Need help setting up backdoor Roth IRA

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IADFlyer
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Need help setting up backdoor Roth IRA

Post by IADFlyer » Fri Apr 21, 2017 6:11 pm

Hello - I am looking for any help I can get on the steps for structuring a backdoor Roth IRA. Specific instructions or directions for my situation and the steps for follow in future years would be very helpful. My wife and I both have incomes over the limit for Roth contributions. I have read various posts and the backdoor wiki and I am still struggling. We both each have a Trad IRA and 401K and I alone have a Roth.

HUSBAND
Trad IRA Value: $15,700
Contribution: $10,300 (from years 2012/2013)
Gain: $5,400

Roth IRA: $4,700
Contributions: $4,740
Gain: $40

TSP (Federal Employee 401K) Value: $430K

WIFE
Trad IRA Value: $5,005
Contribution: $5,000 (from 2012)
Gain: $5

No Roth IRA

TSP (Federal Employee 401K) Value: $315K

Thank you kindly.

EDIT: I have also read the finance buff article at https://thefinancebuff.com/the-backdoor ... ow-to.html
It's just not clicking for me, because I have a gain to deal with.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Fri Apr 21, 2017 7:22 pm

Is the money in each tIRA pre-tax or could there be some "basis" in there, say...from a non-deductible contribution to IRA? The answer may not be the same for both of you.

If any contributions were non-deductible, did you file the Form 8606 for those contributions?

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Duckie
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Re: Need help setting up backdoor Roth IRA

Post by Duckie » Fri Apr 21, 2017 7:32 pm

IADFlyer wrote:My wife and I both have incomes over the limit for Roth contributions.

Unless you are filing separately, it's your joint income that counts. So your joint income for 2017 will be more than $196K?

HUSBAND
Trad IRA Value: $15,700
Contribution: $10,300 (from years 2012/2013)
Gain: $5,400

Were the contributions non-deductible?

WIFE
Trad IRA Value: $5,005
Contribution: $5,000 (from 2012)
Gain: $5

Again, was the contribution non-deductible?

Since you both have TSPs you can roll your pre-tax TIRA assets over the the TSPs. Any non-deductible basis cannot be rolled to the TSP but can be converted without taxes.

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Sat Apr 22, 2017 6:02 am

retiredjg wrote:Is the money in each tIRA pre-tax or could there be some "basis" in there, say...from a non-deductible contribution to IRA? The answer may not be the same for both of you.


I am not really sure what you mean here.

retiredjg wrote:If any contributions were non-deductible, did you file the Form 8606 for those contributions?


Not sure. Don't know. I can look at prior years' turbo tax filing.

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Sat Apr 22, 2017 6:16 am

Duckie wrote:
IADFlyer wrote:My wife and I both have incomes over the limit for Roth contributions.

Unless you are filing separately, it's your joint income that counts. So your joint income for 2017 will be more than $196K?

Yes, we file MFJ and are over the limit.

Duckie wrote:
Iadflyer wrote:HUSBAND
Trad IRA Value: $15,700
Contribution: $10,300 (from years 2012/2013)
Gain: $5,400

Were the contributions non-deductible?

I'm not sure. How do I find out or what does it mean so that I can determine?

Duckie wrote:
Iadflyer wrote:WIFE
Trad IRA Value: $5,005
Contribution: $5,000 (from 2012)
Gain: $5

Again, was the contribution non-deductible?

Same as above.

Duckie wrote:Since you both have TSPs you can roll your pre-tax TIRA assets over the the TSPs. Any non-deductible basis cannot be rolled to the TSP but can be converted without taxes.

Would I need to sell the current holdings in my Trad IRA since the TSP is limited to the 5 funds?

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Sat Apr 22, 2017 6:50 am

OK, let's back up then.


HUSBAND
Trad IRA Value: $15,700
Contribution: $10,300 (from years 2012/2013)
Gain: $5,400

Where did the contribution of $10,300 come from? Was that from contributions that you deducted from your taxable income? Or a rollover from a work plan?

Or was it from contributions that you did not deduct from your taxable income because your income was too high?


WIFE
Trad IRA Value: $5,005
Contribution: $5,000 (from 2012)
Gain: $5

Same questions.

Do you remember about how much money you made in 2012 and 2013? Did you make a lot less back then? About the same? Were you married back then?

