Backdoor Roth IRAs Could Cost Some Investors at Tax Time

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Doc
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Backdoor Roth IRAs Could Cost Some Investors at Tax Time

Post by Doc »

Backdoor Roth IRAs Could Cost Some Investors at Tax Time
This maneuver could spell trouble for those with other IRA assets.
However, if you have other IRA assets that haven't been taxed yet, you need to think twice before engineering a backdoor Roth. If you don't, your new Roth IRA could cost you a lot more in taxes than you had planned.
http://news.morningstar.com/articlenet/ ... ?id=364861
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
natureexplorer
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Post by natureexplorer »

There is a work around for that.
Wagnerjb
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Re: Backdoor Roth IRAs Could Cost Some Investors at Tax Time

Post by Wagnerjb »

Doc wrote:Backdoor Roth IRAs Could Cost Some Investors at Tax Time
This maneuver could spell trouble for those with other IRA assets.
Christine should have written this article 365 days ago. This was a well known risk of the TIRA "back door" and was discussed several times at this forum. Sadly, Christine waits until 2010 is completely over before highlighting this risk. I pity the poor M* reader who rushed to open a non-deductible TIRA and converted to a Roth, only to get a nasty surprise when they do their taxes.

Best wishes.
Andy
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oneleaf
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Re: Backdoor Roth IRAs Could Cost Some Investors at Tax Time

Post by oneleaf »

Wagnerjb wrote:
Doc wrote:Backdoor Roth IRAs Could Cost Some Investors at Tax Time
This maneuver could spell trouble for those with other IRA assets.
Christine should have written this article 365 days ago. This was a well known risk of the TIRA "back door" and was discussed several times at this forum. Sadly, Christine waits until 2010 is completely over before highlighting this risk. I pity the poor M* reader who rushed to open a non-deductible TIRA and converted to a Roth, only to get a nasty surprise when they do their taxes.

Best wishes.
no kidding. from the title of the article, i thought there was some interesting new revelation. But she just highlighted an issue that was a fundamental aspect to the decision to do a backdoor Roth. This information is way too late.
ChiSox
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Post by ChiSox »

natureexplorer wrote:There is a work around for that.
What's the work around?
ChiSox
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Re: Backdoor Roth IRAs Could Cost Some Investors at Tax Time

Post by ChiSox »

Wagnerjb wrote:
Doc wrote:Backdoor Roth IRAs Could Cost Some Investors at Tax Time
This maneuver could spell trouble for those with other IRA assets.
Christine should have written this article 365 days ago. This was a well known risk of the TIRA "back door" and was discussed several times at this forum. Sadly, Christine waits until 2010 is completely over before highlighting this risk. I pity the poor M* reader who rushed to open a non-deductible TIRA and converted to a Roth, only to get a nasty surprise when they do their taxes.

Best wishes.
Consider me one of those fools. What are my options? Recharacterize back and just have the 5k plus or minus sit in a non deductible? What really gets me is I could have contributed directly to a Roth in 2010. D'oh!
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dmcmahon
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Post by dmcmahon »

What about someone who has a single IRA, 100% untaxed money, who converts part of the account to a Roth? In this case, she just pays tax on 100% of the converted amount, correct?
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Cloud
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Post by Cloud »

ChiSox wrote:
natureexplorer wrote:There is a work around for that.
What's the work around?
Hide or get rid of your IRA first. Roll it into your employers 401K plan is one option.

http://thefinancebuff.com/the-backdoor- ... ow-to.html
Jfet
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Post by Jfet »

my strategy, called the "risky roth", is implemented a bit differently.

I split up my non-deductable $50,000 IRA into ten $5000 accounts, then invested each of those accounts in a high risk/high reward stock play. The idea was to keep the good ones and recharacterize the poor performers.

Right now, because of a big move in CSCO, MSFT and FRO, three of my plays have doubled in value (a bit over) and I am keeping those and putting them in Vanguard funds (so will now have around $35,000 Roth in Vanguard fund for $5000 or so in taxes). The other 7 plays are doing fair...one is up $1000, four are +/-$100, and two are not looking so hot (shorted Netflix and Apple). Hopefully I will get at least 2 more to double out of the seven before I am done.
Wagnerjb
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Post by Wagnerjb »

Jfet wrote:two are not looking so hot (shorted Netflix and Apple).
I thought I read you are not allowed to short in an IRA (maybe because you aren't allowed to have a margin account in an IRA?). Did your broker allow you to do this?

Best wishes.
Andy
Jfet
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Post by Jfet »

Wagnerjb wrote:
Jfet wrote:two are not looking so hot (shorted Netflix and Apple).
I thought I read you are not allowed to short in an IRA (maybe because you aren't allowed to have a margin account in an IRA?). Did your broker allow you to do this?

Best wishes.
I bought puts.
ChiSox
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Post by ChiSox »

Update: I spoke with the IRS and Vanguard, in that order. I told the IRS of my plan to recharacterize the 2010 contribution back to my non-deductable IRA and then remove it and directly contribute it to the Roth for 2010. The lady seemed to agree with me that I was doing everything correctly.

