Author Topic: T IRA with Pre and Post monies: What to do? Think I screwed up.  (Read 1153 times)

Easye418

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T IRA with Pre and Post monies: What to do? Think I screwed up.
« on: January 31, 2020, 11:46:43 AM »
I was able to untangle the web of monies and realized I screwed the pooch.

2019 AGI MFJ $180K (should be $20k lower in 2020)

I mistakenly rolled over two old 401ks into a traditional IRA instead of just rolling them into a 401k.  I then made several nondeductible contributions into that account.  I was hoping to do a reverse rollover and separate the monies.  Vanguard burst that bubble because when I mix pre and post monies, they consider it "pro rata".  Explained it like coffee and creamer, once you mix em, you can't get em back out.

That being said, the traditional IRA has $30k in it, ~$9K nondeductible contributions, $11k pretax 401k monies, and the rest is growth.

My ultimate plan was to move out the 401k monies, and then convert the nondeduc contrib to ROTH IRA.

It looks like I cannot do that, I thought of just moving the nondeduc contrib and Vanguard told me that the IRS would tax me on that money if I put it into a ROTH even if I have the documentation to prove that I paid taxes on $9K.  They figure it out by ratio of pre to post tax. 

Is there anything I can do?  It seems that if I start to make more money, I will eventually have to convert and pay taxes again on the nondeductible monies to backdoor ROTH.  For now, I figured opening up a ROTH IRA and start contributing while I can is probably the only thing I can do?



secondcor521

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #1 on: January 31, 2020, 01:19:23 PM »
Yeah, now that you've mixed, I think Vanguard is correct that you can't unmix as you want to do.

You probably know this, but you're getting close to where contributions to a Roth may be limited by your AGI.  For this year it starts phasing out at $196K per a Schwab site I checked.

If you do decide to convert from the coffee creamer to the Roth, then it will be considered to be made proportionately between pre-tax and post-tax.  You will not pay taxes on the portion that is post-tax; that's the whole point of the pro-rata rule.  It is a bit of a paperwork and tracking job for you though.  Start reading the instructions for Form 8606.

terran

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #2 on: January 31, 2020, 04:19:55 PM »
You probably know this, but you're getting close to where contributions to a Roth may be limited by your AGI.  For this year it starts phasing out at $196K per a Schwab site I checked.

Oh, right. Somehow I missed that when I first read this what with backdoor Roth rules swirling around in my brain. The OP is actually eligible for direct Roth contributions by about $13k: https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019

If the after tax IRA contributions were made in 2019 then there's still time to recharacterize to Roth, so just do that. It makes it as if you contributed to Roth in the first place, so there won't even be tax on the gains.

secondcor521

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #3 on: January 31, 2020, 05:07:03 PM »
You probably know this, but you're getting close to where contributions to a Roth may be limited by your AGI.  For this year it starts phasing out at $196K per a Schwab site I checked.

Oh, right. Somehow I missed that when I first read this what with backdoor Roth rules swirling around in my brain. The OP is actually eligible for direct Roth contributions by about $13k: https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019

If the after tax IRA contributions were made in 2019 then there's still time to recharacterize to Roth, so just do that. It makes it as if you contributed to Roth in the first place, so there won't even be tax on the gains.

Good point on your last paragraph.  OP did say they have $9K in after-tax contributions, so unlikely to be all 2019 since it sounds like they're in 1 player mode.

MDM

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #4 on: January 31, 2020, 05:20:16 PM »
I was hoping to do a reverse rollover and separate the monies.  Vanguard burst that bubble because when I mix pre and post monies, they consider it "pro rata".  Explained it like coffee and creamer, once you mix em, you can't get em back out.
If by "reverse rollover" you mean roll over from IRA to a current 401k, you may do so as long as your current 401k plan allows it.  That's a common step in the backdoor IRA process.

Or did you mean something different?

Easye418

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #5 on: February 03, 2020, 10:27:21 AM »
Yeah, now that you've mixed, I think Vanguard is correct that you can't unmix as you want to do.

You probably know this, but you're getting close to where contributions to a Roth may be limited by your AGI.  For this year it starts phasing out at $196K per a Schwab site I checked.

If you do decide to convert from the coffee creamer to the Roth, then it will be considered to be made proportionately between pre-tax and post-tax.  You will not pay taxes on the portion that is post-tax; that's the whole point of the pro-rata rule.  It is a bit of a paperwork and tracking job for you though.  Start reading the instructions for Form 8606.

