Critique my plan to start Roth

[mucchad]

Calling all Mustachians

I have a plan to do my first backdoor Roth conversion this year, based on my research here and on Mad Feistiest. Please critique this plan to help me make it audit proof. Dont hold back the face punches :)

Background
1) 2019 income above limit, cannot Roth as per rules
2) Never done Roth before
3) Started 2019 with 2 pre tax IRAs with more than 90K balance each
4) In the past week I have rolled over most of the balance to a 401K, and have less then 5K balance remaining

Plan
1) Rollover entire pre tax IRA balance ( less then 5K ) to Roth
2) Open a new IRA for after tax contributions for 2019, and fund it fully and then rollover to Roth

[terran]

As long as you have no previously deducted IRA balance by December 31st of the year you do the conversion you should be good. Why not rollover the remaining $5k to the 401(k)?

[MDM]

Or, if you have a reason for wanting to pay tax on that $5K now, why not make your non-deductible contribution to the IRA holding it (instead of a new one) and convert $11K to Roth?

What you suggest will work - just asking to understand why....

[mucchad]

As long as you have no previously deducted IRA balance by December 31st of the year you do the conversion you should be good. Why not rollover the remaining $5k to the 401(k)?

Thanks @terran !
I didnt roll over the full amount to 401(k) due to two reasons - 1) My bank charged fees to close the IRA and roll the funds 2) I think I have overpaid my taxes and rather than get a refund I would convert to Roth
I didnt get what you mean by "no previously deducted IRA balance". I did rollover from the same IRA to a 401(k), and I will be converting the rest of the balance. Is that a problem?

[mucchad]

Or, if you have a reason for wanting to pay tax on that $5K now, why not make your non-deductible contribution to the IRA holding it (instead of a new one) and convert $11K to Roth?

What you suggest will work - just asking to understand why....

Thanks @MDM !
I am going to convert all the balance over to Roth, but I am not sure how to cleanly show the before-tax and after-tax part of the IRA for the pro-rata calculation.
I hope that having separate accounts will make that reporting easy.

[terran]

The $5k balance is a previously deducted balance. If that's still in the IRA (or already converted to Roth) in the year you make the conversion the non-deductible IRA balance to Roth (backdoor Roth), you'll owe tax on the conversion in the proportion (pro-rata) of the previously deducted balance to the total balance. So if you have $5k previously deducted, you contribute $5k that you don't deduct, and convert $5k, then 50% ($2500) of the conversion would be taxable. It sounds like you want to convert the whole thing ($10k in my example), so 50% will still be taxable ($5k) and in future years you won't have any previously deducted balance, so you'll be able to make the contribution/conversion without paying tax.

By rolling over most of it's not a big deal either way at this point, but to be totally optimal you'd roll over that $5K that you'd owe tax on before December 31st of the year you do the deduction so you wouldn't owe any tax since you're currently in a high tax bracket.

You'll indicate the amount of the rollover that's taxable and the amount that's not on form 8606.