Can I Backdoor ROTH older Non Deductable tIRA

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
OhSoClose
Posts: 3
Joined: Wed Jan 09, 2019 10:41 am

Can I Backdoor ROTH older Non Deductable tIRA

Post by OhSoClose » Wed Jan 09, 2019 11:07 am

Hello,

First off, just want to thank everyone for your knowledge. Been great reading all the threads

Back in 2015 my employer added to my income (their error) which caused me to be ineligible for ROTH. Unfortunately I contributed earlier in the year ($6500 & $5500 spouse). Contributions went into (3) Funds for me, and (2) Funds for my wife. In April (before 15th) I Recharacterized these to non deductible tIRA, same funds as before. I filled out the 8606, and sent an explanation with my 2015 taxes. Unfortunately we both have large tIRA balances before this issue

I was never sure what do do with these, until I started reading BH. Is it possible to do a backdoor ROTH for these? if so, what would be the tax issues and steps that would be needed to complete?

Thanks

mhalley
Posts: 6512
Joined: Tue Nov 20, 2007 6:02 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by mhalley » Wed Jan 09, 2019 12:25 pm

Maybe semantics, but a backdoor Roth is putting money into a trad Ira, then immediately converting it to a Roth. You can do a “normal” conversion to a Roth at any time, you just have to pay taxes on any gains.
If not doing backdoor roths, it is generally better to put money into a taxable account than a non deductable Ira as the tax accounting can be complicated.
If you desire to do backdoor roths, you can transfer the Ira to your 401k or convert the entire amount to a Roth.
Last edited by mhalley on Wed Jan 09, 2019 12:31 pm, edited 1 time in total.

Topic Author
OhSoClose
Posts: 3
Joined: Wed Jan 09, 2019 10:41 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by OhSoClose » Wed Jan 09, 2019 12:29 pm

thanks mhalley

being that they are non deductible tIRA, I would only pay taxes on the growth over the base (6500 & 5500)? is that correct

mhalley
Posts: 6512
Joined: Tue Nov 20, 2007 6:02 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by mhalley » Wed Jan 09, 2019 12:32 pm

Yes, taxes only on the gains if it was non deductable Ira. Here is some info on non deductable Ira
https://www.nerdwallet.com/blog/investi ... ributions/
Last edited by mhalley on Wed Jan 09, 2019 12:34 pm, edited 1 time in total.

exigent
Posts: 872
Joined: Fri May 07, 2010 8:49 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by exigent » Wed Jan 09, 2019 12:33 pm

mhalley wrote:
Wed Jan 09, 2019 12:25 pm
Maybe semantics, but a backdoor Roth is putting money into a trad Ira, then immediately converting it to a Roth. You can do a “normal” conversion to a Roth at any time, you just have to pay taxes on any gains.
But if you also have deductible contributions in a tIRA (you meantioned large balances from before this issue; unclear if those were deductible or not) then you will have to convert and pay taxes on a pro data basis. In short, the conversion will contain some deductible and some non-deductible funds.

The only way to do this cleanly and without tax consequences would be to get the deductible funds into a 401(k) so they won’t be “visible” to the conversion process.

mhalley
Posts: 6512
Joined: Tue Nov 20, 2007 6:02 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by mhalley » Wed Jan 09, 2019 12:36 pm

Sorry, I forgot to mention the pro rata rule. Kitces discusses it here
https://www.kitces.com/blog/the-impact- ... -payments/

Topic Author
OhSoClose
Posts: 3
Joined: Wed Jan 09, 2019 10:41 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by OhSoClose » Wed Jan 09, 2019 1:08 pm

thanks for all the replys

Yes, the balance of our tIRA is deductible tIRA. I was afraid the pro rata rule would be an issue. At this point the non deductible tIRA balance is only ~2-4 % of the total tIRA. I'll do conversions once we are in a lower tax bracket

Thanks

retiringwhen
Posts: 746
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by retiringwhen » Wed Jan 09, 2019 1:18 pm

moving the pre-tax IRA funds to a 401(K) is a great solution to the pro-rata problem. I would look into your 401(k)'s provisions to support this move.

I had not done any back-door Roths due to a very large Rollover IRA. After reading about the 401(K) move, I did it and moved all the pre-tax IRA into my 401(k) in 2017. In 2018 I did my first back-door with no pro-rata issues, but if done in the correct sequence, it is doable to make both moves in one year.

BTW, make sure the move to your 401(k) is desirable from a fees and funds availability perspective (in my case it was no-brainer).

Gigisnow
Posts: 2
Joined: Sat Jan 12, 2019 11:21 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by Gigisnow » Sat Jan 12, 2019 11:56 am

Hello all. I’m new to the board and posting for the first time. After some searching I think I found the righ thread for my question, but still have questions. :)

An astute tax advisor familiar with my employer plan suggested a strategy for mega backdoor roth and also a backdoor roth every year.

I have a deductible ira account which he said I could roll in to 401k, thus resulting in a situation where I no longer hold any funds in that account. (Found this mentioned on this thread.) I would then open a new traditional ira into which I would put after tax contributions that I would immediately roll into a roth. That’s the backdoor. Within the 401k I would continue after tax contributions that roll out to a Roth IRA once a year, paying taxes on growth.

Can’t locate irs rules specific to this but it may be they do not spell this out clearly and the strategy is there for the taking for those who understand the rules.

My questions are:

1 — do I need to roll the roth amounts into the 401k as well? Or can I just roll my deductible ira into the 401k?
2 — does the ira need to show a zero balance at the end of the 2019 tax year BEFORE I can contribute after-tax funds for the 2020 tax year as part of the backdoor? I don’t think I can roll my ira into my 401k now, then a week later contribute after tax funds to a new ira, then roll those into a roth. I did see someone mention this can be done with the right sequencing but I’m trying to find the irs guidelines that would support this advice.

Again, I’ve looked for this on the board but still have these questions.

Thank you all for the great comments on this site.
Gloria

mhalley
Posts: 6512
Joined: Tue Nov 20, 2007 6:02 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by mhalley » Sat Jan 12, 2019 12:09 pm

1. Roth doesn’t need rolled over.
2. As long as the trad Ira has a zero balance on 12/31, you are ok.

User avatar
Earl Lemongrab
Posts: 6218
Joined: Tue Jun 10, 2014 1:14 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by Earl Lemongrab » Sat Jan 12, 2019 3:30 pm

You're not even allowed to roll Roth IRAs into qualified plans. What you need to do is roll only the pretax amounts from the TIRAs into to 401(k). This will leave behind the previous non-deductible amounts. After that is successfully done, add any new contributions, then convert.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
FiveK
Posts: 5989
Joined: Sun Mar 16, 2014 2:43 pm

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by FiveK » Sat Jan 12, 2019 6:49 pm

Gigisnow wrote:
Sat Jan 12, 2019 11:56 am
Can’t locate irs rules specific to this but it may be they do not spell this out clearly and the strategy is there for the taking for those who understand the rules.
See Notice 2014-54 Allows After-Tax 401k Roth Conversions.
Again, I’ve looked for this on the board but still have these questions.
Previous posters have given good advice.

To understand the 31-Dec balance effect, you may find it helpful to fill out a draft Form 8606. Either by hand or with the help of a "transparent" tool such as the 'Form8606' tab in the personal finance toolbox spreadsheet.

Gigisnow
Posts: 2
Joined: Sat Jan 12, 2019 11:21 am

Re: Can I Backdoor ROTH older Non Deductable tIRA

Post by Gigisnow » Sat Jan 12, 2019 7:22 pm

Thank you for your prompt reply! I’ll fill this out right away.

Post Reply