Author Topic: Might have screwed up on Backdoor Roth conversion  (Read 1577 times)

Mother Fussbudget

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Might have screwed up on Backdoor Roth conversion
« on: June 17, 2016, 10:35:42 AM »
I have a $0 dollar t-IRA at Vanguard I use to contribute my max IRA amount each year, and then CONVERT that contribution to a Roth-IRA.
However... at Fidelity, I have a separate t-IRA (rollover) account with a large balance. 

I've seen warnings to Backdoor Roth contributors to consider the FULL amount of ALL t-IRA accounts when doing the conversion, and some constraint that things must be done by 12/31 of the calendar year. 

Q:  Do I owe taxes on the funds in the Fidelity t-IRA even though I didn't touch this account?  (i.e. all contributions/conversions were done at Vanguard)?  If so, do I owe tax on the FULL BALANCE of the t-IRA, and/or must I convert the full amount to Roth by end-of-year?

[the concern here is at 28%, this potentially large bill is not budgeted for, and would set back my FIRE date by 6-8 months]
[I've reached out separately to 'thewealthyaccountant', but appreciate adding any help here to self-administered face-punches...]
« Last Edit: June 17, 2016, 10:44:38 AM by Mother Fussbudget »

MrMoogle

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Re: Might have screwed up on Backdoor Roth conversion
« Reply #1 on: June 17, 2016, 11:45:45 AM »
On your Vanguard t-IRA is this "after-tax," as in you don't get a deduction for it?  Typically this is the case for backdoor Roth, but just making sure.

If so, say Vanguard's is 5k, and Fidelity's is 45k.  So 10% is after-tax.  Moving 5k from t-IRA to Roth, 10% is moved tax-free, and the other 90% is taxed.  So you'd owe 28% * 90% * 5k in taxes or $1260.

Mother Fussbudget

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Re: Might have screwed up on Backdoor Roth conversion
« Reply #2 on: June 17, 2016, 12:35:55 PM »
The full $6,500 t-IRA to Roth conversion was after-tax. (no deduction possible - I earned too much)
The Fidelity t-IRA is ~$150K.

MrMoogle

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Re: Might have screwed up on Backdoor Roth conversion
« Reply #3 on: June 17, 2016, 12:42:53 PM »
Then only ~4% is tax free.  Looks like you'll owe $1745 in taxes from this.

Choices

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Re: Might have screwed up on Backdoor Roth conversion
« Reply #4 on: June 24, 2016, 09:03:52 AM »
Even if your entire Vanguard account is after-tax, the IRS uses the total amount in all t-IRAs. So total =156,500.
6500/156,500 = 0.041.

So you pay tax on 96% of the 6500 you converted...UNLESS you can move your Fidelity t-IRA into a 401K by the end of December.

Do you have a side business? I opened a solo-401K and moved my pre-tax IRA contributions to that. I still have full control and can invest in any fund I want, but I can do the backdoor Roth every year with my full 5500.

Mother Fussbudget

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Re: Might have screwed up on Backdoor Roth conversion
« Reply #5 on: June 24, 2016, 09:51:26 AM »
...UNLESS you can move your Fidelity t-IRA into a 401K by the end of December.

Do you have a side business? I opened a solo-401K and moved my pre-tax IRA contributions to that. I still have full control and can invest in any fund I want, but I can do the backdoor Roth every year with my full 5500.

I have a side-gig business, and *can* setup a solo-401K.  But does the rollover from the t-IRA to the solo-401K cause a taxable event?
[i.e. will I have to pay tax on the gains in the t-IRA?]

MrMoogle

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Re: Might have screwed up on Backdoor Roth conversion
« Reply #6 on: June 24, 2016, 10:13:08 AM »
...UNLESS you can move your Fidelity t-IRA into a 401K by the end of December.

Do you have a side business? I opened a solo-401K and moved my pre-tax IRA contributions to that. I still have full control and can invest in any fund I want, but I can do the backdoor Roth every year with my full 5500.

I have a side-gig business, and *can* setup a solo-401K.  But does the rollover from the t-IRA to the solo-401K cause a taxable event?
[i.e. will I have to pay tax on the gains in the t-IRA?]
No, your solo-401k will be pre-tax too.