Funding a backdoor Roth for 2015 in 2016

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Onionroottoots
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Funding a backdoor Roth for 2015 in 2016

Post by Onionroottoots » Wed Jan 06, 2016 10:59 pm

Hi there,

I just found out about the backdoor Roth today (no thanks to my father-in-law, who is a financial advisor.) I wish I had known about it in 2010.

I would love to get one done for 2015 but don't know if it's possible given the status of my current accounts. I have an 8-year-old Rollover IRA with about $90K in it which I plan to reverse-rollover into a 401(k) account I still have from my last employer (to avoid the pro-rata rule). I verified my 401(k) allows roll-ins and I can do the roll-in even though I'm no longer an employee.

The problem is, since that is my only IRA I believe I would need to use it to contribute the $5,500 for 2015 which I would then convert to the Roth before April. I don't know if the Rollover IRA account stays opened once I roll the existing balance to the 401(k) and even if it does, maybe there is some legal hitch preventing me from doing the contribution and conversion for a year in which it contained pre-tax funds.

Does anyone have insight into whether I can still get this done for 2015 or am I stuck just opening a new tIRA and doing a backdoor for 2016? More details that might help: I stay-at-home (since 2009) and we are considered "high income" (over the Roth IRA eligibility limit).

Many thanks for any advice you can offer!

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cfs
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Re: Funding a backdoor Roth for 2015 in 2016

Post by cfs » Thu Jan 07, 2016 10:22 am

Onionroottoots wrote:. . . Does anyone have insight into whether I can still get this done for 2015 or am I stuck just opening a new tIRA and doing a backdoor for 2016? . . .
Welcome aboard!

A new shipmate! Your first post! It is great to see our new shipmates checking in! Let me give this post a bump for visibility. Your questions are very important, please wait for inputs and recommendations from our awesome shipmates, and f you don't see replies within 24 hours please click the "Post Reply" button, and post your questions again.

Again, welcome aboard, and good luck with your investments.
~ Member of the Active Retired Force since 2014 ~

cmublitz
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Re: Funding a backdoor Roth for 2015 in 2016

Post by cmublitz » Thu Jan 07, 2016 10:30 am

I would think you could just open a new Traditional IRA account at any broker and drop in $5500 as a 2015 contribution before April 2016 and then another $5500 as a 2016 contribution. You could then convert that $11000 Traditional IRA to a Roth IRA in 2016. The Rollover IRA should be put back into a 401K before the end of 2016 to not suffer from the pro-rata rule on the Roth conversion.

^ Could be wrong, but is my best guess until someone more knowledgeable chimes in.

shashi
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Re: Funding a backdoor Roth for 2015 in 2016

Post by shashi » Thu Jan 07, 2016 10:38 am

Just make sure there is no growth in the funds before converting to Roth. Otherwise, it becomes taxable for that amount. Its a pain to manage this. I would like to hear what type of investments others have chosen before backdooring to Roth.

jpelder
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Re: Funding a backdoor Roth for 2015 in 2016

Post by jpelder » Thu Jan 07, 2016 11:32 am

I do think that the account has to be open by the end of the tax year in which you wish to contribute. That said, there's no tax difference between a rollover IRA and a Traditional IRA. So after the re-roll of the contents of your IRA into the old 401k, you'll be left with an empty Traditional IRA. You can do the Backdoor process using that. You could try opening a new Traditional IRA and making a 2015 contribution. If it doesn't work, then you know your answer

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Duckie
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Duckie » Thu Jan 07, 2016 4:32 pm

Onionroottoots wrote:Does anyone have insight into whether I can still get this done for 2015 or am I stuck just opening a new tIRA and doing a backdoor for 2016?
You are allowed to contribute to an IRA for 2015 up until mid April 2016. The conversion can happen anytime. Although you could probably use the Rollover IRA it would be better to start clean.

