A separate traditional IRA acccount?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

A separate traditional IRA acccount?

Post by annabel » Fri Apr 05, 2019 3:53 pm

Hi,

I over contributed ROTH IRA a few years back and converted/recharacterized it to a brand new Traditional IRA account in time so there was no penalty.

Now I want to do backdoor ROTH IRA. I think another brand new Traditional IRA account should be established so I won't mess up the one has the recharacterized money mentioned above since IRS says we can't move the recharacterized money back to ROTH IRA.
1. Is my plan a good plan? Create a second traditional IRA account.
2. Is there any limit of contribution to the Traditional IRA per year per person? My understanding after googling is there is none.
3. I believe I won't have to pay tax for the first Traditional IRA account when I do take the money out since it was from ROTH IRA and I didn't benefit any tax deductible. Am I right?

Thanks for any input in advance.

User avatar
David Jay
Posts: 6451
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: A seperate tradiontal IRA acccount?

Post by David Jay » Fri Apr 05, 2019 4:00 pm

A “second” IRA won’t work. All your tIRA accounts are treated as one by the IRS.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

User avatar
Duckie
Posts: 6504
Joined: Thu Mar 08, 2007 2:55 pm

Re: A separate traditional IRA acccount?

Post by Duckie » Fri Apr 05, 2019 5:11 pm

annabel wrote:I think another brand new Traditional IRA account should be established so I won't mess up the one has the recharacterized money mentioned above since IRS says we can't move the recharacterized money back to ROTH IRA.
Where did you read this? Money contributed to a Roth IRA and recharacterized to a Traditional IRA can be converted back into a Roth IRA. It happens all the time.
Is my plan a good plan? Create a second traditional IRA account.
That won't help. The IRS considers all non-Roth IRAs (Traditional IRA, Rollover IRA, SEP IRA, and SIMPLE IRA) to be one big fat IRA.
Is there any limit of contribution to the Traditional IRA per year per person? My understanding after googling is there is none.
For 2019 the contribution limit to TIRA is $6,000 if under age 50 and $7,000 if 50 or above. These are the same limits as for a Roth IRA. See IRA FAQs - Contributions.
I believe I won't have to pay tax for the first Traditional IRA account when I do take the money out since it was from ROTH IRA and I didn't benefit any tax deductible. Am I right?
You need to track your non-deductible basis. When you recharacterized the contribution it became a TIRA contribution. Did you deduct it on your taxes or not? If not, did you file Form 8606 for that tax year to report the non-deductible basis?

If you did deduct it, it is considered a pre-tax asset. If you did not deduct it, the basis (the original amount) is considered non-deductible and the gains are considered pre-tax. If you did not deduct it and did not file Form 8606 you can still file that form on its own. Find the form for the correct tax year, download it, print it out, fill it in, and mail it in. That will document your basis.

In order to do the backdoor method properly you will need to get rid of the amount in your TIRA. Pre-tax amounts can be rolled to employer plans if the plan allows it. If that isn't an option the pre-tax amounts can be converted and taxes paid on them. The after-tax basis can be converted without incurring taxes.

User avatar
Earl Lemongrab
Posts: 7004
Joined: Tue Jun 10, 2014 1:14 am

Re: A separate traditional IRA acccount?

Post by Earl Lemongrab » Sat Apr 06, 2019 3:59 pm

I think this has to have zoomed to the top of "most misunderstood financial concepts" on Bogleheads. I know, tough competion from "one rollover rule" and "wash sale".
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Sun Apr 07, 2019 10:09 am

I guess I am confused right now and may have misunderstood things I read.

https://www.irs.gov/retirement-plans/ir ... tributions

"Can I recharacterize a rollover or conversion to a Roth IRA?
Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans."

I did file Form 8606 (non deductible contribution) for $6500 for tax 2017 in March 2018. And Vanguard shows two cash amount ($6,570.39+$1,577.29) to the brand new TIRA account in March 2018. Now I am not sure why those amounts.

So is $6500 the non deductible basis? Will I still pay tax when I do take the $6500 + out in the future?

Thanks in advance for any help.

MotoTrojan
Posts: 3793
Joined: Wed Feb 01, 2017 8:39 pm

Re: A separate traditional IRA acccount?

