Where to park non-deductible IRA before backdoor conversion?

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jenig0013
Posts: 20
Joined: Sat Aug 02, 2014 10:52 pm
Location: Central Florida

Where to park non-deductible IRA before backdoor conversion?

Post by jenig0013 » Tue Mar 13, 2018 2:17 pm

Hi smart people!

So planning to do the backdoor Roth conversion for the first time this year. I don't have the cash on hand to put all $5500 into the non-deductible traditional IRA (just bought a house two weeks ago), so I was planning on sending $1375/month over the next four months. Should I
(a) set aside money in savings account over 4 months and then place into tIRA and then immediately convert?
(b) send money into tIRA over 4 months and convert monthly?
(c) send money into tIRA and after I hit $5500 then convert? If this option, what fund should I park money in?

Seems to me that a lot of stuff I read says to put tIRA money in VMMXX to avoid volatility - does this make sense? Wouldn't it be better to place in a regular index fund FFNOX or something similar, understanding that I'll pay a bit in taxes during the conversion?

Thanks for all the excellent advice.

nolesrule
Posts: 705
Joined: Thu Feb 26, 2015 10:59 am

Re: Where to park non-deductible IRA before backdoor conversion?

Post by nolesrule » Tue Mar 13, 2018 3:41 pm

I contribute the money as soon as possible into the Vanguard settlement fund and convert each contribution as soon as possible. This year I think I earned a total of 33 cents in interest while waiting for the funds to settle.

I do two rounds of contributions because I want to ensure I have enough earned income.

mega317
Posts: 2554
Joined: Tue Apr 19, 2016 10:55 am

Re: Where to park non-deductible IRA before backdoor conversion?

Post by mega317 » Tue Mar 13, 2018 4:29 pm

jenig0013 wrote:
Tue Mar 13, 2018 2:17 pm
Wouldn't it be better to place in a regular index fund FFNOX or something similar, understanding that I'll pay a bit in taxes during the conversion?
Yes.

Buy whatever you would have bought directly in the Roth. If it goes up you get the gains minus taxes, if it goes down it would have gone down anyway in the Roth.

Edit to add I would do this in taxable so you pay lower capital gains taxes or can harvest losses.

retiredjg
Posts: 33539
Joined: Thu Jan 10, 2008 12:56 pm

Re: Where to park non-deductible IRA before backdoor conversion?

Post by retiredjg » Tue Mar 13, 2018 4:36 pm

If you want to contribute exactly $5,500 and convert exactly $5,500, you need to save the money, put the money in tIRA in money market and convert the next day or two. This makes the paperwork super easy and "clean".

If you understand the paperwork and know how to achieve the numbers you want on each line, you can invest in anything for any length of time and it will all come out good. In a case like that, I would not do the conversion step if the balance has fallen to some number less than what you contributed.

In between those two extremes are an infinite way of doing this including multiple contributions with one conversion or multiple contributions with multiple conversions. They all work if you know what you are doing.

Since this is your first time, I'd try the first option above - save the money, put it in tIRA in money market, convert the next day. Watch to see if a few pennies show up in your tIRA by the end of they year. If under 50 cents, ignore it and just convert it with your next years' contribution.

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