Here is the series of steps:
  1. Open a Traditional IRA and a Roth IRA at the same custodian.
    .
  2. Make your 2015 contribution to the TIRA. You should be asked which year the contribution is for. Specify 2015. This will be a non-deductible contribution, but the IRA custodian doesn't need that information. You may want the TIRA to hold a money market fund to avoid market swings.
    .
  3. Once the contribution posts, usually within a couple of days, convert 100% of the assets to your Roth IRA. Don't use dollar amounts because account values shift, use 100%. If the custodian asks to withhold taxes, say NO. If, in a few weeks, a tiny amount from some dividends shows up in the TIRA, just convert that, too.
    .
  4. When you have enough for the 2016 contribution make it to the TIRA. Then convert it in the same manner.
    .
  5. When you file your taxes for the year 2015 add IRS Form 8606. Fill out Part I for the 2015 non-deductible contribution.
    .
  6. When you file your taxes for the year 2016 again add IRS Form 8606. Fill out Part I for the 2016 non-deductible contribution and Part II for both conversions. It's best to make both the contribution and conversion happen in and for the same year. As long as the TIRA is empty as of December 31st any taxes will be negligible.
    .
  7. Do it again the next year. The TIRA should stay open for awhile even though empty so you should be able to use the same TIRA the next time. If not, just open another TIRA.
This will only work properly if you have no other non-Roth IRAs (Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA) because of the pro-rata rule. All non-Roth IRA accounts must have a $0 balance as of December 31st in the year of the conversion or you'll be paying a chunk of taxes. So make sure that Rollover IRA is empty by the end of the year.

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Epsilon Delta
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Epsilon Delta » Thu Jan 07, 2016 10:01 pm

shashi wrote:Just make sure there is no growth in the funds before converting to Roth. Otherwise, it becomes taxable for that amount. Its a pain to manage this. I would like to hear what type of investments others have chosen before backdooring to Roth.
I invest in whatever I want to have in the Roth. "A pain to manage" is way overstating it. Having earnings in the transitory traditional IRA is somewhere below the pain level of a tag on a t-shirt.

Onionroottoots
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Onionroottoots » Fri Jan 08, 2016 12:50 am

I'm happy I will be able to get this done for 2015 and 2016.

My main point of confusion was the pro-rata rule and whether my pretax IRA balance at the end of 2015 would apply to the Roth conversion or if the balance at the end of 2016 would control. Based on your responses and outside reading it sounds like since I will be doing the conversion itself in 2016, the pretax IRA balance at the end of 2016 (which will be $0 after the 401(k) roll-in) applies.

I also verified that the IRA account I use to deposit my 2015 contribution (and later, the 2016 contribution) can be opened now. There is no deadline for account establishment per IRS Pub 590-A:
https://www.irs.gov/publications/p590a/ ... 1000230367

Thanks for your replies and help!

Miriam2
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Miriam2 » Fri Jan 08, 2016 1:08 am

Duckie wrote:Here is the series of steps:
  1. Open a Traditional IRA and a Roth IRA at the same custodian.
    .
  2. Make your 2015 contribution to the TIRA. You should be asked which year the contribution is for. Specify 2015. This will be a non-deductible contribution, but the IRA custodian doesn't need that information. You may want the TIRA to hold a money market fund to avoid market swings.
    .
  3. Once the contribution posts, usually within a couple of days, convert 100% of the assets to your Roth IRA. Don't use dollar amounts because account values shift, use 100%. If the custodian asks to withhold taxes, say NO. If, in a few weeks, a tiny amount from some dividends shows up in the TIRA, just convert that, too.
    .
  4. When you have enough for the 2016 contribution make it to the TIRA. Then convert it in the same manner.
    .
  5. When you file your taxes for the year 2015 add IRS Form 8606. Fill out Part I for the 2015 non-deductible contribution.
    .
  6. When you file your taxes for the year 2016 again add IRS Form 8606. Fill out Part I for the 2016 non-deductible contribution and Part II for both conversions. It's best to make both the contribution and conversion happen in and for the same year. As long as the TIRA is empty as of December 31st any taxes will be negligible.
    .
  7. Do it again the next year. The TIRA should stay open for awhile even though empty so you should be able to use the same TIRA the next time. If not, just open another TIRA.
This will only work properly if you have no other non-Roth IRAs (Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA) because of the pro-rata rule. All non-Roth IRA accounts must have a $0 balance as of December 31st in the year of the conversion or you'll be paying a chunk of taxes. So make sure that Rollover IRA is empty by the end of the year.
Duckie's Step-by-Step Backdoor Roth Conversion Made Easy -

Duckie - this is the easiest understandable step-by-step I've seen :happy

BAM!
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Re: Funding a backdoor Roth for 2015 in 2016

Post by BAM! » Fri Jan 08, 2016 3:25 am

I am planning to do a backdoor Roth for the first time. This will be for both my wife any me. I'd like to follow the above steps and want to make sure I have enough money saved to pay taxes come April. Here are some hypothetical numbers. Am I doing this right?

