help deciphering past taxed IRA to roth conversion pros/cons

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swampdoctor
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Joined: Tue Jun 12, 2018 3:27 pm

help deciphering past taxed IRA to roth conversion pros/cons

Post by swampdoctor » Tue Jun 12, 2018 4:09 pm

Hi folks,
Can't express enough appreciation for the knowledge I've gained from everyone here. I have searched, but have not found a clear answer to my case.

The issue is that my wife and I have been contributing taxed nondeductible money into an IRA for several years now, not realizing we could have been utilizing a back door roth ira etc.

My own side of things is more straight forward, as outside of my roth IRA, I only have one traditional IRA account and have only contributed after tax nondeductible dollars, starting in 2015. I have never filed the form 8606. My understanding is I would have to file form 8606 for all prior years (2015-present), and then convert and file the 8606 for this year. In future years I would do the swift ~2 day turnaround IRA contribution and Roth IRA conversion etc, and file the 8606 annually. Is this correct?

Also, we each currently have 22,000 in basis, with about 7000 in gains. My understanding in running through form 8606 is that I will be taxed at my current high tax bracket on these gains. My initial reaction is to convert now, so that we can continue with backdoor Roth in future years and realize the long term tax benefits therein. The feeling I get in thinking about these taxes does cause a gut reaction and significant hesitation...

We have a significant portion of our savings in taxable accounts, and have about 8-10 years of earnings before our planned early retirement. It would be 8-10 years before our tax bracket changes for the better in terms of further roth conversions etc.

My wife has a rollover IRA and a separate traditional IRA. This traditional IRA is "clean" so to speak with only post tax nondeductible contributions, also contributing to this since 2015. The rollover IRA is from past employer 401k. We have considered rolling her entire rollover IRA into her TSP account, then allowing us to follow the above protocol of filing the necessary 8606s for past IRA contributions, rolling over the lump sum, and following the back door roth contribution process in future years.

Thanks so much for your insights

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Duckie
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Re: help deciphering past taxed IRA to roth conversion pros/cons

Post by Duckie » Tue Jun 12, 2018 5:53 pm

swampdoctor, welcome to the forum.
swampdoctor wrote:My understanding is I would have to file form 8606 for all prior years (2015-present), and then convert and file the 8606 for this year. In future years I would do the swift ~2 day turnaround IRA contribution and Roth IRA conversion etc, and file the 8606 annually. Is this correct?
Correct.
Also, we each currently have 22,000 in basis, with about 7000 in gains. My understanding in running through form 8606 is that I will be taxed at my current high tax bracket on these gains.
You would be if you convert the $7K gains. If you have a current employer plan which allows incoming rollovers, you could roll the pre-tax amounts over which would avoid the tax-hit now.
My wife has a rollover IRA and a separate traditional IRA. This traditional IRA is "clean" so to speak with only post tax nondeductible contributions, also contributing to this since 2015. The rollover IRA is from past employer 401k. We have considered rolling her entire rollover IRA into her TSP account, then allowing us to follow the above protocol of filing the necessary 8606s for past IRA contributions, rolling over the lump sum, and following the back door roth contribution process in future years.
Rolling all pre-tax amounts to her TSP is a great option. That could include the $7K gains in her "clean" TIRA.

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FiveK
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Re: help deciphering past taxed IRA to roth conversion pros/cons

Post by FiveK » Tue Jun 12, 2018 9:53 pm

swampdoctor wrote:
Tue Jun 12, 2018 4:09 pm
My understanding is I would have to file form 8606 for all prior years (2015-present), and then convert and file the 8606 for this year. In future years I would do the swift ~2 day turnaround IRA contribution and Roth IRA conversion etc, and file the 8606 annually. Is this correct?
Yes. You could use the 'Form8606' tab in the personal finance toolbox spreadsheet as a double check on the multiple forms you do by hand.

