Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

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letsgobobby
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by letsgobobby » Sun Dec 30, 2018 4:39 pm

Backdoor Roth IRA is no less substantial than any other IRA, is it? Money is money.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by willthrill81 » Sun Dec 30, 2018 4:44 pm

JamesSFO wrote:
Sun Dec 30, 2018 3:29 pm
willthrill81 wrote:
Sun Dec 30, 2018 2:05 pm
I never said it wasn't worthwhile, nor that it wasn't beneficial. But using Roth IRAs over taxable in such instances is not going to make a substantial mathematical difference in the end with things like time to retire, portfolio size after taxes, income in retirement, etc. It might, but it isn't likely. That's all.
If each year you are able to put 20-50% of the "excess" savings you would make into taxable accounts so you are never taxed during the growing years on the earnings + withdraw tax free, I'm not willing to go along and say it is not going to be substantial. Of course, it will vary tremendously (tax rate changes now vs. retirement, years to grow, etc.) but if the choice is save as a $6K taxable account vs. $6K in a Roth and invest them the same (and pay taxes out of the balance) then at the end of 20 years the Roth will have a higher balance (no taxes along the way or at end).

So I'm still not seeing why you think it is insubstantial...?
Here are some rough numbers to illustrate my point, which is a subjective one.

A MFJ couple saves $60k in one year. In the first scenario, they save it all in taxable accounts. They buy Vanguard's Lifestrategy Moderate Growth Fund (60/40 AA). Using Vanguard's numbers, which assume the highest tax brackets possible, the return after taxes on distributions since the fund's inception in 1994 was 6.58%. Assuming they achieve this return, after 20 years, they will have $214,618, and if they pay 20% long-term capital gains on the growth, the after-tax total will be $183,694. That's pretty much the worst case scenario because there are ways to reduce the effective long-term capital gains tax rate (e.g. gifting shares, step-up basis for heirs).

Now let's assume that they put $12k into a Roth account and the remaining $48k into a taxable account. The pre-tax return on the same fund over the same period as above was 7.66%. After 20 years, they will have $52,513 in the Roth account, and after paying LTCG on the taxable account, $146,955 there, a total of $199,469.

So using the Roth increased the couple's after-tax wealth on this one year's savings by 8.6%, which some might consider to be substantial, although I certainly would not. But that's difference is for money invested over 20 years. The money that is saved over shorter periods will not see this much of a difference between the two scenarios. For instance, if we reduce the above periods to 10 years, then the Roth account is only ahead by 4.4%. I can't see how anyone would consider that to be "substantial."

And again, I'm not saying that it isn't worthwhile for high income earners with a high savings rate to make Roth contributions or do a backdoor Roth. A mega-backdoor Roth can have a much greater impact than the above scenario. But apart from that, the math indicates that only putting 20% of one's savings into a Roth instead of a taxable account isn't likely to make a big difference in one's total after-tax wealth.
Last edited by willthrill81 on Sun Dec 30, 2018 4:48 pm, edited 1 time in total.
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by willthrill81 » Sun Dec 30, 2018 4:47 pm

letsgobobby wrote:
Sun Dec 30, 2018 4:39 pm
Backdoor Roth IRA is no less substantial than any other IRA, is it? Money is money.
The marginal impact of using a Roth instead of taxable is not the same for high income earners with a high savings rate as opposed to others. Only putting 20% of one's savings into a Roth account for 20 years instead of taxable only isn't likely to increase one's after-tax wealth by more than about 6% and probably less than that. Please see my above post as to why.
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by letsgobobby » Sun Dec 30, 2018 5:16 pm

I don't know about you, but I spend dollars, not percents.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by willthrill81 » Sun Dec 30, 2018 7:13 pm

letsgobobby wrote:
Sun Dec 30, 2018 5:16 pm
I don't know about you, but I spend dollars, not percents.
That's obviously true, but the difference in dollars in the above examples is not very big. And the higher the dollar amount saved, the lower the total impact of the Roth accounts since their contribution limits are fixed.

My point was not that Roth accounts aren't worthwhile, only that for high income earners with a high savings rate, they aren't a big help.
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by Spirit Rider » Sun Dec 30, 2018 7:32 pm

willthrill81 wrote:
Sun Dec 30, 2018 7:13 pm
letsgobobby wrote:
Sun Dec 30, 2018 5:16 pm
I don't know about you, but I spend dollars, not percents.
That's obviously true, but the difference in dollars in the above examples is not very big. And the higher the dollar amount saved, the lower the total impact of the Roth accounts since their contribution limits are fixed.

My point was not that Roth accounts aren't worthwhile, only that for high income earners with a high savings rate, they aren't a big help.
Having Roth dollars to spend in retirement are invaluable. I saved ~$19K in health insurance premiums and out of pocket medical expenses. Not to mention ~$2500 in property taxes + many other discounts and rebates. All because of the ability to control my AGI/MAGI with tax-free dollars. There are many other AGI/MAGI limits where tax-free dollars can make a difference. After you enroll in Medicare, IRMA cliffs will impact Parts B and D premiums of higher income individuals.

You want to talk in percents. The percentage of savings my Roth dollars is > 50%. Your analysis of limiting the Backdoor Roth benefit to marginal tax rates, is woefully incomplete.

[OT comment removed by admin LadyGeek]

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by willthrill81 » Sun Dec 30, 2018 7:44 pm

Spirit Rider wrote:
Sun Dec 30, 2018 7:32 pm
willthrill81 wrote:
Sun Dec 30, 2018 7:13 pm
letsgobobby wrote:
Sun Dec 30, 2018 5:16 pm
I don't know about you, but I spend dollars, not percents.
That's obviously true, but the difference in dollars in the above examples is not very big. And the higher the dollar amount saved, the lower the total impact of the Roth accounts since their contribution limits are fixed.

My point was not that Roth accounts aren't worthwhile, only that for high income earners with a high savings rate, they aren't a big help.
Having Roth dollars to spend in retirement are invaluable. I saved ~$19K in health insurance premiums and out of pocket medical expenses. Not to mention ~$2500 in property taxes + many other discounts and rebates. All because of the ability to control my AGI/MAGI with tax-free dollars. There are many other AGI/MAGI limits where tax-free dollars can make a difference. After you enroll in Medicare, IRMA cliffs will impact Parts B and D premiums of higher income individuals.

You want to talk in percents. The percentage of savings my Roth dollars is > 50%. Your analysis of limiting the Backdoor Roth benefit to marginal tax rates, is woefully incomplete.

[OT comment removed by admin LadyGeek]
I have no doubt that someone with over 50% of their savings in Roth accounts can do what you're doing. But that has literally nothing to do with what I prefaced all of this with.