HIS:
$5,500.00 contribution for 2015
$20,000.00 Amount in his existing Roth IRA
$3,987.50 Taxable amount on Roth conversion
28% Tax rate
$1,116.50 Taxes Due on his Roth Conversion

HERS:
$5,500.00 contribution for 2015
$40,000.00 Amount in her existing Roth IRA
$4,743.75 Taxable amount on Roth conversion
28% Tax rate
$1,328.25 Taxes Due on her Roth Conversion

Summary:
$11,000.00 total contributions to 2 Roth Conversions
$2,444.75 total taxes due for both Roth Conversions
22.23% Total Tax rate on Backdoor Roth

TAKE HOME:
So I'll make 2 tIRAs, one for him and one for her (2015 contribution).
Contribute $5500 to each.
Then convert 100% to existing rIRAs for both him and her.
Then I'll need to save $2444.75 to pay taxes at the end of the year? :confused

retiredjg
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Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Fri Jan 08, 2016 8:37 am

BAM! wrote:I am planning to do a backdoor Roth for the first time. This will be for both my wife any me. I'd like to follow the above steps and want to make sure I have enough money saved to pay taxes come April. Here are some hypothetical numbers. Am I doing this right?

HIS:
$5,500.00 contribution for 2015
$20,000.00 Amount in his existing Roth IRA
$3,987.50 Taxable amount on Roth conversion<---why is there an amount that is going to be taxable?
28% Tax rate
$1,116.50 Taxes Due on his Roth Conversion

HERS:
$5,500.00 contribution for 2015
$40,000.00 Amount in her existing Roth IRA
$4,743.75 Taxable amount on Roth conversion
28% Tax rate
$1,328.25 Taxes Due on her Roth Conversion

Summary:
$11,000.00 total contributions to 2 Roth Conversions
$2,444.75 total taxes due for both Roth Conversions
22.23% Total Tax rate on Backdoor Roth

TAKE HOME:
So I'll make 2 tIRAs, one for him and one for her (2015 contribution).
Contribute $5500 to each.
Then convert 100% to existing rIRAs for both him and her.
Then I'll need to save $2444.75 to pay taxes at the end of the year? :confused
What you have might be right, but it is not possible to know without more information. Why is almost $4k of his IRA contribution taxable at the conversion? Same question for almost $5k of her IRA contribution?

retiredjg
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Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Fri Jan 08, 2016 8:42 am

Duckie, I wonder if your steps should be put in the Wiki?

One thing I might question is the second conversion - do we actually know if a custodian will convert something like 6 cents to Roth? It seems to me that as long as the amount is 49 cents or less, it should not matter - it can just be left there and will not complicate the conversion calculations.

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Epsilon Delta
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Epsilon Delta » Fri Jan 08, 2016 11:47 am

retiredjg wrote:Duckie, I wonder if your steps should be put in the Wiki?

One thing I might question is the second conversion - do we actually know if a custodian will convert something like 6 cents to Roth? It seems to me that as long as the amount is 49 cents or less, it should not matter - it can just be left there and will not complicate the conversion calculations.
They should not be in the wiki as is. This is because they are not the way of doing a backdoor Roth, they are a way of doing it, tailored to the OP's circumstances. If you put them in the wiki you will get questions such as "Why should I wait until 2016 to make my 2015 contribution?".

retiredjg
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Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Fri Jan 08, 2016 11:57 am

Epsilon Delta wrote:
retiredjg wrote:Duckie, I wonder if your steps should be put in the Wiki?

