Author Topic: Help with backdoor Roth process  (Read 613 times)

aak

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Help with backdoor Roth process
« on: April 21, 2019, 03:45:08 PM »
Hello community!

I've been doing a lot of reading and learning about the backdoor Roth process, and I have two questions that I still need help with.

My situation: I have a 401(k) plan through my employer that I max out each year. I also have some money in a rollover ira that's been sitting untouched for several years now. Next week I will rollover the all of the IRA money into my employer 401(k). I also have a Roth IRA that I haven't contributed to for a few years due to income restrictions.

Can I make a non deductible contribution to my IRA and roll it over to my Roth IRA this year, or do I need to wait a year?

If yes, then can I do so without paying taxes on the money rolled over to my 401(k)? i.e does the pro rata rule apply to two separate rollovers?

Thank you all for your help!


terran

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Re: Help with backdoor Roth process
« Reply #1 on: April 21, 2019, 03:47:26 PM »
My understanding is that as long as you have $0 previously deducted in an IRA as of December 31 of the year in which you make a conversion then you can convert non-deducted IRA balances without paying tax.

MDM

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Re: Help with backdoor Roth process
« Reply #2 on: April 21, 2019, 10:23:50 PM »
1. Can I make a non deductible contribution to my IRA and roll it over to my Roth IRA this year, or do I need to wait a year?

2. If yes, then can I do so without paying taxes on the money rolled over to my 401(k)?

3. i.e does the pro rata rule apply to two separate rollovers?
1.  This year (assuming the rollover to the 401k succeeds).
2.  Yes.  One does not pay tax on rollovers.  On conversion, yes, but not rollovers.
3.  Best way to answer is fill out Form 8606 now, as if you were filling it out a year from now.  What answer (i.e., taxable amount) do you get?

ericbonabike

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Re: Help with backdoor Roth process
« Reply #3 on: May 10, 2019, 08:13:01 AM »
You will run into a problem with a backdoor roth iRA because you have a rollover IRA.

Let's say you have $100,000 in a traditional rollover IRA.
And you want to put $6000 into a "backdoor" roth.

You would fund it by putting it into a traditional IRA, but declare it be an "after-tax" contribution.
Then ideally, you'd immediately convert the traditional IRA after-tax contribution into a ROTH.
And this is how it would work if you didn't have the traditional rollover.

But....The IRS requires a proportional conversion of after-tax and pre-tax dollars.
So, in the case above:
IRS would require you to move a proportional amount from each account.
I think the math would go something like:
6000/(100000+6000) = after-tax percentage allowed to be rolled over.


So, when you went to do the rollover,  you'd be able to move 5.6% of your after-tax contribution ($340).
And the other 94% would come from pre-tax dollars ($6000-$340) = $5660.
This would unfortunately force you to declare that $5660 as income and pay wage taxes on it your highest marginal rate. 

The only way I could figure out to get around this was to convert my rollover IRA back into a 401k via my current employer.


MDM

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Re: Help with backdoor Roth process
« Reply #4 on: May 10, 2019, 10:02:33 AM »
You will run into a problem with a backdoor roth iRA because you have a rollover IRA.
...
The only way I could figure out to get around this was to convert my rollover IRA back into a 401k via my current employer.
Next week I will rollover the all of the IRA money into my employer 401(k).
Appears the OP has that plan.