Post by MotoTrojan » Sun Apr 07, 2019 10:13 am

annabel wrote:
Sun Apr 07, 2019 10:09 am
I guess I am confused right now and may have misunderstood things I read.

https://www.irs.gov/retirement-plans/ir ... tributions

"Can I recharacterize a rollover or conversion to a Roth IRA?
Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans."

I did file Form 8606 (non deductible contribution) for $6500 for tax 2017 in March 2018. And Vanguard shows two cash amount ($6,570.39+$1,577.29) to the brand new TIRA account in March 2018. Now I am not sure why those amounts.

So is $6500 the non deductible basis? Will I still pay tax when I do take the $6500 + out in the future?

Thanks in advance for any help.
Nowhere in this tax can I find any exclusions for converting a tIRA to Roth, it just cannot be unwound via a recharacterization. You said "converted/recharacterized" but those are two different things.

You should convert. Sadly you'll pay tax on the gains that occurred in the last "few" years. Holding a post-tax IRA is in most cases worse than taxable, and it is preventing you from doing a proper backdoor without prorata taxation.

Also hopefully you've been filling the proper tax-forms EVERY year to track the basis in your post-tax tIRA.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Sun Apr 07, 2019 10:46 am

Hi,

My head is not working well right now.

I over contributed it in 2017 and moved it to TIRA in March 2018 before the tax filing due date so I didn't get any penalty. I did file form 8606 for the $6500.

If I convert it back to Roth now then anything over $6500 is my gain and I will have to pay tax for it. correct?

Thanks for any help in advance.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Sun Apr 07, 2019 11:28 am

annabel wrote:
Fri Apr 05, 2019 3:53 pm
I over contributed ROTH IRA a few years back and converted/recharacterized it to a brand new Traditional IRA account in time so there was no penalty.
Sometimes terminology matters a lot. This is one of them. You did not convert to a brand new Traditional IRA. You recharacterized it.

When talking about IRAs, the word "convert" has a very specific meaning. You "convert" from tIRA to Roth IRA but not the other way around.

Now I want to do backdoor ROTH IRA. I think another brand new Traditional IRA account should be established so I won't mess up the one has the recharacterized money mentioned above since IRS says we can't move the recharacterized money back to ROTH IRA.
You do not need another tIRA. You can convert what you have to Roth IRA any time you want. (There used to be a waiting requirement on this, but no more).

1. Is my plan a good plan? Create a second traditional IRA account.
No. Do not do this.

2. Is there any limit of contribution to the Traditional IRA per year per person? My understanding after googling is there is none.
Yes, there is always a limit to contribute to IRA. This year it is $6k if you are under 50. The $6k can go into traditional IRA or Roth IRA or a combination of the two. Hard to understand how googling did not reveal this.

3. I believe I won't have to pay tax for the first Traditional IRA account when I do take the money out since it was from ROTH IRA and I didn't benefit any tax deductible. Am I right?
You are kind of right, but not because it came from Roth IRA. You won't pay tax on it because it was a non-deductible contribution and you documented that on the Form 8606 I think. That needs to be clarified.

I guess I am confused right now and may have misunderstood things I read.

https://www.irs.gov/retirement-plans/ir ... tributions

"Can I recharacterize a rollover or conversion to a Roth IRA?
Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans."
That is correct. But it does not apply to what you are doing. You can no longer recharacterize a Roth conversion. That is not what you are doing.

I did file Form 8606 (non deductible contribution) for $6500 for tax 2017 in March 2018.
Was this the excess contribution to Roth that you mentioned in your first post? The one you recharacterized to tIRA?

And Vanguard shows two cash amount ($6,570.39+$1,577.29) to the brand new TIRA account in March 2018. Now I am not sure why those amounts.
I'm guessing that the $6,570 was your excess Roth contribution and it's earnings - the money that was recharacterized to tIRA and became your non-deductible contribution for 2017.

Is it possible that the $1,577 was a non-deductible contribution to tiRA for 2018? If yes, how much did you contribute?

You keep mentioning "brand new TIRA account". Do you have any other IRA accounts? SEP? SIMPLE? Rollover?