One thing I might question is the second conversion - do we actually know if a custodian will convert something like 6 cents to Roth? It seems to me that as long as the amount is 49 cents or less, it should not matter - it can just be left there and will not complicate the conversion calculations.
They should not be in the wiki as is. This is because they are not the way of doing a backdoor Roth, they are a way of doing it, tailored to the OP's circumstances. If you put them in the wiki you will get questions such as "Why should I wait until 2016 to make my 2015 contribution?".
This is a good point ED. Nevertheless, this question comes up enough times that I think it would be helpful to have something in the Wiki. I thought this was a good start.

Miriam2
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Miriam2 » Fri Jan 08, 2016 3:20 pm

retiredjg wrote:Duckie, I wonder if your steps should be put in the Wiki?
Epsilon Delta wrote:They should not be in the wiki as is. This is because they are not the way of doing a backdoor Roth, they are a way of doing it, tailored to the OP's circumstances. If you put them in the wiki you will get questions such as "Why should I wait until 2016 to make my 2015 contribution?".
retiredjg wrote:
This is a good point ED. Nevertheless, this question comes up enough times that I think it would be helpful to have something in the Wiki. I thought this was a good start.
As a common person who for some reason just could not understand Roth conversions and the backdoor Roth and how it played into a conversion from a tIRA to a Roth, I would say Duckie's steps are so simple and understandable that - maybe with a little tweeking and expansion - they should be in our wiki.

If we look at our Roth IRA conversion wiki, it has great info about many aspects of the Roth conversion, but no "Here is how to do it." A step-by-step would be helpful. Each step could have its caveats - ie. if this, then go to that - but the basic outline would be so helpful to everyone. What Duckie has set out is a great first outline. It can be changed to apply to "within-the-same-year" situations, to the "do-you-have-some-old-deducted-tIRA" situations, etc.

For example, at the end of Duckie's steps, there is the pro-rata caveat. Short and sweet. Move to the pro rata step-by-step if you have pro-rata issues. Move to the step-by-step for backdoor Roth conversions. Duckie also linked the reader to IRS form 8606, which is a great service.

www.bogleheads.org/wiki/Roth_IRA_conversion

In the past, retiredjg has linked us to the Finance Buff's "Backdoor Roth: A Complete How-To."
www.thefinancebuff.com/the-backdoor-rot ... ow-to.html

This was very helpful, precisely because it's in a step-by-step format - with diagrams -which made this complicated subject easier to understand. IMHO, our Backdoor Roth IRA wiki article could benefit from this approach. Diagrams, flow arrows, steps, etc. As it is now, the algebraic :shock: GASP!! tax formulas at the end - might give the impression to readers that it is more difficult than it is and more difficult than they can do.
www.bogleheads.org/wiki/Backdoor_Roth_IRA

Just my thoughts.
BTW - thank you all so much for educating me about Roth conversions, backdoor conversions and the dreaded pro-rata rule, it took all your efforts, but I think I got it :D (now I just have to do it)

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Epsilon Delta
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Epsilon Delta » Fri Jan 08, 2016 4:33 pm

Miriam2 wrote: For example, at the end of Duckie's steps, there is the pro-rata caveat. Short and sweet. Move to the pro rata step-by-step if you have pro-rata issues. Move to the step-by-step for backdoor Roth conversions. Duckie also linked the reader to IRS form 8606, which is a great service.
A caveat that has resulted in far too much pointless worry about stray pennies.

I'd phrase this something like: Because of the pro-rata rule if you have any other IRAs you will pay taxes proportional to that balance. If the balance is a few dollars or less that extra tax will be negligible.

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Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Fri Jan 08, 2016 5:08 pm

Epsilon Delta wrote:A caveat that has resulted in far too much pointless worry about stray pennies.
Yes, but the stray pennies phenomenon seems to be relatively recent as far as I can tell. I think that can be most easily remedied by changing a few words in the caveat.
I'd phrase this something like: Because of the pro-rata rule if you have any other IRAs you will pay taxes proportional to that balance. If the balance is a few dollars or less that extra tax will be negligible.
You know what that means and I know what that means, and I'm sure many others know what that means. But it does not address the problem because people who are asking the stray pennies questions apparently don't understand the back door contribution in the first place. If they really understood the back door process, they would already know the answer to the question. And if the balance is a few dollars, that means carrying over basis calculations on an 8606 for even more years. Most folks are not willing to do that ( or know they need to do that).

The back door is a great and wonderful thing, but it is counter-intuitive and lots of people using it just don't fully get it. It's frustrating, isn't it?

