Married Filing Separately & A Roth IRA Mistake

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Topic Author
orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

Read through the Backdoor Roth wiki, very concise and informative. After reading, the plan for me is:

1. Establish a new 403b or 457 through my employer. The choice will come down to fees and investment options (expense ratios too).

2. Contact Vanguard during market hours and rollover the entire balance of my current Traditional IRA (approx. $13,000) to the newly established 403b or 457.

3. The above steps leave me with a $0 balance in any and all Traditional IRAs. I will then contact Vanguard (again) to have the excess contribution to my Roth IRA ($6,000) recharacterized to my now empty Traditional IRA.

4. Upon completion of the transaction I can then convert the Traditional IRA to a Roth IRA, completing the Backdoor Roth.

The above steps will then make me compliant from a IRS and Roth IRA contribution standpoint. No penalties will be due. The taxes paid will be minimal. The fees will come down to whatever my 403b or 457 plan administrator charges. So we still get to take advantage of the unique 2020 year for us by filing MFS and we do not get penalized for the excess Roth contribution.

Please take a look at my process and shoot holes in it! Here to learn and very thankful for all the dialogue so far. You all have likely saved me a good chunk of money.
Topic Author
orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

Katietsu wrote: Thu Apr 29, 2021 10:18 pm Do you plan to contribute to either one of these accounts in the future? If not, I would just go with the cheapest. This appears to be Voya.

The 457 has an advantage of penalty free withdrawals after leaving the employer regardless of age. On other words, the funds can be withdrawn before 59.5 years of age without penalty.

On the other hand, the 403b and Fidelity are a rock solid option. The annual fee will become a smaller and smaller percentage if you begin to contribute.

At your household income level, you likely should be using some of these retirement savings options.
Right now, no current plans to do additional contributions to these accounts at this time. That could change. I agree on Voya being the cheapest right now. The .12% of $13,000-ish versus the guaranteed $75 fee with Fidelity. Great point by you in that this equation could change with additional contributions in the future.

I like the 457 option of penalty-free withdrawal after leaving the employer.
cas
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Re: Married Filing Separately & A Roth IRA Mistake

Post by cas »

orygunboxer wrote: Thu Apr 29, 2021 10:41 pm
Katietsu wrote: Thu Apr 29, 2021 10:18 pm
[ . . .]

At your household income level, you likely should be using some of these retirement savings options.
Right now, no current plans to do additional contributions to these accounts at this time. That could change. I agree on Voya being the cheapest right now. The .12% of $13,000-ish versus the guaranteed $75 fee with Fidelity.
Is there any employer match for the 403(b)?

That would change the calculations both on whether you should be contributing to the 403(b) in preference to a Roth IRA and on the net annual "cost" of the 403(b) vs 457.
retiredjg
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Re: Married Filing Separately & A Roth IRA Mistake

Post by retiredjg »

orygunboxer wrote: Thu Apr 29, 2021 10:27 pm 1. Establish a new 403b or 457 through my employer. The choice will come down to fees and investment options (expense ratios too).
Another thing to consider is if one of them allows Roth contributions in addition to tax-deferred contributions.

Agree with others that you should be contributing to a retirement plan anyway. Maybe it cannot be this year, but it should start sometime. And it sounds like you have have a pension so having the ability to use either tax-deferred or Roth contributions could be useful.

If you use one of these plans just to get the $13k out of the way and don't eventually use this plan for contributions, then you are just paying an extra $75 or .12% a year in order to achieve less tax for 2020. These fees go on forever and you will eventually not have saved anything in 2020 by doing this.


3. The above steps leave me with a $0 balance in any and all Traditional IRAs. I will then contact Vanguard (again) to have the excess contribution to my Roth IRA ($6,000) recharacterized to my now empty Traditional IRA.
This needs to be done before October 15. Not only will the $6k move, but the associated earnings will also move into the tIRA. Those associated earnings will be taxable when you do the Roth conversion. The market has gone up a lot since early 2020. Be sure you know how large the earnings are before doing this.
little_star
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Re: Married Filing Separately & A Roth IRA Mistake

Post by little_star »

For a $13,000 balance in the traditional IRA, I would seriously consider converting this amount to Roth as well. You will owe taxes on the conversion (in the tax year in which you do the conversion), but you would avoid recurring fees in the 403b or 457, which you appear to not want to utilize in general.