I called Vanguard and told them of my plan and they recharacterized the contribution plus earnings back to the IRA. She also mentioned that on Monday I could call back and have them recharacterize that contribution as a Roth contribution (instead of removing it from the account and then directly contributing it to the Roth).

This seems to make sense so that's what I will do come Monday morning, unless the wise folks on the forum can think of anything I'm overlooking?
Wagnerjb
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Re: Backdoor Roth IRAs Could Cost Some Investors at Tax Time

Post by Wagnerjb »

ChiSox wrote:Consider me one of those fools. What are my options? Recharacterize back and just have the 5k plus or minus sit in a non deductible? What really gets me is I could have contributed directly to a Roth in 2010. D'oh!
Yes, that's certainly one option. That alternative of recharacterizing will allow you to avoid paying tax on the value of the pretax IRA that is considered to be converted. Or, you can pay the tax and move on.

But if you pay the tax and move on, you have to track the basis and deal with ratios next time too. Let's say you had a pretax IRA of $45,000 and you contributed to a $5000 non-deductible IRA in 2010....then converted $5000 to a Roth. For 2010, you pay tax on 90% of the conversion value. Then at a later date when you either convert additional amounts or withdraw from the IRA, you will have to track the appropriate percentages too. That certainly isn't a daunting task, just an annoying one.

I believe my example with the 90% figure is accurate, but be sure to check with your accountant for the exact procedure.

Best wishes.
Andy
want2bedone
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Post by want2bedone »

Cloud wrote:
ChiSox wrote:
natureexplorer wrote:There is a work around for that.
What's the work around?
Hide or get rid of your IRA first. Roll it into your employers 401K plan is one option.

http://thefinancebuff.com/the-backdoor- ... ow-to.html
Thank you soooooo much for posting this link. I had no idea that this was even a possibility. I called my 401k custodian today and found out they allow imcoming rollovers. I'm so beyond glad I can get rid of my TIRA to facilitate a backdoor ROTH without having to convert the TIRA and pay the associated taxes on the conversion.

Dang I love this board!!!!
rai
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Post by rai »

our tax laws are very confusing (IMO)
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair
allancoleman
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Post by allancoleman »

Lessons learned is don't try to get " cute " or " fancy " or anything " complicated " with your Roth conversions . I've been doing straight Roth conversions for years now and I've never used any " tricks " to accomplish them . Either I qualfy each tax year or I don't . :)
JW-Retired
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Post by JW-Retired »

allancoleman wrote: I've been doing straight Roth conversions for years now and I've never used any " tricks " to accomplish them. Either I qualfy each tax year or I don't .
The 2010 change is now everyone is "qualified". No income limit any more. So it's a new thing for many of us.
JW
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Post by allancoleman »

JW Nearly Retired wrote:
allancoleman wrote: I've been doing straight Roth conversions for years now and I've never used any " tricks " to accomplish them. Either I qualfy each tax year or I don't .
The 2010 change is now everyone is "qualified". No income limit any more. So it's a new thing for many of us.
JW
You're right , JW Nearly Retired , and I think its wonderful . :)
JW-Retired
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Post by JW-Retired »

Wagnerjb wrote:Christine should have written this article 365 days ago. This was a well known risk of the TIRA "back door" and was discussed several times at this forum. Sadly, Christine waits until 2010 is completely over before highlighting this risk. I pity the poor M* reader who rushed to open a non-deductible TIRA and converted to a Roth, only to get a nasty surprise when they do their taxes.
Amen to that. She waits until Jan 3rd to inform M* readers so they will have already converted. Thanks for nothing Christine. M* should dump her.
JW
natureexplorer
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Post by natureexplorer »

JW Nearly Retired wrote:Amen to that. She waits until Jan 3rd to inform M* readers so they will have already converted. Thanks for nothing Christine. M* should dump her.
Financial journalism doesn't pay well, so you get what they pay.
allancoleman
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Post by allancoleman »

JW Nearly Retired wrote:
Wagnerjb wrote:Christine should have written this article 365 days ago. This was a well known risk of the TIRA "back door" and was discussed several times at this forum. Sadly, Christine waits until 2010 is completely over before highlighting this risk. I pity the poor M* reader who rushed to open a non-deductible TIRA and converted to a Roth, only to get a nasty surprise when they do their taxes.
Amen to that. She waits until Jan 3rd to inform M* readers so they will have already converted. Thanks for nothing Christine. M* should dump her.
JW
You're right , JW . Most investors do NOT realize that the Roth conversion deadline is December 31st of each calendar year and NOT tax time each April as it is for Roth contributions . :!: . I always do my Roth conversions each fall after I get a pretty good idea of what my income is going to be for that tax year so I can better calculate my taxes owned on that conversion .
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Post by JW-Retired »

allancoleman wrote: You're right, JW . Most investors do NOT realize that the Roth conversion deadline is December 31st of each calendar year and NOT tax time each April as it is for Roth contributions . . I always do my Roth conversions each fall after I get a pretty good idea of what my income is going to be for that tax year so I can better calculate my taxes owned on that conversion.
You clearly understand what you are doing Allan. How did you become well informed about how to go about it? Were any financial journalist articles of any help at all?
JW
allancoleman
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Post by allancoleman »