So is $6500 the non deductible basis? Will I still pay tax when I do take the $6500 + out in the future?
It appears it is your basis. You will not pay tax on the $6,500 again if you do the paperwork right.

User avatar
Earl Lemongrab
Posts: 7004
Joined: Tue Jun 10, 2014 1:14 am

Re: A separate traditional IRA acccount?

Post by Earl Lemongrab » Sun Apr 07, 2019 11:41 am

annabel wrote:
Sun Apr 07, 2019 10:46 am
If I convert it back to Roth now then anything over $6500 is my gain and I will have to pay tax for it. correct?
There's nothing special about the situation. Any time you convert an amount in a TIRA, no matter how it got there, the taxes are based on the pro-rated amount of taxable and non-taxable. If it's a complete conversion, then the net taxes will be on all of the pretax amount. In your example that's the earnings.

People get confused because they think there are some special rules for backdoor Roth. There aren't. There are two separate sets of rules that have to do with contributions and conversions. They have no connection, other than there has to be money in a TIRA or other retirement account (401(k) etc.) to be able to do a conversion.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Sun Apr 07, 2019 12:06 pm

Hi,

I think I have better understanding of what I had done now. (My memory is not as good as before. I should have written it down last year.)

I realized in March 2018 that I over contributed $6500 in 2017 and $1624 in 2018. So I opened a TIRA in Vanguard in March 2018 and recharacterized them into a TIRA. And two cash amounts went into that account ($6570 and $1577). I did file Form 8606 of $6500 for tax year 2017. But I didn't file $1624 for tax year 2018 (this year).

1. Should I have filed Form 8606 for 2018 for that $1624? Vanguard didn't send me any document this year. Should they? I had already e-filed my tax for 2018.
2. Does it mean I have a loss for that $1624 since only $1577 went into the TIRA?
3. Is my after tax basis $6570 for 2017 and $1577 for 2018?
4. If I convert everything from the TIRA to Roth IRA now, I will need to pay tax on the gain (X-6570=?) and (Y-1577=?). X+Y = z will be the current balance in the TIRA now, correct?
5. How will I go about in (4)? What tax form will I need to use?

Thanks for any help in advance.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Sun Apr 07, 2019 12:34 pm

annabel wrote:
Sun Apr 07, 2019 12:06 pm
I realized in March 2018 that I over contributed $6500 in 2017 and $1624 in 2018. So I opened a TIRA in Vanguard in March 2018 and recharacterized them into a TIRA. And two cash amounts went into that account ($6570 and $1577).I did file Form 8606 of $6500 for tax year 2017. But I didn't file $1624 for tax year 2018 (this year).

1. Should I have filed Form 8606 for 2018 for that $1624?
Yes, you need to file a 2018 Form 8606 to document your $1,624 non-deductible contribution in 2018. That can still be done. You can fill it in by hand and sign it and send it to the IRS without amending your return.

Your 2018 8606 will bring forward the $6,500 basis from the 2017 Form. Line 14 at the bottom should show that you have a total of $8,124.

Vanguard didn't send me any document this year. Should they? I had already e-filed my tax for 2018.
Vanguard should not send you any form for this. They do not know if you deducted that contribution to IRA or not.

2. Does it mean I have a loss for that $1,624 since only $1577 went into the TIRA?
Do not be concerned about this. Your basis is your basis.

3. Is my after tax basis $6570 for 2017 and $1577 for 2018?
No, your basis is $6,500 for 2017 and $1,624 for 2018. A recharacterization makes things as if you put the money in the tIRA in the first place.

4. If I convert everything from the TIRA to Roth IRA now, I will need to pay tax on the gain (X-6570=?) and (Y-1577=?). X+Y = z will be the current balance in the TIRA now, correct?
Right idea, wrong numbers. Your basis is $8,124. When you convert, you will pay tax on anything over that.

5. How will I go about in (4)? What tax form will I need to use?
You will use the back side of the 2019 Form 8606 to figure out the taxable portion of your Roth conversion. Write yourself a note to expect a 1099 next year for this Roth conversion.


You didn't answer the question about having other IRAs. That will change everything.