I have lost track of what has happened with your spouse's Roth contribution. Are you planning on re-characterizing as a non-deductible traditional contribution there as well?

If you go this route, remember to document your non-deductible contributions (and the initial recharacterization) in your 2020 taxes - use IRS Form 8606 - and the conversion in the tax year in which you do the conversion (IRS Form 8606).
retiredjg
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Re: Married Filing Separately & A Roth IRA Mistake

Post by retiredjg »

little_star wrote: Fri Apr 30, 2021 8:17 am For a $13,000 balance in the traditional IRA, I would seriously consider converting this amount to Roth as well. You will owe taxes on the conversion (in the tax year in which you do the conversion), but you would avoid recurring fees in the 403b or 457, which you appear to not want to utilize in general.
I was wondering the same thing. :happy Or maybe for your partner. Other than MFJ or MFS, you two do not need to do the same thing.
Topic Author
orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

cas wrote: Fri Apr 30, 2021 5:44 am
orygunboxer wrote: Thu Apr 29, 2021 10:41 pm
Katietsu wrote: Thu Apr 29, 2021 10:18 pm
[ . . .]

At your household income level, you likely should be using some of these retirement savings options.
Right now, no current plans to do additional contributions to these accounts at this time. That could change. I agree on Voya being the cheapest right now. The .12% of $13,000-ish versus the guaranteed $75 fee with Fidelity.
Is there any employer match for the 403(b)?

That would change the calculations both on whether you should be contributing to the 403(b) in preference to a Roth IRA and on the net annual "cost" of the 403(b) vs 457.
No employer match available for either the 403b or the 457.
Topic Author
orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

retiredjg wrote: Fri Apr 30, 2021 6:53 am
orygunboxer wrote: Thu Apr 29, 2021 10:27 pm 1. Establish a new 403b or 457 through my employer. The choice will come down to fees and investment options (expense ratios too).
Another thing to consider is if one of them allows Roth contributions in addition to tax-deferred contributions.

Agree with others that you should be contributing to a retirement plan anyway. Maybe it cannot be this year, but it should start sometime. And it sounds like you have have a pension so having the ability to use either tax-deferred or Roth contributions could be useful.

If you use one of these plans just to get the $13k out of the way and don't eventually use this plan for contributions, then you are just paying an extra $75 or .12% a year in order to achieve less tax for 2020. These fees go on forever and you will eventually not have saved anything in 2020 by doing this.


3. The above steps leave me with a $0 balance in any and all Traditional IRAs. I will then contact Vanguard (again) to have the excess contribution to my Roth IRA ($6,000) recharacterized to my now empty Traditional IRA.
This needs to be done before October 15. Not only will the $6k move, but the associated earnings will also move into the tIRA. Those associated earnings will be taxable when you do the Roth conversion. The market has gone up a lot since early 2020. Be sure you know how large the earnings are before doing this.
The 457 does allow for Roth contributions. The language for the 403b says it "depends."

You all are right about contributing to a retirement plan. Right now we both max out our Roth contributions annually. I also have two avenues for retirement, one being an individual account that is paid on my behalf (about 5% each paycheck). I am also a part of a state-wide pension program. But supplementing would be wise, I agree.

Agreed that I am potentially paying fees for the new account into perpetuity just to avoid an issue in this one tax year. In the future I will need to find a fix for this issue. For now I am happy to have a satisfactory solution for this ordeal in general.

Thank you for the heads up on the move being made before Oct. 15. Is that based on assuming an extending tax filing deadline for us? Mid-May was always our target date for filing.

Agreed that I need to calculate the earnings portion to understand what the tax liability will be. Going to call Vanguard for that number. Stay tuned.
Topic Author
orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

little_star wrote: Fri Apr 30, 2021 8:17 am For a $13,000 balance in the traditional IRA, I would seriously consider converting this amount to Roth as well. You will owe taxes on the conversion (in the tax year in which you do the conversion), but you would avoid recurring fees in the 403b or 457, which you appear to not want to utilize in general.

I have lost track of what has happened with your spouse's Roth contribution. Are you planning on re-characterizing as a non-deductible traditional contribution there as well?

If you go this route, remember to document your non-deductible contributions (and the initial recharacterization) in your 2020 taxes - use IRS Form 8606 - and the conversion in the tax year in which you do the conversion (IRS Form 8606).
Thanks for this idea. That would be a considerable tax burden to be paid in the current year, no?

