Contribution to Rollover IRa

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triplejr
Posts: 4
Joined: Thu Mar 08, 2018 12:48 pm

Contribution to Rollover IRa

Post by triplejr » Sun Mar 11, 2018 11:33 pm

Hi,

I just read online that it's a bad idea to make contribution to a rollover IRA account. I have been contributing $100/month ($1200/year) since 2016. Assuming the readings are correct, I would stop the contrition ASAP.

2 questions:
  • Is the contribution to a rollover IRA tax deductible or it's a separate line item that count toward after-tax contribution similar to a 401k?
  • Can this rollover IRA account be converted to a Roth IRA with the backdoor method? If yes, do I have to end up paying the conversion tax for the $2400 that I contributed with after tax $?


Thanks!

123
Posts: 3890
Joined: Fri Oct 12, 2012 3:55 pm

Re: Contribution to Rollover IRa

Post by 123 » Mon Mar 12, 2018 12:23 am

I think the main reason for not making any additional contributions to a Rollover IRA account is that when you add new money to the account it really loses it's characterization as a Rollover IRA. Typically a Rollover IRA is established to hold the proceeds from an employment 401K account after employment ends. The main reason for keeping funds from a 401K account in a separate Rollover IRA is segregate the funds in case a future employer accepts "Rollover" contributions to a 401K plan. Generally employers will not accept outside deposits to a 401K plan unless they come from another 401k plan or they have been held in a segregated Rollover IRA account.

The Rollover IRA account allows the employer to know that there is no "basis" in the IRA account.
The closest helping hand is at the end of your own arm.

krow36
Posts: 1937
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Contribution to Rollover IRa

Post by krow36 » Mon Mar 12, 2018 1:19 am

triplejr wrote:
Sun Mar 11, 2018 11:33 pm
I just read online that it's a bad idea to make contribution to a rollover IRA account. I have been contributing $100/month ($1200/year) since 2016. Assuming the readings are correct, I would stop the contrition ASAP.
Since you have already added contributions to the rollover IRA, it is no longer holds only employer plan contributions. I think you might as well continue to make contributions to it.

2 questions:
  • Is the contribution to a rollover IRA tax deductible or it's a separate line item that count toward after-tax contribution similar to a 401k?
The contributions you made to the 401k were not included in your taxable income. You can deduct the new contributions to the rollover IRA.
  • Can this rollover IRA account be converted to a Roth IRA with the backdoor method? If yes, do I have to end up paying the conversion tax for the $2400 that I contributed with after tax $?

You can convert part or all of any traditional IRA to a Roth IRA but the amount converted is added to your taxable income. If you convert $2400, that amount is added to your income. If you convert the whole of the rollover IRA including the added contributions, you will add that amount to your income. This is not the backdoor Roth, which starts with a nondeductible contribution to a tIRA followed by a conversion to a Roth IRA.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Contribution to Rollover IRa

Post by retiredjg » Mon Mar 12, 2018 6:17 am

triplejr wrote:
Sun Mar 11, 2018 11:33 pm
I just read online that it's a bad idea to make contribution to a rollover IRA account. I have been contributing $100/month ($1200/year) since 2016. Assuming the readings are correct, I would stop the contrition ASAP.
It may or may not be a bad idea depending on what you eventually want to do with the IRA. Since it is already done, stopping now will not change anything.

Is the contribution to a rollover IRA tax deductible or it's a separate line item that count toward after-tax contribution similar to a 401k?
It might be deductible or it might not. That depends on whether you are eligible to deduct it (depends on your income) and whether you choose to deduct it (you don't have to).

Can this rollover IRA account be converted to a Roth IRA with the backdoor method?
An IRA can be converted to Roth IRA. This is called a "Roth conversion" and it is not the same thing as the "back door". Whether you should convert the IRA to Roth is unknown based on the information presented. Do you have other IRAs? What is your tax bracket? Do you have a 401k you could roll the tax-deferred part of the IRA into? etc.

If yes, do I have to end up paying the conversion tax for the $2400 that I contributed with after tax $?
Not if you did the proper paperwork (Form 8606) to document your non-deductble contribution each year. If you did not do the paperwork, it can still be done now.

krow36
Posts: 1937
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Contribution to Rollover IRa

Post by krow36 » Mon Mar 12, 2018 9:55 pm

triplejr wrote:
Sun Mar 11, 2018 11:33 pm
  • Can this rollover IRA account be converted to a Roth IRA with the backdoor method? If yes, do I have to end up paying the conversion tax for the $2400 that I contributed with after tax $?
I'm not sure I understand what you have done. I think you contributed $100/mo ($1200/yr) for 2 years to what was initially a rollover IRA. Did you report these contributions on your income tax? If you did, then those contributions were tax-deferred, and not "after-tax".

If you did not report the contributions on your 1040, then they would be "after-tax", and retiredjg's comment about the Form 8606 applies in order to avoid being taxed twice on the contributions.

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