Backdoor ROTH IRA

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Topic Author
recklessmax
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Joined: Mon Feb 06, 2017 5:16 am

Backdoor ROTH IRA

Post by recklessmax »

Based on my income limits i am not eligible for ROTH IRA but I understand that irrespective of income limit i can do a backdoor ROTH
I was planning to do the backdoor ROTH with fidelity as i dont hold any IRAs with them for FY 2019

However i do hold a traditional IRA at vanguard . As per fidelity i can still do a backdoor ROTH with them without any consequences. However i read somewhere that in order to do a backdoor ROTH you should not be holding a traditional IRA account anywhere. Is this understanding accurate and would it trigger any tax consequences/penalties if i do a backdoor ROTH at fidelity ?

Can someone please clarify ? Thanks in advance
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KingRiggs
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Location: Indiana

Re: Backdoor ROTH IRA

Post by KingRiggs »

The IRS considers ALL your IRA accounts to be as one, regardless of type (traditional, Simple, SEP) or where you hold them.

If you had a non-zero balance in ANY IRA except Roth (BTW< Senator Roth did not spell it with all capitals), as of 12/31/2019, you will be subject to the pro rata rule.

It's not surprising that the Fidelity rep didn't know all the ins and outs of the backdoor Roth procedure, since it's not really an official thing...
Advice = noun | Advise = verb | | Roth, not ROTH
Silk McCue
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Re: Backdoor ROTH IRA

Post by Silk McCue »

KingRiggs wrote: Wed Mar 11, 2020 12:14 pm The IRS considers ALL your IRA accounts to be as one, regardless of type (traditional, Simple, SEP) or where you hold them.

If you had a non-zero balance in ANY IRA except Roth (BTW< Senator Roth did not spell it with all capitals), as of 12/31/2019, you will be subject to the pro rata rule.

It's not surprising that the Fidelity rep didn't know all the ins and outs of the backdoor Roth procedure, since it's not really an official thing...
+1

The Fidelity rep is absolutely wrong.

Cheers
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Backdoor ROTH IRA

Post by lakpr »

^^ What KingRiggs said.

You can take the following steps:
- Make a non-deductible contribution to a Traditional IRA, keep it in a money-market fund until the step below is completed
- Contact your 401k plan and Traditional IRA custodian, and initiate a rollover of the Traditional IRA to 401k
- Once the rollover is completed ... you actually see the money in your 401k balances ... then convert the n-d-tIRA to Roth.

Complete the first step before April 15th.
Then attempt to complete step-2, you have until the end of the year, obviously you don't want to dawdle too long.
If you hit a snag in that reverse-rollover step, you can ask the custodian to return your contributions as if it was never made.
If you did complete, proceed to the last step.
ososnilknarf
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Re: Backdoor ROTH IRA

Post by ososnilknarf »

I was in the same boat last year, and did a back-door Roth for the first time in 2019.
First I contacted my 401k provider and rolled my traditional IRA into my 401k to eliminate any pro-rata rule taxation.

Read this wiki page. It is extremely helpful in understanding it all:
https://www.bogleheads.org/wiki/Backdoor_Roth
Topic Author
recklessmax
Posts: 19
Joined: Mon Feb 06, 2017 5:16 am

Re: Backdoor ROTH IRA

Post by recklessmax »

lakpr wrote: Wed Mar 11, 2020 12:18 pm ^^ What KingRiggs said.

You can take the following steps:
- Make a non-deductible contribution to a Traditional IRA, keep it in a money-market fund until the step below is completed
- Contact your 401k plan and Traditional IRA custodian, and initiate a rollover of the Traditional IRA to 401k
- Once the rollover is completed ... you actually see the money in your 401k balances ... then convert the n-d-tIRA to Roth.

Complete the first step before April 15th.
Then attempt to complete step-2, you have until the end of the year, obviously you don't want to dawdle too long.
If you hit a snag in that reverse-rollover step, you can ask the custodian to return your contributions as if it was never made.
If you did complete, proceed to the last step.
Thanks for info provided earlier . this process got pushed out as the tax deadline was extended and im doing this now
2 questions

in step 1 You mentioned to keep money in money market till everything is completed. what happens to the interest earned
on 6K in the traditional IRA money market until all the other deductible traditional IRAs are moved to the 401K. this interest
will be taxable so where does that go ?

Also what is reverse rollover step if i hit a snag. u mean the after tax funds i invested into traditional IRA for 2019 can be returned back
if things dont work out ?