User avatar
Earl Lemongrab
Posts: 7004
Joined: Tue Jun 10, 2014 1:14 am

Re: A separate traditional IRA acccount?

Post by Earl Lemongrab » Sun Apr 07, 2019 12:36 pm

Unless you want to turn non-taxable into taxable, then you need to file 8606. That form can be filed on its own. Get the fillable PDF, fill it out, and send it in. Or go back through you tax software, answer the questions about making an IRA contribution, and print the 8606 it will generate.
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
LadyGeek
Site Admin
Posts: 52768
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: A separate traditional IRA acccount?

Post by LadyGeek » Sun Apr 07, 2019 1:05 pm

one sleepy kitty has a question which I've moved into a new thread. See: [My retirement portfolio]
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Mon Apr 08, 2019 8:39 pm

Hi,

Thank you very much to everyone spending time and patiently teaching me here.I am getting to understand my issue better now.

I don't have any other IRA except one Roth IRA in Vanguard and another old Roth IRA in TDAmeritrade. I don't have SEP or SIMPLE.

I will fill out the form 8606 (line 14) with $1624 this week for the 2018 tax year on my TurboTax. And this will bring the total of $8124.

I plan to convert everything from the TIRA to Roth IRA after 4/5/19 as soon as possible. And my basis will be $8124. Next year I will get 1099 from Vanguard. I will pay tax for the portion of (current balance - $8124).

Hopefully I understand everything 100% now.

Thanks again for all the help here.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Tue Apr 09, 2019 6:58 am

annabel wrote:
Mon Apr 08, 2019 8:39 pm
I will fill out the form 8606 (line 14) with $1624 this week for the 2018 tax year on my TurboTax. And this will bring the total of $8124.
The $1,624 does not go on line 14. It goes on line 1. :happy

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Tue Apr 09, 2019 8:45 am

Thank you very much.
I will put $1624 on line 1.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Tue Apr 09, 2019 3:24 pm

You need to fill out some other lines as well. See if you can figure it out. Read the form carefully (and read the Form instructions for line 2). If you need help after reading it carefully, just ask.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Thu Apr 11, 2019 7:24 pm

Hi,

I just used TurboTax for the IRA section. (I guess I forgot about the 2018 re-characterization when I was working on the tax last month. So I just skipped that whole IRA section.) I hope I did it right today. Right now the form 8606 shows
line 1 = 1625 (round up from 1,624.98)
line 2 = 6500
line 3 = 8125
line 14 = 8125
That is it.

To-do list:
1. I will mail this Form 8606 to the Fed IRS this weekend.
2. Next week I will tell Vanguard to 'convert' all $X from the TIRA to my Roth IRA. I will pay tax on the portion ($X- $8125 = $Y) in 2019 when I fill out tax form in 2019.
3. A week after next week, I will put $7000? or ($7000 - $Y)? to the TIRA and wait for a few days then ask Vanguard to convert it to Roth IRA. And I will pay tax for the whole amount in 2019 when I fill out tax form.

I think my to do list is good now. Except I am not sure it should be $7000 or ($7000 - $Y) for my situation since there is $7000 limit per year.

Thanks for any help in advance.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Fri Apr 12, 2019 5:59 am

annabel wrote:
Thu Apr 11, 2019 7:24 pm
Hi,

I just used TurboTax for the IRA section. (I guess I forgot about the 2018 re-characterization when I was working on the tax last month. So I just skipped that whole IRA section.) I hope I did it right today. Right now the form 8606 shows
line 1 = 1625 (round up from 1,624.98)
line 2 = 6500
line 3 = 8125
line 14 = 8125
That is it.
This is correct.

To-do list:
1. I will mail this Form 8606 to the Fed IRS this weekend. yes

2. Next week I will tell Vanguard to 'convert' all $X from the TIRA to my Roth IRA. I will pay tax on the portion ($X- $8125 = $Y) in 2019 when I fill out tax form in 2019. yes, except there is no need to wait till next week

3. A week after next week, I will put $7000? or ($7000 - $Y)? to the TIRA and wait for a few days then ask Vanguard to convert it to Roth IRA. And I will pay tax for the whole amount in 2019 when I fill out tax form. First, are you sure you still need to use the back door rather than contribute directly to Roth IRA? The contribution limit is $7k if you are over 50. There is no need to subtract Y. Most importantly, you will not pay tax on it when you convert.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Fri Apr 12, 2019 10:50 am

Hi,

3. How come I won't need to pay tax in 2020 when I convert the new $7000 from TIRA to Roth next week? Because it is not deductible?
Our income level doesn't allow us to contribute to Roth IRA any more.

