Backdoor Roth - should I convert or rollover my Trad IRA?

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NewbieBogle007
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Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Tue Jan 14, 2020 8:59 pm

I'm planning on doing a backdoor Roth this month because my income will be too high this year to contribute to a Roth IRA. I have all of my retirement funds in a work 403B, work Roth 457, Roth IRA, with the exception of about $300 in a traditional IRA (which is a remnant from a recharacterization I did many years ago). Reading up on how to proceed, I understand that I need to nix the traditional IRA -- but I am not sure if it would be best to rollover the $300 into my work 403b (my job says it can be done), or just convert the traditional to Roth and pay the tax. What would be the easiest and most cost-effective?

Silk McCue
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by Silk McCue » Tue Jan 14, 2020 9:04 pm

Whatever is easiest. The tax on converting $300 isn’t going to change your life one way or the other.

It will be great to be able to perform the Backdoor Roths. I would say converting the $300 would be much easier and requires substantially less time.

Cheers

Mtmp8888
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by Mtmp8888 » Tue Jan 14, 2020 9:09 pm

I’d just convert all... tax on $300 shouldn’t be that much...

mhalley
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by mhalley » Wed Jan 15, 2020 2:55 am

Another vote on convert. Easy peasy, lemon squeezy.

campy2010
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by campy2010 » Wed Jan 15, 2020 3:28 am

If you were to rollover your $300 into your 403b then the pro rata rule would still apply until 2021. So yes, convert it and pay the taxes.

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neurosphere
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by neurosphere » Wed Jan 15, 2020 4:30 am

campy2010 wrote:
Wed Jan 15, 2020 3:28 am
If you were to rollover your $300 into your 403b then the pro rata rule would still apply until 2021. So yes, convert it and pay the taxes.
I'm not sure that's true. It's the value in the IRA as of Dec 31st that's important. As an example, one could contribute $6000 to IRA #1, convert it to Roth, and then later rollover IRA #2 which already had $$ into a 401k. No tax would be due on the conversion.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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neurosphere
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by neurosphere » Wed Jan 15, 2020 4:30 am

campy2010 wrote:
Wed Jan 15, 2020 3:28 am
If you were to rollover your $300 into your 403b then the pro rata rule would still apply until 2021. So yes, convert it and pay the taxes.
I'm not sure that's true. It's the value in the IRA as of Dec 31st that's important. As an example, one could contribute $6000 to IRA #1, convert it to Roth, and then later rollover IRA #2 which already had $$ into a 401k. No tax would be due on the conversion.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

Silk McCue
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by Silk McCue » Wed Jan 15, 2020 8:06 am

campy2010 wrote:
Wed Jan 15, 2020 3:28 am
If you were to rollover your $300 into your 403b then the pro rata rule would still apply until 2021. So yes, convert it and pay the taxes.
This is not correct. The 403b is not an IRA and therefore the balance after the transaction will have $0 in any IRA on 12/31/2020. The only date that matters is 12/31 of the year in which the Backdoor Roth conversion occurs.

Cheers

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NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Sun Jan 19, 2020 1:14 am

Thanks for all the replies. So How should I proceed? Do I put $6k into the Traditional IRA that contains the $300, and then transfer all of it over to my current Roth IRA?

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BL
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by BL » Sun Jan 19, 2020 1:59 am

Sounds good. Quick and easy, and set up for future backdoors as well.

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Wiggums
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by Wiggums » Sun Jan 19, 2020 5:30 am

Mtmp8888 wrote:
Tue Jan 14, 2020 9:09 pm
I’d just convert all... tax on $300 shouldn’t be that much...
+1

Topic Author
NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Mon Jan 20, 2020 1:16 am

By doing this, how is it clear that only the $300 is being taxed for the conversion to Roth, and not the full $6300?

lakpr
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by lakpr » Mon Jan 20, 2020 4:50 am

NewbieBogle007 wrote:
Mon Jan 20, 2020 1:16 am
By doing this, how is it clear that only the $300 is being taxed for the conversion to Roth, and not the full $6300?
Please work through the Form 8606 manually, and pay special attention on lines 8 and 11 in the form. It is not that difficult, and does not require any other information. You will see that only $300 gets taxed

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NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Mon Jan 20, 2020 5:17 pm

Thanks.
Do I instruct Vanguard to withold federal income tax?