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Earl Lemongrab
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Re: Need help setting up backdoor Roth IRA

Post by Earl Lemongrab » Sat Apr 22, 2017 12:09 pm

Well, presumably you made these contributions because your MAGI was too high in the years past to make regular Roth IRA contributions. Is that accurate? If so, then given the existence of work plans, you would not have been able to deduct the TIRA contributions. So those should have been recorded on form 8606 filed with taxes. If not, then you need to do that as a first step.
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Sat Apr 22, 2017 2:51 pm

retiredjg wrote:OK, let's back up then.


HUSBAND
Trad IRA Value: $15,700
Contribution: $10,300 (from years 2012/2013)
Gain: $5,400

Where did the contribution of $10,300 come from? Was that from contributions that you deducted from your taxable income? Or a rollover from a work plan?

Or was it from contributions that you did not deduct from your taxable income because your income was too high?


WIFE
Trad IRA Value: $5,005
Contribution: $5,000 (from 2012)
Gain: $5

Same questions.

Do you remember about how much money you made in 2012 and 2013? Did you make a lot less back then? About the same? Were you married back then?


I am still having trouble figuring how to classify the contributions. They did not come work plan rollovers. They were all out of pocket. I didn’t see any Form 8606 on any of the returns. MFJ since 2006.

2012 and 2013 incomes were lower because of the sale of a rental property in each year and capture of the associated losses. IRS did not like the method used, so in an audit, required us to repay 11K and 12K in the respective years.

The contributions were made in the amounts of:

Husband – Trad IRA
3/21/2013(2012) - $4,800
8/6/2013(2013) - $5,500

Husband – Roth
7/13/2012 - $200
5/22/2014 – 1/28/2014 – (45 contributions x $100)

Wife – Trad IRA
4/15/2013(2012) - $5,000


INCOME 2012-2016

2012
AGI $ 81,277
Taxable: $ 36,607
Fed Tax: $ 2,866

2013
AGI $125,219
Taxable: $76,842
Fed Tax: $8,853

2014
AGI $184,787
Taxable: $138,653
Fed Tax: $25,623

2015
AGI $198,800
Taxable: $150,504
Fed Tax: $28,800

2016
AGI $199,566
Taxable: $150,380
Fed Tax: $28,778

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Sat Apr 22, 2017 2:52 pm

Earl Lemongrab wrote:Well, presumably you made these contributions because your MAGI was too high in the years past to make regular Roth IRA contributions. Is that accurate? If so, then given the existence of work plans, you would not have been able to deduct the TIRA contributions. So those should have been recorded on form 8606 filed with taxes. If not, then you need to do that as a first step.

I did not find any Form 8606 in the last five years worth of returns.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Sat Apr 22, 2017 3:34 pm

IADFlyer wrote:I did not find any Form 8606 in the last five years worth of returns.

The form will only be generated if you tell your tax software or your tax preparer that you made a non-deductible contribution to IRA.

I'll see if I can find the income limits for 2012 and 2013.

Do you still have those tax records? If so, look on line 32 for years 2012 and 2013 IRA Deduction and see if there is an entry for either of those 2 years. Just to help double check, look at 2011 and 2104 if you have them as well.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Sat Apr 22, 2017 3:37 pm

P.S. The AGIs that you gave us - was that after the audit or before?

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Duckie
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Re: Need help setting up backdoor Roth IRA

Post by Duckie » Sat Apr 22, 2017 4:14 pm

IADFlyer wrote:
Duckie wrote:Since you both have TSPs you can roll your pre-tax TIRA assets over the the TSPs. Any non-deductible basis cannot be rolled to the TSP but can be converted without taxes.

Would I need to sell the current holdings in my Trad IRA since the TSP is limited to the 5 funds?

Yes. You would liquidate the current holdings and transfer the cash.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Sat Apr 22, 2017 4:22 pm

For 2013, the modified AGI limit for deducting contributions to IRA was $95k if each of you had a plan at work. Since your AGI was $125k, I think it is almost certain the contributions for 2013 were non-deductible. If it turns out one of you did not have a plan at work in 2013, I'll have to dig further.

For 2012, it is not so clear. Your AGI is under the limit of $92k, but your modified AGI might be over $92k. Again, it might be different if either of you did not have a plan at work.

