might or might not need to backdoor Roth -- how do I prepare?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
firstchair
Posts: 7
Joined: Wed Feb 17, 2021 1:14 pm

might or might not need to backdoor Roth -- how do I prepare?

Post by firstchair »

Hello all. Thanks again for all the knowledge gleaned here. Hope I am not duplicating too many previous threads here, but seeking guidance on the sequence of events.

We are MFJ, and make regular monthly contributions to his and her Roths via direct debit. This has been set-it-and-forget-it for years.

This year, for the first year ever, our HHI MIGHT reach the level where we will be ineligible to make Roth contributions. One earner is hourly with wild variations in earnings, so I can't be certain. (And I'll say I'm having a hard time really parsing the rules for how to determine AGI and the Roth-style MAGI in advance). But at that earner's current rate, it appears possible.


PROBLEM 1:
We have already contributed half a year's worth of Roth contributions via those monthly debits. Kinda can't turn back now. If I have to pay taxes on this, fine, but I would like to avoid paying the penalty if we reach EOY and find out, oops, we overcontributed, possibly by 100%.

Solution, as I see it, will be to recharacterize these as TIRA contributions, then do a backdoor Roth. Which leads to problem 2.

PROBLEM 2: We each already have "rollover IRAs" at Vanguard, which contain money from a combination of 401k's from previous employers. If I understand backdoors correctly, we can't do one without triggering huge new tax headaches in these.

Solution there, I guess, is to roll these rollover IRAs into our new current 401k/403b with current employers.

The good news is these are "clean" pre-tax rollover IRAs, containing purely the funds from old 401Ks and earnings on those funds. They are not commingled with other IRA contributions. (Bad news is, the old employers are defunct or not reachable, so if anybody requires attestation of that, I'm at the mercy of what Vanguard will tell them. I have not inquired with Vanguard about this yet.)

Last wrinkle, I guess, is that all other things being equal, I don't really want to roll out of our rollover IRAs if I don't have to. They have worked fine for years. One of our 401ks is an OK plan. The other 403b offers good choices but charges some small fees I'd rather avoid.

However, I want to keep doing Roths, and avoid being dinged for this year's contributions.

Given all that... if I want to backdoor, I assume my order of operations here would be to:
- First convert both rollovers into our current 401k/403bs
- Then open a "new" TIRA and recharacterize our 2021 Roth contributions as after-tax TIRA contributions
- Then backdoor the TIRA contribs back into our Roths.

So my questions are:
1. Is the above thinking even correct? Can I do this?
2. Given that I don't want to close the Rollover IRAs if I don't have to, can I wait until end of 2021 to determine our real MAGI? And then begin this process? Or do I need to get all this done in calendar 2021?
3. Similar timing question for the recharacterization: Can I recharacterize our 2021 Roth contribs as TIRA contribs during the time from Jan. 1 to April 15, 2022? Or do I need to get that done by Dec. 31?
4. Same timing question then for the backdoor -- do I do that after Jan. 1, or before, or...?

[edited above to correct years, these are 2021 contributions -- thanks to katietsu for flagging.]
[gee, if I don't remember what year it is, maybe I CAN'T handle doing a backdoor...]

Thanks, and please point me to a wiki page about this if I'm missing it.
Last edited by firstchair on Wed Jul 21, 2021 10:36 pm, edited 1 time in total.
Katietsu
Posts: 5103
Joined: Sun Sep 22, 2013 1:48 am

Re: might or might not need to backdoor Roth -- how do I prepare?

Post by Katietsu »

firstchair wrote: Wed Jul 21, 2021 10:05 pm So my questions are:
1. Is the above thinking even correct? Can I do this?
2. Given that I don't want to close the Rollover IRAs if I don't have to, can I wait until end of 2020 to determine our real MAGI? And then begin this process? Or do I need to get all this done in calendar 2020?
3. Similar timing question for the recharacterization: Can I recharacterize our 2020 Roth contribs as TIRA contribs during the time from Jan. 1 to April 15, 2021? Or do I need to get that done by Dec. 31?
4. Same timing question then for the backdoor -- do I do that after Jan. 1, or before, or...?

Thanks, and please point me to a wiki page about this if I'm missing it.
Are all your years off by one? I will assume that your 2020 should be 2021. And your 2021 should be 2022.

1) Sounds like you understand.
2) Yes, you can wait until until after the calendar year to see if you have an excess contribution.
3) The recharacterization needs to happen by your tax filing deadline. So, you can even extend the recharacterization deadline to Oct 15, 2021.
4) Moving the money into the 401k and doing the Roth conversion can be done at anytime. It is usually recommended to do it sooner rather than later so that there is more opportunity for gains to occur after the conversion.
User avatar
FiveK
Posts: 11813
Joined: Sun Mar 16, 2014 2:43 pm

Re: might or might not need to backdoor Roth -- how do I prepare?

Post by FiveK »

There is a Backdoor Roth - Bogleheads wiki.

If that doesn't answer your questions, providing feedback on what it didn't answer could help improve it.

Yes, you can wait until 2022 to decide if you want to
a) Do an IRA recharacterization to change the Roth contribution to traditional, and
b) convert the traditional balance to Roth

Note that it is the 31-Dec non-Roth IRA balance for the year in which you do the conversion that matters for the pro-rata taxation. So you can also wait until 2022 to
c) roll the pre-tax IRAs into the 401k/403b plans, if you have also waited until 2022 to do the conversion in step b).
Topic Author
firstchair
Posts: 7
Joined: Wed Feb 17, 2021 1:14 pm

Re: might or might not need to backdoor Roth -- how do I prepare?

Post by firstchair »

Just a post to say thank you for the replies. The backdoor Roth wiki didn't help me on this one but the IRA recharacterization page https://www.bogleheads.org/wiki/IRA_recharacterization did.
User avatar
FiveK
Posts: 11813
Joined: Sun Mar 16, 2014 2:43 pm

Re: might or might not need to backdoor Roth -- how do I prepare?

Post by FiveK »

Good to see that was helpful, and thanks for the feedback! Added a sentence to the backdoor Roth wiki referencing the recharacterization process, which I thought was there all along but wasn't.
User avatar
Eagle33
Posts: 1486
Joined: Wed Aug 30, 2017 3:20 pm

Re: might or might not need to backdoor Roth -- how do I prepare?

Post by Eagle33 »

FiveK wrote: Sat Jul 31, 2021 1:07 pm Good to see that was helpful, and thanks for the feedback! Added a sentence to the backdoor Roth wiki referencing the recharacterization process, which I thought was there all along but wasn't.
Thank you FiveK and the other wiki editors for keeping that vast wealth of knowledge up to date.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Post Reply