When to convert IRA to Roth and should I contribute first?

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wisevermilion
Posts: 16
Joined: Sat Jun 20, 2015 4:53 pm

When to convert IRA to Roth and should I contribute first?

Post by wisevermilion » Sat Mar 10, 2018 6:29 pm

I have a few questions regarding 2017 and 2018 taxes and my traditional IRA.

Details
  • I got married in 2017. My wife currently has no retirement accounts.
  • We plan to do a backdoor Roth for my wife for both 2017 and 2018.
  • Filing status: Married, filing jointly for 2017 and beyond.
  • In 2017, I did an indirect rollover from a SIMPLE IRA at Franklin Templeton to a Traditional IRA at Vanguard. I received a 1099-R for this.
  • My Traditional IRA: ~$3,400 (from previous years).
  • My Roth IRA: ~$48,000 (none via backdoor).
  • I contributed (via work) to a Roth 401k.
2017
  • MAGI: ~$210,000
  • Marginal tax rate: 28%
2018
  • MAGI: Anticipated to be ~$180,000 (should be lower than 2017 since my wife does not plan to work)
  • Marginal tax rate: 24%
Questions
  1. When should I convert my traditional IRA to a Roth IRA?
  2. Should I contribute ($5,500) to my traditional IRA before converting? If so, should I contribute for 2017, 2018 or both (and then convert)?

nolesrule
Posts: 702
Joined: Thu Feb 26, 2015 10:59 am

Re: When to convert IRA to Roth and should I contribute first?

Post by nolesrule » Sat Mar 10, 2018 6:41 pm

You can do conversions as often as you want. The longer you let money sit in the Traditional IRA, the more likely you will have additional growth that you will then have to pay taxes on.

retiredjg
Posts: 33518
Joined: Thu Jan 10, 2008 12:56 pm

Re: When to convert IRA to Roth and should I contribute first?

Post by retiredjg » Sun Mar 11, 2018 12:27 pm

For Her, backdoor seems the only way to go for 2017.

For Him, the traditional IRA is in the way. If you do the back door for 2017, you will have to convert the whole thing to Roth (current tIRA + 2017 contribution) or pro-rate it. I'd go ahead and add the $5,500 for 2017 and convert the whole thing to Roth.

For 2018, if you changed your Roth 401k contribution to traditional 401k contribution, you might get below the limit and not need to use the back door at all. Instead, each of you could make direct contributions to Roth IRA.

wisevermilion
Posts: 16
Joined: Sat Jun 20, 2015 4:53 pm

Re: When to convert IRA to Roth and should I contribute first?

Post by wisevermilion » Mon Mar 12, 2018 5:54 pm

My plan: in the next few days, contribute $5,500 (non-deductible) for 2017. Shortly thereafter, convert the entire tIRA (which will then be around ~$8,900) to a Roth.

In that scenario, I owe taxes on $3,400. So, pro-rata would only cause me to pay more if I do not convert (and convert quickly after contributing) the entire tIRA amount, correct?

Spirit Rider
Posts: 8550
Joined: Fri Mar 02, 2007 2:39 pm

Re: When to convert IRA to Roth and should I contribute first?

Post by Spirit Rider » Mon Mar 12, 2018 6:14 pm

If your work 401k accepts rollover contributions. You can rollover the total pre-tax balances in all traditional, SEP and SIMPLE IRAs to the traditional 401k account.'

Then you could make either just the 2017 $5,500 non-deductible traditional IRA contribution or or make both $5,500 non-deductible traditional IRA contributions for 2017 and 2018.

Finally, depending on the option above do a Roth conversion of the entire traditional IRA account (either $5,500+ or $11,000+) with little to no tax liability.

retiredjg
Posts: 33518
Joined: Thu Jan 10, 2008 12:56 pm

Re: When to convert IRA to Roth and should I contribute first?

Post by retiredjg » Tue Mar 13, 2018 8:16 am

wisevermilion wrote:
Mon Mar 12, 2018 5:54 pm
My plan: in the next few days, contribute $5,500 (non-deductible) for 2017. Shortly thereafter, convert the entire tIRA (which will then be around ~$8,900) to a Roth.

In that scenario, I owe taxes on $3,400.
This is correct.
So, pro-rata would only cause me to pay more if I do not convert (and convert quickly after contributing) the entire tIRA amount, correct?
Not sure what this is asking, but I'll give it a try. If you convert less than the entire $8,900, you will pay some taxes on the conversion and there will be some basis left in the IRA.

If you decide to keep the $3,400 in the tIRA, the easiest thing is just to convert the entire thing at once. There is no benefit in spreading it out over time unless that keeps you from going over some limit (such as a tax bracket line).

Agree with Spirit Rider than you could roll the pre-tax money into a 401k and avoid taxes.

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