Author Topic: Where to Open an Backdoor Roth IRA  (Read 2417 times)

travelawyer

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Where to Open an Backdoor Roth IRA
« on: January 03, 2017, 03:18:31 PM »
Apologies if this has been asked before (search is not working for me), but I would like to start the year off right by doing a backdoor Roth IRA.  My understanding is that I just open and fund a regular IRA, and then I convert it to Roth--correct?  Do I need to be concerned about provider considering this slightly more complicated procedure?  Does everyone just do these through VG, like they do everything else?

Next year, do I open a new IRA, and then convert it into the existing Roth?  or do I end up with a bunch of small Roth accounts for each year?

Background Facts:
-Yes, I already max out 401k, and DH's 401k. $18k each.
-I'm pregnant and on the "good" healthcare plan, so HSA not an option this year.
-Income is over the limits for a regular Roth, and for contributing to IRA tax-free (because of already contributing to the 401ks).

Thanks!

bugbaby

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Re: Where to Open an Backdoor Roth IRA
« Reply #1 on: January 03, 2017, 05:26:08 PM »
My understanding is that you open a Roth IRA like any other. Then over time you move funds from your IRA to your Roth IRA. You'll have to pay tax on the transferred funds.  But after this they'll have the benefits of a Roth. 

What is your marginal tax rate, will it be worth it now vs after FIRE?

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Spork

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Re: Where to Open an Backdoor Roth IRA
« Reply #2 on: January 03, 2017, 05:57:53 PM »
I'm partial to Vanguard because that's what I am familiar with.  Lots of folks use Fidelity and think it's just as good (and Fidelity is starting to have funds that undercut Vanguard's expense ratios by 1/1000 of a percent just to mess with them.)

My main advice would be: open both traditional and Roth at the same place.  It will make it easier.  Effectively you'll just be transferring cash from one account to another this way.

MDM

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Re: Where to Open an Backdoor Roth IRA
« Reply #3 on: January 03, 2017, 06:17:34 PM »
See Backdoor Roth IRA - Bogleheads and links therein for this topic.

In short, Spork said it: using the same broker for both the non-deductible tIRA and the Roth does make the most sense.

With This Herring

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Re: Where to Open an Backdoor Roth IRA
« Reply #4 on: January 03, 2017, 06:39:47 PM »
*snip*
Next year, do I open a new IRA, and then convert it into the existing Roth?  or do I end up with a bunch of small Roth accounts for each year?
*snip*

I have not done a backdoor Roth, but I did recently do a Roth conversion on an existing traditional IRA (both with Vanguard).  I would assume the account setup issues would be similar if not the same.

I started out with:
Account A - $100 - long-standing Roth IRA with a bunch of years of contributions in it
Account B - $200 - traditional IRA, rolled from a traditional 401(k)

I submitted the conversion request, specifying I wanted the entire amount for the traditional IRA converted to a Roth (and that I wanted to pay taxes directly, without having anything withheld from my IRA amounts being converted).

This left me with:
Account A - $300 - Roth IRA
Account B - $    0 - empty traditional rollover IRA (Vanguard has confirmed I can roll or contribute more money into this account later)
...and a tax bill for a $200 Roth conversion.

All numbers are, of course, made up.

So, I find it unlikely that you would need more than two IRA accounts per spouse (one traditional, one Roth).  You wouldn't need to open a new account each year.

cheddarpie

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Re: Where to Open an Backdoor Roth IRA
« Reply #5 on: January 03, 2017, 07:20:08 PM »
I have mine through Schwab and agree with others that having the Traditional IRA and the Roth at the same brokerage is easiest, whichever brokerage you choose.

I contribute the max $5500 to the Traditional IRA, then the following day transfer it to the Roth. I don't think it's necessarily a requirement that the transactions happen on different days, but I do it this way jut to be extra confident it doesn't get confused. It's the same idea if you make smaller stepped contributions, but I find it easier to keep track if I just do it all at once.

I've been doing this for several years and never had any issues tax-wise. They will send you a form after tax time (for me it's usually in May) for the conversion. You don't have to file it, but you do have to save it in case there are any questions that come up, so keep an eye out for it because it comes at such a strange time.


LeRainDrop

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Re: Where to Open an Backdoor Roth IRA
« Reply #6 on: January 03, 2017, 07:46:52 PM »
I'm partial to Vanguard because that's what I am familiar with.  Lots of folks use Fidelity and think it's just as good (and Fidelity is starting to have funds that undercut Vanguard's expense ratios by 1/1000 of a percent just to mess with them.)

My main advice would be: open both traditional and Roth at the same place.  It will make it easier.  Effectively you'll just be transferring cash from one account to another this way.

Exactly this.  If you already have a Roth IRA open at Vanguard, Fidelity, or another low-cost broker where you're happy, then you would contribute into a new traditional IRA with that broker, and then the next day convert those funds into your existing Roth IRA with that broker.  Vanguard's website makes it pretty easy to follow the process, but if you're more comfortable talking with an account rep to make sure you do it correctly, you can call them and they know exactly what to do.  I have no experience with Fidelity, but I'm sure they have the same quality guidance online and on the phone.

jamesbond007

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Re: Where to Open an Backdoor Roth IRA
« Reply #7 on: January 03, 2017, 08:18:29 PM »
See Backdoor Roth IRA - Bogleheads and links therein for this topic.

In short, Spork said it: using the same broker for both the non-deductible tIRA and the Roth does make the most sense.

How to do I make it "non-deductible"? I tried to open an tIRA at Vanguard and found no option to mark it non-deductible. So I stopped doing it to make sure I do it right. I talked to a rep and he told me to open the IRA online and call them for conversion. Do you open the IRA and fund it and then convert it to Roth after the funds are posted?

MDM

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Re: Where to Open an Backdoor Roth IRA
« Reply #8 on: January 03, 2017, 08:36:24 PM »
See Backdoor Roth IRA - Bogleheads and links therein for this topic.

In short, Spork said it: using the same broker for both the non-deductible tIRA and the Roth does make the most sense.

How to do I make it "non-deductible"? I tried to open an tIRA at Vanguard and found no option to mark it non-deductible. So I stopped doing it to make sure I do it right. I talked to a rep and he told me to open the IRA online and call them for conversion. Do you open the IRA and fund it and then convert it to Roth after the funds are posted?
In general, it's not you who makes it non-deductible, it's the IRS who does so.  See IRA Deduction Limits.

Were you able to read the whole Bogleheads article and the "comprehensive tutorial" linked near its beginning?
« Last Edit: January 03, 2017, 10:11:00 PM by MDM »

travelawyer

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Re: Where to Open an Backdoor Roth IRA
« Reply #9 on: January 03, 2017, 09:31:11 PM »
Thanks everyone for your responses. I do not have an IRA or Roth IRA anywhere yet so I am a free agent. Since it seems any major brokerage is a fine choice, I will probably stick with Fidelity as that's where my taxable brokerage account is. Bogleheads article was very helpful-did not realize that even if you had separate IRAs your conversion would be averaged across the for tax purposes. Not an issue for now but good to know.

trammatic

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Re: Where to Open an Backdoor Roth IRA
« Reply #10 on: January 04, 2017, 12:14:43 PM »
Bogleheads article was very helpful-did not realize that even if you had separate IRAs your conversion would be averaged across the for tax purposes.
One way around this is to transfer your existing, pre-tax IRA amounts into an employer 401(k) plan.  If you have nothing in pre-tax IRAs, then the entire conversion amount is essentially tax-free.