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Epsilon Delta
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Epsilon Delta » Fri Jan 08, 2016 5:59 pm

retiredjg wrote:
Epsilon Delta wrote:A caveat that has resulted in far too much pointless worry about stray pennies.
Yes, but the stray pennies phenomenon seems to be relatively recent as far as I can tell. I think that can be most easily remedied by changing a few words in the caveat.
Yes it does seem recent. I don't think it's mostly because of rising interest rates. Even at .01% you earn a penny on $5,500 in less than a week so pennies should have turned up long before now. Sure some people will have been quick, but a couple of days in Prime MM should generate a penny for the last few years . I'd guess there has been a change in the accounting methods that make them more visible, unless it's a viral meme caused by people reading the headings and not the responses.
retiredjg wrote:
I'd phrase this something like: Because of the pro-rata rule if you have any other IRAs you will pay taxes proportional to that balance. If the balance is a few dollars or less that extra tax will be negligible.
You know what that means and I know what that means, and I'm sure many others know what that means.
But they don't understand the original either, if they did we wouldn't have all those penny posts. Worse we've seen people take counter productive steps when the penny shows up, steps that have cost them hundreds, possibly thousands, of dollars.
retiredjg wrote: But it does not address the problem because people who are asking the stray pennies questions apparently don't understand the back door contribution in the first place. If they really understood the back door process, they would already know the answer to the question. And if the balance is a few dollars, that means carrying over basis calculations on an 8606 for even more years. Most folks are not willing to do that ( or know they need to do that).
The "penalty" for failing to carry forward the basis is that you lose that basis. Losing a few bucks of basis is no big deal. Although if people are using tax software it will carry forward the basis with no user effort.

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Duckie
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Duckie » Fri Jan 08, 2016 6:50 pm

BAM! wrote:Here are some hypothetical numbers. Am I doing this right?
The amount in the existing Roth IRAs is irrelevant. The only way you would pay taxes on the conversions is if you have non-Roth IRAs, which you haven't mentioned.

retiredjg
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Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Fri Jan 08, 2016 8:21 pm

Epsilon Delta wrote:Yes it does seem recent. I don't think it's mostly because of rising interest rates. Even at .01% you earn a penny on $5,500 in less than a week so pennies should have turned up long before now. Sure some people will have been quick, but a couple of days in Prime MM should generate a penny for the last few years . I'd guess there has been a change in the accounting methods that make them more visible, unless it's a viral meme caused by people reading the headings and not the responses.
I wondered about that too. Maybe they only deposit amounts over 5 cents? I don't know - have we heard about stray pennies from other brokers? It does seem like the Vanguard name comes up a lot. I'm pretty much bewildered by the stray pennies posts of the last several months.
Worse we've seen people take counter productive steps when the penny shows up, steps that have cost them hundreds, possibly thousands, of dollars.
We have? I guess I missed that.

retiredjg
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Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Fri Jan 08, 2016 8:23 pm

Duckie wrote:
BAM! wrote:Here are some hypothetical numbers. Am I doing this right?
The amount in the existing Roth IRAs is irrelevant. The only way you would pay taxes on the conversions is if you have non-Roth IRAs, which you haven't mentioned.
There could be tax. Some of the contribution could be deductible….

I would not do it that way myself. That's why I asked where those numbers came from about what is taxable.

BAM!
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Re: Funding a backdoor Roth for 2015 in 2016

Post by BAM! » Sat Jan 09, 2016 2:06 am

Duckie wrote:
BAM! wrote:Here are some hypothetical numbers. Am I doing this right?
The amount in the existing Roth IRAs is irrelevant. The only way you would pay taxes on the conversions is if you have non-Roth IRAs, which you haven't mentioned.

Thanks! good to know. I don't have any other non-Roth IRAs.

I do have a 401k that i am maxing out. Will this be problematic?

retiredjg
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Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Sat Jan 09, 2016 6:31 am

Bam, you have not explained why some of the conversion is taxable and some is not. What's going on with that?

Rose
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Rose » Sat Jan 09, 2016 9:13 am

retiredjg wrote:Duckie, I wonder if your steps should be put in the Wiki?