Spouse is likely able to do something similar to me. Rollover the current Traditional IRA holdings into an employer-sponsored plan that allows for rollovers. Then do the same recharacterization process as me.

It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
retiredjg
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Re: Married Filing Separately & A Roth IRA Mistake

Post by retiredjg »

orygunboxer wrote: Fri Apr 30, 2021 10:08 am Thank you for the heads up on the move being made before Oct. 15. Is that based on assuming an extending tax filing deadline for us? Mid-May was always our target date for filing.
If your excess contribution has not been removed by October 15(ish), you will pay a 6% excise tax on that $6k with your 2021 taxes.
retiredjg
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Re: Married Filing Separately & A Roth IRA Mistake

Post by retiredjg »

orygunboxer wrote: Fri Apr 30, 2021 10:13 am It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
Just convert to Roth and pay the tax. Doing a rollover for $2k is just not worth it.
Topic Author
orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

Update... After contacting Vanguard, the gain from my 2020 Roth IRA contribution of $6,000 is approx. $1,833 as of today (4.30.21). So I would be paying the taxes on that portion upon conversion.
cas
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Re: Married Filing Separately & A Roth IRA Mistake

Post by cas »

orygunboxer wrote: Fri Apr 30, 2021 11:27 am Update... After contacting Vanguard, the gain from my 2020 Roth IRA contribution of $6,000 is approx. $1,833 as of today (4.30.21). So I would be paying the taxes on that portion upon conversion.
OK ... so now you can start calculating some definite cost/benefit numbers for each of your 3 options that retiredjg previously mentioned. (For you, at least. You may still be working on your partner's numbers.)
retiredjg wrote: Thu Apr 29, 2021 6:38 am
I see your choices like this.

1. File MFJ. Leave everything like it is. If you make this choice, you get to keep the Roth IRAs as they are which means the earnings that have occurred over the last 14 or so months get to stay in Roth IRA tax free. This has been a time of fast growth so the earnings could be a nice amount. But you give up the stimulus money.


2. File MFS. Re-characterize 2 Roth IRA contributions (and their associated earnings) to 2 non-deductible contributions to traditional IRA. Move each rollover IRA into a 401k or similar plan (does partner have such a plan available?). Convert the 2 non-deductible contributions to Roth IRA paying tax on the earnings part. An additional potential downside to this plan is that you may have rolled the IRAs into work plans that have higher costs than the IRAs at Vanguard. [edit by cas: also paying taxes on anything currently in the tIRAs that you decide to convert to Roth rather than roll to an employer plan. Plus paying employer plan fees.]


3. File MFS. Leave everything as it is until after October 15. Then withdraw each of the excess contributions, leaving the earnings in the Roth IRAs. Pay a 6% excise tax with your 2021taxes on the 2 excess contributions that were not withdrawn before the deadline. In this case, you will not have a contribution for Roth IRA at all for the year 2020 but the earnings get to stay in the Roth IRA. And you get the stimulus money.

I didn't do the calculations for the 3 options, so I don't know how it will turn out. But ... don't disregard retiredjg's previous wise statement from the end of her "options" post:
retiredjg wrote: Thu Apr 29, 2021 6:38 am I think if you look at these options, you may find that none has a definite advantage over the others. In that case, I'd suggest the simple one (#1).
Topic Author
orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

Quick question that will help with our calculation... I made the 2020 contribution to my Roth in January of 2020. I typically do this to take advantage of the year of growth as opposed to waiting until the end of the year. If I do the recharacterization of this contribution from my Roth IRA to a Traditional IRA, will the gains that are being taxed be considered Long-Term Capital Gains since I held for over 1 year? This would drastically change the equation. Approx. $440 in federal taxes due in a short-term situation versus $275 in a long-term situation. Please let me know what you think. Thanks.
retiredjg
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Re: Married Filing Separately & A Roth IRA Mistake

Post by retiredjg »

No. A Roth conversion is taxed as ordinary income. "Capital gains" don't exist in IRA. :happy
Topic Author
orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

retiredjg wrote: Fri Apr 30, 2021 5:03 pm No. A Roth conversion is taxed as ordinary income. "Capital gains" don't exist in IRA. :happy
Thank you!
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ipdiddly
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Re: Married Filing Separately & A Roth IRA Mistake

Post by ipdiddly »

orygunboxer wrote: Thu Apr 29, 2021 6:40 pm Update to the situation.

