Author Topic: Did I Goof on My Backdoor Roth?  (Read 2893 times)

Bones81

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Did I Goof on My Backdoor Roth?
« on: January 08, 2017, 02:27:52 PM »
Since 2010, I've contributed after-tax dollars to my tIRA in the max allowed given my income has been too high to make deductable tIRA contributions.  These contributions have totaled $37k through 2016. 

Recently, I rolled a $401k from a previous employer into the tIRA.  This was a large amount and my tiRA balance is now sitting at $300k and my Roth balance is ~$47k.  If I'm interpreting the pro-rata rule correctly, on any distribution from my tIRA to my Roth, ~76% this would be taxable (~$84k of after-tax dollars versus ~$347k in total IRA assets). 

If 75% of any money I move from my traditional to Roth is taxable, then I will hold off on doing any Roth ladders until I'm done working and don't have much income. 

I'm checking with my present 401k administrator to see if the mega backdoor is an option.  Maybe I can go that route to get money into the Roth in a tax efficient manner. 

Just wanted to make sure I'm interpreting everything correctly and seeing if I have any other options. 

erutio

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Re: Did I Goof on My Backdoor Roth?
« Reply #1 on: January 08, 2017, 02:30:49 PM »
See if you can roll you tIRA back into your 401k.

Trifele

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Re: Did I Goof on My Backdoor Roth?
« Reply #2 on: January 08, 2017, 05:06:41 PM »
Posting to follow. I am trying to figure out the mega backdoor Roth . . .

Bones81

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Re: Did I Goof on My Backdoor Roth?
« Reply #3 on: January 08, 2017, 08:16:37 PM »
Posting to follow. I am trying to figure out the mega backdoor Roth . . .

I'll see if and what I can roll into my 401k.  Ideally, I'd move all my pre-tax money into it, make my $5,500 contribution for 2017 into the tIRA and then roll it and the rest of the after-tax money over to my roth. 

Now I have to figure out if there are restrictions on moving money back and forth between 401ks and IRAs.


Bourbon

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Re: Did I Goof on My Backdoor Roth?
« Reply #4 on: January 08, 2017, 08:56:19 PM »
Didn't have that much in my IRA when I had to start using the backdoor, but I was able to roll all the pretax money into my 401k.  Hopefully your plan allows as well. 

Don't have the options necessary to do the mega backdoor, but at least this was available to me.

seattlecyclone

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Re: Did I Goof on My Backdoor Roth?
« Reply #5 on: January 08, 2017, 09:24:50 PM »
Just to clarify, did you ever move your after-tax traditional IRA contributions to Roth, or are they all still sitting there in the traditional account along with the pre-tax money you rolled in from your 401(k)?

The pro-rata rule doesn't take any existing Roth dollars into account. It only looks at the pre-tax vs. post-tax balance in your traditional IRAs.

Bones81

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Re: Did I Goof on My Backdoor Roth?
« Reply #6 on: January 08, 2017, 11:16:25 PM »
Just to clarify, did you ever move your after-tax traditional IRA contributions to Roth, or are they all still sitting there in the traditional account along with the pre-tax money you rolled in from your 401(k)?

The pro-rata rule doesn't take any existing Roth dollars into account. It only looks at the pre-tax vs. post-tax balance in your traditional IRAs.

I haven't moved my after-tax traditional IRA contributions to my Roth.  If the pro-rata rule doesn't take Roth dollars into account, then $37k of after-tax dollars of my $300k traditional IRA total balance means ~88% of any money I move into the Roth would be taxable. 

seattlecyclone

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Re: Did I Goof on My Backdoor Roth?
« Reply #7 on: January 09, 2017, 09:04:17 PM »
Okay, then yes you did goof. You should have done a Roth conversion prior to moving your old 401(k) in there. You can look into whether your current 401(k) will accept rollovers from IRAs. If so, you can roll the whole pre-tax balance in there and then you're free to do a Roth conversion on the rest.

Bones81

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Re: Did I Goof on My Backdoor Roth?
« Reply #8 on: January 09, 2017, 09:20:52 PM »
Okay, then yes you did goof. You should have done a Roth conversion prior to moving your old 401(k) in there. You can look into whether your current 401(k) will accept rollovers from IRAs. If so, you can roll the whole pre-tax balance in there and then you're free to do a Roth conversion on the rest.

