Author Topic: Backdoor Roth mid-year situation  (Read 1339 times)

Bourbon

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Backdoor Roth mid-year situation
« on: April 21, 2014, 08:18:10 AM »
We currently max out my wife and my 401k each year, and then max out our Roth's as well.  Due to a promotion that is in the works, I am concerned that we will not be eligible to contribute to our Roth's this year and will need to begin to use the backdoor IRA -> Roth trick.

My problem is that I began to autopilot my roth this year, instead of waiting for a dip or excess funds to be available and contributing the full amount in a single transaction, I have had included vanguard on my direct deposit form at work.  To date I have $1,833.36 contributed to my Roth for the year.  Is there anyway to salvage this for the year?  It seems like it would be fishy to remove those funds, put then into an IRA and then reclass. 

Also, I currently have ~30k in my Roth, but also 25k in a a traditional IRA that was rolled over from a previous employer.  I currently focus on just buying VTSMX/VTSAX for my portfolio.  I believe I will have to roll the tIRA into my current 401k with WellsFargo, which will mean trading VTSAX for a 83/17 split of Blackrock S&P fund(.04% ER) and VSISX Small cap (.10% ER).  Slight different allocation, but I am thinking the benefits of preserving ongoing ROTH contributions will be worth it.

zurich78

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Re: Backdoor Roth mid-year situation
« Reply #1 on: April 21, 2014, 08:57:32 AM »
You are right  ... You have to be careful doing a backdoor Roth if you have ANY money in any traditional or rollover IRA (even at a different institution).  If you do, you'll be subject to the pro rata rule.  If you have $95K in your IRA and you do a backdoor Roth for $5K, I believe 95% of your $5K will be considered taxable.

There is only one workaround that I know of.  As you said, roll all over your IRA funds in to your company 401K (if it allows) so that you have no money in any IRA account at any institution on Dec 31.  Then you make your non-deductible contribution to your IRA and move it to a Roth.

I'm no tax guy, but they allow tax free withdrawals on contributions in the Roth right?  So WORST case, couldn't you withdraw contributions on Dec 30 if you're worried about it, wait to see what your AGI is, and if it's low enough, do a standard contribution (put it back) and if it's too high, then do a backdoor Roth IRA conversion in 2015 for tax year 2014? 


FrugalSpendthrift

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Re: Backdoor Roth mid-year situation
« Reply #2 on: April 21, 2014, 10:36:43 AM »
I'm no tax guy, but they allow tax free withdrawals on contributions in the Roth right?  So WORST case, couldn't you withdraw contributions on Dec 30 if you're worried about it, wait to see what your AGI is, and if it's low enough, do a standard contribution (put it back) and if it's too high, then do a backdoor Roth IRA conversion in 2015 for tax year 2014?
I ran into this one year, when my income first exceeded the roth limit.  I had to withdraw the contribution and it's earnings.  The earnings were taxable that year as regular short term capital gains.

I guess I could of then made a non-deductible traditional contribution and rolled that over, but I wasn't that wise at the time.