So it will be very helpful if you can look at the IRA Deduction on line 32 of those two years' returns.

Also, I'm thinking the AGIs you gave did not reflect the audit.

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Sat Apr 22, 2017 4:33 pm

retiredjg wrote: Do you still have those tax records? If so, look on line 32 for years 2012 and 2013 IRA Deduction and see if there is an entry for either of those 2 years. Just to help double check, look at 2011 and 2104 if you have them as well.

2012 returns have $9,800 in Line 32 IRA Deductions. All other years 2011-2014 have nothing in that line.

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Sat Apr 22, 2017 4:39 pm

retiredjg wrote:For 2013, the modified AGI limit for deducting contributions to IRA was $95k if each of you had a plan at work. Since your AGI was $125k, I think it is almost certain the contributions for 2013 were non-deductible. If it turns out one of you did not have a plan at work in 2013, I'll have to dig further.

For 2012, it is not so clear. Your AGI is under the limit of $92k, but your modified AGI might be over $92k. Again, it might be different if either of you did not have a plan at work.

We both have had plans available to use and have used them during this period of time.

retiredjg wrote:So it will be very helpful if you can look at the IRA Deduction on line 32 of those two years' returns.

Also, I'm thinking the AGIs you gave did not reflect the audit.

2012 returns have $9,800 in Line 32.

The 2012 and 2013 AGI are before the audit, IRS raised the number significantly.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Sat Apr 22, 2017 4:45 pm

So it appears to me that 2013 is the only year for which you made non-deductible contributions. And it was a single contribution of $5,500 to His TIRA. None were made to Her TIRA for that year.

Do I have it right?

If so, you would download the 2013 Form 8606 from the internet and fill in lines 1 and 14. There may be a line or two in between that I'm not remembering. And send that to the IRS documenting your non-deductible contribution that year.

You would then roll all but $5,500 of His tIRA into His 401k (or 403b). I'm assuming you have one. The other possibility is to just convert it to Roth and you will pay tax on all but the $5,500. Once the other money is gone to the 401k, convert the $5,500 to Roth. That will be documented on the back of the 2017 Form 8606 a year from now. We'll talk more if you want to make a 2017 contribution (I'm assuming you will).

Her tIRA is ready to go to the TSP. There is another thread going right now about how to do that. The other possibility is to just convert that $5,005 to Roth and pay the tax.

I'll need to look at this again in the morning when my mind is fresh, but I think I've got it right.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Sat Apr 22, 2017 4:48 pm

IADFlyer wrote:The 2012 and 2013 AGI are before the audit, IRS raised the number significantly.

This worries me a little. If the IRS audit raised the number significantly, that $9800 should not have been deductible after the audit. If so, only part of what I said above is correct.

Do you have an amended 1040 for 2012? Or a transcript or something?

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Sun Apr 23, 2017 10:37 am

retiredjg wrote:
IADFlyer wrote:The 2012 and 2013 AGI are before the audit, IRS raised the number significantly.

This worries me a little. If the IRS audit raised the number significantly, that $9800 should not have been deductible after the audit. If so, only part of what I said above is correct.

Do you have an amended 1040 for 2012? Or a transcript or something?


Based on my recollection of the audit and the summary of examination changes document, it really appears they were only after the losses we claimed from the sale of two rentals and did not bother with much else (right or wrong). It almost felt like a settlement.

The IRS raised our 2012 Taxable Income by $101,311 to a grand total of $137, 918.
The IRS raised our 2013 Taxable Income by $55,774 to a grand total of $132,616.

No amended 1040, they sent a Form 4549 with a summary of the changes.

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Sun Apr 23, 2017 10:41 am

Duckie wrote:
IADFlyer wrote:
Duckie wrote:Since you both have TSPs you can roll your pre-tax TIRA assets over the the TSPs. Any non-deductible basis cannot be rolled to the TSP but can be converted without taxes.

Would I need to sell the current holdings in my Trad IRA since the TSP is limited to the 5 funds?

Yes. You would liquidate the current holdings and transfer the cash.

Helpful, thank you.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Sun Apr 23, 2017 3:25 pm

IADFlyer wrote:No amended 1040, they sent a Form 4549 with a summary of the changes.