You're throwing out generalities that do not apply to the specific position that I was very careful to state clearly, and nothing anyone has said has changed that one bit. A high income earner with a high savings rate will not be capable of having remotely 50% of their savings in Roth accounts without a mega backdoor Roth, and I specifically spelled that out as an exception.
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by LadyGeek » Sun Dec 30, 2018 7:55 pm

I removed an off-topic comment. As a reminder, see: General Etiquette
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by Spirit Rider » Sun Dec 30, 2018 8:08 pm

I didn't mean I had over 50% of my savings in Roth accounts (I don't). I was referring to the effect using my Roth dollars to reduce my AGI/MAGI.

I have to say this more carefully. When you are making statements about impact. You need to consider more than the narrow scope of marginal taxes. When it comes to Roth dollars, their tax-free nature carries a significant impact when used. To not include that in the analysis is greatly misleading about their value.

Tax diversification has always been a fundamental tenet of the Roth decision. To neglect it in any analysis does forum members a disservice and is fundamentally misleading.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by willthrill81 » Sun Dec 30, 2018 9:04 pm

Spirit Rider wrote:
Sun Dec 30, 2018 8:08 pm
I didn't mean I had over 50% of my savings in Roth accounts (I don't). I was referring to the effect using my Roth dollars to reduce my AGI/MAGI.

I have to say this more carefully. When you are making statements about impact. You need to consider more than the narrow scope of marginal taxes. When it comes to Roth dollars, their tax-free nature carries a significant impact when used. To not include that in the analysis is greatly misleading about their value.

Tax diversification has always been a fundamental tenet of the Roth decision. To neglect it in any analysis does forum members a disservice and is fundamentally misleading.
I never said that tax diversification is a bad idea; on the contrary, I believe it is an underutilized strategy.

I would like to see a concrete example, similar to what I have already put forward, where a high income earner with a high savings rate experiences a demonstrated, substantial benefit from utilizing Roth IRAs (no mega-backdoor Roths). There can definitely be significant benefits where one is on the margin of receiving ACA benefits, but this is not likely to benefit a high income earner with a high savings rate unless they are trying to FIRE very early (i.e. income still too high).
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by JustinR » Sun Dec 30, 2018 10:53 pm

Why isn't this old thread locked yet? It's completely false.

Thousands of people go through this exact same scenario every year:

IRS: Excuse me, you owe us $x on this IRA withdrawal.
Person: No I did a backdoor Roth IRA conversion.
IRS: Ok never mind. You owe $0. Case closed.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by smitcat » Mon Dec 31, 2018 8:54 am

willthrill81 wrote:
Sun Dec 30, 2018 9:04 pm
Spirit Rider wrote:
Sun Dec 30, 2018 8:08 pm
I didn't mean I had over 50% of my savings in Roth accounts (I don't). I was referring to the effect using my Roth dollars to reduce my AGI/MAGI.

I have to say this more carefully. When you are making statements about impact. You need to consider more than the narrow scope of marginal taxes. When it comes to Roth dollars, their tax-free nature carries a significant impact when used. To not include that in the analysis is greatly misleading about their value.

Tax diversification has always been a fundamental tenet of the Roth decision. To neglect it in any analysis does forum members a disservice and is fundamentally misleading.
I never said that tax diversification is a bad idea; on the contrary, I believe it is an underutilized strategy.

I would like to see a concrete example, similar to what I have already put forward, where a high income earner with a high savings rate experiences a demonstrated, substantial benefit from utilizing Roth IRAs (no mega-backdoor Roths). There can definitely be significant benefits where one is on the margin of receiving ACA benefits, but this is not likely to benefit a high income earner with a high savings rate unless they are trying to FIRE very early (i.e. income still too high).
"I would like to see a concrete example, similar to what I have already put forward, where a high income earner with a high savings rate experiences a demonstrated, substantial benefit from utilizing Roth IRAs (no mega-backdoor Roths)."

Willthrill81- I do not have an example such as you described but I do know that our Roths all totaled will be a great advantage in providing more 'spendable' money to us and our heirs.
The Roths will have been accumulated by utilizing yearly contributions, mega backdoor and Roth conversions so in the end there are/were multiple methods used to get these funds into the Roths. KItces has the best description about how these funds can be utilized in this article...
https://www.kitces.com/blog/tax-efficie ... ing-needs/

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by DaftInvestor » Mon Dec 31, 2018 9:44 am

Earl Lemongrab wrote:
Fri Dec 28, 2018 5:00 pm
It's been clear for a number of years that the IRS is aware of the backdoor Roth, doesn't like it, and doesn't see any administrative way to shut it down. The previous administration tried to get legislation to close the loophole. Congress was uninterested.

It's also not clear that if the IRS did try to use the Step Transaction theory what the consequences would be. It's not like it's a deduction and they could make you pay the tax after all. Undo the transaction? There never has been a mechanism to recharacterize a conversion after the deadline. Now you can't at all. They can't make up law. I guess force a distribution but that seems more punitive than the situation calls for. I suspect if would fail in Tax Court.
How has it been clear that the IRS doesn't like the back-door IRA? I haven't been able to find any evidence of this.
Last edited by DaftInvestor on Mon Dec 31, 2018 9:48 am, edited 1 time in total.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by Bacchus01 » Mon Dec 31, 2018 9:47 am

letsgobobby wrote:
Sun Dec 30, 2018 12:33 pm
Bacchus01 wrote:
Sun Dec 30, 2018 6:19 am
White Coat Investor wrote:
Sun Dec 30, 2018 1:49 am
Next week I do my Backdoor Roth IRA for the 10th time. I publicize it widely. If the IRS is going to pick out a poster boy to enforce it on, it will be me. I'll let you know when it happens.

Until then, my opinion is that Michael Kitces owes his readers an apology for what I have always considered bad advice on this topic. I think he was ridiculously overly conservative and it looks to me like the IRS and Congress agree with me.
So many people are filing an 8606 that if the IRS didn’t want it to happen, they would have specifically provided guidance that it is not legal. It’s not like they don’t know about it.
Do we know how many 8606s are filed each year?
Enough

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by dodecahedron » Mon Dec 31, 2018 10:20 am

willthrill81 wrote:
Sun Dec 30, 2018 7:44 pm

You're throwing out generalities that do not apply to the specific position that I was very careful to state clearly, and nothing anyone has said has changed that one bit. A high income earner with a high savings rate will not be capable of having remotely 50% of their savings in Roth accounts without a mega backdoor Roth, and I specifically spelled that out as an exception.
My late husband was a high earner and high saver during his sadly short life. Though a high earner overall, much of his income was from self-employment and subject to fluctuation. He did not have access to a mega backdoor Roth but he did some opportunistic Roth conversions during relatively lower taxable income years and was relatively aggressive (and lucky) with his aggressive investment choices in the Roth accounts. I am grateful that he left with me a tax diversified portfolio. Roughly half taxable, 25% Roth, 25% tax-deferred.

Although Roth is, as you say, nowhere near 50% of his total savings, it does have a lot of benefits for me. I am grateful he took the trouble to put some of the funds in Roth. I am not sure why you disparage them so strongly. They are not right for everyone but they worked for our family.