In this case the rollover would be for the amount of around $13,000. Which option would you all pick here?

Still working on options for my partner, but getting closer to being able to execute a Backdoor for both of us. Cannot thank you all enough for your help!
Whoa! All this convoluted exercise over a measly $13K????

Why not just recharacterize the Roth contribution to your t-IRA, then simply convert the entire t-IRA ($19K?) to Roth and get it all over with in one fell swoop? Sure you'll get a tax hit, but it is relatively small in the overall scheme of things. Then you will have a nice Roth account from here into the future that will grow tax free through your working career. I see little point in going through all sorts of financial gyrations for such a small amount, particularly since you are probably better off having the funds in a Roth. Bear in mind, the tax hit (payable next year) is only on the pre-tax $13K, not the after-tax $6K recharacterized contribution. You just need to be sure you process next year's tax return correctly since your 1099 will show the full amount of the conversion.

In your situation, I would consider the stimulus eligibility as a discount on doing the Roth conversions now. You won't have that discount available in the future.
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orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

ipdiddly wrote: Sun May 02, 2021 9:11 am
orygunboxer wrote: Thu Apr 29, 2021 6:40 pm Update to the situation.

In this case the rollover would be for the amount of around $13,000. Which option would you all pick here?

Still working on options for my partner, but getting closer to being able to execute a Backdoor for both of us. Cannot thank you all enough for your help!
Whoa! All this convoluted exercise over a measly $13K????

Why not just recharacterize the Roth contribution to your t-IRA, then simply convert the entire t-IRA ($19K?) to Roth and get it all over with in one fell swoop? Sure you'll get a tax hit, but it is relatively small in the overall scheme of things. Then you will have a nice Roth account from here into the future that will grow tax free through your working career. I see little point in going through all sorts of financial gyrations for such a small amount, particularly since you are probably better off having the funds in a Roth. Bear in mind, the tax hit (payable next year) is only on the pre-tax $13K, not the after-tax $6K recharacterized contribution. You just need to be sure you process next year's tax return correctly since your 1099 will show the full amount of the conversion.

In your situation, I would consider the stimulus eligibility as a discount on doing the Roth conversions now. You won't have that discount available in the future.
Thank you.
AnEngineer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by AnEngineer »

orygunboxer wrote: Wed Apr 28, 2021 3:33 pm
TropikThunder wrote: Wed Apr 28, 2021 1:59 pm
orygunboxer wrote: Wed Apr 28, 2021 10:52 am But when we switch to filing MFS, one of us does qualify and is able to take advantage. When we do "dummy" tax returns in a MFJ scenario versus a MFS scenario, we come out on top in the MFS scenario by a large margin. So right now it makes sense to file MFS, but we are looking for a fix for the Roth IRA scenario before we commit.
I’m having trouble seeing where MFS would come out ahead. Let’s say your MFJ AGI is above the phase-out of $160,000. But one of you is below the MFS phaseout of $80,000 while the other one is above. With a dependent assigned to the one below the phase-out, that means the lower-earning spouse now qualifies for $2,800 in stimulus.

But surely the higher tax brackets for MFS would cost you more than the stimulus, wouldn’t they? For example, the 12% bracket for MFJ goes up to $81,000 while it only goes up to $40,000 for MFS. That means a MFS filer with $81,000 in taxable income has $41,000 of that income in the 22% bracket instead of the 12% bracket, costing an additional $4,100 in taxes. Are you really in such a sweet spot that the increased tax burden of MFS is less than the $2,800 stimulus “by a large margin”?
I will try my best to explain our situation. At first I was timid to provide details, but I now understand there is some anonymity here and providing context is the best way to get accurate answers while also helping this community at large. My partner is a CPA. She handles the taxes. I do most of the investment research (thus my membership on this site).

The MFS designation allows one of us (the one with the lower income) to qualify for: a $500 dependent stimulus that was not received (in error) in 2020, a $600 dependent stimulus (same situation). It also qualifies one of us to exclude taxes from unemployment income that was earned during the 2020 year.