What happened is that the audit income moved your MAGI from being eligible to deduct your contribution to not being eligible to deduct your contribution. They sent you a bill and you paid it, not knowing if they "un-deducted" the contributions or not.

If you or your tax-preparer had done an amended return with software, the deduction would have been eliminated and you would know to call that $9,800 in 2012 non-deductible contributions to His and Her IRAs. Since it was more of a "settlement", you are a bit in the dark.

Is there anything on Form 4549 (for 2012) which indicates what the AGI was?

I don't know what to suggest other than trying to get some input from tax-preparers.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Sun Apr 23, 2017 3:30 pm

We know what to do for 2013 - the $5,500 was a non-deductible contribution.

We don't know what to do for 2012. After the audit, the two contributions totaling $9,800 may or may not have been deducted. What this boils down to is paying taxes on that $9,800 again. Some people would go to great lengths to try to avoid that if they can. Others would blow it off and just move on. I'm not sure where you are on that spectrum.

As soon as this little part is straight (or you make a decision about what you think or what to do), we can go back to your original question about getting set up to do the back door.

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Mon Apr 24, 2017 2:42 pm

retiredjg wrote:Is there anything on Form 4549 (for 2012) which indicates what the AGI was?

No, other than my MAGI for 2012 was now $182,588.

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Mon Apr 24, 2017 2:47 pm

retiredjg wrote:We know what to do for 2013 - the $5,500 was a non-deductible contribution.

We don't know what to do for 2012. After the audit, the two contributions totaling $9,800 may or may not have been deducted. What this boils down to is paying taxes on that $9,800 again. Some people would go to great lengths to try to avoid that if they can. Others would blow it off and just move on. I'm not sure where you are on that spectrum.

As soon as this little part is straight (or you make a decision about what you think or what to do), we can go back to your original question about getting set up to do the back door.

I'm closer to the "move on" camp, because it just seems like trying to unravel an endless ball of yarn. Out of curiosity, any ideas how tax on the $9,800 would be calculated?
I think we can get back to setting up the back door. Thanks for your help so far. :sharebeer

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Mon Apr 24, 2017 3:14 pm

I am told behind the scenes that the 4549 should say if the IRA deductions you had taken that year were disallowed. My best guess is that would be in section 1, "Adjustments to income". Did they add that $9,800 back in? If not, perhaps they simply overlooked it.

If you don't know or can't tell...it might be best to just assume the $9,800 was deducted from your taxable income (it was a deductible contribution rather than non-deductible contribution.) even if you were not eligible. In that case, no Form 8606 is needed for 2012.

As to how it will be eventually taxed, if you are in the 25% bracket when the money comes out to be spent, you will pay an extra $2,450 in tax over the years as that money is used. In retirement, many couples are in the 15% bracket, so it could be less.


So all that takes us back to here:

So it appears to me that 2013 is the only year for which you made non-deductible contributions. And it was a single contribution of $5,500 to His TIRA. None were made to Her TIRA for that year.

Do I have it right?

The first step is to document that contribution by downloading the 2013 Form 8606 from the internet and fill in lines 1 and 14. There may be a line or two in between that I'm not remembering. And send that to the IRS documenting your non-deductible contribution that year. This is one form that the IRS will usually accept alone without amending your return because there is no change in tax.



You would then roll all but $5,500 of His tIRA into His 401k (or 403b). I'm assuming you have one. The other possibility is to just convert it to Roth and you will pay tax on all but the $5,500. Once the other money is gone to the 401k, convert the $5,500 to Roth. That will be documented on the back of the 2017 Form 8606 a year from now. We'll talk more if you want to make a 2017 contribution (I'm assuming you will).

Her tIRA is ready to go to the TSP. There is another thread going right now about how to do that. The other possibility is to just convert that $5,005 to Roth and pay the tax with your 2017 taxes.

I think this brings us up to the point where your confusion starts. And it seems your confusion is about the gains. It's pretty simple. Andy money that has not been taxed (that includes all gains) can be rolled into His 401k (if he has one) or Her TSP. Or it could be converted to Roth if you are willing to pay tax.

What is it you need help with, specifically?

Are you ready to start the back door by making a 2017 non-deductible contribution to tIRA?