One thing I might question is the second conversion - do we actually know if a custodian will convert something like 6 cents to Roth? It seems to me that as long as the amount is 49 cents or less, it should not matter - it can just be left there and will not complicate the conversion calculations.
Retiredjg, I agree with you completely. It is useful for some people in the same situation. I already posted the request:
viewtopic.php?f=9&t=18149&p=2751369#p2751369

Welcome others to do the same in the future. Really appreciate bogleheads generosity to share.

JW-Retired
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Re: Funding a backdoor Roth for 2015 in 2016

Post by JW-Retired » Sat Jan 09, 2016 9:54 am

Onionroottoots wrote: I would love to get one done for 2015 but don't know if it's possible given the status of my current accounts. I have an 8-year-old Rollover IRA with about $90K in it which I plan to reverse-rollover into a 401(k) account I still have from my last employer (to avoid the pro-rata rule). I verified my 401(k) allows roll-ins and I can do the roll-in even though I'm no longer an employee.
One comment....even though you have until 12/31/2016 to get your rollover IRA moved to your old 401k, I would get that move done ASAP before you do the backdoor maneuver. I don't put much trust in what 401k advisor phone voices tell me. At the very least, organizing this rollover may take a lot longer than you think.
JW
Retired at Last

overhaul
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Re: Funding a backdoor Roth for 2015 in 2016

Post by overhaul » Sat Jan 09, 2016 11:21 am

long time lurker but first time poster

I didnt think I could do a late contribution and subsequent conversion for the backdoor Roth so this was immensely helpful. After doing a littler further searching I came across an example of the 8606 form filled out at the wonderful blog by EmergDoc and excellently described above by Duckie.

Here is the link:
http://whitecoatinvestor.com/late-contr ... -roth-ira/

Note: if you use this page as a reference for filling out the form line 10 in the latter year you file is"1.000" not "1,000"

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Re: Funding a backdoor Roth for 2015 in 2016

Post by LadyGeek » Sat Jan 09, 2016 1:21 pm

Rose wrote:
retiredjg wrote:Duckie, I wonder if your steps should be put in the Wiki?

One thing I might question is the second conversion - do we actually know if a custodian will convert something like 6 cents to Roth? It seems to me that as long as the amount is 49 cents or less, it should not matter - it can just be left there and will not complicate the conversion calculations.
Retiredjg, I agree with you completely. It is useful for some people in the same situation. I already posted the request:
viewtopic.php?f=9&t=18149&p=2751369#p2751369

Welcome others to do the same in the future. Really appreciate bogleheads generosity to share.
Thanks to Rose's suggestion in Re: Suggestions for the Wiki, Duckie's post has been added to the wiki.

See: Backdoor Roth IRA ("External links")
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.

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Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Sat Jan 09, 2016 1:58 pm

That works. Putting it in as an external link gets the information in there in the right context - spanning 2 years. Get's past Epsilon Delta's first concern.

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Duckie
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Duckie » Sat Jan 09, 2016 3:52 pm

BAM! wrote:I don't have any other non-Roth IRAs.

I do have a 401k that i am maxing out. Will this be problematic?
No. 401k plans are not IRAs and so are not part of the pro-rata issue.

Onionroottoots
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Re: Funding a backdoor Roth for 2015 in 2016

Post by Onionroottoots » Sun Jan 10, 2016 12:25 am

JW-Retired wrote: I would get that move done ASAP before you do the backdoor maneuver. I don't put much trust in what 401k advisor phone voices tell me. At the very least, organizing this rollover may take a lot longer than you think.
Thanks, JW. I have it in process but you are right, it won't be fast or easy.

IRA manager says, "fill out these 8 pages and have 401(k) advisor sign this form."
401(k) advisor says, "fill out these other 8 pages and have IRA manager sign this other form."
Then both say they won't sign the others' forms because they are "third party."