I live modestly but comfortably in a low cost of living area. The balance is a good and tax efficient one. It simplifies my life and helps me organize my thinking about how to plan going forward. I continue to work part-time but put all my earned income into a Roth 403(b) as well as a Roth IRA. As a result my Roth is now larger than my tax-deferred. My SS, small pension, and dividends from taxable account are an adequate LMP (liability matching portfolio) to take care of routine spending once I reach FRA. The Roth IRA, now conservatively invested mostly in TIPS, will likely be a very tax-efficient bequest to our daughters, which they can stretch over their respective remaining life expectancies. The Roth may also be a good tax-efficient source of funds for me to draw on for occasional large lumpy expenditure needs which might arise in my retirement years, e.g., buying a home better suited for aging in place in a higher cost of living area or buying into a continuing care residence. The taxable account is a good source of appreciated securities to donate to charity until I reach 70 1/2, at which point I can switch over to QCDs from the tax-deferred account. The daughters will also get the residual in the taxable account with a stepped-up basis. The residual in the tax-deferred account will be a tax-efficient bequest to charity. As it stands now, I will not need to worry about IRMAA or losing the senior citizen property tax break on my home.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by letsgobobby » Mon Dec 31, 2018 10:40 am

I have never doubted the legality of this move.

I started making non deductible contributions to our IRAs in 2006, after I read the WSJ article explaining that the just passed tax reform under President Bush had eliminated the income cap on conversions beginning in 2010. I figured if the WSJ described it, it must be legal, and anyway - doesn't the IRS read the WSJ?

https://www.wsj.com/articles/SB117511735138452332

Various bloggers and writers opined about the matter for years but I never paused as I figured the strategy was hardly a secret and the IRS had taken no public steps to discourage its practice.

I also had two paper audits in this time frame. They were interested in our backdoor Roths as well as our nanny taxes. A simple explanation sufficed in both cases. No additional tax was owed. Another score for the backdoor Roth.

Then in 2012 the WSJ published a brief interview with an IRS spokesperson who again acknowledged the existence of the backdoor Roth and seemed to bless its existence. While not officially representing the IRS, his comments indicated yet again that the IRS was well aware of the practice and had at that point not considered it illegal.

viewtopic.php?t=94372

So it has been clear to me for many years that the IRS at this time has no problem with this strategy. Doesn't mean they can't change their minds later. Doesn't mean Congress can't change the laws. But for more than a decade we have slept well at night by simply following the law. Among all my investment worries, this doesn't even make the list.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by marcopolo » Mon Dec 31, 2018 10:47 am

willthrill81 wrote:
Sun Dec 30, 2018 9:04 pm
Spirit Rider wrote:
Sun Dec 30, 2018 8:08 pm
I didn't mean I had over 50% of my savings in Roth accounts (I don't). I was referring to the effect using my Roth dollars to reduce my AGI/MAGI.

I have to say this more carefully. When you are making statements about impact. You need to consider more than the narrow scope of marginal taxes. When it comes to Roth dollars, their tax-free nature carries a significant impact when used. To not include that in the analysis is greatly misleading about their value.

Tax diversification has always been a fundamental tenet of the Roth decision. To neglect it in any analysis does forum members a disservice and is fundamentally misleading.
I never said that tax diversification is a bad idea; on the contrary, I believe it is an underutilized strategy.

I would like to see a concrete example, similar to what I have already put forward, where a high income earner with a high savings rate experiences a demonstrated, substantial benefit from utilizing Roth IRAs (no mega-backdoor Roths). There can definitely be significant benefits where one is on the margin of receiving ACA benefits, but this is not likely to benefit a high income earner with a high savings rate unless they are trying to FIRE very early (i.e. income still too high).
Willthrill81,
I usually find you analysis of various investment ideas insightful. I have to admit, I am a bit confused about the point you are trying so adamantly to make here.

It seems like you argument is essentially that in some narrowly defined scenarios, Roth IRAs are only a "little bit helpful". To the tune of many thousands of dollars, which you deem "not substantial". In other scenarios, which others readily utilize, the advantages are quite substantial.

For the sake of discussion, let's assume your analysis is correct. So, then you have a vehicle that has substantial benefit for some scenarios, and only small benefits for others. What is wrong with That?

On a forum that regularly has discussions on how to shave a couple of basis points on investment costs, or agonizes over getting a free copy of turbo tax, and numerous other small money saving approaches, it seems a bit odd to be so disparaging about a vehicle that even in the worst case scenario "only" provides a few thousand dollars of benefits.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by EddyB » Mon Dec 31, 2018 10:58 am

marcopolo wrote:
Mon Dec 31, 2018 10:47 am
willthrill81 wrote:
Sun Dec 30, 2018 9:04 pm
Spirit Rider wrote:
Sun Dec 30, 2018 8:08 pm
I didn't mean I had over 50% of my savings in Roth accounts (I don't). I was referring to the effect using my Roth dollars to reduce my AGI/MAGI.

I have to say this more carefully. When you are making statements about impact. You need to consider more than the narrow scope of marginal taxes. When it comes to Roth dollars, their tax-free nature carries a significant impact when used. To not include that in the analysis is greatly misleading about their value.

Tax diversification has always been a fundamental tenet of the Roth decision. To neglect it in any analysis does forum members a disservice and is fundamentally misleading.
I never said that tax diversification is a bad idea; on the contrary, I believe it is an underutilized strategy.

I would like to see a concrete example, similar to what I have already put forward, where a high income earner with a high savings rate experiences a demonstrated, substantial benefit from utilizing Roth IRAs (no mega-backdoor Roths). There can definitely be significant benefits where one is on the margin of receiving ACA benefits, but this is not likely to benefit a high income earner with a high savings rate unless they are trying to FIRE very early (i.e. income still too high).
Willthrill81,
I usually find you analysis of various investment ideas insightful. I have to admit, I am a bit confused about the point you are trying so adamantly to make here.

It seems like you argument is essentially that in some narrowly defined scenarios, Roth IRAs are only a "little bit helpful". To the tune of many thousands of dollars, which you deem "not substantial". In other scenarios, which others readily utilize, the advantages are quite substantial.

For the sake of discussion, let's assume your analysis is correct. So, then you have a vehicle that has substantial benefit for some scenarios, and only small benefits for others. What is wrong with That?

On a forum that regularly has discussions on how to shave a couple of basis points on investment costs, or agonizes over getting a free copy of turbo tax, and numerous other small money saving approaches, it seems a bit odd to be so disparaging about a vehicle that even in the worst case scenario "only" provides a few thousand dollars of benefits.
My Roth accounts are targeted for “overspending” years—anticipated costs like college expenses and potential costs like a boat. The marginal tax rate that would apply to my other sources of income in the projected overspending years (based on current rates and residency) would likely be 31.9%, so I consider the Roth to be a great discount on those expenditures.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of Backdoor Roth IRA's

Post by dodecahedron » Mon Dec 31, 2018 10:59 am

letsgobobby wrote:
Mon Dec 31, 2018 10:40 am
I have never doubted the legality of this move.