By our calculations, we come out on top by about $2000 when compared with MFJ. I hope this helps provide context.
Here's an alternative: file MFS, wait for $2800 in 2021 stimulus money to come in based on 2020 taxes (lower earner plus dependent), then amend to MFJ. Leave your IRA contributions as is. This is assuming you will not eventually get 2021 stimulus money based on 2021 income. Either way, make sure you're factoring in the third-round stimulus money.
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orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

Time for an update. My hope is that this archive of information will be helpful to someone else at a later date.

We did some math on the main options available to us. Here were the main financial considerations for the different scenarios:
- Dependent stimulus payments
- Tax relief for unemployment income
- Paying ordinary income tax rates on the gain for the Roth conversion
- Investment options and on-going annual fees related to the new retirement accounts for the rollover
- 10% early withdrawal penalties
- 6% excess contribution penalties

For us, the MFS options make the most sense because they provide a net positive effect of approx. $2,000. Not worth all the work and maneuvering for most, but for us it matters. Dollar for dollar the best option came out as the option to wait beyond Oct. 15th, keep the gains in the Roth (withdrawing the excess contributions of $6,000 each), and pay the 6% penalty on the excess contributions. In the end we are not in favor of this option even though it is superior in the short-term, because we would lose out on a $6,000 (each) Roth contribution for 2020 and therefore the long-term growth of that money over what is a long time horizon for us.

We plan to move forward with the option of: filing MFS, emptying current Traditional IRAs into employer retirement accounts, recharacterizing the Roth contributions as Traditional IRA contributions for 2020, completing a Backdoor Roth to get that money back into post-tax treatment (paying ordinary income taxes on the gain).
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orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

retiredjg wrote: Fri Apr 30, 2021 11:13 am
orygunboxer wrote: Fri Apr 30, 2021 10:13 am It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
Just convert to Roth and pay the tax. Doing a rollover for $2k is just not worth it.
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?
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ipdiddly
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Re: Married Filing Separately & A Roth IRA Mistake

Post by ipdiddly »

orygunboxer wrote: Mon May 03, 2021 10:10 am
retiredjg wrote: Fri Apr 30, 2021 11:13 am
orygunboxer wrote: Fri Apr 30, 2021 10:13 am It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
Just convert to Roth and pay the tax. Doing a rollover for $2k is just not worth it.
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?
I think what is being suggested is that your partner first recharacterize her Roth to t-IRA, then convert the entire t-IRA to Roth ($6K + $2K + gains). This will result in a 1099 reporting approx. $8-9K distribution, of which $6K is after tax (so ultimately not counted as income), meaning anything above that $6K is taxable income, payable on 2021 tax return. The trick is to complete your 2021 tax return correctly (as with any backdoor Roth) so that the full distribution is reported under income and the $6K IRA contribution (the recharacterized Roth) is reported as a non-deductible IRA contribution. It's actually not that complicated if you carefully follow the instructions in a tax program like TurboTax. I've been doing this for years for my son and DIL, who must file MFS to keep her student loans reasonable. Unfortunately, by filing MFS, they are not eligible to make a direct Roth contribution and must go backdoor (non-deductible t-IRA contribution, then convert to Roth).
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ipdiddly
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Re: Married Filing Separately & A Roth IRA Mistake

Post by ipdiddly »

orygunboxer wrote: Mon May 03, 2021 10:10 am
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?
How is the tax on a $2K conversion $600? That's 30%. I thought your partner was at a relatively low income level. What state are you in?
Katietsu
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Re: Married Filing Separately & A Roth IRA Mistake

Post by Katietsu »

orygunboxer wrote: Mon May 03, 2021 10:10 am
retiredjg wrote: Fri Apr 30, 2021 11:13 am
orygunboxer wrote: Fri Apr 30, 2021 10:13 am It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
Just convert to Roth and pay the tax. Doing a rollover for $2k is just not worth it.
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?

Well, the main guaranteed pro is avoiding the hassle. If the workplace plan has higher fees, there could also be a benefit of a tiny fee savings over the years. Finally, remember that if you eventually withdraw at the same tax rate as you contribute, you have not saved the $600 by all these steps, you have just delayed paying the tax.
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orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

ipdiddly wrote: Mon May 03, 2021 10:40 am
orygunboxer wrote: Mon May 03, 2021 10:10 am
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?
How is the tax on a $2K conversion $600? That's 30%. I thought your partner was at a relatively low income level. What state are you in?
I don't want to guarantee the accuracy of my numbers. I made a rough approximation. We live in Oregon. Partner's in the 22% marginal tax bracket for federal purposes.
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orygunboxer
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Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

Katietsu wrote: Mon May 03, 2021 10:46 am
orygunboxer wrote: Mon May 03, 2021 10:10 am
retiredjg wrote: Fri Apr 30, 2021 11:13 am
orygunboxer wrote: Fri Apr 30, 2021 10:13 am It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
Just convert to Roth and pay the tax. Doing a rollover for $2k is just not worth it.
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?