Silk McCue
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by Silk McCue » Mon Jan 20, 2020 5:43 pm

NewbieBogle007 wrote:
Mon Jan 20, 2020 5:17 pm
Thanks.
Do I instruct Vanguard to withold federal income tax?
No. That way it all goes into the Roth. Just pay the tax on next years return.

Cheers

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Mon Jan 20, 2020 5:44 pm

NewbieBogle007 wrote:
Sun Jan 19, 2020 1:14 am
Thanks for all the replies. So How should I proceed? Do I put $6k into the Traditional IRA that contains the $300, and then transfer all of it over to my current Roth IRA?
That would work.

By doing this, how is it clear that only the $300 is being taxed for the conversion to Roth, and not the full $6300?
The Form 8606 takes care of this. Do not venture into backdoor-land without a thorough understanding of this form.

Do I instruct Vanguard to withold federal income tax?
No. That would be an early withdrawal unless you are already 59.5.

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NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Mon Jan 20, 2020 6:04 pm

Thanks for the replies.
So does Vanguard generate a tax form that I plug into my tax software to account for this? Or do I actually have to fill out that 8606 (just glancing at it makes me sleepy). Thanks!

Silk McCue
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by Silk McCue » Mon Jan 20, 2020 6:23 pm

NewbieBogle007 wrote:
Mon Jan 20, 2020 6:04 pm
Thanks for the replies.
So does Vanguard generate a tax form that I plug into my tax software to account for this? Or do I actually have to fill out that 8606 (just glancing at it makes me sleepy). Thanks!
Time to step up. Lakpr told you about needing to get familiar with the 8606 and what to pay attention to.

The tax form from VG and your tax software isn’t going to make this happen without your active attention to detail in order to ensure you file the information properly.

Cheers

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Mon Jan 20, 2020 6:27 pm

NewbieBogle007 wrote:
Mon Jan 20, 2020 6:04 pm
Thanks for the replies.
So does Vanguard generate a tax form that I plug into my tax software to account for this? Or do I actually have to fill out that 8606 (just glancing at it makes me sleepy). Thanks!
You need to become one with this form. :happy

No. That is not a joke. Vanguard does not send you any form that you just plug in like a 1099. They do not know what you are doing on your taxes.

If you don't understand this process and it's paperwork fully, you will likely just be another person who messes it up and then comes here in a panic to get it fixed 2 years later after getting a letter from the IRS.

This is why I stopped recommending the "back door" several years ago.

Not kidding about that either. :happy Too many people mess it up.

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NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Mon Jan 20, 2020 7:26 pm

Haha okay guys. I'll have to study the form then.
Another question - if I am not 100% sure I'll be over the income limit that will disqualify me from doing a regular Roth this year, should I just wait to do this at the end of the year?

Silk McCue
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by Silk McCue » Mon Jan 20, 2020 7:48 pm

NewbieBogle007 wrote:
Mon Jan 20, 2020 7:26 pm
Haha okay guys. I'll have to study the form then.
Another question - if I am not 100% sure I'll be over the income limit that will disqualify me from doing a regular Roth this year, should I just wait to do this at the end of the year?
Convert the $300 tomorrow and put that behind you. Take a little bit of time to familiarize yourself with the 8606 now and then do the Backdoor Roth after that. Delaying is just going to make it harder to do later in the year and you will be back here having to ask questions again.

You can do this.

Cheers

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Mon Jan 20, 2020 7:50 pm

If you choose to use the back door, that can be done any time...regardless of whether you are over the limit or not.

If you want to try to do a direct contribution, it appears you need to wait til the end of the year and hope your situation is more clear.

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NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Mon Jan 20, 2020 8:13 pm

Thanks so much. As I understand it, there would be no downside to doing the backdoor Roth IRA contribution instead of a regular Roth IRA should my income fall below the income limit. Is this correct?

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Mon Jan 20, 2020 8:18 pm

That is correct. There is no requirement to be over the Roth IRA limit in order to use the back door.

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NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Mon Jan 20, 2020 10:06 pm

So I'm reading the instructions and here it reads:

"To verify the nontaxable part of distributions from your IRAs, including Roth IRAs, keep a copy of the following forms and records until all distributions are made.

Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.

Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years...
"


Am I really supposed to hold onto these 8606 forms every year for the next 30 years?