I started making non deductible contributions to our IRAs in 2006, after I read the WSJ article explaining that the just passed tax reform under President Bush had eliminated the income cap on conversions beginning in 2010. I figured if the WSJ described it, it must be legal, and anyway - doesn't the IRS read the WSJ?
The IRS is not a monolith. The IRS can also be very circumspect when it chooses to be, particularly if something has not yet been tested in court. There are almost always grey areas, which can have unforeseen ramifications. Just because something may be legal does not mean that some individual IRS auditors may not raise eyebrows if they are not familiar with it. If you look at Tax Court opinions (on other issues far more clearcut than this one ever was), you routinely see issues where it is clear that the auditors as well as higher level folks over them were not correctly applying the laws. IRS auditors have the daunting responsibility of enforcing an incredibly complex tax code with a wide variety of provisions on a dizzying variety of potentially taxable transactions. My experience is that if you can get through to a human being, they are generally trying their best to do a good job, but they are not perfect. (Who is?) And that is a big IF. Often you get a computerized notice and you can´t reach a human being on the phone.

Also important to note that this thread is over two years old! Kitces wrote well before TCJA was a gleam in anyone´s eye. It is entirely possible that back then Kitces´ (or his many colleagues, since he is obviously active in professional networks) encountered individual clients who shared stories of individual IRS auditor challenges to their backdoor Roths. These encounters would never be public knowledge unless the clients took the trouble to appeal all the way to Tax Court. Given the amounts at stake in a typical backdoor Roth, it would not be worth taking all the way to Tax Court.

Edited to add: if you go back and read the OP, Michael Kitces himself never expressed doubt about the legality of backdoor Roths. He simply said that he had heard from a couple of individual clients that they had been hassled about their backdoor Roths by individual auditors and chose not to fight it due to the relatively small gains compared to the cost of fighting.

Note to OP or moderators: the tense in the title of this thread should be changed to read ¨Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs.. As it stands now, the tense in the title is currently misleading.
Last edited by dodecahedron on Mon Dec 31, 2018 11:12 am, edited 1 time in total.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by LadyGeek » Mon Dec 31, 2018 11:11 am

^^^ I retitled the thread, thanks.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by letsgobobby » Mon Dec 31, 2018 11:37 am

Dodecahedron,

At this point there is no doubt that the IRS is well aware of the backdoor Roth IRA and has been for at least ten years. My opinion is that if they had believed it was illegal, they would have said so. That they have not suggests to me they do not think it is illegal.

Many posters here have reported interactions with the IRS via paper audit regarding their backdoor Roth IRA and off the top of my head I believe every single case was easiliy resolved with no additional tax due. Bogleheads are generally getting audited more frequently than the average taxpayer because Bogleheads are richer and pay more taxes, so this anecdotal data is not worthless.

Has any Boglehead posted that the IRS has rejected their explanation for a backdoor Roth IRA? I am not aware of a single instance.

No doubt nothing I posted is definitive. But at some point we (non tax professionals, non attorneys) make our best judgments and move on.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by willthrill81 » Mon Dec 31, 2018 12:41 pm

marcopolo wrote:
Mon Dec 31, 2018 10:47 am
willthrill81 wrote:
Sun Dec 30, 2018 9:04 pm
Spirit Rider wrote:
Sun Dec 30, 2018 8:08 pm
I didn't mean I had over 50% of my savings in Roth accounts (I don't). I was referring to the effect using my Roth dollars to reduce my AGI/MAGI.

I have to say this more carefully. When you are making statements about impact. You need to consider more than the narrow scope of marginal taxes. When it comes to Roth dollars, their tax-free nature carries a significant impact when used. To not include that in the analysis is greatly misleading about their value.

Tax diversification has always been a fundamental tenet of the Roth decision. To neglect it in any analysis does forum members a disservice and is fundamentally misleading.
I never said that tax diversification is a bad idea; on the contrary, I believe it is an underutilized strategy.

I would like to see a concrete example, similar to what I have already put forward, where a high income earner with a high savings rate experiences a demonstrated, substantial benefit from utilizing Roth IRAs (no mega-backdoor Roths). There can definitely be significant benefits where one is on the margin of receiving ACA benefits, but this is not likely to benefit a high income earner with a high savings rate unless they are trying to FIRE very early (i.e. income still too high).
Willthrill81,
I usually find you analysis of various investment ideas insightful. I have to admit, I am a bit confused about the point you are trying so adamantly to make here.

It seems like you argument is essentially that in some narrowly defined scenarios, Roth IRAs are only a "little bit helpful". To the tune of many thousands of dollars, which you deem "not substantial". In other scenarios, which others readily utilize, the advantages are quite substantial.

For the sake of discussion, let's assume your analysis is correct. So, then you have a vehicle that has substantial benefit for some scenarios, and only small benefits for others. What is wrong with That?

On a forum that regularly has discussions on how to shave a couple of basis points on investment costs, or agonizes over getting a free copy of turbo tax, and numerous other small money saving approaches, it seems a bit odd to be so disparaging about a vehicle that even in the worst case scenario "only" provides a few thousand dollars of benefits.
I started all of this by merely pointing out that making regular Roth IRA contributions ($6k annual limit per person in 2019) is not going to 'move the needle much' for a high income earner with a high savings rate, and I subsequently demonstrated this using real numbers. People then started misinterpreting greatly what I said. They somehow seem to think that I'm disparaging to Roth accounts or that I'm ignoring some huge benefit that they will not or cannot quantify. There is virtually always a real benefit to anyone using Roth accounts, but let's not say that regular Roth contributions (i.e. $6k limit, not conversions or mega backdoors) are likely to be a substantial benefit to a high income earner with a high savings rate.

I never said that Roth accounts are not valuable.

I never said that anyone should avoid Roth accounts or making contributions when it is financially helpful to do so.

I never said that Roth conversions or mega backdoor Roths cannot be a significant benefit to anyone.

For once and for all, I am PRO-Roth. But that doesn't mean that what I originally said is false.

Peace out. :beer
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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by Earl Lemongrab » Mon Dec 31, 2018 12:54 pm

Just because the IRS doesn't think it's illegal doesn't in turn means that they approve of it. I think it's clear that they don't, which is why the previous administration floated legislation to nail that door shut. It didn't go anywhere in Congress.
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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by dodecahedron » Mon Dec 31, 2018 12:59 pm

letsgobobby wrote:
Mon Dec 31, 2018 11:37 am
Dodecahedron,

At this point there is no doubt that the IRS is well aware of the backdoor Roth IRA and has been for at least ten years. My opinion is that if they had believed it was illegal, they would have said so. That they have not suggests to me they do not think it is illegal.

Many posters here have reported interactions with the IRS via paper audit regarding their backdoor Roth IRA and off the top of my head I believe every single case was easiliy resolved with no additional tax due. Bogleheads are generally getting audited more frequently than the average taxpayer because Bogleheads are richer and pay more taxes, so this anecdotal data is not worthless.

