backdoor Roth conversion - is this is correct?

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UncleBogle
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backdoor Roth conversion - is this is correct?

Post by UncleBogle » Tue Sep 11, 2018 4:14 pm

I just wanted to make sure that my procedure is correct here, I have never done this before.

I currently have a traditional IRA that has mixed funds(a prior rollover from my an old 401k/403b, some tax-deductible contributions, and some after-tax contributions). I just found out that I can roll over the pre-tax amount from my IRA into my TSP, essentially leaving only the after tax contributions in my IRA.

My plan is to is convert this residual IRA into a backdoor Roth.

The only other accounts that I have are 529s for my children and a taxable account.

I do not want to trigger a taxable event, and just wanted a second opinion, to make sure that there is nothing else I am forgetting.

Also, is it correct that when I convert this IRA to a backdoor Roth, that only my accounts could potentially trigger a taxable event, not my wife's?

JW-Retired
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Re: backdoor Roth conversion - is this is correct?

Post by JW-Retired » Tue Sep 11, 2018 4:34 pm

Yes, correct to both your questions.

For any year there were any non-deductible contributions, have you documented all with IRS 8606 forms? That would make this quite easy.
JW
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The Wizard
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Re: backdoor Roth conversion - is this is correct?

Post by The Wizard » Tue Sep 11, 2018 4:40 pm

UncleBogle wrote:
Tue Sep 11, 2018 4:14 pm
I just wanted to make sure that my procedure is correct here, I have never done this before.

I currently have a traditional IRA that has mixed funds(a prior rollover from my an old 401k/403b, some tax-deductible contributions, and some after-tax contributions). I just found out that I can roll over the pre-tax amount from my IRA into my TSP, essentially leaving only the after tax contributions in my IRA.

My plan is to is convert this residual IRA into a backdoor Roth...
This by itself is simply a Roth conversion, nothing backdoor about it.

But by rolling the pre-tax portion into your TSP, you now make it easy to do backdoor Roth contribution of $5500 in future years...
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The Wizard
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Re: backdoor Roth conversion - is this is correct?

Post by The Wizard » Tue Sep 11, 2018 4:42 pm

Also, there likely will be a smallish taxable event on this conversion based on the gains accrued by your after-tax investments while in the tIRA...
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FactualFran
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Re: backdoor Roth conversion - is this is correct?

Post by FactualFran » Tue Sep 11, 2018 4:52 pm

Please avoid using the term "backdoor Roth". There is no separate type of Roth IRA that is a "backdoor Roth".

There is a multi-step procedure known as a "backdoor Roth contribution". Those whose income is too high to make a contribution to a Roth IRA may first contribute to a traditional IRA and then do a conversion from the traditional IRA to a Roth IRA. The net effect is to have used a "backdoor" to make a contribution to a Roth IRA.

You plan to convert money that is in a traditional IRA to a Roth IRA. There is nothing backdoor about that. If the dollar balance of your traditional IRAs is equal to the non-deducted contribution you have made to your traditional IRAs, then there is no income tax due to a traditional IRA to Roth IRA conversion. If the balance is greater than the non-deducted contributions, then income tax is due on the difference.

The "I" in "IRA" stands for "Individual". In terms of income tax, the IRAs of a person and IRAs of the person's living spouse are separate.

UncleBogle
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Re: backdoor Roth conversion - is this is correct?

Post by UncleBogle » Tue Sep 11, 2018 7:34 pm

FactualFran wrote:
Tue Sep 11, 2018 4:52 pm
Please avoid using the term "backdoor Roth". There is no separate type of Roth IRA that is a "backdoor Roth".

There is a multi-step procedure known as a "backdoor Roth contribution". Those whose income is too high to make a contribution to a Roth IRA may first contribute to a traditional IRA and then do a conversion from the traditional IRA to a Roth IRA. The net effect is to have used a "backdoor" to make a contribution to a Roth IRA.

Due to my income status, I cannot open a Roth. Therefore I am converting my post tax non-deductible contributions that I made to my traditional IRA into a Roth. My understanding is that this process is referred to as creating a "backdoor Roth"(it is still a Roth, but it is not created in the standard fashion - therefore "backdoor").

UncleBogle
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Re: backdoor Roth conversion - is this is correct?

Post by UncleBogle » Tue Sep 11, 2018 7:43 pm

The Wizard wrote:
Tue Sep 11, 2018 4:42 pm
Also, there likely will be a smallish taxable event on this conversion based on the gains accrued by your after-tax investments while in the tIRA...
I need to check this out. Everything I have read so far has stated that any gains realized by my post tax contributions now become become "pre-tax" by nature and can be rolled into my TSP. Thus avoiding a taxable event.

