means moving Shares of Stock, not Cash.
I'm doing this because I picked up as many AAPL shares as possible on the dip last week. I've already seen a solid return on that stock pick (**Side note, all of my other accounts are in low-expense-ratio Index funds).

Does anyone have experience doing backdoor Roth Conversions In-Kind after a Roth to Trad. IRA recharacterization of contribution?
Does this all look legit?

Also, since the amounts are currently in the Traditional IRA and are a mix of non-deductible after-tax contributions, and pre-tax gains, should I just leave everything in there or continue with the backdoor conversion?

I'm thinking that the $12,727 can do a lot of tax-free growth in the Roth IRA if I go ahead with the conversion and pay the taxes on the $1,227 gain portion now to get it over with ($1,227 @ 24% = $294 taxes owed). Essentially that means I pay $294 now to never have to pay taxes on any of it down the road (since it will all be moved to Roth). Good plan, right? Am I missing anything?

Thanks in advance for your expertise!

-TaxableEvent :greedy

Alan S.
Posts: 8079
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by Alan S. » Thu Jan 10, 2019 8:57 pm

All fairly routine and not a problem. You have the tax impact assessed correctly and should proceed with the conversion after reading the following.

When you do the in kind transfer to a Roth IRA, the value of the account when the custodian processes the transfer (probably after hours) will be the gross amount converted. 11,500 of that amount will be non taxable as reported on your 2019 Form 8606, which will also show your 2019 non deductible contribution and carryover of your 2018 ND contribution on line 2 of the 8606.

Other stuff:
1) You should include an explanatory statement with your 2018 return about the recharacterization of the Roth contribution - show amount and date of the contribution and amount and date of the recharacterization.
2) Am assuming the TIRA is your ONLY TIRA account and the value in TIRAs on 12/31/2019 will be 0.
3) There is no step transaction test. If there was you would not have waited long enough!
4) Be sure to decline withholding at the time you execute the conversion.

Topic Author
TaxableEvent
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Joined: Thu Jan 10, 2019 6:57 pm

Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by TaxableEvent » Thu Jan 10, 2019 10:46 pm

Thanks Alan!!
2) Am assuming the TIRA is your ONLY TIRA account and the value in TIRAs on 12/31/2019 will be 0.
Correct. No other TIRA funds elsewhere, and yes will be converting out all of it so 0.00 on 12/31/2019.
It sounds like I'm at the mercy of the stock price at time of execution by the custodian.

So if the AAPL stock goes up further by next week, then my tax amount owed will be greater than $294. (I suppose it could go the other way though too).

Thanks for the expertise! :sharebeer

aristotelian
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Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by aristotelian » Fri Jan 11, 2019 6:35 am

If they won't let you do a conversion in-kind, and if you don't want to be out of market, simply buy AAPL or whatever in your Roth now and go to cash in the Traditional.

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Tamarind
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Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by Tamarind » Fri Jan 11, 2019 7:43 am

I'm curious. Knowing you were no longer eligible for a direct Roth contribution, why would you then try to make a direct Roth contribution again for 2019? Seems like an extra step. Or did you only realize you'd be ineligible after making both direct contributions?

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

Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by retiredjg » Fri Jan 11, 2019 9:02 am

TaxableEvent wrote:
Thu Jan 10, 2019 10:46 pm
Correct. No other TIRA funds elsewhere, and yes will be converting out all of it so 0.00 on 12/31/2019.
Maybe. You should check in a month or so to be sure a few pennies or dollars don't show up later.

Topic Author
TaxableEvent
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Joined: Thu Jan 10, 2019 6:57 pm

Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by TaxableEvent » Fri Jan 11, 2019 12:18 pm

by Tamarind » Fri Jan 11, 2019 4:43 am

I'm curious. Knowing you were no longer eligible for a direct Roth contribution, why would you then try to make a direct Roth contribution again for 2019? Seems like an extra step. Or did you only realize you'd be ineligible after making both direct contributions?
Yeah i realized this after I had made both direct contributions.

Topic Author
TaxableEvent
Posts: 4
Joined: Thu Jan 10, 2019 6:57 pm

Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by TaxableEvent » Fri Jan 11, 2019 12:20 pm

retiredjg wrote:
Fri Jan 11, 2019 9:02 am
TaxableEvent wrote:
Thu Jan 10, 2019 10:46 pm
Correct. No other TIRA funds elsewhere, and yes will be converting out all of it so 0.00 on 12/31/2019.
Maybe. You should check in a month or so to be sure a few pennies or dollars don't show up later.
You're saying that the custodian's process may leave some residual value in the TIRA, right?

So I should check back and do a second conversion if necessary?

Alan S.
Posts: 8079
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by Alan S. » Fri Jan 11, 2019 4:10 pm

You could, but it really makes very little difference.

For example, let's assume 73 shows up for some reason in the TIRA.

That would change the taxable amount of your conversion from 1227 to 1298 depending on the number of decimal places you round to for Form 8606.
If you converted the 73 before year end, then your taxable amount would be 1300.

If you just left the amount in the TIRA until next year, you would start with around 66 of basis to apply to the 73 in the following year. So whether you convert the small amount or not is not about taxes, it is about how clean you want your 8606 to be. You still have to do the division and complete the applicable lines either way.

retiredjg
Posts: 35095
Joined: Thu Jan 10, 2008 12:56 pm

Re: 2018 Roth Contribution Rechar'ed to Traditional on 1/7/19. Now want to perform Backdoor Roth Conversion. Need help

Post by retiredjg » Sat Jan 12, 2019 7:57 am

TaxableEvent wrote:
Fri Jan 11, 2019 12:20 pm
You're saying that the custodian's process may leave some residual value in the TIRA, right?

So I should check back and do a second conversion if necessary?
That is what I meant. And as Alan said, it is not that big a deal, but many people find it disconcerting because they did not expect it to be there and they want line 14 (basis going forward into the next year) to be $0.

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