SweetTooth wrote: ↑Fri Jun 18, 2021 11:23 pm
Husband age 70 has a T-IRA that contains $625,000, of which $7500 is aftertax dollars (about 1% of total T-IRA).
This sounds like he did the first half of the
Backdoor Roth process, but didn't follow through on the second half. And it sounds like you already understand the
pro rata rule, since you/your software has been using Form 8606 several years to calculate the taxes. I'm 'with' you in thinking this should be cleaned up, to help make your tax life a little simpler and you already understand what needs to me done.
However, have you been planning around future RMDs and been doing Roth conversions the last few years? (If so, you are ahead of me.
) If he hasn't done his Roth conversion yet for this year, he should leave not only the basis, but how much additional he wants to convert in his TIRA. He should convert AT LEAST the amount that the TIRA grows each year. If he converts/withdraws less than the yearly growth, the balance is growing faster than he is withdrawing. This will make his future RMDs continue to grow faster than the RMD divisors require.
I spoke to two people at Vanguard where the T-IRA is located, and they were skeptical of the strategy and of course they do not advise on tax matters. One person suggested it might be a lot of "process" to go through -- and asked --is it really worth it?
The phone reps (at any custodian) don't know if the contributions made to a TIRA were deductible or not. (That's between you and the IRS.) All they know is that lots of customers contact them to help with a conversion or to clean up some error that was made. ASK THE CUSTODIAN HOW THEY WILL BE DOING THE TRANSFER BEFORE YOU AUTHORIZE THE TRANSACTION! One important "error" to look out for (prevent) is that the rollover
from and
to the TIRA should be a "direct rollover". This means the money should go from a custodian to another custodian electronically or by a check that is make out to the new custodian, "for benefit of <husband>". They may mail the check to you and you are then responsible for making a copy and forwarding it to the new custodian asap. DO NOT GET A CHECK MADE OUT TO HIM AS THIS WILL BE A "INDIRECT ROLLOVER" that prevents him from doing another direct rollover for 365 days. So, if something else comes along that he decides he wants to do with the TIRA or 457B, he may forget, and be subject to severe penalties if he does another "indirect rollover" within the next 365 days.
And I assume one of you has already cleared this with the 457B administrator (so you don't end up with a check made out to them that can't be deposited.)
- Is there any downside to this strategy?
- Would you go to the trouble to "rescue" a $7500 basis? We would need to cash out of bond funds and Wellesley before we did the rollover to the employer.
- We would do the conversion strategy in 2021 (rollover the pretax $ to 457B retirement plan; convert the aftertax $ to Roth) and then rollover the 457B $ back to the VG T-IRA in 2022. Is there any benefit to waiting closer to end of year to do the conversion? (The only negative I can see is that the Employer's 457B charges a small annual fee .0006, calculated daily and charged monthly, about $31/mo.)
- Has anyone successfully carried out this strategy on this forum? No hiccups?
The only 'downside' is if you or a custodian make an error along the way. I assume you know that if you get a check, it needs to be in the other account within 60 days. If there is a custodian to custodian transfer and they "lose" track of the rollover, the time limit doesn't apply, since you weren't doing the physical transfer.
I would do it. In the long term, the time to do the 2 rollovers will someday be less than filing Form 8606 over the rest of his life. It will help simplify your financial life a bit. (Who is going to remember to keep reporting the remaining basis if you both have mental decline and your tax forms are handed over to a tax preparer?)
By waiting until closer to the end of the year, your 457 fees will be a little less, but the stock market will likely change as time goes on. If we have a 'bear' market this year, you may want to convert a lot more than you would have otherwise, since you can convert more shares when they are cheaper, for the same tax hit. But the converse is true, too. If the markets grow, the taxes on the excess "Roth conversion" will also grow. But don't do any rollovers in December as the custodians are very busy with year-end activities then, while employees take time off for the holidays. The rollover may end up taking longer than you expect or might only be 2 or 3 days.
Yes, lots of Bogleheads have done something similar, but it is usually in the context of fixing up a Backdoor Roth that they messed up. (A few times a year, someone will realize they were subject to the
pro rata rule when they make a non-deductible contribution to a TIRA that already had pre-tax money in it. The following year when doing taxes, they come here to ask why their Roth conversion was taxed. After they learn about the
pro rata rule, they roll their remaining pre-tax money into a 401K, then convert the remaining basis. After they retire, they then roll the pre-tax money back to a TIRA.)
Here a 'test' for the OP: if you understand all the nuances in this post (and I didn't make any typos), you are making a smart move and should be fine. If something is not clear, let us know BEFORE you do anything.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.