S_Track
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by S_Track » Mon Jan 20, 2020 10:51 pm

NewbieBogle007 wrote:
Mon Jan 20, 2020 7:26 pm
Haha okay guys. I'll have to study the form then.
Another question - if I am not 100% sure I'll be over the income limit that will disqualify me from doing a regular Roth this year, should I just wait to do this at the end of the year?
In 2019 I converted my Trad IRA to Roth. This past weekend I started to work through Turbo Tax, (VG had the 1099-R ready online) not too difficult and I believe I have it correct. My trad IRA was 2 years old so like you I had some gains but all contribution were non deductible. I converted 100%.

Two vids that helped me.

Explains the 8606: (I believe the author is a forum member)
https://www.youtube.com/watch?v=w244kccgl84

Explains Turbo Tax procedure.
https://www.youtube.com/watch?v=eGvHZqD-QMQ
Last edited by S_Track on Mon Jan 20, 2020 10:57 pm, edited 1 time in total.

S_Track
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by S_Track » Mon Jan 20, 2020 10:55 pm

Deleted duplicate
Last edited by S_Track on Mon Jan 20, 2020 10:58 pm, edited 1 time in total.

HomeStretch
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by HomeStretch » Mon Jan 20, 2020 10:55 pm

NewbieBogle007 wrote:
Mon Jan 20, 2020 10:06 pm
So I'm reading the instructions and here it reads:

"To verify the nontaxable part of distributions from your IRAs, including Roth IRAs, keep a copy of the following forms and records until all distributions are made.

Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.

Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years...
"


Am I really supposed to hold onto these 8606 forms every year for the next 30 years?
Yes. I keep the documentation (including 5498/1099R) per the Form 8606 instructions you quoted, above. Scan it and it will take up very little storage space.

Topic Author
NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Mon Jan 20, 2020 11:12 pm

HomeStretch wrote:
Mon Jan 20, 2020 10:55 pm
NewbieBogle007 wrote:
Mon Jan 20, 2020 10:06 pm
So I'm reading the instructions and here it reads:

"To verify the nontaxable part of distributions from your IRAs, including Roth IRAs, keep a copy of the following forms and records until all distributions are made.

Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.

Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years...
"


Am I really supposed to hold onto these 8606 forms every year for the next 30 years?
Yes. I keep the documentation (including 5498/1099R) per the Form 8606 instructions you quoted, above. Scan it and it will take up very little storage space.
So these will need to be furnished for sure, or is it a "just in case" the IRS asks for them?

HomeStretch
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by HomeStretch » Mon Jan 20, 2020 11:55 pm

NewbieBogle007 wrote:
Mon Jan 20, 2020 11:12 pm
HomeStretch wrote:
Mon Jan 20, 2020 10:55 pm
NewbieBogle007 wrote:
Mon Jan 20, 2020 10:06 pm
So I'm reading the instructions and here it reads:

"To verify the nontaxable part of distributions from your IRAs, including Roth IRAs, keep a copy of the following forms and records until all distributions are made.

Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.

Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years...
"


Am I really supposed to hold onto these 8606 forms every year for the next 30 years?
Yes. I keep the documentation (including 5498/1099R) per the Form 8606 instructions you quoted, above. Scan it and it will take up very little storage space.
So these will need to be furnished for sure, or is it a "just in case" the IRS asks for them?
Just in case. Burden of proof is on the taxpayer.

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Tue Jan 21, 2020 7:04 am

NewbieBogle007 wrote:
Mon Jan 20, 2020 10:06 pm
Am I really supposed to hold onto these 8606 forms every year for the next 30 years?
Depends on how old you are. :happy And good for you for finding that.

If you ever want/need to take money out of Roth IRA before you are 59.5 years old, you have to know the original source and dates of the contributions in order to know if any of your withdrawal is taxable. This is because money is deemed to come out of the Roth IRA in a certain order (not necessarily the same order it went in there). The only way to do that is by having the records.

This website explains.

https://fairmark.com/retirement/roth-ac ... -overview/

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Tue Jan 21, 2020 7:15 am

S_Track wrote:
Mon Jan 20, 2020 10:51 pm
Two vids that helped me.

Explains the 8606: (I believe the author is a forum member)
https://www.youtube.com/watch?v=w244kccgl84

Explains Turbo Tax procedure.
https://www.youtube.com/watch?v=eGvHZqD-QMQ
Can't believe I've never seen either of these!