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Mon Apr 24, 2017 9:56 pm

retiredjg wrote:I am told behind the scenes that the 4549 should say if the IRA deductions you had taken that year were disallowed. My best guess is that would be in section 1, "Adjustments to income". Did they add that $9,800 back in? If not, perhaps they simply overlooked it.

No, Section 1 only includes adjustments to schedule E, E1 and capital gains.
retiredjg wrote:If you don't know or can't tell...it might be best to just assume the $9,800 was deducted from your taxable income (it was a deductible contribution rather than non-deductible contribution.) even if you were not eligible. In that case, no Form 8606 is needed for 2012.

I think I agree with this.

retiredjg wrote:As to how it will be eventually taxed, if you are in the 25% bracket when the money comes out to be spent, you will pay an extra $2,450 in tax over the years as that money is used. In retirement, many couples are in the 15% bracket, so it could be less.

Got it. So, I will pay tax on the money when I take a distribution and it will be taxed at whatever my tax rate is at the time of distribution.

retiredjg wrote:So all that takes us back to here:

So it appears to me that 2013 is the only year for which you made non-deductible contributions. And it was a single contribution of $5,500 to His TIRA. None were made to Her TIRA for that year.

Do I have it right?

yes

retiredjg wrote:The first step is to document that contribution by downloading the 2013 Form 8606 from the internet and fill in lines 1 and 14. There may be a line or two in between that I'm not remembering. And send that to the IRS documenting your non-deductible contribution that year. This is one form that the IRS will usually accept alone without amending your return because there is no change in tax.

ok-step one

retiredjg wrote:You would then roll all but $5,500 of His tIRA into His 401k (or 403b). I'm assuming you have one. The other possibility is to just convert it to Roth and you will pay tax on all but the $5,500. Once the other money is gone to the 401k, convert the $5,500 to Roth. That will be documented on the back of the 2017 Form 8606 a year from now. We'll talk more if you want to make a 2017 contribution (I'm assuming you will).

ok-step two. So, sell all positions in account (approx $15,700) and rollover $10,200 to His TSP.
ok-step three, convert $5,500 to already established His Roth via fidelity. How is that transaction done?
ok-step four, file form 8606 with my 2017 tax return? What exactly is this documenting?

retiredjg wrote:Her tIRA is ready to go to the TSP. There is another thread going right now about how to do that. The other possibility is to just convert that $5,005 to Roth and pay the tax with your 2017 taxes.

Thank you, I'll locate and research that thread.

retiredjg wrote:I think this brings us up to the point where your confusion starts. And it seems your confusion is about the gains. It's pretty simple. Andy money that has not been taxed (that includes all gains) can be rolled into His 401k (if he has one) or Her TSP. Or it could be converted to Roth if you are willing to pay tax.

The TIRA is funded with after tax dollars, so the only thing eligible for taxation would be the gain, right? How can than be rolled in to TSP, which is pre-tax?
retiredjg wrote:What is it you need help with, specifically?

Are you ready to start the back door by making a 2017 non-deductible contribution to tIRA?


Yes, once I clear up my remaining confusion.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Tue Apr 25, 2017 6:10 am

Ok. It appears you are good to go.


ok-step one
ok-step two. So, sell all positions in account (approx $15,700) and rollover $10,200 to His TSP.
ok-step three, convert $5,500 to already established His Roth via fidelity. How is that transaction done?
ok-step four, file form 8606 with my 2017 tax return? What exactly is this documenting?

I've never used Fidelity so I don't know the steps. It should be easy to do online, but they should be able to walk you through this with a short phone call.

The Form 8606 documents 2 things. In the front, it documents a non-deductible contribution so you don't pay tax on that money a second time. On the back, it documents a Roth conversion. It appears you will do the conversion in 2017 so you document that on the back of the 2017 form next spring.

Note: the back door is two steps, each of which are documented separately. First, a contribution is documented with the tax year it is done FOR. That is why you are going to use the 2013 Form 8606 to document that old contributions. Second, a conversion is documented with the tax year it is done IN. That is why your 2017 conversion will be documented with the year 2017 taxes.

This sounds confusing, but it actually isn't. You'll see how it works when you start working through the forms.

Thank you, I'll locate and research that thread.

It's been a few days now, I'll look for it too.



retiredjg wrote:I think this brings us up to the point where your confusion starts. And it seems your confusion is about the gains. It's pretty simple. Andy money that has not been taxed (that includes all gains) can be rolled into His 401k (if he has one) or Her TSP. Or it could be converted to Roth if you are willing to pay tax.