Thanks
Topic Author
recklessmax
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Re: Backdoor ROTH IRA

Post by recklessmax »

Thanks for info provided earlier by everyone . this process got pushed out as the tax deadline was extended and im doing this now

Im contributing non deductible 6K to the traditional IRA to do a backdoor roth before end of year by moving all my deductible IRA to the 401K
However what happens to the interest earned in the traditional IRA until all the process is completed. Since that interest is taxable where
does it go and how is it reported at time of conversion to Roth IRA

Also what is the general timeframe to effect the conversion. Does it take few days or weeks to do conversion from traditional to IRA by
the custodian

Thanks
02nz
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Re: Backdoor ROTH IRA

Post by 02nz »

recklessmax wrote: Mon Jul 13, 2020 5:40 pm Im contributing non deductible 6K to the traditional IRA to do a backdoor roth before end of year by moving all my deductible IRA to the 401K
However what happens to the interest earned in the traditional IRA until all the process is completed. Since that interest is taxable where
does it go and how is it reported at time of conversion to Roth IRA
The backdoor Roth is a two-step process, 1) contribute and 2) convert. They can be done a day or 10 years apart. Moving the tax-deferred IRA balance into your 401k - to avoid the pro-rata rule - only matters for the second step, conversion. It does not affect the contribution step at all. If you couldn't move the tax-deferred tIRA into a 401k, you could still make the nondeductible contribution every year, you just couldn't convert to Roth without the pro-rata rule applying.

The gains/interest between contribution and conversion are subject to income tax. It's reported on Form 8606.
recklessmax wrote: Mon Jul 13, 2020 5:40 pm Also what is the general timeframe to effect the conversion. Does it take few days or weeks to do conversion from traditional to IRA by
the custodian
It should be no more than one business day, maybe even same business day.
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celia
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Re: Backdoor ROTH IRA

Post by celia »

First, I want to make a correction to several posters above. All your traditional IRAs don't HAVE TO be empty at the end of the year. If they aren't, it just means the pro-rata rule will apply to the Roth conversion tax calculation. And the traditional IRAs don't HAVE TO be empty when the contribution is made, just at the end of the years in which a Roth conversion is being made (for Backdoor Roth purposes).
recklessmax wrote: Mon Jul 13, 2020 5:40 pm Im contributing non deductible 6K to the traditional IRA to do a backdoor roth before end of year by moving all my deductible IRA to the 401K
I suggest you contribute $6K to your traditional IRA RIGHT NOW (by July 15), putting it a money market account to keep it separate from the money going to the 401K. Have that contribution count towards 2019. (I assume you earned at least that much last year.) Then you can make another $6K contribution for 2020 by the end of the year (the deadline really is April 15, 2021, but it is cleaner if you contribute and convert in the same year). Meanwhile, move all the other money to your 401K. Don't worry if you leave a few extra dollars in the IRA as you can convert that small amount too and just pay taxes on anything over the non-deductible contribution(s).
However what happens to the interest earned in the traditional IRA until all the process is completed. Since that interest is taxable where does it go and how is it reported at time of conversion to Roth IRA
When you convert, be sure to convert EVERYTHING in the traditional IRA (after you moved the pre-tax money to the 401K). When you report the conversion for 2020 (next year), you will only pay taxes on anything over the non-deductible contributions. As an example, if you have an extra $10, convert it and if you are in the 24% tax bracket, the extra taxes will be $2.40.
Also what is the general timeframe to effect the conversion. Does it take few days or weeks to do conversion from traditional to IRA by the custodian
The conversion is a separate transaction YOU need to initiate. Once you see your contribution in the traditional IRA (and you've rolled over to 401K), call up for a Roth conversion, which will happen that night if you call when the markets are open, else the following day.
Topic Author
recklessmax
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Re: Backdoor ROTH IRA

Post by recklessmax »

Thanks also lets say i move all the pretax IRA funds into my 401K at work and do the roth conversion for the post tax funds by end of this year along with paying tax on any little interest . Now what i decide to leave my current 401K employer . Although i can leave the funds in the 401K with them or move it to subsequent employer if they have a good plan but it would be better to move them into a rollover IRA to have more choices. In that case can both rollover IRA and Roth IRA exists independently int he same year without triggering the IRA pro-rate rule or any other tax consequences as long as i file tax forms correctly
lakpr
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Re: Backdoor ROTH IRA