swampdoctor
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Joined: Tue Jun 12, 2018 3:27 pm

Re: help deciphering past taxed IRA to roth conversion pros/cons

Post by swampdoctor » Fri Jun 15, 2018 10:58 am

Duckie wrote:
Tue Jun 12, 2018 5:53 pm
You would be if you convert the $7K gains. If you have a current employer plan which allows incoming rollovers, you could roll the pre-tax amounts over which would avoid the tax-hit now.
By rolling "the pre-tax amounts over which would avoid the tax-hit now" you mean the 7k in gains I've currently made on my 22k basis can be rolled over into a 403b if allowed by my plan, and then my 22k can be rolled over to a roth tax free? Sorry if I am being redundant, this idea is news to me and hoping to have clarity.

Alternatively, you mention "IF" I were to convert the 7k gains, you are referencing the above option to roll over those gains first before the conversion. Just want to be clear as my understanding that I cannot leave those gains in the IRA and roll over my 22k basis to the roth, because in this and future years I would still be taxed on the ratio of basis to total non roth IRA amounts?

Thanks so much.

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: help deciphering past taxed IRA to roth conversion pros/cons

Post by FiveK » Fri Jun 15, 2018 11:07 am

swampdoctor wrote:
Fri Jun 15, 2018 10:58 am
By rolling "the pre-tax amounts over which would avoid the tax-hit now" you mean the 7k in gains I've currently made on my 22k basis can be rolled over into a 403b if allowed by my plan, and then my 22k can be rolled over to a roth tax free?
Yes.
Alternatively, you mention "IF" I were to convert the 7k gains, you are referencing the above option to roll over those gains first before the conversion. Just want to be clear as my understanding that I cannot leave those gains in the IRA and roll over my 22k basis to the roth, because in this and future years I would still be taxed on the ratio of basis to total non roth IRA amounts?
May seem strange, but the order in which you do the pre-tax rollover to the 403b and the tIRA to Roth conversion of the basis doesn't matter.

What matters is
- the amount of the basis
- the amount converted to Roth
- the tIRA balance on 31-Dec.

If you haven't already, filling Form 8606 based on what you expect to do should be instructive.

soccerrules
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Joined: Mon Nov 14, 2016 4:01 pm

Re: help deciphering past taxed IRA to roth conversion pros/cons

Post by soccerrules » Fri Jun 15, 2018 11:27 am

Duckie wrote:
Tue Jun 12, 2018 5:53 pm
You would be if you convert the $7K gains. If you have a current employer plan which allows incoming rollovers, you could roll the pre-tax amounts over which would avoid the tax-hit now.
another way to look at this
You want to keep in your traditional IRA only the cost basis/ contributions dating as far back as you made non-deductible after tax contributions.

EX: If you made a $4,000 contribution 1 year, then $5,500 another year, and maybe a $3500 contribution a 3rd year -- the total is $13,000. You would want to rollover all the other money in the account to your employer plan, except $13,000. Once the rollover is accepted into your employer plan (leaving the $13K in tIRA alone)-- then you move the $13,000 to a separate Roth IRA account (created prior to conversion). Form 8606 would be updated to reflect the "move".
I just completed this process. I had $8K of contributions from years past on a 6 figure IRA account (401K rollovers, gains). Sold funds in tIRA to MM account. Then subtracted $8K from the total balance and rolled that amount to my employers plan. I also made a 2018 non-deductible contribution ($6500) to tIRA --then converted whole account ($14,500) to Roth IRA account.
Now tIRA has a $0 balance ready to process the 2019 contribution.
Don't let your outflow exceed your income or your upkeep will be your downfall.

swampdoctor
Posts: 3
Joined: Tue Jun 12, 2018 3:27 pm

Re: help deciphering past taxed IRA to roth conversion pros/cons

Post by swampdoctor » Fri Jun 15, 2018 1:16 pm

Thanks everyone. Very glad i asked for advice on this one!

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