My 401k allows for transfers from IRAs but no in-service withdraws so I can't move the money back into the IRA while I'm still at my current job. Not a big deal since I'm planning on leaving that job soon anyway.  So I guess once I know I'm leaving, I'll roll the pre-tax money into the 401k, make my 2017 contribution to the tIRA and then move it all to the Roth.  Once I start a new job, I'll roll the 401k back into the tIRA and should be a happy camper. 

Unfortunately my current 401 doesn't accept after-tax contributions, so no mega backdoor option.   

seattlecyclone

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Re: Did I Goof on My Backdoor Roth?
« Reply #9 on: January 09, 2017, 09:28:06 PM »
Might as well get the ball rolling now. The transfer process can take a couple of weeks, and it's unlikely the fund options in your current 401(k) are so terrible that you would need to wait until the last minute if you're planning on switching jobs sometime this year anyway.

Bones81

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Re: Did I Goof on My Backdoor Roth?
« Reply #10 on: March 24, 2017, 01:32:15 PM »
Finally got all of this taken care of and just in time since my last official day at the job is April 4.  I moved all the pre-tax contributions and earnings over to the 401k which surprisingly took only a week.  I mailed the forms to Vanguard and T. Rowe Price and they just did it, no follow up questions etc. which was nice.  Moved the after tax contributions in my traditional over to my Roth today and that only took a few clicks on Vanguard's website. 

The one thing I didn't realize before and I'm glad I caught is that the pro rata rule doesn't apply on the date that you make the traditional-to-Roth conversion but rather on the last day of the year in which you did the conversion.  That means I have to let the money I rolled into my 401k sit there the rest of the year and then I can roll it all into my traditional IRA in January of next year.  If I rolled the 401k into my traditional IRA in a few weeks once I was eligible (because I'm no longer employed by that company) I would have been borked pretty hard by the pro rata rule. 

Thanks for the advice on this.   

ClovisKid

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Re: Did I Goof on My Backdoor Roth?
« Reply #11 on: March 25, 2017, 09:46:07 AM »
Why not just keep your money in the 401k? Most 401ks these days have a selection of some of the same low cost mutual funds and ETFs that you can get outside of a 401k. The financial industry continues to tout rollovers so they can get their hands on your money, but the advantages of doing a rollover have diminished over the years as 401k costs and administrative fees have been reduced or eliminated altogether. 401ks have some protection advantage over IRAs in cases where you may be sued in the future. Also, if you plan to work again, you can't do any more post tax IRA rollovers to a Roth without being subject to the same pro-rata rule you just worked to avoid. There's no guarantee that the 401(k) at any future employer would accept IRA rollovers like your current/former employer.
« Last Edit: March 27, 2017, 03:44:58 PM by ClovisKid »

Bones81

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Re: Did I Goof on My Backdoor Roth?
« Reply #12 on: March 26, 2017, 02:10:16 PM »
Why not just keep your money in the 401k? Most 401ks these days have a selection of some of the same low cost mutual funds and ETFs that you can get outside of a 401k. The financial industry continues to tout rollovers so they can get their hands on your money, but the advantages of doing a rollover have diminished over the years as 401k costs and administrative fees have been reduced or eliminated altogether. 401ks have some protection advantage over IRAs in cases where you may be sued in the future. Also, if you plan to work again, you can't do any more post tax IRA rollovers to a Roth without being subject to the same pro-rata rule you just worked to avoid. There's no guarantee that the 401(k) at any future employer would except IRA rollovers like your current/former employer.

The investment selections in the current 401k are pretty crap.  Best I can do is a T. Rowe Price 2045 fund which charges ~75 bps in annual fees.  If I start working again, I'll see what options the new 401k will have, if it is decent, I could just roll the existing 401 to the new one, if not, then it goes into my Vanguard Brokerage IRA where I can buy my low cost Vanguard ETFs.   

ClovisKid

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Re: Did I Goof on My Backdoor Roth?
« Reply #13 on: March 27, 2017, 03:42:58 PM »
Why not just keep your money in the 401k? Most 401ks these days have a selection of some of the same low cost mutual funds and ETFs that you can get outside of a 401k. The financial industry continues to tout rollovers so they can get their hands on your money, but the advantages of doing a rollover have diminished over the years as 401k costs and administrative fees have been reduced or eliminated altogether. 401ks have some protection advantage over IRAs in cases where you may be sued in the future. Also, if you plan to work again, you can't do any more post tax IRA rollovers to a Roth without being subject to the same pro-rata rule you just worked to avoid. There's no guarantee that the 401(k) at any future employer would accept IRA rollovers like your current/former employer.