I was hoping to do a reverse rollover and separate the monies.  Vanguard burst that bubble because when I mix pre and post monies, they consider it "pro rata".  Explained it like coffee and creamer, once you mix em, you can't get em back out.
If by "reverse rollover" you mean roll over from IRA to a current 401k, you may do so as long as your current 401k plan allows it.  That's a common step in the backdoor IRA process.

Or did you mean something different?

Thank you for the reply.

Yes, that is what I was looking to explore however Vanguard said they won't be able to unmix it and my 401k will only take pre-tax monies. 

The $9k contributions were from several years. 

I don't think I will run into an issue with ROTH contributions for the foreseeable future.

Easye418

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #6 on: February 03, 2020, 10:29:44 AM »
You probably know this, but you're getting close to where contributions to a Roth may be limited by your AGI.  For this year it starts phasing out at $196K per a Schwab site I checked.

Oh, right. Somehow I missed that when I first read this what with backdoor Roth rules swirling around in my brain. The OP is actually eligible for direct Roth contributions by about $13k: https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019

If the after tax IRA contributions were made in 2019 then there's still time to recharacterize to Roth, so just do that. It makes it as if you contributed to Roth in the first place, so there won't even be tax on the gains.

Unfortunately, it was not contributed in 2019 but over several years. 

Still think I just keep it going until I run into issues with ROTH contributions and maybe talk to a tax professional to figure out if/when I should port over.

I have PLENTY of other investment vehicles I need to max out (401ks and HSA)

MDM

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #7 on: February 03, 2020, 11:22:39 AM »
Yes, that is what I was looking to explore however Vanguard said they won't be able to unmix it and my 401k will only take pre-tax monies. 
The only non-pre-tax money is the sum of your non-deducted contributions.  Any deducted contributions and growth are pre-tax.

If you roll over an amount equal to "total balance minus non-deducted contributions" to the 401k then you may convert the remaining amount to Roth tax free.

Easye418

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #8 on: February 03, 2020, 02:46:31 PM »
Yes, that is what I was looking to explore however Vanguard said they won't be able to unmix it and my 401k will only take pre-tax monies. 
The only non-pre-tax money is the sum of your non-deducted contributions.  Any deducted contributions and growth are pre-tax.

If you roll over an amount equal to "total balance minus non-deducted contributions" to the 401k then you may convert the remaining amount to Roth tax free.

I asked Fidelity who I would be rolling the money over to and they said we will only take money from "rollover" accounts.  Vanguard said we will not call it a rollover account because the monies have been mixed so we won't certify it. 

I was trying to do exactly what you are saying though, but supposedly, I cannot because of "pro rata". 

MDM

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #9 on: February 03, 2020, 03:05:01 PM »
I asked Fidelity who I would be rolling the money over to and they said we will only take money from "rollover" accounts.  Vanguard said we will not call it a rollover account because the monies have been mixed so we won't certify it. 
You can't because whoever set up your employer's 401k plan (Fidelity is only following the employer's rules) decided it would only take money from "rollover" accounts, and Vanguard is correct that if non-rollover money is added to what was a rollover IRA then it no longer is a rollover IRA.


Easye418

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #10 on: February 05, 2020, 12:15:11 PM »
I asked Fidelity who I would be rolling the money over to and they said we will only take money from "rollover" accounts.  Vanguard said we will not call it a rollover account because the monies have been mixed so we won't certify it. 
You can't because whoever set up your employer's 401k plan (Fidelity is only following the employer's rules) decided it would only take money from "rollover" accounts, and Vanguard is correct that if non-rollover money is added to what was a rollover IRA then it no longer is a rollover IRA.

Thanks.

So I guess IF I need to start doing a backdoor ROTH conversion, I am going to have to bite the bullet and convert the money over and pay taxes (whatever percentage IRS believes).  Wonder if I should start slowly doing it over time. 

I am going to open a ROTH separately and make contributions to it. 

Believe that is right?

MDM

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #11 on: February 05, 2020, 12:21:19 PM »
I am going to open a ROTH separately and make contributions to it. 
If you can do that, you don't need to use the backdoor route.

If you need to use the backdoor route, that means you can't make direct contributions to a Roth IRA.

See Retirement Topics - IRA Contribution Limits | Internal Revenue Service.
« Last Edit: February 05, 2020, 04:34:14 PM by MDM »

secondcor521

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Re: T IRA with Pre and Post monies: What to do? Think I screwed up.
« Reply #12 on: February 05, 2020, 04:24:22 PM »
Also, there is no problem with having a Roth IRA which receives contributions from you and conversions from your traditional IRA.  The IRS aggregates your Roth just like it does your traditional, so you would need to keep track of how much you have in contributions and how much you have in conversions (if you plan to, or want to maintain the option to, withdraw from your Roth before 59.5).  No need to have two as far as I know.