Has any Boglehead posted that the IRS has rejected their explanation for a backdoor Roth IRA? I am not aware of a single instance.
The anecdotes are good to hear and certainly not worthless. However, IRS officials have told me in the past that generally folks with good results from audits are more likely to share their experiences than folks with bad results, so there may be some selection bias in who chooses to share what.

That said, the experience of folks that I personally assist with is that audits (on other issues--folks I work with do not need backdoor Roths and they get audited more often than most Bogleheads do) are harder to get resolved than they used to be.

Shortstaffing at the IRS is an increasing problem. Experienced and knowledgeable veteran IRS employees who retire are often not replaced. If they are replaced, it is with folks who are less knowledgeable. The law grows more complex every year.

There is increasing reliance on computers, which often seem to be hard to reason with. There are folks who were able to correctly reason their way out of IRS challenges in the past (again on other issues) who are not getting through to human beings now. IRS offices are getting consolidated and cases are often getting reassigned to folks who have less familiarity with the issues than before.

It would be good to have dates on anecdotes. My guess is that things may have perhaps improved for backdoor Roth IRAs in recent years, especially given the large amounts of publicity about that particular issue, but they seem to have gotten worse in other areas.

I hear many anecdotes (again involving other issues--the folks I assist are not in need of the backdoor Roths but get audited at higher rates than Bogleheads) which I am not free to share. Things have gotten worse for them recently. Documents and the wording of explanations I helped them to prepare in the past that worked fine in the past do not always help now. Again, these are other issues, but my general conclusion is that being in the right is not always enough to make it worth arguing with the IRS and that things which sailed through audits in the past may not in the future.

Personally, I am happy that I do not need to worry about backdoor Roths. The front door works for me. Happy to be able to keep my tax return simpler--at least in that respect--going forward.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by Leesbro63 » Mon Dec 31, 2018 2:58 pm

Reply to the post just above by Dodecahedron:

The staffing problem that you mention supports why I never ever call the IRS. I do everything in writing by certified mail. Not that I've done that much, but have handled mail inquiries for myself and family members...maybe 6-7 over the past 10 years.

The second point goes to your comment about new IRS staffers not understanding part of the tax law. My guess is that when the computer kicks out an inquiry for a "backdoor Roth", the staffer handling it doesn't even know that there is such a thing. They do know that one can contribute to a non-deductible IRA and they also know that taxable IRAs can be converted to Roths. But my guess is that many IRS staffers don't realize that the two transactions are connected in our minds as a "backdoor Roth". So as long as you follow the rules for the contribution and for the conversion (or whichever of those, or both, that the IRS is asking about), you can just send the documentation and no one will even ever think "there goes one of those backdoor loophole users".

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by DaftInvestor » Mon Dec 31, 2018 3:54 pm

Earl Lemongrab wrote:
Mon Dec 31, 2018 12:54 pm
Just because the IRS doesn't think it's illegal doesn't in turn means that they approve of it. I think it's clear that they don't, which is why the previous administration floated legislation to nail that door shut. It didn't go anywhere in Congress.
You might be confusing "The Administration", "Congress", and "the IRS".

Where are you getting that the IRS doesn't approve? I have found no such evidence.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by Earl Lemongrab » Mon Dec 31, 2018 5:07 pm

DaftInvestor wrote:
Mon Dec 31, 2018 3:54 pm
Earl Lemongrab wrote:
Mon Dec 31, 2018 12:54 pm
Just because the IRS doesn't think it's illegal doesn't in turn means that they approve of it. I think it's clear that they don't, which is why the previous administration floated legislation to nail that door shut. It didn't go anywhere in Congress.
You might be confusing "The Administration", "Congress", and "the IRS".

Where are you getting that the IRS doesn't approve? I have found no such evidence.
I don't thinks so. As I recall, the IRS was bugging the rest of the Executive branch about the subject. The President sent proposed legislation to Congress to change the law to only allow converting pretax amounts. Congress at that point wasn't much interested in the change.
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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by JustinR » Mon Dec 31, 2018 11:18 pm

dodecahedron wrote:
Mon Dec 31, 2018 12:59 pm
letsgobobby wrote:
Mon Dec 31, 2018 11:37 am
Dodecahedron,

At this point there is no doubt that the IRS is well aware of the backdoor Roth IRA and has been for at least ten years. My opinion is that if they had believed it was illegal, they would have said so. That they have not suggests to me they do not think it is illegal.

Many posters here have reported interactions with the IRS via paper audit regarding their backdoor Roth IRA and off the top of my head I believe every single case was easiliy resolved with no additional tax due. Bogleheads are generally getting audited more frequently than the average taxpayer because Bogleheads are richer and pay more taxes, so this anecdotal data is not worthless.

Has any Boglehead posted that the IRS has rejected their explanation for a backdoor Roth IRA? I am not aware of a single instance.
The anecdotes are good to hear and certainly not worthless. However, IRS officials have told me in the past that generally folks with good results from audits are more likely to share their experiences than folks with bad results, so there may be some selection bias in who chooses to share what.

That said, the experience of folks that I personally assist with is that audits (on other issues--folks I work with do not need backdoor Roths and they get audited more often than most Bogleheads do) are harder to get resolved than they used to be.

Shortstaffing at the IRS is an increasing problem. Experienced and knowledgeable veteran IRS employees who retire are often not replaced. If they are replaced, it is with folks who are less knowledgeable. The law grows more complex every year.

There is increasing reliance on computers, which often seem to be hard to reason with. There are folks who were able to correctly reason their way out of IRS challenges in the past (again on other issues) who are not getting through to human beings now. IRS offices are getting consolidated and cases are often getting reassigned to folks who have less familiarity with the issues than before.

It would be good to have dates on anecdotes. My guess is that things may have perhaps improved for backdoor Roth IRAs in recent years, especially given the large amounts of publicity about that particular issue, but they seem to have gotten worse in other areas.

I hear many anecdotes (again involving other issues--the folks I assist are not in need of the backdoor Roths but get audited at higher rates than Bogleheads) which I am not free to share. Things have gotten worse for them recently. Documents and the wording of explanations I helped them to prepare in the past that worked fine in the past do not always help now. Again, these are other issues, but my general conclusion is that being in the right is not always enough to make it worth arguing with the IRS and that things which sailed through audits in the past may not in the future.

Personally, I am happy that I do not need to worry about backdoor Roths. The front door works for me. Happy to be able to keep my tax return simpler--at least in that respect--going forward.
This happens to thousands of people every year. I imagine it happened to hundreds of Bogleheads. It will happen to lots of Bogleheads again this year.

You can do a search for "CP2000 backdoor roth" and read the anecdotes yourself.

viewtopic.php?t=247277
viewtopic.php?t=93608
viewtopic.php?t=253346

In all of them, the IRS says "ok" and closes the claim.

There's yet to be one data point of a person getting penalized for a legit backdoor Roth.

I know someone who literally gets the same letter every year from the IRS, and it ends up closed like all the rest.

Bottom line: The IRS has absolutely no problem with the backdoor Roth.