Post by lakpr »

recklessmax wrote: Mon Jul 13, 2020 7:43 pm Thanks also lets say i move all the pretax IRA funds into my 401K at work and do the roth conversion for the post tax funds by end of this year along with paying tax on any little interest . Now what i decide to leave my current 401K employer . Although i can leave the funds in the 401K with them or move it to subsequent employer if they have a good plan but it would be better to move them into a rollover IRA to have more choices. In that case can both rollover IRA and Roth IRA exists independently int he same year without triggering the IRA pro-rate rule or any other tax consequences as long as i file tax forms correctly
No. The IRS rules are clear. If you want to do backdoor Roth you cannot have a Traditional IRA, even if Rollover IRA, as of 12/31/20xx, where 20xx is the year you have done ANY Roth conversion. You can make a non-deductible contribution but no Roth conversion, if you want to, to escape the pro-rata rule; but if you make a Roth conversion in January when you had $0 in pretax IRA, but later in September you roll 401k funds to a Rollover IRA, bingo you are subject to pro-rata rule.

Seriously, how many funds do you need to invest? If the 401k plan is low cost, and provides choices for total US stock market index (or a major slice of it like S&P 500 index), total ex-US market index (or a major slice of it like Developed Markets), and a decent Total Bond Index fund, you are set. Investing in 20 different funds is not diversifying; it is madness.
Topic Author
recklessmax
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Re: Backdoor ROTH IRA

Post by recklessmax »

So based on the comments you cannot have any other IRA except ROTH IRA in the calendar year you execute the backdoor roth strategy so you dont get hit by the IRS prorata rule. Bit post that calendar year if you decide you can have a rollover IRA and roth IRA independently without triggering any IRS prorata rule/ Is this understanding correct ?
McDougal
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Re: Backdoor ROTH IRA

Post by McDougal »

recklessmax wrote: Tue Jul 14, 2020 5:53 am So based on the comments you cannot have any other IRA except ROTH IRA in the calendar year you execute the backdoor roth strategy so you dont get hit by the IRS prorata rule. Bit post that calendar year if you decide you can have a rollover IRA and roth IRA independently without triggering any IRS prorata rule/ Is this understanding correct ?
I just went thru this process for the first time(HUGE thank you to this forum and especially celia!). My understanding is you can have as many traditional IRA and Roth IRA accounts as you want. As mentioned before the IRS counts all tIRAs as one tIRA, and all Roth IRAs as one Roth. The important thing is to not have any money in the tIRAs (all of them) on 12/31 of the year you made a conversion to a Roth. They should all be empty. If you do have balances in a tIRA, you will then be bound by the pro rata rule. Which is not the end of the world by the way, depending on how much tax it will generate.
Topic Author
recklessmax
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Re: Backdoor ROTH IRA

Post by recklessmax »

McDougal wrote: Tue Jul 14, 2020 6:47 am
recklessmax wrote: Tue Jul 14, 2020 5:53 am So based on the comments you cannot have any other IRA except ROTH IRA in the calendar year you execute the backdoor roth strategy so you dont get hit by the IRS prorata rule. Bit post that calendar year if you decide you can have a rollover IRA and roth IRA independently without triggering any IRS prorata rule/ Is this understanding correct ?
I just went thru this process for the first time(HUGE thank you to this forum and especially celia!). My understanding is you can have as many traditional IRA and Roth IRA accounts as you want. As mentioned before the IRS counts all tIRAs as one tIRA, and all Roth IRAs as one Roth. The important thing is to not have any money in the tIRAs (all of them) on 12/31 of the year you made a conversion to a Roth. They should all be empty. If you do have balances in a tIRA, you will then be bound by the pro rata rule. Which is not the end of the world by the way, depending on how much tax it will generate.
Thanks but that dosent answer the specific question i had asked which is after the calendar year of doing the roth conversion.
Silk McCue
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Re: Backdoor ROTH IRA

Post by Silk McCue »

recklessmax wrote: Tue Jul 14, 2020 6:55 am ...

Thanks but that dosent answer the specific question i had asked which is after the calendar year of doing the roth conversion.
Yes it does, you just aren't seeing it. The year after doesn't matter as the only thing that matters is the balance in any and all IRAs on 12/31 of the year you perform the Backdoor Roth. If you have funds in the IRA the following year you would face the same restrictions on performing a Backdoor Roth in that year.

CHeers
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