JW Nearly Retired wrote:
allancoleman wrote: You're right, JW . Most investors do NOT realize that the Roth conversion deadline is December 31st of each calendar year and NOT tax time each April as it is for Roth contributions . . I always do my Roth conversions each fall after I get a pretty good idea of what my income is going to be for that tax year so I can better calculate my taxes owned on that conversion.
You clearly understand what you are doing Allan. How did you become well informed about how to go about it? Were any financial journalist articles of any help at all?
JW
No , JW . I just enjoy reading the different IRS publications word - for - word every year and finding the numerous small errors in each publication . :) . In the end , ALL of the financial articles , books , and publications won't do you any good IF they don't agree with the IRS publications . :!: . The I.R.S. publications are definitely the final word on any transactions to do with IRAs . And that includes any particular individual custodian IRA policies . And even then when I have had an arguement with the I.R.S. on some of their local individual office decisions and taken my arguement to the I.R.S. Washington , D.C. office , I have won . :)
JW-Retired
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Post by JW-Retired »

allancoleman wrote:No , JW . I just enjoy reading the different IRS publications word - for - word every year and finding the numerous small errors in each publication . In the end, ALL of the financial articles , books , and publications won't do you any good IF they don't agree with the IRS publications.
Yes, but there are maybe millions of us in similar circumstances. We should not all have to reinvent the wheel separately. That's what the financial writers should be there for.

It sure was my lucky day when I stumbled upon Bogleheads.org.
JW
allancoleman
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Post by allancoleman »

JW Nearly Retired wrote:
allancoleman wrote:No , JW . I just enjoy reading the different IRS publications word - for - word every year and finding the numerous small errors in each publication . In the end, ALL of the financial articles , books , and publications won't do you any good IF they don't agree with the IRS publications.
Yes, but there are maybe millions of us in similar circumstances. We should not all have to reinvent the wheel separately. That's what the financial writers should be there for.

It sure was my lucky day when I stumbled upon Bogleheads.org.
JW
Financial writers aren't always going to be completely accurate in all of their articles contents , JW , and you still may have to " reinvest " the wheel separately in order to solve some of your separate individual circumstances issues that may conflict with the many different IRS publication regulations . Publication 590 is up to 110 pages long now . :!: . Its no wonder our tax code is so complicated . :)

And ditto on bogleheads.org . :!: . There are a lot of really knowledgeable folks here . :)

Bottom line is to read the IRS publications fully that might apply to your separate issues and you'll save yourself a lot of grief later .
alphastar
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Post by alphastar »

Allan,
Is it possible to
1. contribute $5000 in non-deductible contributions for a new IRA for the 2010 year, now
2. contribute a further $5000 to the same IRA for the 2011 year
3. Convert the entire $10000 + earnings in the IRA to a Roth IRA anytime before Dec 31, 2011, without any taxable income being generated?

Thanks
Alpha
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SSSS
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Post by SSSS »

alphastar wrote:Allan,
Is it possible to
1. contribute $5000 in non-deductible contributions for a new IRA for the 2010 year, now
2. contribute a further $5000 to the same IRA for the 2011 year
3. Convert the entire $10000 + earnings in the IRA to a Roth IRA anytime before Dec 31, 2011, without any taxable income being generated?
Yes, except if you don't convert right away, the market value when you convert is likely to be higher (or lower) than your $10,000 basis, and you'll have to pay tax on the gains. When the funds are in the traditional IRA, you can put them in a money market fund to prevent market fluctuations prior to the conversion.
Abbey
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Post by Abbey »

Is it correct that I can only convert once a year from IRA to Roth? I believe I read that but can't find the section in the IRS code.
Abbey
anoop
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Re: Backdoor Roth IRAs Could Cost Some Investors at Tax Time

Post by anoop »

I recently came across this article which discusses yet another issue regarding the backdoor roth -- the step transaction doctrine.

In all these years of reading recommendations for how to participate in the backdoor roth, this is the first article that points to a risk.
https://www.kitces.com/blog/dodging-the ... -or-abuse/

Has anyone else come across this? Is this a genuine concern?
Iorek
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Re: Backdoor Roth IRAs Could Cost Some Investors at Tax Time

Post by Iorek »

anoop wrote:I recently came across this article which discusses yet another issue regarding the backdoor roth -- the step transaction doctrine.

In all these years of reading recommendations for how to participate in the backdoor roth, this is the first article that points to a risk.
https://www.kitces.com/blog/dodging-the ... -or-abuse/

Has anyone else come across this? Is this a genuine concern?
Being discussed here viewtopic.php?f=10&t=186298
anoop
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Re: Backdoor Roth IRAs Could Cost Some Investors at Tax Time

Post by anoop »

Thanks!
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