My closure came today. All is well. $0.00 owed.. revised down from proposed amount of $14,850
I got my resolution notice for my CP2000 today. The information provided answered their questions. Amount due: $0.00.
They closed my CP2000 saying I owe nothing, so computer glitch basically. Glad to be done with it.
Update to my CP2000. I received a letter last Friday saying I owe $0 :)
I received similar notice last week that my response had been received.

Today received the following notice:
"Your 2010 Form 1040 inquiry is closed. Amount Due: $0.00"
Our inquiry closing letter arrived yesterday as well!
Stars did align yesterday for us and IRS letter safely made it to our mail box.
Total Amount Due: $0.00 Case closed :D
Update: For what it's worth, 2.5 month after reviewing copies of the relevant parts of the original tax return, the IRS has decided that the backdoor Roth, in my circumstance, was done correctly and they closed the matter.
Thanks to all who gave me their ideas about how to respond to the IRS. I followed your suggestions and filed my paperwork with IRS in mid-July.

I got a letter from IRS yesterday. The inquiry is closed, and no tax is due.
BTW, I received a letter from the IRS saying that my issue had been resolved and that I do not owe any further taxes.
I just returned the CP2000, by certified mail, with a note that I believed "everything was filed properly as per the attached". And attached a copy of Forms 1040 and 8606 with the pertinent areas circled in red Sharpie. I got a "get out of jail free" letter about 60 days later.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by White Coat Investor » Tue Jan 01, 2019 1:50 am

Leesbro63 wrote:
Sun Dec 30, 2018 1:14 pm
White Coat Investor wrote:
Sun Dec 30, 2018 1:49 am
Next week I do my Backdoor Roth IRA for the 10th time. I publicize it widely. If the IRS is going to pick out a poster boy to enforce it on, it will be me. I'll let you know when it happens.

Until then, my opinion is that Michael Kitces owes his readers an apology for what I have always considered bad advice on this topic. I think he was ridiculously overly conservative and it looks to me like the IRS and Congress agree with me.
You make a good point, but to be fair to Kitces, it was murkier then. And I still don't love the fact that it's still a murky thing. Again, the way to have made this not murky would have been to allow direct contributions to a ROTH IRA through the front door. While it appears very much to be legal, it still requires two steps to "take advantage" of two slightly different areas of IRA tax law (the ability to make a non-deductible traditional IRA contribution and the ability to convert a traditional IRA to a Roth). It's still murky.
I guess it is slightly more clear now, but I thought it was pretty darn clear then and said so then.
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by Iorek » Tue Jan 01, 2019 7:54 pm

Earl Lemongrab wrote:
Sat Dec 29, 2018 12:52 am

I also think that if Step Doctrine applied, waiting a month or even a year probably wouldn't help.
I think the risk was small before and is even smaller now (to the point of not worth worrying about even for those people who like to be conservative on their taxes) but for what it's worth I also think this statement is not consistent with the history/caselaw on step transaction/economic substance.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by rookieschmookie » Sat Jan 12, 2019 6:23 pm

Did some more digging on congress.gov around the sequence of events that led to the Tax Cuts & Jobs Act. I started with the "Actions" which tracks changes leading up to the final signed bill.Here's what I was able to unearth:

(Refer to: https://www.congress.gov/congressional- ... iew=closed)

12/15/2017 Conference report H. Rept. 115-466 filed.

E. Simplification and Reform of Savings, Pensions, Retirement

1. Repeal of special rule permitting recharacterization of IRA contributions (sec. 1501 of the House bill, sec. 13611 of the Senate amendment, and sec. 408A of the Code)

HOUSE BILL
The House bill repeals the special rule that allows IRA contributions to one type of IRA (either traditional or Roth) to be recharacterized as a contribution to the other type of IRA. Thus, for example, under the provision, a conversion contribution establishing a Roth IRA during a taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion).\276\
---------------------------------------------------------------------------
\276\The provision does not preclude an individual from making a contribution to a traditional IRA and converting the traditional IRA to a Roth IRA. Rather, the provision would preclude the individual from later unwinding the conversion through a recharacterization.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable years beginning after December 31, 2017.

SENATE AMENDMENT
The Senate amendment is the same as the House bill.

CONFERENCE AGREEMENT
The conference agreement follows the House bill and the Senate amendment with a modification. Under the provision, the special rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Roth IRA and, before the due date for the individual's income tax return for that year, recharacterize it as a contribution to a traditional IRA.\277\
---------------------------------------------------------------------------
\277\In addition, an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, but the provision precludes the individual from later unwinding the conversion through a recharacterization.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable years beginning after December 31, 2017.

12/19/2017 Conference report agreed to in House

12/20/2017 Resolving differences -- House actions: On motion that the House agree to the Senate amendment Agreed to by the Yeas and Nays: 224 - 201

https://www.congress.gov/congressional- ... e/H10252-4

I couldn't find anything in here pertaining to backdoor ROTH, so presumably this was left intact in the conference report.

12/21/2017 Presented to President.

12/22/2017 Signed by President.

12/22/2017 Became Public Law No: 115-97.

Full text is here: https://www.congress.gov/congressional- ... e/H10261-2

Below is the section that is supposed to deal with backdoor ROTHs. But the only text here deals with recharactsrizations and not backdoor ROTHs:

Subpart B—Retirement Plans
SEC. 13611. REPEAL OF SPECIAL RULE PERMITTING RECHARACTERIZA- TION OF ROTH CONVERSIONS.
(a) IN GENERAL.—Section 408A(d)(6)(B) is amended by adding at the end the following new clause:
‘‘(iii) CONVERSIONS.—Subparagraph (A) shall not apply in the case of a qualified rollover contribution to which subsection (d)(3) applies (including by reason of subparagraph (C) thereof).’’.

Section 408A(d)(6) Taxpayer may make adjustments before due date
(A) In general
Except as provided by the Secretary, if, on or before the due date for any taxable year, a taxpayer transfers in a trustee-to-trustee transfer any contribution to an individual retirement plan made during such taxable year from such plan to any other individual retirement plan, then, for purposes of this chapter, such contribution shall be treated as having been made to the transferee plan (and not the transferor plan).
(B) Special rules
(i) Transfer of earnings
Subparagraph (A) shall not apply to the transfer of any contribution unless such transfer is accompanied by any net income allocable to such contribution.
(ii) No deduction
Subparagraph (A) shall apply to the transfer of any contribution only to the extent no deduction was allowed with respect to the contribution to the transferor plan.
(iii) Conversions
Subparagraph (A) shall not apply in the case of a qualified rollover contribution to which subsection (d)(3) applies (including by reason of subparagraph (C) thereof).


MY CONCLUSION:

The conference report text that allows backdoor ROTHs does not seem to have been subsequently debated / overturned / deleted on the path toward the ACT getting signed. Yet, the final text of the ACT does not seem to mention anything on the topic.

I am no legal or constitutional expert, but it seems that the conference report speaks to the spirit of the law. Which seems to allow backdoor ROTH conversions.

Thoughts?

