Author Topic: Back Door Roth question  (Read 942 times)

dude

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Back Door Roth question
« on: March 08, 2017, 10:40:36 AM »
So, the wife and I are over the MAGI threshold for contributing to a Roth this year, but as I understand it, a basic backdoor Roth conversion is available.  According to Michael Kitces' website, the steps are as follows:

How To Do A Backdoor Roth IRA Contribution Safely
1.Verify there are no other pre-tax IRAs
2.If there are, roll over existing pre-tax IRAs to a 401(k) (if available) to avoid the IRA aggregation rule
3.Contribute to non-deductible IRA (if eligible)
4.Invest funds in the non-deductible IRA
5.Keep invested for 1 year (or if you’re more aggressive follow the “one-statement” rule)
6.Convert to Roth IRA
7.Repeat steps 2-5 annually as desired
8.Do not at any point along the way note that you are doing a “backdoor Roth contribution”!

https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggregation-rule-and-the-step-transaction-doctrine/

I have a 401k at work, but from what I can tell, that doesn't limit my ability to open a non-deductible Traditional IRA. Once I've done that, and a bit of time has passed, I can then convert it to a Roth.

Has anyone here done this?  What is the process for making the actual conversion from the non-deductible tIRA to the Roth IRA?

Appreciate any input!

dandarc

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Re: Back Door Roth question
« Reply #1 on: March 08, 2017, 10:45:41 AM »
Step 5 is a little paranoid, but yeah, that's the procedure.  I've heard Vanguard will do a backdoor Roth for you in one phone call, but as I've never personally been over the limit, no experience with that.
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cheddarpie

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Re: Back Door Roth question
« Reply #2 on: March 08, 2017, 10:58:31 AM »
I do this, but not steps 4, 5, or 8. I have done this the last five years with no issues. It's all aboveboard so I'm not sure why steps 5 and 8 are considered necessary. I contribute the max ($5500) to a traditional IRA, then the next day move it into my Roth. (Technically, I don't think you have to even wait a day.)

I use Schwab and they've made it very easy -- I call to verify I'm doing it right and they walk me through the steps. You'll get a form 5498 confirming the conversion but it's not one you have to file.

erutio

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Re: Back Door Roth question
« Reply #3 on: March 08, 2017, 11:38:50 AM »
Yeah, some of these steps are WAY too paranoid. In fact, steps 4 and 5 will cause additional headache and paperwork for you.  You do NOT want to earn any interest or capital gains in the TIRA before you make the conversion to roth.

 I've been doing the backdoor for the past 5 years.  In fact, vanguard and fidelity both encourage it as an option if your magi is to0 high; it's spelled out on their websites how to do it!

My first 2 years, I would deposit 5.5k into a tIRA, putting it in a money market fund. The day the funds clear, usually 5 business days, I call up VG and say I want to make a backdoor conversion.  I literally say, "I want to make a backdoor Roth conversion."  They know what I'm talking about and it's done within 10 mins.  For the past few years, I've just been doing it online; takes even less time.
« Last Edit: March 08, 2017, 11:45:12 AM by erutio »

erutio

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Re: Back Door Roth question
« Reply #4 on: March 08, 2017, 11:52:29 AM »
I dont understand the concern or paranoia about the backdoor Roth I've seen in recent posts.
In the 7 or so years of existence of the backdoor and millions of instances this has been used, the IRS has never once challenged it for anyone.  Congress has even made comments or hints that they are aware of it and it's kosher with them (for now).  Rules may change with the new administration, but if they do change, all prior conversions will likely be grandfathered.   

dude

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Re: Back Door Roth question
« Reply #5 on: March 10, 2017, 08:21:21 AM »
I hear you guys on the paranoia, but the step transaction caselaw is out there, so it continues to be a concern for many. I have to do step 4 (contribute to a non-deductible IRA), because I'm phased out of regular Roth contributions and I can't do a deductible IRA because I have a work provided plan that I max out.  I think I'll probably take the less paranoid route and just deposit the funds in a money market account within a non-deductible tIRA, then convert to a Roth a week later.  Thanks for the input!

financepatriot@gmail.com

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Re: Back Door Roth question
« Reply #6 on: March 10, 2017, 09:53:17 AM »
Before you do a backdoor Roth, you really need to consider if you have enough taxable investments to fund your early retirement.  The reason is that only Roth principal withdrawals are free of tax and penalty in a Roth.  Everything else is locked up until age 59.5.
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dandarc

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Re: Back Door Roth question
« Reply #7 on: March 10, 2017, 10:19:44 AM »
Before you do a backdoor Roth, you really need to consider if you have enough taxable investments to fund your early retirement.  The reason is that only Roth principal withdrawals are free of tax and penalty in a Roth.  Everything else is locked up until age 59.5.
Simply not true

Edit:  Got confused for a second.  Regular Roth contributions + aged conversion amounts (including backdoor Roth contributions that are 5 years old) can be withdrawn tax and penalty free before 59.5.
« Last Edit: March 10, 2017, 10:22:28 AM by dandarc »
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Aggie1999

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Re: Back Door Roth question
« Reply #8 on: March 10, 2017, 10:26:55 AM »
Got a question. I contributed the $5500 to my Roth IRA for 2017 at the start of Jan. I have now found out I will probably be over the 2017 MAGI limit for the full contribution. I have no traditional IRAs. Logically I should just be able to leave this $5500 contribution plus growth in the rIRA since in the end it is no different than me contributing the $5500 to a tIRA as non-deductible and then immediately rolling it over to a rIRA. Do I really have to re-characterize the $5500 plus growth to a tIRA and then do the conversion back to the rIRA while paying taxes on the growth? Any rule with the IRS allowing me to not have to go through this hassle as long as I keep track that I can't withdraw the $5500 from the rIRA before 5 years?

dandarc

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Re: Back Door Roth question
« Reply #9 on: March 10, 2017, 10:29:26 AM »
Got a question. I contributed the $5500 to my Roth IRA for 2017 at the start of Jan. I have now found out I will probably be over the 2017 MAGI limit for the full contribution. I have no traditional IRAs. Logically I should just be able to leave this $5500 contribution plus growth in the rIRA since in the end it is no different than me contributing the $5500 to a tIRA as non-deductible and then immediately rolling it over to a rIRA. Do I really have to re-characterize the $5500 plus growth to a tIRA and then do the conversion back to the rIRA while paying taxes on the growth? Any rule with the IRS allowing me to not have to go through this hassle as long as I keep track that I can't withdraw the $5500 from the rIRA before 5 years?
Yes.  because if you don't, you have made an excess contribution to your Roth IRA.  It is not exactly the same thing because rather than a "regular" contribution, this will be a "conversion" which has different rules for withdrawal down the road.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/