Author Topic: Question re: "backdoor" conversion to Roth IRA  (Read 1558 times)

Melisande

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Question re: "backdoor" conversion to Roth IRA
« on: May 01, 2017, 01:56:16 PM »
Based on our modified adjusted gross income, we are no longer eligible to buy Roth IRAs. However, I have read that you can buy a traditional IRA, then immediately convert to a Roth -- carry out a "backdoor" conversion. I just called a Vanguard rep. and he said, yes, this is the case. However, I know that there is a catch. If you already have a traditional IRA, you cannot simply choose to convert some of it, but not all of it. This is discussed in the following quote from Bogglehead's financial wiki (the main page is here: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA).

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If you have any other (non-Roth) IRAs, the taxable portion of any conversion you make is prorated over all your IRAs; you cannot convert just the non-deductible amount.[3] In order to benefit from the backdoor, you must either convert your other IRAs as well (which may not be a good idea, as you are usually in a high tax bracket if you need to use the backdoor), or else transfer your deductible IRA contributions to an employer plan such as a 401(k) (which may cost you if the 401(k) has poor investment options).

But here is what I do not understand. My husband does indeed already have a traditional IRA, but it is with TIAA, not with Vanguard.  When they talk about converting your other IRAs as well, are they just talking about IRA accounts with one particular investment company or all your IRA accounts across all investment companies? So, if he created a traditional IRA account at Vanguard, then converted it, would this have anything to do with his IRA account with TIAA?

Thanks ...

seattlecyclone

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Re: Question re: "backdoor" conversion to Roth IRA
« Reply #1 on: May 01, 2017, 02:03:36 PM »
For this purpose, the IRS doesn't care how many companies you have traditional IRAs with. The pre-tax IRA with TIAA would invoke the pro-rata rule just the same as if you had pre-tax and post-tax amounts in the same account at Vanguard.

Melisande

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Re: Question re: "backdoor" conversion to Roth IRA
« Reply #2 on: May 01, 2017, 02:18:05 PM »
OK, that makes sense.

So, it looks like it will be a hassle to do the conversion. Should we just skip it and just get traditional Roth IRAs, then deduct the contribution on next year's taxes? How does one figure out which would be the best option - just doing the conversion and taking the pro-rata hit? Or just sticking with traditional IRA and taking the deduction and paying the taxes later. If it makes any difference, the balance in my husband's existing traditional IRA with TIAA is very small -- $1,362.99. It a very small part of his investments w/ TIAA. The bogleheads article makes mention of converting it to a 401(K), but we don't have one, as far as I know, so that option is out.

However, I do not fully understand this process. If we convert the newly purchased traditional IRA to a Roth IRA at Vanguard, this process will involve visiting the Vanguard website or calling a rep and moving the funds around. It has nothing at all to do with TIAA. Does this mean that we have to go into TIAA and do a similar transaction? Or are we just going to be taxed as if we had done that when in fact nothing was moved?

seattlecyclone

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Re: Question re: "backdoor" conversion to Roth IRA
« Reply #3 on: May 01, 2017, 04:44:29 PM »
OK, that makes sense.

So, it looks like it will be a hassle to do the conversion. Should we just skip it and just get traditional Roth IRAs, then deduct the contribution on next year's taxes?

Not sure what you mean by a "traditional Roth IRA." A Roth IRA is a different thing from a traditional IRA, and there's no such thing as a "traditional Roth."

However I'm pretty sure that the limits are set up such that if your income is too high for a Roth IRA contribution you're not going to be able to deduct traditional IRA contributions either.

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How does one figure out which would be the best option - just doing the conversion and taking the pro-rata hit? Or just sticking with traditional IRA and taking the deduction and paying the taxes later.

Again, there's no deduction available if your income is in the range where you would need to use the back door. You either do a backdoor contribution or your skip IRAs entirely and invest in a taxable account instead.

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If it makes any difference, the balance in my husband's existing traditional IRA with TIAA is very small -- $1,362.99. It a very small part of his investments w/ TIAA. The bogleheads article makes mention of converting it to a 401(K), but we don't have one, as far as I know, so that option is out.

Okay, in this case you might just want to convert the whole thing to Roth. The trade-off here is you wold be increasing your taxable income by $1362.99 this year in exchange for tax-free growth on your $5,500 contribution this year and in any future years where you would be using the backdoor method. This is likely a good trade, but I can't make a blanket statement that it definitely is.

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However, I do not fully understand this process. If we convert the newly purchased traditional IRA to a Roth IRA at Vanguard, this process will involve visiting the Vanguard website or calling a rep and moving the funds around. It has nothing at all to do with TIAA. Does this mean that we have to go into TIAA and do a similar transaction? Or are we just going to be taxed as if we had done that when in fact nothing was moved?

You'll need to call up TIAA to do a rollover from their traditional IRA into a Roth IRA at the new place (Vanguard). That will clear out your pre-tax traditional IRA balance. At that point you can do the backdoor IRA: contribute to a traditional IRA at Vanguard and convert it to Roth. This part can all be done online.

Bruinguy

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Re: Question re: "backdoor" conversion to Roth IRA
« Reply #4 on: May 01, 2017, 06:19:35 PM »
If you have access to a 401(k) plan, you may be able to roll your current traditional IRAs into the 401(k).  It will depend on the policies of the 401(k) / plan administrator whether or not you can.  I just called the company that administers my 401(k) and asked.  If you can do that, then you can do the backdoor Roth without incurring any taxes at the time of conversion.  It just adds an extra step.

MDM

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Re: Question re: "backdoor" conversion to Roth IRA
« Reply #5 on: May 01, 2017, 06:51:55 PM »
My husband does indeed already have a traditional IRA....
But you do not, correct?

In that case, you can do a backdoor Roth without any problem.  The "I" in IRA does stand for "individual".


the_fixer

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Re: Question re: "backdoor" conversion to Roth IRA
« Reply #6 on: May 02, 2017, 10:37:52 AM »
The husband and wife's IRA are viewed individually by the IRS's correct?

Husband has IRA = pro-rata
Wife with no IRA = ok

This is what I have been lead to believe in my prep for a backdoor Roth this year where my wife has an IRA from and old 401K and I only have a 401K.   

seattlecyclone

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Re: Question re: "backdoor" conversion to Roth IRA
« Reply #7 on: May 02, 2017, 12:00:35 PM »
Yep, each spouse's IRAs are considered completely separately.