Thanks for any help in advance.

Spirit Rider
Posts: 10305
Joined: Fri Mar 02, 2007 2:39 pm

Re: A separate traditional IRA acccount?

Post by Spirit Rider » Fri Apr 12, 2019 12:13 pm

There is no reason for two separate Roth conversions. Both conversions in 2019 will be reported on a single line on your 2019 Form 8606 anyway.

Wait until the middle of next week just to make sure, contribute a 2019 $7,000 non-deductible traditional IRA contribution, when that clears do a Roth conversion of the entire balance involving all prior non-deductible contributions and little if any earnings.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Fri Apr 12, 2019 12:28 pm

Thank you very much to all who have helped me here. I am very grateful to all your help.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Sat Apr 13, 2019 9:05 am

annabel wrote:
Fri Apr 12, 2019 10:50 am
Because it is not deductible?
Yes. Your income is too high to deduct it from your taxable income, so it has already been taxed. No need to tax it again.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Sat Apr 13, 2019 9:34 am

Hi,

Then why do I need to pay tax on the portion over basis (= earnings) for converting money from current TIRA back to Roth IRA? I paid tax on the money I put into Roth IRA in the first place already. Is this a timing thing because I will move the new $7000 from TIRA to Roth IRA right away so likely no earnings will occur?

Thanks for any help in advance.

nolesrule
Posts: 1173
Joined: Thu Feb 26, 2015 10:59 am

Re: A separate traditional IRA acccount?

Post by nolesrule » Sat Apr 13, 2019 10:30 am

annabel wrote:
Sat Apr 13, 2019 9:34 am
Hi,

Then why do I need to pay tax on the portion over basis (= earnings) for converting money from current TIRA back to Roth IRA? I paid tax on the money I put into Roth IRA in the first place already. Is this a timing thing because I will move the new $7000 from TIRA to Roth IRA right away so likely no earnings will occur?

Thanks for any help in advance.
Because when you convert money in a TIRA to Roth that has not been taxed yet, you must pay taxes on it. You do not pay tax on non-deductible contributions because you did not take a tax deduction on the contribution, but any earnings in the TIRA will always be pre-tax.

When you recharacterized the contribution from Roth to Traditional, it's as if the you had always made the contribution to Traditional, so the rules for Traditional IRAs apply to both the contribution and earnings.

Spirit Rider
Posts: 10305
Joined: Fri Mar 02, 2007 2:39 pm

Re: A separate traditional IRA acccount?

Post by Spirit Rider » Sat Apr 13, 2019 10:32 am

annabel wrote:
Sat Apr 13, 2019 9:34 am
Then why do I need to pay tax on the portion over basis (= earnings) for converting money from current TIRA back to Roth IRA? I paid tax on the money I put into Roth IRA in the first place already. Is this a timing thing because I will move the new $7000 from TIRA to Roth IRA right away so likely no earnings will occur?
You paid taxes on the non-deductivle contribution, but unlike a Roth IRA, all earnings in a traditional IRA account are taxable.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Sat Apr 13, 2019 11:21 am

Hi,

So if I let the new $7000 sit too long in TIRA before I move it to Roth IRA and end up with some earnings then I will need to pay tax on the earnings. Correct? Therefore I should not let it stay in TIRA too long.

Thanks for any help in advance.

User avatar
Earl Lemongrab
Posts: 7004
Joined: Tue Jun 10, 2014 1:14 am

Re: A separate traditional IRA acccount?

Post by Earl Lemongrab » Sat Apr 13, 2019 11:34 am

annabel wrote:
Sat Apr 13, 2019 11:21 am
Hi,

So if I let the new $7000 sit too long in TIRA before I move it to Roth IRA and end up with some earnings then I will need to pay tax on the earnings. Correct? Therefore I should not let it stay in TIRA too long.