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by Stormbringer » Sat Jan 12, 2019 6:53 pm

rookieschmookie wrote:
Sat Jan 12, 2019 6:23 pm
I am no legal or constitutional expert, but it seems that the conference report speaks to the spirit of the law. Which seems to allow backdoor ROTH conversions.

Thoughts?
I've been doing backdoor Roth's for years, and never had a problem with it. All the angst over them seems to be over a theoretical application of the step transaction doctrine that as far as I can tell, has never been used to challenge a backdoor Roth contribution. I've never heard of it happening to anyone.

The footnotes of the new law appear to give it legitimacy, but unless there is a tax court case affirming it, we'll probably never know with absolute certainty. I don't see any good reason not to take advantage of them.
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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by rookieschmookie » Sun Jan 13, 2019 12:18 am

Agreed. I took advantage of this in the nick of time in 2018, and again at the start of 2019. I intend to continue doing it.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by DaftInvestor » Mon Jan 14, 2019 10:27 am

Stormbringer wrote:
Sat Jan 12, 2019 6:53 pm
rookieschmookie wrote:
Sat Jan 12, 2019 6:23 pm
I am no legal or constitutional expert, but it seems that the conference report speaks to the spirit of the law. Which seems to allow backdoor ROTH conversions.

Thoughts?
I've been doing backdoor Roth's for years, and never had a problem with it. All the angst over them seems to be over a theoretical application of the step transaction doctrine that as far as I can tell, has never been used to challenge a backdoor Roth contribution. I've never heard of it happening to anyone.

The footnotes of the new law appear to give it legitimacy, but unless there is a tax court case affirming it, we'll probably never know with absolute certainty. I don't see any good reason not to take advantage of them.
This Kitces article is the only place that I have been able to find that makes mention of the IRS "disapproved" and the only source he states is hearing from "a couple of people". My conclusion from the countless other threads on the topic (whereby folks say they were audited for the maneuver but the auditors backed down when they explained what they did) is that the auditors from the "couple of people" that Kitces talked to simply didn't understand it. I have seen it mentioned on a number of popular financial sites in addition to popular finance magazines (like "Money" and "Kiplinger's Personal Finance") without any rebuttal from anyone that was either audited and had to undo it, or from the IRS themselves. The only conclusion I can draw is that they do NOT disapprove and this Kitces article was a bit of irresponsible journalism.

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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by Earl Lemongrab » Mon Jan 14, 2019 12:21 pm

DaftInvestor wrote:
Mon Jan 14, 2019 10:27 am
This Kitces article is the only place that I have been able to find that makes mention of the IRS "disapproved" and the only source he states is hearing from "a couple of people". My conclusion from the countless other threads on the topic (whereby folks say they were audited for the maneuver but the auditors backed down when they explained what they did) is that the auditors from the "couple of people" that Kitces talked to simply didn't understand it. I have seen it mentioned on a number of popular financial sites in addition to popular finance magazines (like "Money" and "Kiplinger's Personal Finance") without any rebuttal from anyone that was either audited and had to undo it, or from the IRS themselves. The only conclusion I can draw is that they do NOT disapprove and this Kitces article was a bit of irresponsible journalism.
Well, Kitces is a blogger with a background in financial planning, not a journalist. This controversial point has been good for getting his posts referenced in many places.
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by DaftInvestor » Mon Jan 14, 2019 12:42 pm

Earl Lemongrab wrote:
Mon Jan 14, 2019 12:21 pm
DaftInvestor wrote:
Mon Jan 14, 2019 10:27 am
This Kitces article is the only place that I have been able to find that makes mention of the IRS "disapproved" and the only source he states is hearing from "a couple of people". My conclusion from the countless other threads on the topic (whereby folks say they were audited for the maneuver but the auditors backed down when they explained what they did) is that the auditors from the "couple of people" that Kitces talked to simply didn't understand it. I have seen it mentioned on a number of popular financial sites in addition to popular finance magazines (like "Money" and "Kiplinger's Personal Finance") without any rebuttal from anyone that was either audited and had to undo it, or from the IRS themselves. The only conclusion I can draw is that they do NOT disapprove and this Kitces article was a bit of irresponsible journalism.
Well, Kitces is a blogger with a background in financial planning, not a journalist. This controversial point has been good for getting his posts referenced in many places.
I never stated that Kitces was a journalist. In any case - what's your point?

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by retiredjg » Mon Jan 14, 2019 12:52 pm

I'd like to suggest that this thread has run it's course and should be locked.

Michael Kitces had an opinion back in 2016. Few people here agreed with it then, but at least it was a legitimate discussion point at the time. Some people, even one I respect greatly, chose to follow Kitces' advice.

It no longer appears that Kitces' opinion back then matters much. I think pretty much everyone agrees with that. I see no purpose in continuing this thread and further discussion is not heading in a positive direction.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by DaftInvestor » Mon Jan 14, 2019 2:00 pm

retiredjg wrote:
Mon Jan 14, 2019 12:52 pm
I'd like to suggest that this thread has run it's course and should be locked.

Michael Kitces had an opinion back in 2016. Few people here agreed with it then, but at least it was a legitimate discussion point at the time. Some people, even one I respect greatly, chose to follow Kitces' advice.

It no longer appears that Kitces' opinion back then matters much. I think pretty much everyone agrees with that. I see no purpose in continuing this thread and further discussion is not heading in a positive direction.
It seems not everyone agrees (which is why the conversation is continuing).

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by Spirit Rider » Mon Jan 14, 2019 2:24 pm

DaftInvestor wrote:
Mon Jan 14, 2019 2:00 pm
retiredjg wrote:
Mon Jan 14, 2019 12:52 pm
I'd like to suggest that this thread has run it's course and should be locked.

Michael Kitces had an opinion back in 2016. Few people here agreed with it then, but at least it was a legitimate discussion point at the time. Some people, even one I respect greatly, chose to follow Kitces' advice.

It no longer appears that Kitces' opinion back then matters much. I think pretty much everyone agrees with that. I see no purpose in continuing this thread and further discussion is not heading in a positive direction.
It seems not everyone agrees (which is why the conversation is continuing).
Except that it has been asked and answered thousands of times since 2011. Nobody is probably going to change their minds at this point.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by DaftInvestor » Mon Jan 14, 2019 2:33 pm

Spirit Rider wrote:
Mon Jan 14, 2019 2:24 pm
DaftInvestor wrote:
Mon Jan 14, 2019 2:00 pm
retiredjg wrote:
Mon Jan 14, 2019 12:52 pm
I'd like to suggest that this thread has run it's course and should be locked.

Michael Kitces had an opinion back in 2016. Few people here agreed with it then, but at least it was a legitimate discussion point at the time. Some people, even one I respect greatly, chose to follow Kitces' advice.

