Author Topic: Backdoor Roth  (Read 2454 times)

Gatorz95uf

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Backdoor Roth
« on: January 03, 2016, 09:37:22 PM »
Hi!

My wife (30 yrs old) and I (44 yrs old) each max our our 401k and receive company match.  We also max out our HSA and contribute to 529.  We also recieve yearly profit sharing. We work for the same company.  Feeling good with what we're doing, but know we could always do more and hope to retire when I hit 60, if not earlier.

I've been exploring what else we could do and keep coming across backdoor Roths.  We make over the max allowable for married file jointly.

My understanding is we can invest 11k in a traditional, non deductible Ira, then convert to Roth IRA the next day.

I'm trying to fully understand the tax implications.  The 11k would be taxed as normal salary, right?  I would be taxed on this if I didn't do the Ira.  Im not being double taxed....Am I missing something else?   

Thanks for any input or advise.

MDM

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Re: Backdoor Roth
« Reply #1 on: January 03, 2016, 11:58:54 PM »
I've been exploring what else we could do and keep coming across backdoor Roths.  We make over the max allowable for married file jointly.

My understanding is we can invest 11k in a traditional, non deductible Ira, then convert to Roth IRA the next day.

I'm trying to fully understand the tax implications.  The 11k would be taxed as normal salary, right?  I would be taxed on this if I didn't do the Ira.  Im not being double taxed....Am I missing something else?   
Gatorz95uf, welcome to the forum.

Your understanding is correct.  See (if you haven't already) https://www.bogleheads.org/wiki/Backdoor_Roth_IRA for more details.

Tjat

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Re: Backdoor Roth
« Reply #2 on: January 04, 2016, 08:48:11 AM »
The 11K would be taxed as you would be making a non-deductible contribution to your traditional IRA. You'd convert it to a roth the next day with no additional taxes taken out. Now that it's in a roth, you're earnings and future eligible withdrawals would be tax free.

BlueHouse

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Re: Backdoor Roth
« Reply #3 on: January 04, 2016, 09:37:11 AM »
My understanding is we can invest 11k in a traditional, non deductible Ira, then convert to Roth IRA the next day.
(emphasis is mine)

My accountant has requested that I allow my contribution to sit in the tIRA for at least one statement before moving it into a Roth.  Makes it easier for tracking and documenting. 

Kitces recommends a full year and here's why:  https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggregation-rule-and-the-step-transaction-doctrine/


catccc

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Re: Backdoor Roth
« Reply #4 on: January 04, 2016, 01:30:52 PM »
If you have any existing traditional (non-roth) IRAs, you'll want to look into the pro-rata rule to ensure your backdoor roth move goes smoothly.

Tjat

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Re: Backdoor Roth
« Reply #5 on: January 04, 2016, 02:43:54 PM »
My understanding is we can invest 11k in a traditional, non deductible Ira, then convert to Roth IRA the next day.
(emphasis is mine)

My accountant has requested that I allow my contribution to sit in the tIRA for at least one statement before moving it into a Roth.  Makes it easier for tracking and documenting. 

Kitces recommends a full year and here's why:  https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggregation-rule-and-the-step-transaction-doctrine/

The step transaction risk is based on a 1930's court case that has yet to be revisited in regard to backdoor roth conversions and has never been commented on by the IRS. I wouldn't sub-optimize your investment strategy on the fear that the IRS will finally define their interpretation and then retroactively single you out of the many thousands that execute a backdoor roth (something legislatively legal without any direct mention of a required time lag). Keep in mind that the tax forms don't even include the day for which you conduct your transactions (may be discovered during an Audit, but there's no indication that the IRS even has a problem with it).


MustacheAndaHalf

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Re: Backdoor Roth
« Reply #6 on: January 05, 2016, 07:29:54 AM »
Here's my non-lawyer opinion.

If the IRS challenges you with the step doctrine, point out that a bond index fund held in a non-deductible IRA has an advantage for you.  The interest stays in the account rather than being taxed, so you earn interest on interest.  Although you later pay taxes, you have earned interest that would not be possible outside the non-deductible IRA.

But the most likely answer is the IRS doesn't care.  Most people wait days or a month before converting, and only the growth is taxed.  So if $5,000 grows to $5,024 before being converted... and you're in the 33% bracket, we're talking $8 in tax.  The IRS could audit you, reverse the transaction, and hand you $8 back.  Consider it from the IRS perspective - is any IRS auditor going to get promoted for finding $8 to pick on, let alone give back to taxpayers?