The TIRA is funded with after tax dollars, so the only thing eligible for taxation would be the gain, right? How can than be rolled in to TSP, which is pre-tax?

If you do the conversion step of the back door pretty quickly each year, the gain will be small. You would not roll that into the TSP each year. You would simply convert it too and pay tax on the small gain. Some people put their contribution into money market so it is not possible to have much in gains before the conversion step. This also prevents a loss of value before the conversion step.

You could actually skip all this rolling into the TSP in 2017 if you want - by simply converting what you each have in tIRA to Roth IRA. Most people want to avoid that because it means more taxes. If you did convert, you'd pay taxes at your current marginal rate on the $12,200 in His IRA and the $5,005 in Her IRA.

Once you pencil through the 2013 Form 8606 I think this will make more sense. You could also pretend you did your conversion in 2016 and download the 2016 Form 8606 and see how it works together with the old form.

Let me know if you are still confused. It is important to figure out this paperwork ahead of time. The actual back door process is very easy to complete - just a few mouse clicks. It is the paperwork that people mess up. That is why you need to understand it first.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Tue Apr 25, 2017 6:16 am

I realized I left something out.

2013 Form 8606 will document the old contribution of $5,500.

2017 Form 8606 will document converting that $5,500 to Roth in 2017.

If you also do a back door contribution in 2017, the 2017 Form 8606 will also document the 2017 contribution on the front and the conversion on the back.

You can convert all the money (both the 2013 money and the 2017 money) at once or do it separately. The total converted in the year is what is reported.

After this year, if you do the contribution and conversion in the same calendar year, it will all get reported on one form.

retiredjg
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Tue Apr 25, 2017 6:20 am

Here's the thread on transferring money into the TSP. One poster gives a detailed description of how to do it.

viewtopic.php?f=1&t=217212&p=3338887#p3338869

IADFlyer
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Thu Apr 27, 2017 3:43 am

@retiredjg - The delaying responding is because I am still processing how to execute this plan based on our situation. I'll be back shortly.

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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Wed May 03, 2017 9:29 am

retiredjg wrote:Ok. It appears you are good to go.

...

Let me know if you are still confused. It is important to figure out this paperwork ahead of time. The actual back door process is very easy to complete - just a few mouse clicks. It is the paperwork that people mess up. That is why you need to understand it first.


I'm back and think I understand.

Actions for my account are as follows:
1) Complete 2013 Form 8606 and send to IRS documenting that in 2013 I made a non-deductible tIRA contribution of $5,500.
2) Sell my tIRA holdings and place in money market inside of tIRA.
3) Send via rollover all but $5,500 to my TSP. So, I am rolling over approximately $10,500.
4) Convert the remaining balance ($5,500) to my Roth IRA.
5) Document 2017 conversion on 2017 Form 8606 at 2017 tax time.

I think this will complete my backdoor for my tIRA and empty this account by rolling over $10,500 to TSP and converting $5,500 to Roth.

Actions for my wife are as follows:
1) Send via rollover all $5,005 to her TSP.

I think this will complete a rollover of $5,005 for my wife and empty her tIRA account.

The next questions I have are in preparation for contributions and conversions in 2017.

1) Once we complete the actions above, can we then begin making contributions into the tIRA accounts up to $5,500 each?
2) Then by Dec 31, 2017 we should have converted the $5,500 to each person's Roth.
3) Then complete 2017 Form 8606 documenting each person's contribution and conversion.
3a) For me the 2017 Form 8606 will document $5,500 of contribution and $11,000 of conversion.
3b) For my wife the 2017 Form 8606 will document $5,500 of contribution and $5,500 of conversion.
4) For 2018 and beyond, make contributions during the year and convert before December 31. Then document contribution and conversion via Form 8606 for that year.

I hope I have gotten this correct.

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Earl Lemongrab
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Re: Need help setting up backdoor Roth IRA

Post by Earl Lemongrab » Wed May 03, 2017 9:51 am

I would make the 2017 contribution before the conversion so you don't have to do it twice.
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Wed May 03, 2017 10:00 am

Earl Lemongrab wrote:I would make the 2017 contribution before the conversion so you don't have to do it twice.

