Author Topic: Backdoor Roth IRA help?  (Read 3876 times)

garfields_lasagna

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Backdoor Roth IRA help?
« on: April 03, 2015, 02:05:43 PM »
Hi - For 2014, my spouse made enough that we are in the phase out range for Roth IRA contributions (married filing together).  Our accountant said that my husband could contribute up to $3230 to a Roth.  I was doing some reading and wonder if we should do a "Back Door" Roth IRA for $2,270 to bring us up to the $5500 max.

Husband has one rollover IRA for $4500 that we could roll into his current 401K plan.  He also has a tiny traditional IRA valued at around $180.  This smaller traditional IRA cannot be rolled into this current employer sponsored 401K.

The questions I have are:

1.  While husband would only have $180 in traditional IRAs (after rolling over the larger one into his 401k plan), I have a larger traditional IRA.  Are spousal traditional IRAs taken into account when determining tax liability for backdoor Roth IRAs?

2. Should we (or can we) also convert the $180 traditional IRA into a Roth IRA?

Not sure if this is worth the headache, but would love to hear feedback if anyone has some.
thanks in advance!

Doulos

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Re: Backdoor Roth IRA help?
« Reply #1 on: April 03, 2015, 02:15:30 PM »
How close are you?
Have you maxed out other things? 401k, HSA?
- I am not 100% sure, but I think you can still put more money into pre-tax accounts for 2014?

What I am asking you is for more details.
We need exact gross, how much you put in HSA, 401k, Roths, 403b, etc for 2014.

Also Charity donates that you might claim?

If you just barely went over the limit I think you can still pre-tax your way back into qualifying?  I am not 100% on that.

garfields_lasagna

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Re: Backdoor Roth IRA help?
« Reply #2 on: April 03, 2015, 02:27:11 PM »
Yes - maxed out on other things.  Charity deduction was taken too.

MDM

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Re: Backdoor Roth IRA help?
« Reply #3 on: April 03, 2015, 02:27:49 PM »
1.  While husband would only have $180 in traditional IRAs (after rolling over the larger one into his 401k plan), I have a larger traditional IRA.  Are spousal traditional IRAs taken into account when determining tax liability for backdoor Roth IRAs?
No.  They are Individual Retirement Accounts.

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2. Should we (or can we) also convert the $180 traditional IRA into a Roth IRA?
Might as well do it and be done with it - more of a paperwork than a financial effect.

garfields_lasagna

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Re: Backdoor Roth IRA help?
« Reply #4 on: April 03, 2015, 03:22:02 PM »
Thanks so much for the reply MDM!

I'm just wondering if you have a source for your answer for #1?  I was searching the web for this answer and couldn't find it anywhere.

As for #2 - I guess if we covert the $180 traditional IRA to Roth, my husband will have no more Traditional Roth IRAs. Should this will make doing future backdoor Roth IRAs more straight forward?  Or is there another reason to do this?
« Last Edit: April 03, 2015, 03:23:45 PM by garfields_lasagna »

seattlecyclone

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Re: Backdoor Roth IRA help?
« Reply #5 on: April 03, 2015, 03:30:28 PM »
Thanks so much for the reply MDM!

I'm just wondering if you have a source for your answer for #1?  I was searching the web for this answer and couldn't find it anywhere.

I think the best source for this would be Form 8606, where you actually report your non-deductible IRA contributions and calculate the tax you pay when you do a Roth rollover from these accounts. The form says to file a separate version for each spouse who makes these contributions. The form doesn't ask you to report anything about your spouse's IRA contributions or balance, only your own. These are truly individual accounts.

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As for #2 - I guess if we covert the $180 traditional IRA to Roth, my husband will have no more Traditional Roth IRAs. Should this will make doing future backdoor Roth IRAs more straight forward?  Or is there another reason to do this?

Making backdoor Roths more straightforward is the main reason. Also having a sum as small as $180 to keep track of in a separate account can make things more complicated. Paying a little bit of tax now to make future management of your financial life more straightforward may be a worthwhile thing to do.

garfields_lasagna

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Re: Backdoor Roth IRA help?
« Reply #6 on: April 03, 2015, 04:01:03 PM »
Thanks for the input SeattleCyclone.  This leads me to another question - btw i need a new accountant.  My accountant turned 81 this year and for the first time, has been giving me questionable information.

If i did the Roth conversion next week (before April 15th, 2015) and wanted it to count towards my 2014 IRA limit, would i need to file form 8606 before April 15, 2015?  I thought yes for sure - but when i spoke with my accountant earlier today, he said he would file it next year.  Either way, my taxes were electronically filed by the accountant today, so i'm not sure i can do much about it.

MDM

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Re: Backdoor Roth IRA help?
« Reply #7 on: April 03, 2015, 04:49:22 PM »
If i did the Roth conversion next week (before April 15th, 2015) and wanted it to count towards my 2014 IRA limit, would i need to file form 8606 before April 15, 2015?  I thought yes for sure - but when i spoke with my accountant earlier today, he said he would file it next year.  Either way, my taxes were electronically filed by the accountant today, so i'm not sure i can do much about it.
You can file an amended return.  Adding form 8606 won't change any numbers on the other forms.

See http://www.irs.gov/pub/irs-pdf/i8606.pdf for details, but the following sections seem pertinent:
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File Form 8606 with your 2014 Form 1040, 1040A, or 1040NR by the due date, including extensions, of your return.

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If you are required to file Form 8606 to report a nondeductible contribution to a traditional IRA for 2014, but do not do so, you must pay a $50 penalty, unless you can show reasonable cause.


garfields_lasagna

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Re: Backdoor Roth IRA help?
« Reply #8 on: April 06, 2015, 02:38:20 PM »
Thanks for the help everyone! It's frustrating that I have a hired CPA who can't answer these questions. My father-in-law is also a tax accountant but apparently never filled out an 8606 before (he works in a small town).

Of course, now i have one more question i'm hoping someone could answer:
In examining 8606, I'm wondering if I should forgo doing the Backdoor Roth IRA for 2014.  Line 6 of the form says, "Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2014."  I have not yet rolled my husband's $4500 rollover IRA into his current employer 401K.  Would doing it now ( before April 15, 2015) be retroactive? Or would the amount $4500 be used in the calculation of the Pro-rata tax amount for 2014?


MDM

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Re: Backdoor Roth IRA help?
« Reply #9 on: April 06, 2015, 03:35:44 PM »
In examining 8606, I'm wondering if I should forgo doing the Backdoor Roth IRA for 2014.
Why deprive yourself of the opportunity?

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Line 6 of the form says, "Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2014."  I have not yet rolled my husband's $4500 rollover IRA into his current employer 401K.  Would doing it now ( before April 15, 2015) be retroactive? Or would the amount $4500 be used in the calculation of the Pro-rata tax amount for 2014?
If all else fails, read and follow the instructions. ;)
Seriously, just do as the form and instructions say - everything will work out ok.  See http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html and related links.  E.g., "You report on the tax return your non-deductible contribution to a traditional IRA *for* that year and your converting to Roth *in* that year."

garfields_lasagna

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Re: Backdoor Roth IRA help?
« Reply #10 on: April 09, 2015, 08:44:54 PM »
Hi MDM - Thanks for the link and the encouragement!  I'm meeting with my accountant tomorrow to file the proper form - he was more confused than i was, but i think i know enough now to file it correctly.

I also found this link quite helpful.  The person posting is in very similar position to me:
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=157414&newpost=2363873

Many thanks to my fellow mustashians who chimed in here :)