Author Topic: Backdoor Roth IRA conversion question  (Read 453 times)

tracipam

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Backdoor Roth IRA conversion question
« on: October 09, 2018, 02:27:29 PM »

Hello to all tax-geniuses out there!

I have a peculiar question and I'm not even sure how to search for the correct terms to see if it's been answered, so my apologies if it has been... and feel free to point me to the relevant posts if this has been done to death.

Question:

I currently contribute to a Roth IRA, and happily for my personal life and unhappily for my Roth IRA account, I'm getting married in a month.  Our combined income will knock us both out of the allowable Roth IRA contributing bracket.

Since I have a 401K at work, I will also not be eligible for a pre-tax traditional IRA, but I understand that I can contribute post-tax money to a traditional IRA and then use the backdoor Roth conversion to move it back to the Roth IRA. Correct? 

My question is, how are taxes handled on the conversion if you have already paid taxes on the traditional IRA and you then convert it to a Roth?  Do you need to pay taxes on the money twice (ie before it goes into the traditional and then when it is moved to the Roth) or if you move it within a certain period of time will it only be taxed once? 

I'm hoping one of the brilliant minds out there either knows or has already answered this question.  I will of course verify with a CPA prior to doing anything permanent, I just wanted to get an idea of what the situation is first. 

I suppose the answer to this question will determine whether I move it at all right now or hold it until I'm in a lower tax bracket in the future. 

Thank you all very much for your help!

Tracy

seattlecyclone

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Re: Backdoor Roth IRA conversion question
« Reply #1 on: October 09, 2018, 02:41:18 PM »
Post-tax traditional IRA funds are not taxed when converting to Roth. To make sure this all works out okay, make sure to file Form 8606 to report the after-tax contribution in the year you make the contribution, and again to report the Roth conversion in the year you make the conversion (could be the same year for both).

tracipam

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Re: Backdoor Roth IRA conversion question
« Reply #2 on: October 09, 2018, 03:52:07 PM »
Thank you so much for the quick response, seattleycyclone!  I really appreciate your help! 

MDM

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Re: Backdoor Roth IRA conversion question
« Reply #3 on: October 09, 2018, 08:26:34 PM »
It's a good idea to fill out form 8606 before you go through the process, just so you understand what will be required when you fill it for real next year.

Ricksun

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Re: Backdoor Roth IRA conversion question
« Reply #4 on: October 10, 2018, 04:00:18 AM »
Post-tax traditional IRA funds are not taxed when converting to Roth. To make sure this all works out okay, make sure to file Form 8606 to report the after-tax contribution in the year you make the contribution, and again to report the Roth conversion in the year you make the conversion (could be the same year for both).

This is true if you have no other pre-tax IRAs sitting around.  If so, you'd have to convert the same ratio amount pre-tax and post-tax, which gets messy (have not done it myself, so you may want to research it yourself if it applies).  You can avoid this by rolling the IRA into your 401k if that's a possibility with your employers plan.

Ricksun