Doing a Backdoor Roth Early in the Tax Year

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sassy_penguin
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Doing a Backdoor Roth Early in the Tax Year

Post by sassy_penguin » Tue Mar 13, 2018 2:46 pm

I will make too much for a tax-deductible TIRA this year no matter what. I won't know until later in the year if I make too much for a regular Roth contribution, but it seems likely. Since recharacterizations have gone away, I wanted to double check my thinking before taking action.

I currently don't have a TIRA at all, only a Roth IRA, and then money in a TSP.

1) Since I prefer to have money in the market sooner, does the following make sense?

Open a new Vanguard TIRA for the $5500 max. As soon as the money hits, roll it over to the Roth account I already have. This should work whether I am under the phase-out range or over it, I think:

If under, then I'd have paid taxes on the roll-over amount anyway at the end of the year.

If over, then I already did the first-step for a backdoor Roth, and will have paid taxes for the non-deductible IRA in the end.

If in the middle of the phase-out, basically the same, just with slightly more complicated math come tax time.

2) Am I missing anything?
3) What do I do with the few cents or whatever that my TIRA accumulate before I do the roll-over? Can those come right back out and go into my brokerage account?

Thanks for your help!

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FiveK
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by FiveK » Tue Mar 13, 2018 4:20 pm

1. Yes
2. No, except possibly...
3. ...make sure you file form 8606 next year (and note that "a few cents" will round down to $0). See Backdoor Roth IRA - Bogleheads and links therein for more.

retiredjg
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by retiredjg » Tue Mar 13, 2018 4:58 pm

3) If they accumulate in the tIRA before the Roth conversion, convert the pennies too.

If they show up after you have done the Roth conversion, anything less than 50 cents can be ignored for the conversion. Just convert the pennies with your next year's contribution.

MotoTrojan
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by MotoTrojan » Tue Mar 13, 2018 5:19 pm

Not sure I follow. You’re committing to the Roth conversion from day one (I do the same). Why does the Roth income limit have any impact on what you do at tax season?

sassy_penguin
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by sassy_penguin » Wed Mar 14, 2018 11:28 am

MotoTrojan wrote:
Tue Mar 13, 2018 5:19 pm
Not sure I follow. You’re committing to the Roth conversion from day one (I do the same). Why does the Roth income limit have any impact on what you do at tax season?
I have no idea :D I have made over the limits for the TIRA for a while, but always well under the Roth cap. This is the first year I have to think about it. But I suppose, in the end, it works out the same whether I'm at $100,000 income and put the money direct in the Roth or at $150,000 and do TIRA--> Roth.

Sometimes it just is nice to get a second set of eyes on what I do before I do it :)

MotoTrojan
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by MotoTrojan » Wed Mar 14, 2018 12:12 pm

sassy_penguin wrote:
Wed Mar 14, 2018 11:28 am
MotoTrojan wrote:
Tue Mar 13, 2018 5:19 pm
Not sure I follow. You’re committing to the Roth conversion from day one (I do the same). Why does the Roth income limit have any impact on what you do at tax season?
I have no idea :D I have made over the limits for the TIRA for a while, but always well under the Roth cap. This is the first year I have to think about it. But I suppose, in the end, it works out the same whether I'm at $100,000 income and put the money direct in the Roth or at $150,000 and do TIRA--> Roth.

Sometimes it just is nice to get a second set of eyes on what I do before I do it :)
Even if you made $100K in both scenarios, assuming you converted to Roth before any market gains, they are identical situations. Gains over a week max should be small so not much tax to pay. If you are at risk of exceeding Roth limit I’d always suggest doing backdoor. Better than realizing you need to do a recharacterization after months of gains and having a bigger tax bill.

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Earl Lemongrab
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by Earl Lemongrab » Thu Mar 15, 2018 12:10 pm

sassy_penguin wrote:
Tue Mar 13, 2018 2:46 pm
Since recharacterizations have gone away, I wanted to double check my thinking before taking action.
This isn't accurate. Recharacterization of conversions has been removed for 2018 on, but not for contributions.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

jatwell
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by jatwell » Sat Mar 17, 2018 7:18 am

There is a difference in contributions and conversions when doing withdrawals.

If you don't plan on taking out the money until after 5 years and 59.5 it won't make much difference though.

https://www.kitces.com/blog/understandi ... nversions/

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FiveK
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by FiveK » Sat Mar 17, 2018 1:31 pm

jatwell wrote:
Sat Mar 17, 2018 7:18 am
There is a difference in contributions and conversions when doing withdrawals.

If you don't plan on taking out the money until after 5 years and 59.5 it won't make much difference though.

https://www.kitces.com/blog/understandi ... nversions/
Except - as described in Backdoor Roth vs. Recharacterization - Bogleheads.org - there is essentially no difference between a direct contribution and a backdoor Roth.

retiredjg
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Re: Doing a Backdoor Roth Early in the Tax Year

Post by retiredjg » Sat Mar 17, 2018 1:52 pm

FiveK wrote:
Sat Mar 17, 2018 1:31 pm
Except - as described in Backdoor Roth vs. Recharacterization - Bogleheads.org - there is essentially no difference between a direct contribution and a backdoor Roth....
....if you convert the exact same amount as you contributed. If you convert more than you contribute because of growth in the account between the two steps, there is more to it because that extra amount takes on a 5 year conversion clock.

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