It no longer appears that Kitces' opinion back then matters much. I think pretty much everyone agrees with that. I see no purpose in continuing this thread and further discussion is not heading in a positive direction.
It seems not everyone agrees (which is why the conversation is continuing).
Except that it has been asked and answered thousands of times since 2011. Nobody is probably going to change their minds at this point.
Good point - it was one of the first questions I asked (viewtopic.php?t=135113).
Everytime someone says (Like Lemongrab did above) something like"it's clear the IRS doesn't approve" I ask for the evidence. But no one can ever provide any (this article came the closest but its just "We heard from someone"). I guess I still somewhat feel like I might be doing something wrong - but can't find anyone that can definitively tell me such. I already did a backdoor for 2019 so have decided to continue.

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Earl Lemongrab
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by Earl Lemongrab » Mon Jan 14, 2019 3:10 pm

DaftInvestor wrote:
Mon Jan 14, 2019 12:42 pm
Earl Lemongrab wrote:
Mon Jan 14, 2019 12:21 pm
Well, Kitces is a blogger with a background in financial planning, not a journalist. This controversial point has been good for getting his posts referenced in many places.
I never stated that Kitces was a journalist. In any case - what's your point?
You commented on his journalism. The point is that it's not useful to hold a non-journalist to journalism standards. He's a blogger looking for traffic. That he did well.
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Re: Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's

Post by DaftInvestor » Mon Jan 14, 2019 3:14 pm

Earl Lemongrab wrote:
Mon Jan 14, 2019 3:10 pm
DaftInvestor wrote:
Mon Jan 14, 2019 12:42 pm
Earl Lemongrab wrote:
Mon Jan 14, 2019 12:21 pm
Well, Kitces is a blogger with a background in financial planning, not a journalist. This controversial point has been good for getting his posts referenced in many places.
I never stated that Kitces was a journalist. In any case - what's your point?
You commented on his journalism. The point is that it's not useful to hold a non-journalist to journalism standards. He's a blogger looking for traffic. That he did well.
The article wasn't his nor his blog. In any case I'll concede the point. What I am really hoping for is someone to either provide some sort of real information that the IRS Disapproves or simply state there is none.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by Earl Lemongrab » Mon Jan 14, 2019 3:48 pm

DaftInvestor wrote:
Mon Jan 14, 2019 2:33 pm
Good point - it was one of the first questions I asked (viewtopic.php?t=135113).
Everytime someone says (Like Lemongrab did above) something like"it's clear the IRS doesn't approve" I ask for the evidence. But no one can ever provide any (this article came the closest but its just "We heard from someone"). I guess I still somewhat feel like I might be doing something wrong - but can't find anyone that can definitively tell me such. I already did a backdoor for 2019 so have decided to continue.
The goal of the lifting of MAGI restrictions on conversions was not to open up the backdoor Roth. It was generate income from taxable conversions. My "IRS doesn't like it" was from the Obama-era efforts to close the loophole, which to my understanding started with the IRS. But it's irrelevant whether they like it or not. It's clear (to me anyway) that they don't think there's anything to be done about it without a change to legislation.

BTW, I don't disagree that Kitces was probably wrong about the specific auditors saying something. I believe that the "dislike" is a higher-level one and that no auditors are trying to enforce anything.
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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by DaftInvestor » Mon Jan 14, 2019 3:54 pm

Earl Lemongrab wrote:
Mon Jan 14, 2019 3:48 pm
DaftInvestor wrote:
Mon Jan 14, 2019 2:33 pm
Good point - it was one of the first questions I asked (viewtopic.php?t=135113).
Everytime someone says (Like Lemongrab did above) something like"it's clear the IRS doesn't approve" I ask for the evidence. But no one can ever provide any (this article came the closest but its just "We heard from someone"). I guess I still somewhat feel like I might be doing something wrong - but can't find anyone that can definitively tell me such. I already did a backdoor for 2019 so have decided to continue.
The goal of the lifting of MAGI restrictions on conversions was not to open up the backdoor Roth. It was generate income from taxable conversions. My "IRS doesn't like it" was from the Obama-era efforts to close the loophole, which to my understanding started with the IRS. But it's irrelevant whether they like it or not. It's clear (to me anyway) that they don't think there's anything to be done about it without a change to legislation.
Okay. Personally I think your understanding of the IRS starting an effort to close the loop-hole is probably incorrect - more likely it was a congressional debate. While the original goal may not have been to open up the backdoor Roth when they lifted the MAGI restriction I'm sure they knew they were doing so as a consequence and weighed the impact it may have (Many folks have done tax-able conversions of prior T-IRAs so they could use the backdoor - that has essentially still captured the additional dollars they were looking for).

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by Earl Lemongrab » Mon Jan 14, 2019 4:00 pm

DaftInvestor wrote:
Mon Jan 14, 2019 3:54 pm
Okay. Personally I think your understanding of the IRS starting an effort to close the loop-hole is probably incorrect - more likely it was a congressional debate.
I don't think so. As I understand it, the initiative came from the executive side and Congress was uninterested.
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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by DaftInvestor » Mon Jan 14, 2019 4:04 pm

Earl Lemongrab wrote:
Mon Jan 14, 2019 4:00 pm
DaftInvestor wrote:
Mon Jan 14, 2019 3:54 pm
Okay. Personally I think your understanding of the IRS starting an effort to close the loop-hole is probably incorrect - more likely it was a congressional debate.
I don't think so. As I understand it, the initiative came from the executive side and Congress was uninterested.
Okay. If you ever come across anything that backs up your understanding let me know.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by Earl Lemongrab » Mon Jan 14, 2019 4:09 pm

I don't see much point in arguing about it. As I said, I also think it's irrelevant because the law is on the side of the backdoor at this time, and Congress is making any move to change it.
Last edited by Earl Lemongrab on Mon Jan 14, 2019 4:17 pm, edited 2 times in total.
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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by DaftInvestor » Mon Jan 14, 2019 4:16 pm

Earl Lemongrab wrote:
Mon Jan 14, 2019 4:09 pm
I don't see much point in arguing about it. As I said, I also think it's irrelevant because the law is on the side of the backdoor at this time, and Congress is making any move to change it.
Okay - your the one that keeps bringing it up :)

Just to be clear - I wasn't trying to argue the point - it was just that if there was info out there that the IRS doesn't approve - I'd have liked to review it.

I'll go back to talking about real issues - like Forever stamps and ripped jeans now.

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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by Earl Lemongrab » Mon Jan 14, 2019 4:17 pm

As far as an initiative to close the loophole, it was apparently in Obama budget proposal for 2016:
2. Limit Roth conversions to pretax dollars

The proposal — After-tax money held in your traditional IRA or employer-sponsored retirement plan would no longer be eligible for conversion to a Roth account.
https://www.marketwatch.com/story/presi ... 2015-02-05

Now, that doesn't indicate that the IRS was the driver within the administration, but that was some commentary that I recall hearing. Of course, I'm not held to journalist standards either.
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Re: Michael Kitces said in 2016 that IRS auditors disapproved of backdoor Roth IRAs

Post by LadyGeek » Mon Jan 14, 2019 4:48 pm

This thread has run its course and is locked (topic exhausted). See: Locked Topics
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