Well, the main guaranteed pro is avoiding the hassle. If the workplace plan has higher fees, there could also be a benefit of a tiny fee savings over the years. Finally, remember that if you eventually withdraw at the same tax rate as you contribute, you have not saved the $600 by all these steps, you have just delayed paying the tax.
Agreed. Always the gamble with the Roth deal. Hard to predict the future. For us that future is about 30 years away too.
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Re: Married Filing Separately & A Roth IRA Mistake

Post by retiredjg »

orygunboxer wrote: Mon May 03, 2021 10:10 am
retiredjg wrote: Fri Apr 30, 2021 11:13 am
orygunboxer wrote: Fri Apr 30, 2021 10:13 am It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
Just convert to Roth and pay the tax. Doing a rollover for $2k is just not worth it.
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?
No. It is just much easier to convert $2k to Roth than to roll it into a work plan.

You seem to have considered all the options upside down and backwards. I don't see any problems.

Here are the deadlines you need to follow.

Recharacterizing the Roth to traditional IRA - before October 15ish. After that, you would have to pay the 6% excise tax.

Getting the rollover IRAs into current work plans - before end of this year. Suggest doing this before the Roth conversions.

Conversion - before the end of this year (would be best)

Remember that the non-deductible contributions will be documented on your 2020 taxes. The conversions will be documented on your 2021 taxes.
Topic Author
orygunboxer
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Joined: Thu Jun 18, 2020 11:48 pm

Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

retiredjg wrote: Mon May 03, 2021 11:09 am
orygunboxer wrote: Mon May 03, 2021 10:10 am
retiredjg wrote: Fri Apr 30, 2021 11:13 am
orygunboxer wrote: Fri Apr 30, 2021 10:13 am It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
Just convert to Roth and pay the tax. Doing a rollover for $2k is just not worth it.
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?
No. It is just much easier to convert $2k to Roth than to roll it into a work plan.

You seem to have considered all the options upside down and backwards. I don't see any problems.

Here are the deadlines you need to follow.

Recharacterizing the Roth to traditional IRA - before October 15ish. After that, you would have to pay the 6% excise tax.

Getting the rollover IRAs into current work plans - before end of this year. Suggest doing this before the Roth conversions.

Conversion - before the end of this year (would be best)

Remember that the non-deductible contributions will be documented on your 2020 taxes. The conversions will be documented on your 2021 taxes.
So on point. Thank you very much for going above and beyond.
Topic Author
orygunboxer
Posts: 35
Joined: Thu Jun 18, 2020 11:48 pm

Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

retiredjg wrote: Mon May 03, 2021 11:09 am
orygunboxer wrote: Mon May 03, 2021 10:10 am
retiredjg wrote: Fri Apr 30, 2021 11:13 am
orygunboxer wrote: Fri Apr 30, 2021 10:13 am It may be more advantageous for my partner to do the full conversion of her Traditional IRA holdings, they are lighter than mine. $2000-ish compared to $13,000.
Just convert to Roth and pay the tax. Doing a rollover for $2k is just not worth it.
I am back for more questions... Can you please give me a quick overview of the pros/cons of simply doing a Roth conversion on the $2000-ish that my partner has in a Traditional IRA currently? Based on the combined marginal tax rates (federal/state) we would be looking at around $600 in taxes paid to do that conversion in 2021. Is the main pro here the simplicity of not having to complete all the additional Backdoor Roth steps?
No. It is just much easier to convert $2k to Roth than to roll it into a work plan.

You seem to have considered all the options upside down and backwards. I don't see any problems.

Here are the deadlines you need to follow.

Recharacterizing the Roth to traditional IRA - before October 15ish. After that, you would have to pay the 6% excise tax.

Getting the rollover IRAs into current work plans - before end of this year. Suggest doing this before the Roth conversions.