The first one is from White Coat Investor Jim Dahle who is a poster here. I have not watched the whole thing, but it should be correct. Not familiar with the other one.

I'll try to watch each of them soon because these videos could be very helpful in the upcoming months when we have so many questions on this issue.

Topic Author
NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Tue Jan 21, 2020 10:02 pm

HomeStretch wrote:
Mon Jan 20, 2020 11:55 pm
NewbieBogle007 wrote:
Mon Jan 20, 2020 11:12 pm
HomeStretch wrote:
Mon Jan 20, 2020 10:55 pm
NewbieBogle007 wrote:
Mon Jan 20, 2020 10:06 pm
So I'm reading the instructions and here it reads:

"To verify the nontaxable part of distributions from your IRAs, including Roth IRAs, keep a copy of the following forms and records until all distributions are made.

Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.

Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years...
"


Am I really supposed to hold onto these 8606 forms every year for the next 30 years?
Yes. I keep the documentation (including 5498/1099R) per the Form 8606 instructions you quoted, above. Scan it and it will take up very little storage space.
So these will need to be furnished for sure, or is it a "just in case" the IRS asks for them?
Just in case. Burden of proof is on the taxpayer.
Hmmm... I would have thought that if I'm submitting a Form 8606 to them year after year, they can refer to their own records if they have any questions.

Topic Author
NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Tue Jan 21, 2020 10:04 pm

retiredjg wrote:
Tue Jan 21, 2020 7:15 am
S_Track wrote:
Mon Jan 20, 2020 10:51 pm
Two vids that helped me.

Explains the 8606: (I believe the author is a forum member)
https://www.youtube.com/watch?v=w244kccgl84

Explains Turbo Tax procedure.
https://www.youtube.com/watch?v=eGvHZqD-QMQ
Can't believe I've never seen either of these!

The first one is from White Coat Investor Jim Dahle who is a poster here. I have not watched the whole thing, but it should be correct. Not familiar with the other one.

I'll try to watch each of them soon because these videos could be very helpful in the upcoming months when we have so many questions on this issue.

Wow - great links!

I also found this from Credit Karma Tax:

https://support.creditkarma.com/s/artic ... butions-US

Topic Author
NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Wed Jan 22, 2020 12:14 am

I worked through the Form 8606 (simulation for tax year 2019) but it doesn't look right. Where did I go wrong?

See here: https://ibb.co/vw2XsYH

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Wed Jan 22, 2020 6:33 am

They say it is ok to round to 3 decimal points, but leave them all in there. That changes the next line to 5,999.99 ($6000) which is what it should be. This also changes line 13, 14, and 17.

Your subtraction of line 17 from line 16 is incorrect. The taxable amount should be $300. :oops:

Good for you for doing this ahead of time!

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Wed Jan 22, 2020 6:38 am

NewbieBogle007 wrote:
Tue Jan 21, 2020 10:02 pm
Hmmm... I would have thought that if I'm submitting a Form 8606 to them year after year, they can refer to their own records if they have any questions.
I don't think this is about showing them anything.

Look at the instructions for Form 8606, Part III which is what you use if you take money out of Roth IRA. There is a worksheet in there to determine what might be taxable.

You are keeping all this information in case you ever need to fill out the worksheet....the Form 8606 is one part of that.

Topic Author
NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Wed Jan 22, 2020 8:01 pm

Thanks so much, everyone. I think I'm ready to do this.

Topic Author
NewbieBogle007
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by NewbieBogle007 » Wed Jan 22, 2020 8:02 pm

retiredjg wrote:
Wed Jan 22, 2020 6:33 am
They say it is ok to round to 3 decimal points, but leave them all in there. That changes the next line to 5,999.99 ($6000) which is what it should be. This also changes line 13, 14, and 17.

Your subtraction of line 17 from line 16 is incorrect. The taxable amount should be $300. :oops:

Good for you for doing this ahead of time!
:oops: :oops:

retiredjg
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Re: Backdoor Roth - should I convert or rollover my Trad IRA?

Post by retiredjg » Wed Jan 22, 2020 8:52 pm

NewbieBogle007 wrote:
Wed Jan 22, 2020 8:01 pm
Thanks so much, everyone. I think I'm ready to do this.
I think you are too. Wish more people would do that....

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