Thanks for any help in advance.
Well, yeah. If you didn't pay tax on the growth, why would you need to convert to Roth?
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Sun Apr 14, 2019 7:01 am

annabel wrote:
Sat Apr 13, 2019 11:21 am
So if I let the new $7000 sit too long in TIRA before I move it to Roth IRA and end up with some earnings then I will need to pay tax on the earnings. Correct? Therefore I should not let it stay in TIRA too long.
Correct.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Tue Apr 16, 2019 12:48 pm

Hi,

Thank you.

One more question. My husband has a TIRA (He did take the tax deductible when he put money into it in the past.) and has no idea of the basis (He didn't keep track.) so he is going to leave it alone and pay tax when he has to take the distribution several years later. If he wants to start a backdoor Roth IRA, it will be better to open another TIRA then start moving money there to his Roth IRA, right?

Thanks for any help in advance.

User avatar
Earl Lemongrab
Posts: 7004
Joined: Tue Jun 10, 2014 1:14 am

Re: A separate traditional IRA acccount?

Post by Earl Lemongrab » Tue Apr 16, 2019 1:03 pm

annabel wrote:
Tue Apr 16, 2019 12:48 pm
One more question. My husband has a TIRA (He did take the tax deductible when he put money into it in the past.) and has no idea of the basis (He didn't keep track.) so he is going to leave it alone and pay tax when he has to take the distribution several years later. If he wants to start a backdoor Roth IRA, it will be better to open another TIRA then start moving money there to his Roth IRA, right?
No, you can't escape pro-rata by opening another account. All TIRAs, including SEP and SIMPLE, are lumped together. Did he make any non-deductible contributions to it previously, or did he deduct them all? If the latter, then the basis is 0.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Tue Apr 16, 2019 3:06 pm

annabel wrote:
Tue Apr 16, 2019 12:48 pm
Hi,

Thank you.

One more question. My husband has a TIRA (He did take the tax deductible when he put money into it in the past.) and has no idea of the basis (He didn't keep track.) so he is going to leave it alone and pay tax when he has to take the distribution several years later. If he wants to start a backdoor Roth IRA, it will be better to open another TIRA then start moving money there to his Roth IRA, right?

Thanks for any help in advance.
If he deducted the contributions from his taxable income in the past, there is no basis. "Basis" is already taxed money.

He should NOT use the back door to contribute to Roth IRA because that tIRA will be pro-rated with it. Just put the money in a taxable account.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Wed Apr 17, 2019 9:05 am

Hi,

OK. Got it. The deductible TIRA has no basis because it was never taxed.

Why shouldn't my husband use backdoor Roth IRA? I thought the whole purpose of using backdoor Roth IRA is not to pay tax on earning in Roth when we take the money out of Roth years later. If he put the money in a taxable account then we are not taking advantage of Roth at all.

Thanks for any help in advance.

nolesrule
Posts: 1173
Joined: Thu Feb 26, 2015 10:59 am

Re: A separate traditional IRA acccount?

Post by nolesrule » Wed Apr 17, 2019 9:13 am

annabel wrote:
Wed Apr 17, 2019 9:05 am
Hi,

OK. Got it. The deductible TIRA has no basis because it was never taxed.

Why shouldn't my husband use backdoor Roth IRA? I thought the whole purpose of using backdoor Roth IRA is not to pay tax on earning in Roth when we take the money out of Roth years later. If he put the money in a taxable account then we are not taking advantage of Roth at all.

Thanks for any help in advance.
Backdoor Roth is making a non-deductible contribution to a Traditional IRA (after-tax) and then converting to Roth. if you have pre-tax (already deducted) money in a Traditional IRA, then the conversion will be a proportional mix of pre-tax and after-tax money based on the balance in the Traditional IRA. You will pay taxes on any pre-tax money that is converted at your ordinary income tax rate. If you have a large pre-tax balance relative to the non-deductible contribution, it will be mostly taxable at your current ordinary income tax rate.

Spirit Rider
Posts: 10305
Joined: Fri Mar 02, 2007 2:39 pm

Re: A separate traditional IRA acccount?