Conversion - before the end of this year (would be best)

Remember that the non-deductible contributions will be documented on your 2020 taxes. The conversions will be documented on your 2021 taxes.
retiredjg... When you outline the Oct. 15th deadline for recharacterizing, does that assume filing taxes on a extended timeline? In other words, if we plan to file based on the fast-approaching mid-May deadline, do we need to have the recharacterization done before then? Thanks in advance for taking the time.
trirod
Posts: 110
Joined: Wed Jul 18, 2007 11:54 am

Re: Married Filing Separately & A Roth IRA Mistake

Post by trirod »

CoastLawyer2030 wrote: Wed Apr 28, 2021 11:11 am
orygunboxer wrote: Wed Apr 28, 2021 10:52 am
arcticpineapplecorp. wrote: Wed Apr 28, 2021 10:28 am can you first tell us what it was about 2020 that made it "likely quite advantageous for us to file our taxes Married Filing Separately (MFS)"?
Sure. It appears to be coming down to the discrepancy between the income of my partner and myself and how that is treated by the many stimulus packages we saw in 2020 and continuing into 2021. We also have one dependent. There are things we do not qualify for when we file jointly. But when we switch to filing MFS, one of us does qualify and is able to take advantage. When we do "dummy" tax returns in a MFJ scenario versus a MFS scenario, we come out on top in the MFS scenario by a large margin. So right now it makes sense to file MFS, but we are looking for a fix for the Roth IRA scenario before we commit.
I think you are jumping the gun here.

I would consult a tax professional about this and not trust "dummy" tax returns. There are extremely few scenarios where MFS is better than MFJ. You might be one of those but the odds are against it.

Pay the $200 or whatever to have a professional look at this.

Then make your move (if necessary).
CPA here. We are filing lots of MFS returns this year for clients that usually file MFJ. The 2 main reasons are the tax exemption for unemployment insurance when income is below $150,000 for MFJ, or $75,000 MFS, and the phaseout of stimulus payments at similar levels. In either case if you have one spouse making below $75k and the other making above this figure (which is a common enough scenario), it’s worth looking at the benefits of filing separately.
retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Married Filing Separately & A Roth IRA Mistake

Post by retiredjg »

orygunboxer wrote: Tue May 04, 2021 6:54 pm retiredjg... When you outline the Oct. 15th deadline for recharacterizing, does that assume filing taxes on a extended timeline? In other words, if we plan to file based on the fast-approaching mid-May deadline, do we need to have the recharacterization done before then? Thanks in advance for taking the time.
The IRS wording is unclear on this, but my understanding from postings here is that the deadline is October 15 even if you do not file an extension.

If you have decided to do the re-characterizations, there is no reason you need to wait until then though.
Topic Author
orygunboxer
Posts: 35
Joined: Thu Jun 18, 2020 11:48 pm

Re: Married Filing Separately & A Roth IRA Mistake

Post by orygunboxer »

retiredjg wrote: Wed May 05, 2021 6:08 am
orygunboxer wrote: Tue May 04, 2021 6:54 pm retiredjg... When you outline the Oct. 15th deadline for recharacterizing, does that assume filing taxes on a extended timeline? In other words, if we plan to file based on the fast-approaching mid-May deadline, do we need to have the recharacterization done before then? Thanks in advance for taking the time.
The IRS wording is unclear on this, but my understanding from postings here is that the deadline is October 15 even if you do not file an extension.

If you have decided to do the re-characterizations, there is no reason you need to wait until then though.
Thank you for this. I have read the same about the Oct. 15th date. It was not clear to me. We were/are not planning to extend, so we plan to file by the May date.

The delay for us is the time needed to open the new 457 & 401k with our respective employers and complete the rollover of our Traditional IRAs. That process will take at least 7 business days. I was trying to do everything in order... Open new accounts < rollover Traditional IRA into new accounts < Recharacterize Roth contributions to Traditional < Convert Traditional IRA back to Roth to complete Backdoor. But it does NOT seem like this string of events must be done in order to keep the IRS happy. My worry was recharacterizing the Roth contributions while there was still funds in our Traditional IRAs. I wanted to keep all that clean and separate since we are new to this process.
retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Married Filing Separately & A Roth IRA Mistake

Post by retiredjg »

Order is important for some things, but not for the re-characterization. But to keep things clean, you should re-characterize into new, empty tIRAs. But do what you are comfortable with on the order (for example if you want to be sure the re-characterization does not get put in with your current tIRAs)
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