The investment selections in the current 401k are pretty crap.  Best I can do is a T. Rowe Price 2045 fund which charges ~75 bps in annual fees.  If I start working again, I'll see what options the new 401k will have, if it is decent, I could just roll the existing 401 to the new one, if not, then it goes into my Vanguard Brokerage IRA where I can buy my low cost Vanguard ETFs.   

Yeah, I would agree that is kinda crappy.  Just be careful re: the last sentence in my post:

There's no guarantee that the 401(k) at any future employer would except IRA rollovers like your current/former employer.

You could lock yourself out of being able to convert any more funds without falling into the proportional rule again.
« Last Edit: March 27, 2017, 03:44:31 PM by ClovisKid »

shawndoggy

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Re: Did I Goof on My Backdoor Roth?
« Reply #14 on: March 27, 2017, 03:55:20 PM »
Finally got all of this taken care of and just in time since my last official day at the job is April 4.  I moved all the pre-tax contributions and earnings over to the 401k which surprisingly took only a week.  I mailed the forms to Vanguard and T. Rowe Price and they just did it, no follow up questions etc. which was nice.  Moved the after tax contributions in my traditional over to my Roth today and that only took a few clicks on Vanguard's website. 

The one thing I didn't realize before and I'm glad I caught is that the pro rata rule doesn't apply on the date that you make the traditional-to-Roth conversion but rather on the last day of the year in which you did the conversion.  That means I have to let the money I rolled into my 401k sit there the rest of the year and then I can roll it all into my traditional IRA in January of next year.  If I rolled the 401k into my traditional IRA in a few weeks once I was eligible (because I'm no longer employed by that company) I would have been borked pretty hard by the pro rata rule. 

Thanks for the advice on this.

I have a similar issue.  How do you "sever" the pre and post tax contributions in your IRA?  My 401k provider will accept a rollover, but only of pre-tax contributions.  It's my understanding that once post-tax contributions have been made to an IRA, that you can't do anything to split "pre" and "post" tax contributions.  Did you just say "roll over this 88%, and leave 12%" and then roll the other 12% to roth because it was your after tax "basis" in the tIRA?

If this actually works I'd totally like to make it happen on my end but my accountant is is saying that the tIRA balance is treated as a whole (i.e. 90% pre-tax/10% post-tax) and I can't split the 90 from the 10 for rollover purposes.  Is he wrong?

Bones81

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Re: Did I Goof on My Backdoor Roth?
« Reply #15 on: March 29, 2017, 12:36:41 AM »
Finally got all of this taken care of and just in time since my last official day at the job is April 4.  I moved all the pre-tax contributions and earnings over to the 401k which surprisingly took only a week.  I mailed the forms to Vanguard and T. Rowe Price and they just did it, no follow up questions etc. which was nice.  Moved the after tax contributions in my traditional over to my Roth today and that only took a few clicks on Vanguard's website. 

The one thing I didn't realize before and I'm glad I caught is that the pro rata rule doesn't apply on the date that you make the traditional-to-Roth conversion but rather on the last day of the year in which you did the conversion.  That means I have to let the money I rolled into my 401k sit there the rest of the year and then I can roll it all into my traditional IRA in January of next year.  If I rolled the 401k into my traditional IRA in a few weeks once I was eligible (because I'm no longer employed by that company) I would have been borked pretty hard by the pro rata rule. 

Thanks for the advice on this.

I have a similar issue.  How do you "sever" the pre and post tax contributions in your IRA?  My 401k provider will accept a rollover, but only of pre-tax contributions.  It's my understanding that once post-tax contributions have been made to an IRA, that you can't do anything to split "pre" and "post" tax contributions.  Did you just say "roll over this 88%, and leave 12%" and then roll the other 12% to roth because it was your after tax "basis" in the tIRA?

If this actually works I'd totally like to make it happen on my end but my accountant is is saying that the tIRA balance is treated as a whole (i.e. 90% pre-tax/10% post-tax) and I can't split the 90 from the 10 for rollover purposes.  Is he wrong?

You can check the Form 8066 from your tax returns to see how much after-tax dollars you have put into your tIRA.  Once I had the exact amount, I converted all the holdings in the tIRA to cash and then moved everything except the after-tax contributions to my 401.  Once that was done, I converted the after-tax contributions in the tIRA to the Roth.

I would make 100% sure you have the after-tax contribution amount correct.  If in doubt, have an accountant double check, better safe than sorry.  Once you have the figure, you can talk to your IRA administrator to see how they can move the funds around.