Post by Spirit Rider » Wed Apr 17, 2019 9:22 am

I'm not sure you fully understand. The question is whether the traditional IRA contribution(s) was deducted or not. Any deducted traditional IRA contributions are pre-tax (meaning they have not been taxed). If they were not deducted, they were non-deductible contributions and they should have been reported as such on a Form 8606 for the tax year of the contribution. This then becomes an accumulating non-deductible basis.

Then @norules point is important. Any Roth conversion takes into account all pre-tax balances in all traditional, SEP and SIMPLE IRA accounts. If there is a partial rollover of the total of all pre-tax and non-deductible basis, a pro-rated amount of the pre-tax balances are included and taxable. If the entire balance is converted, the non-deductible basis is tax free, but all of the pre-tax balance in taxable.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Wed Apr 17, 2019 11:49 am

Hi,

Thanks for all the explanation.

I understand that his TIRA was all deductible from tax when he put the money in. But I am thinking he can add $7000 into it this month then convert that $7000 to Roth IRA right away. I plan to do the same way for myself too. And we will do that every year from now on to take advantage of backdoor Roth IRA. We will pay tax for all the current TIRA (before the new $7000 we are thinking about) when he takes the money out years later.

Thanks for any help in advance.

Spirit Rider
Posts: 10305
Joined: Fri Mar 02, 2007 2:39 pm

Re: A separate traditional IRA acccount?

Post by Spirit Rider » Wed Apr 17, 2019 11:59 am

You are still not understanding. If there are any pre-tax balances in any IRA and you make a $7,000 non-deductible contribution and do a $7,000 Roth conversion. A pro-rata amount of that conversion will be taxable.

nolesrule
Posts: 1173
Joined: Thu Feb 26, 2015 10:59 am

Re: A separate traditional IRA acccount?

Post by nolesrule » Wed Apr 17, 2019 12:29 pm

Let's use some numbers for an actual example.

Let's say the current pre-tax balance in the TIRA is $50,000. You make a $7,000 non-deductible contribution and convert $7,000. The percentage of pre-tax money in the year of the conversion is 87.7% ( 50k / ($57k) ). The conversion will increase your taxable income by $6140. You will pay taxes on $6140 of the $7000 conversion in the year of the conversion. $860 of the conversion will be non-taxable. You will then have a TIRA of $50,000 with $43,860 in pre-tax money and $6140 of after-tax money.
Last edited by nolesrule on Wed Apr 17, 2019 3:46 pm, edited 1 time in total.

Topic Author
annabel
Posts: 75
Joined: Mon May 19, 2014 11:32 am

Re: A separate traditional IRA acccount?

Post by annabel » Wed Apr 17, 2019 2:59 pm

Hi,

Thank you very much using the actual number to demonstrate. Thanks for being patient with me. I do need the education and that is why I am here.

I understand we will have to pay tax for $6140 because the $50000 is 87.7% of $57000. And $7000 * 87.7% = $6140.
1. I don't understand how $43,680 is calculated though.
2. Can I convert more than $7000 from TIRA to Roth per year?

Thanks for any help in advance.

nolesrule
Posts: 1173
Joined: Thu Feb 26, 2015 10:59 am

Re: A separate traditional IRA acccount?

Post by nolesrule » Wed Apr 17, 2019 3:22 pm

annabel wrote:
Wed Apr 17, 2019 2:59 pm
Hi,

Thank you very much using the actual number to demonstrate. Thanks for being patient with me. I do need the education and that is why I am here.

I understand we will have to pay tax for $6140 because the $50000 is 87.7% of $57000. And $7000 * 87.7% = $6140.
1. I don't understand how $43,680 is calculated though.
2. Can I convert more than $7000 from TIRA to Roth per year?

Thanks for any help in advance.
When you do a conversion and you have a prorated conversion amount, part of the after-tax money stays behind in the Traditional IRA as basis. This is why you aren't actually double taxed.

So if you have $50k* add $7k after-tax and convert $7k you are left with $50k as the account balance. Of the $7k converted, $6140 was pre-tax and $860 was after-tax. So, of the remaining balance, $6140 is after-tax, and the rest ($43860) is pre-tax.