I was hoping to get the money rolled before this market dive is over so it got back into investments before recovery but it's doubtful.

riskybiz64
Posts: 2
Joined: Mon Jan 25, 2016 11:41 am

Re: Funding a backdoor Roth for 2015 in 2016

Post by riskybiz64 » Mon Jan 25, 2016 11:51 am

Duckie, I've been doing backdoor Roth contributions since 2010 as I had no previous TIRA balances. This year, I have a sizeable rollover of an employee pension lump sum coming in to a TIRA (expected to be paid by March 1, 2016). Can I still do backdoor for 2015 (contributing to my existing 0-balance TIRA at Vanguard before April 15 and doing the conversion) without triggering any pro-rata rules, since my TIRA balance at Dec 31, 2015 was still zero? What if the rollover balance hits my TIRA account before April 15, 2016?

Related question, if I have a rollover TIRA balance in the future, but my wife does not, can I continue to do backdoor Roth conversions for her without triggering the pro-rate rules?

retiredjg
Posts: 33867
Joined: Thu Jan 10, 2008 12:56 pm

Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Mon Jan 25, 2016 4:48 pm

riskybiz64 wrote: Can I still do backdoor for 2015 (contributing to my existing 0-balance TIRA at Vanguard before April 15 and doing the conversion) without triggering any pro-rata rules, since my TIRA balance at Dec 31, 2015 was still zero? What if the rollover balance hits my TIRA account before April 15, 2016?
I'm not Duckie, but I'll go ahead and answer since she seems to be away for a bit.

You don't want to do this. The tIRA balance last year is not relevant. It is the tIRA balance at the end of a year in which you do a Roth conversion that matters. If you use the back door to contribute to Roth IRA in 2016, even if the contribution is for 2015, your Rollover IRA at the end of 2016 will be pro-rated with any Roth conversion that occurred in 2016.

Do you have somewhere to roll the Rollover before the end of the year?

I'm curious about something. There have been a number of people confused recently about this - thinking it is the tIRA balance at the end of the previous year that counts. Do you recall where you read or heard that?
Related question, if I have a rollover TIRA balance in the future, but my wife does not, can I continue to do backdoor Roth conversions for her without triggering the pro-rate rules?
Your IRA and your wife's IRA are individual. She can still do back door contributions even if it is not a good thing for you to do. Your Rollover IRA will not affect her.

riskybiz64
Posts: 2
Joined: Mon Jan 25, 2016 11:41 am

Re: Funding a backdoor Roth for 2015 in 2016

Post by riskybiz64 » Mon Jan 25, 2016 5:20 pm

Thanks, retiredjg.
retiredjg wrote:Do you have somewhere to roll the Rollover before the end of the year?
Possibly, but depends on new employer and whether their 401k plan is attractive.
retiredjg wrote:I'm curious about something. There have been a number of people confused recently about this - thinking it is the tIRA balance at the end of the previous year that counts. Do you recall where you read or heard that?
I think the confusion relates to the way the Form 8606 is worded and structured. When I go to fill out the form, in line 6 it says "Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2015, plus any outstanding rollovers (see instructions)" ... those instructions leave it unclear whether my not-yet-received pension rollover (which was not triggered until Jan 2016) is considered an "outstanding rollover" that should be included in the basis. Thanks to your answer, I see now that for my 2015 return, the non-deductible basis for 2015 is not affected (so my calendar year 2015 backdoor conversion is not taxable) but it would mess up any conversions done in 2016 calendar year (even if the non-deductible TIRA contribution was for 2015), when I go to do my 2016 return (and have to include the rollover).
retiredjg wrote:Your IRA and your wife's IRA are individual. She can still do back door contributions even if it is not a good thing for you to do. Your Rollover IRA will not affect her.
Thanks, I was hoping that would be the answer.

retiredjg
Posts: 33867
Joined: Thu Jan 10, 2008 12:56 pm

Re: Funding a backdoor Roth for 2015 in 2016

Post by retiredjg » Mon Jan 25, 2016 5:52 pm

In this case, perhaps you will know by mid-April whether your new 401k is attractive and whether it accepts inbound IRA rollovers.

If you find the new 401k is a go, you can contribute to IRA for 2015 up until tax day making sure you earmark it for 2015. Then at your leisure you can convert it to Roth.

As long as the Rollover IRA (and other IRAs) is empty by the end of the year, it will not affect your Roth conversion. It is not necessary that your tIRA be empty on the day you do a conversion. It simply must be empty, other than a few stray pennies, by the end of the year.

I too find the "outstanding rollovers" confusing. It is one of those things that is clear if you already understand what it is supposed to mean.

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