Are suggesting doing my step 4 (the conversion) after making my 2017 contributions? If so, that sounds good.

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Re: Need help setting up backdoor Roth IRA

Post by Earl Lemongrab » Wed May 03, 2017 10:32 am

IADFlyer wrote:
Earl Lemongrab wrote:I would make the 2017 contribution before the conversion so you don't have to do it twice.

Are suggesting doing my step 4 (the conversion) after making my 2017 contributions? If so, that sounds good.

Yes. Why go through the conversion process an extra time?
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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Wed May 03, 2017 10:49 am

I hope I have gotten this correct.

It appears you do have it correct. A few comments.

It is not required that you "2) Sell my tIRA holdings and place in money market inside of tIRA". The part going to the TSP will be sold the day they transfer the holdings out. If I were going to do it, I'd only exchange $5,500 into money market so that amount neither gains or loses value. This allows you to convert your exact basis which makes the paperwork cleaner. However exchanging all or part to money market is not a required step. But it is a fine step if you want to do it.

Regarding 2017... step 1.....you don't actually have to wait although many people want to. And you don't have to do two conversions if you don't want to (as mentioned already). That said, it is not wrong to wait nor is it wrong to do two conversions and many people get less confused by doing each step separately the first time.

The critical thing is that on Dec 31 of any year you do a conversion, your IRAs (including SIMPLE and SEP) have to be empty.

Congrats on getting it figured out ahead of time. This can save hours of grief later on. :happy

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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Wed May 03, 2017 11:34 am

retiredjg wrote:Congrats on getting it figured out ahead of time. This can save hours of grief later on. :happy

Thank you everyone, especially retiredjg, for the assistance.

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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Fri May 05, 2017 9:19 am

When sending in Form 8606 separately from my return, should I expect any sort of confirmation or acknowledgement from the IRS?

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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Fri May 05, 2017 3:55 pm

IADFlyer wrote:When sending in Form 8606 separately from my return, should I expect any sort of confirmation or acknowledgement from the IRS?

No. As a matter of fact, you can expect NOT to hear from them from what we've heard.

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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Thu Oct 12, 2017 12:45 pm

Now that I have contributed the full $5,500 to my tIRA for 2017, do I need to wait until the end of year to execute the conversion to my Roth IRA? Or can I do that now, essentially whenever I've met my annual contribution goal (i.e. $5,500)?

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Re: Need help setting up backdoor Roth IRA

Post by retiredjg » Thu Oct 12, 2017 1:40 pm

YOu can do it any time you want. You could have even done several different conversions though out the year if you wanted.

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Earl Lemongrab
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Re: Need help setting up backdoor Roth IRA

Post by Earl Lemongrab » Thu Oct 12, 2017 1:42 pm

In general, contributions and conversions have no connection other than you have to have money in the account to convert. It's not like the Backdoor Roth is some IRS-provided service with its own special rules. It's just people noticing a loophole caused by combining two separate things.
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Fri Oct 13, 2017 11:50 am

Got it. Thanks.

When I try to execute the conversion online through Fidelity, it ask me if I want to have taxes withheld. Doesn’t make sense to me as the money in my tIRA is after-tax money already.

However, there is $1.23 of gain in the tIRA account.

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Re: Need help setting up backdoor Roth IRA

Post by Earl Lemongrab » Fri Oct 13, 2017 12:04 pm

IADFlyer wrote:
Fri Oct 13, 2017 11:50 am
Got it. Thanks.

When I try to execute the conversion online through Fidelity, it ask me if I want to have taxes withheld. Doesn’t make sense to me as the money in my tIRA is after-tax money already.

However, there is $1.23 of gain in the tIRA account.
Custodian don't know and don't care what the taxable nature of TIRA contributions are. That's between you and the IRS.
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Fri Oct 13, 2017 1:21 pm

Earl Lemongrab wrote:
Fri Oct 13, 2017 12:04 pm
IADFlyer wrote:
Fri Oct 13, 2017 11:50 am
Got it. Thanks.

When I try to execute the conversion online through Fidelity, it ask me if I want to have taxes withheld. Doesn’t make sense to me as the money in my tIRA is after-tax money already.