If you do this year after year, you will have to carryover the remaining after-tax basis when doing the conversion taxable amount calculations. The IRS uses Form 8606 to track basis in traditional IRA and calculate taxable amounts of distributions and conversions. If basis remains in a TIRA, you will carry it over from the previous year's Form 8606 to include in the next year's calculations.

You will be tied to this form and a mix of pre-tax and after-tax money in traditional IRAs until all Traditional IRA is empty.

* The number used here is the balance of all traditional IRAs on December 31 in the year of the conversion, not the balance atthe time of the conversion. See From 8606.

Edited to fix my transposed numbers.
Last edited by nolesrule on Wed Apr 17, 2019 3:46 pm, edited 1 time in total.

Spirit Rider
Posts: 10305
Joined: Fri Mar 02, 2007 2:39 pm

Re: A separate traditional IRA acccount?

Post by Spirit Rider » Wed Apr 17, 2019 3:42 pm

If you are currently employed* with a 401k, 403b or 457b plan that accepts IRA rollovers. You can rollover only the pre-tax IRA balances in all IRAs. Then you can do a Roth conversion of the remaining non-deductible basis with little to no tax liability.

*It is not common, but a small minority of plans such as the TSP will accept IRA rollovers after separation.

diy60
Posts: 249
Joined: Wed Sep 07, 2016 6:54 pm

Re: A separate traditional IRA acccount?

Post by diy60 » Wed Apr 17, 2019 3:43 pm

nolesrule wrote:
Wed Apr 17, 2019 3:22 pm
So, of the remaining balance, $6140 is after-tax, and the rest ($43680) is pre-tax.
* The number used here is the balance of all traditional IRAs on December 31 in the year of the conversion, not the balance atthe time of the conversion. See From 8606.
I think it should be $6140 after tax, $43860 pre tax. ( 50,000 - 6140 = 43860)

nolesrule
Posts: 1173
Joined: Thu Feb 26, 2015 10:59 am

Re: A separate traditional IRA acccount?

Post by nolesrule » Wed Apr 17, 2019 3:45 pm

diy60 wrote:
Wed Apr 17, 2019 3:43 pm
nolesrule wrote:
Wed Apr 17, 2019 3:22 pm
So, of the remaining balance, $6140 is after-tax, and the rest ($43680) is pre-tax.
* The number used here is the balance of all traditional IRAs on December 31 in the year of the conversion, not the balance atthe time of the conversion. See From 8606.
I think it should be $6140 after tax, $43860 pre tax. ( 50,000 - 6140 = 43860)
Yeah, I transposed the numbers. Thanks. I fixed my posts.

User avatar
Duckie
Posts: 6504
Joined: Thu Mar 08, 2007 2:55 pm

Re: A separate traditional IRA acccount?

Post by Duckie » Wed Apr 17, 2019 5:23 pm

annabel wrote:Can I convert more than $7000 from TIRA to Roth per year?
Yes, but now you're talking about a regular conversion, not the backdoor method.

retiredjg
Posts: 35707
Joined: Thu Jan 10, 2008 12:56 pm

Re: A separate traditional IRA acccount?

Post by retiredjg » Thu Apr 18, 2019 4:15 pm

Anabel, as I understand it, you and your husband currently make too much money to contribute directly to Roth IRA. You do not have any other IRAs (except Roth) so it is OK for you to use the back door as long as you can figure out the paperwork.

Your husband does have an IRA although I don't think we know how much money is in it. The presence of his IRA makes his doing the back door a poor idea because the 2019 non-deductible contribution will be pro-rated with his other IRA and that will cause tax to be paid on his back door at your current tax rate. Unless his IRA is small it is likely better for him to just put the money into a taxable account instead of into Roth IRA.

If he has a 401k or 403b or 457 plan, he could roll his IRA into that (if the plan is willing to receive it) and then he could also do the back door without pro-rating.

My suggestion is to put his situation on hold for awhile. After you have done the conversion paperwork for your own Roth IRA, you may understand this process better. The back door is easy to do but the paperwork can be challenging. Get yours figured out and then decide if it is worth the trouble for him to get involved with this as well.

It will not make a great deal of difference in the long run if his $7k goes into Roth or into taxable. The important thing is to save money. What account it gets saved in is less important.

Post Reply