My understanding is that these gains will eventually be taxed once withdrawals are made, just like any other tax-deferred account.

JW-Retired
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Re: backdoor Roth conversion - is this is correct?

Post by JW-Retired » Tue Sep 11, 2018 8:39 pm

UncleBogle wrote:
Tue Sep 11, 2018 7:43 pm
The Wizard wrote:
Tue Sep 11, 2018 4:42 pm
Also, there likely will be a smallish taxable event on this conversion based on the gains accrued by your after-tax investments while in the tIRA...
I need to check this out. Everything I have read so far has stated that any gains realized by my post tax contributions now become become "pre-tax" by nature and can be rolled into my TSP. Thus avoiding a taxable event.

My understanding is that these gains will eventually be taxed once withdrawals are made, just like any other tax-deferred account.
I believe you are correct. Only the original post-tax contribution amounts constitute your post tax basis. All their earnings are tax deferred dollars that merge with all the rest of these and can be accepted by the a 401k or the TSP. If you don't make any more post-tax contributions your basis never changes.... (until you convert it as you will, or begin withdrawing some of it as part of your RMD, as I am).
JW
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Spirit Rider
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Re: backdoor Roth conversion - is this is correct?

Post by Spirit Rider » Tue Sep 11, 2018 10:47 pm

JW-Retired wrote:
Tue Sep 11, 2018 8:39 pm
UncleBogle wrote:
Tue Sep 11, 2018 7:43 pm
The Wizard wrote:
Tue Sep 11, 2018 4:42 pm
Also, there likely will be a smallish taxable event on this conversion based on the gains accrued by your after-tax investments while in the tIRA...
I need to check this out. Everything I have read so far has stated that any gains realized by my post tax contributions now become become "pre-tax" by nature and can be rolled into my TSP. Thus avoiding a taxable event.

My understanding is that these gains will eventually be taxed once withdrawals are made, just like any other tax-deferred account.
I believe you are correct. Only the original post-tax contribution amounts constitute your post tax basis. All their earnings are tax deferred dollars that merge with all the rest of these and can be accepted by the a 401k or the TSP. If you don't make any more post-tax contributions your basis never changes.... (until you convert it as you will, or begin withdrawing some of it as part of your RMD, as I am).
This is 100% correct.

You rollover your total balances - your non-deductable basis. This pre-tax rollover amount includes your pre-tax contributions and earnings and your non-deductible contribution's pre-tax earnings.

Only your non-deductible basis remains. The only possible tax liability from the Roth conversion is any pre-tax earnings that occur between the time of your calculation and rollover and the Roth conversion of the remaining balance.

UncleBogle
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Re: backdoor Roth conversion - is this is correct?

Post by UncleBogle » Wed Sep 12, 2018 1:02 pm

One other question

To move my pre-tax dollars over, I have to cash out the positions. However, Can I keep the post tax portion of the IRA in their current positions, or do they need to be cashed out for the Roth conversion as well?

Thanks to all.

Spirit Rider
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Re: backdoor Roth conversion - is this is correct?

Post by Spirit Rider » Wed Sep 12, 2018 2:21 pm

Whether you can do an "in-kind" Roth conversion is dependent on whether the traditional and Roth IRAs are at the same custodian and their policies. Most support this if both are at the same custodian. If not, less likely.

BruinBones
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Re: backdoor Roth conversion - is this is correct?

Post by BruinBones » Wed Sep 12, 2018 7:45 pm

Wouldn't converting the basis of the non deductible tIRA contributions to the Roth-IRA first, followed by rolling over the remaining tIRA value to his TSP second, avoid accruing any of the smallish taxable amount of the conversion? (As long as both are done well before the end of the year).

Spirit Rider
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Re: backdoor Roth conversion - is this is correct?

Post by Spirit Rider » Wed Sep 12, 2018 8:59 pm

BruinBones wrote:
Wed Sep 12, 2018 7:45 pm
Wouldn't converting the basis of the non deductible tIRA contributions to the Roth-IRA first, followed by rolling over the remaining tIRA value to his TSP second, avoid accruing any of the smallish taxable amount of the conversion? (As long as both are done well before the end of the year).
Yes and that is what many people did in past years.

However, under the tax reform, Roth conversions made after 12/31/2017 can no longer be recharacterized. We have seen cases on Boggleheads where individuals have been told they can rollover IRAs to a qualified plan only to find out after they attempt the rollover, that is not true or there are restrictions they were not told about. Before, if they had done the Roth conversion ahead of time, they could recharacterize the conversion. Now you are stuck with potentially significant unexpected tax liability.

It is just safer to make sure the rollover is successfully completed, before doing the Roth conversion. At most this is a few dollars in taxable conversions. No big deal.

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