However, there is $1.23 of gain in the tIRA account.
Custodian don't know and don't care what the taxable nature of TIRA contributions are. That's between you and the IRS.
I didn’t understand this reply. So, does that mean I should not have taxes withheld, if this is all after-tax money? I thought I should be converting the full $5,500.

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Re: Need help setting up backdoor Roth IRA

Post by Earl Lemongrab » Fri Oct 13, 2017 1:53 pm

IADFlyer wrote:
Fri Oct 13, 2017 1:21 pm
I didn’t understand this reply. So, does that mean I should not have taxes withheld, if this is all after-tax money? I thought I should be converting the full $5,500.
That's a different question than you asked. You wanted to know why the custodian asked about withholding when it was after-tax. They don't know that, so the option comes up. To answer this question, no you don't want withholding. Generally you don't for conversions unless you're over 59-1/2 and doing conversions of pretax amounts and don't have or don't want to use outside money for taxes.
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Fri Oct 13, 2017 1:57 pm

Thank you!! Yes, that makes sense.

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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Tue Oct 17, 2017 4:09 pm

Me again. I was preparing to click the confirm button on my conversion today and had a question about the gain from tIRA.

The background is that I had a total balance of approximately $15,700 in my tIRA. $9,800 from 2012/13 that was decided to be deductible contributions which produced about $5,900 in gains. In June, I rolled over all but $5,500 to my TSP. The $5,500 sat idle, while I made 2017 non-deductible contributions. Now there is a total of 11,001.23 in the in the tIRA that I want to convert. (The $1.23 are earning from the cash holding account).

My question - Is there a tax due on the gain earned ($5,000+) prior to the conversion? If so, or not, why?

Thank you and I appreciate the help as I am getting closer to completing my first one.

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Earl Lemongrab
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Re: Need help setting up backdoor Roth IRA

Post by Earl Lemongrab » Tue Oct 17, 2017 5:10 pm

If you contributed 11k then your gain is $1.23, not 5k+.
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Tue Oct 17, 2017 6:38 pm

Earl Lemongrab wrote:
Tue Oct 17, 2017 5:10 pm
If you contributed 11k then your gain is $1.23, not 5k+.
I am so sorry for being thick-headed on this. Using simple numbers, I put a deductible $10K in my tIRA and a few years later it was worth $15K. I then rolled the initial $10K into my 401K. Is the remaining $5K I want to convert to a Roth a taxable gain? I guess my confusion is because I didn't "contribute" that $5K, I earned it FROM my contributions.

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Re: Need help setting up backdoor Roth IRA

Post by Earl Lemongrab » Tue Oct 17, 2017 7:24 pm

IADFlyer wrote:
Tue Oct 17, 2017 6:38 pm
Earl Lemongrab wrote:
Tue Oct 17, 2017 5:10 pm
If you contributed 11k then your gain is $1.23, not 5k+.
I am so sorry for being thick-headed on this. Using simple numbers, I put a deductible $10K in my tIRA and a few years later it was worth $15K. I then rolled the initial $10K into my 401K. Is the remaining $5K I want to convert to a Roth a taxable gain? I guess my confusion is because I didn't "contribute" that $5K, I earned it FROM my contributions.
Yes, that's pretax. You should have rolled it into the 401(k) as well. If you still can, do it now.
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Re: Need help setting up backdoor Roth IRA

Post by IADFlyer » Tue Oct 17, 2017 9:09 pm

IADFlyer wrote:
Tue Oct 17, 2017 6:38 pm
Earl Lemongrab wrote:
Tue Oct 17, 2017 5:10 pm
If you contributed 11k then your gain is $1.23, not 5k+.
I am so sorry for being thick-headed on this. Using simple numbers, I put a deductible $10K in my tIRA and a few years later it was worth $15K. I then rolled the initial $10K into my 401K. Is the remaining $5K I want to convert to a Roth a taxable gain? I guess my confusion is because I didn't "contribute" that $5K, I earned it FROM my contributions.
Ah, I found my mistake. I figured/recalled that of the deductible $10K, only ~ $4800 was mine. The rest was my wife’s on a MFJ return. Therefore the remaining $5,500 and the 2017 $5,500 in my tIRA are conversion eligible non-deductible contributions totaling $11,000. And the $1.23 is the taxable gain for purposes of the conversion. You were correct, I just had to work through it.

Thank you!!

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