The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: slowplod on November 28, 2017, 09:10:24 AM
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I rolled over some old employer funds into a Vanguard IRA before I knew about the Backdoor Roth. My understanding is that I will pay income tax on the cost basis of the overall IRA, which would be quite a lot of gains.
Can I get around the cost basis of my previous IRA investments if I open up a Fidelity IRA and convert to the Roth using that fund?
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The compact that holds your funds don't matter. Are you saying that you currently have a traditional IRA consisting of tax deferred contributions plus gains?
If so, you will need to pay taxes on the whole amount in order to convert to a Roth IRA.
Or, is does your existing IRA consist of after tax contributions plus gains? In that case, it is a bit more complicated because you need to know the original contributions.
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The compact that holds your funds don't matter. Are you saying that you currently have a traditional IRA consisting of tax deferred contributions plus gains?
If so, you will need to pay taxes on the whole amount in order to convert to a Roth IRA.
Or, is does your existing IRA consist of after tax contributions plus gains? In that case, it is a bit more complicated because you need to know the original contributions.
The IRA currently is a rolled-over 401k, so contributions are pre-tax plus gains.
What I want to do is contribute 5,500 post tax into an IRA, then convert the funds into a Roth. Basically, I'm wondering if I have a separate IRA, with separate funds, can I pay taxes only on the gains that the $5,500 is associated with.
Example:
I have $100k in pretax IRA invested in Vanguard Total Stock Market fund (VTSMX)
I contribute $5,500 post tax into an IRA Fidelity Total Stock Market Fund (FSTMX)
What's my tax basis for converting the $5,500 into a Roth? My Tax basis on the $100K is $0 because I've never paid taxes on that money. But the $5,500 was taxed - if I keep these funds/custodians separate, is my tax basis $5,500, or is it still 0?
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Where the IRA is located doesn't matter, all of your traditional IRAs are pooled for purposes of cost basis accounting, so your basis is neither $5,500 nor zero (it's a ratio). See #1: http://ibd.morningstar.com/article/article.asp?id=547153&CN=brf295,http://ibd.morningstar.com/archive/archive.asp?inputs=days=14;frmtId=12,%20brf295
Do you have a current 401(k) that will accept IRA funds? If you do, you can roll the traditional IRA into your current 401(k) and thus remove any challenges of having a traditional IRA.