Backdoor Roth mistake

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Bird Beard
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Joined: Fri Nov 17, 2017 12:20 am

Backdoor Roth mistake

Post by Bird Beard » Wed Oct 10, 2018 9:21 pm

This past spring I made my backdoor Roth IRA contribution. I did not have a traditional IRA at the time. However, I also switched employers this year. My plan was to keep my 401k money with my previous employer's plan until I am eligible for my current employer's plan (January 2019). At that point, I intended to roll over the money from my previous 401k to my new 401k (assuming they accepted rollovers from other 401k plans). However, my previous 401k plan has been terminated and the money was moved into a rollover IRA. Because of the new tax law, I am unable to recharacterize that Roth IRA money back to a traditional IRA. I am not sure what my best option is at this point to avoid the pro-rata rule.

The 401K plan had approximately $51k in it. I am 36 years old and am in a high tax bracket (AGI ~ 375k).

One option I thought about was to just convert the entire IRA to Roth and just eat the taxes now. Are there any other penalties for this? Would I need to pay the taxes now or by April?

How much income from a side job do you need to legitimately open up a solo 401k that allows rollovers from an IRA?

If I wait until 2019 to potentially rollover my rollover IRA into my employer's plan, will the pro-rata rule still apply to my 2018 backdoor Roth?

I think my takeaway lesson going forward is to wait until the end of the year to do Backdoor Roth contributions.

mhalley
Posts: 6290
Joined: Tue Nov 20, 2007 6:02 am

Re: Backdoor Roth mistake

Post by mhalley » Wed Oct 10, 2018 9:57 pm

If you elect to roll it all to a Roth, you might want to pay estimated taxes to avoid any irs penalties. The pro rata rule applies to money in an Ira as of dec 31.
The amount you need to earn to open a solo 401k is minimal per my nderstanding.

ImUrHuckleberry
Posts: 140
Joined: Sat Apr 15, 2017 7:44 am

Re: Backdoor Roth mistake

Post by ImUrHuckleberry » Wed Oct 10, 2018 10:02 pm

I believe that as long as you're in "safe harbor" for at least one of the various qualifying reasons, you can wait and pay taxes in April. You probably should investigate this yourself or check with your tax pro to be sure.

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Earl Lemongrab
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Re: Backdoor Roth mistake

Post by Earl Lemongrab » Thu Oct 11, 2018 1:17 am

Probably not the best idea to convert all of that. I would just pay the pro-rata taxes for this year. Then next year roll the remaining pretax into the new plan (8606 will tell you how much basis is left).
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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celia
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Location: SoCal

Re: Backdoor Roth mistake

Post by celia » Thu Oct 11, 2018 1:50 am

Earl Lemongrab wrote:
Thu Oct 11, 2018 1:17 am
Probably not the best idea to convert all of that. I would just pay the pro-rata taxes for this year. Then next year roll the remaining pretax into the new plan (8606 will tell you how much basis is left).
+1
After rolling the pre-tax part to your new 401K, then convert the rest. That will get rid of the remaining basis. This will be a tax-free event unless you want to leave some extra pre-tax money with the post-tax and convert it too. Then, after all your traditional IRA(s) are empty, you can do a clean backdoor Roth for 2019!

You never really made a "mistake". You just temporarily ended up in an unexpected set of circumstances and did what you thought was best. Many of us would have done the same.

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