Author Topic: Back door Roth - should I do this?  (Read 5143 times)

jb14

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Back door Roth - should I do this?
« on: February 13, 2015, 02:01:03 PM »
Hello,

Our income is above the limits to contribute to a roth or Traditional IRA and get a tax benefit. I was researching the backdoor roth idea. Problem is I have an old 401 in a traditional IRA, which would make for a very lousy tax. My current 401k will allow a IRA "roll in" and we have pretty good fund choices in there with respect to low expense ratios.

Here's what I have:
Old 401k in a traditional IRA at Vanguard: ~68k
Existing traditional IRA that was funded before we hit income limits :~9300k (this would have to be backdoored into the Roth over this year and next-right)
Current 401k: ~295k

Cost basis on the existing IRA is $7,400, so there's about 2k of gains that would be taxed, correct? I don't think it's possible to transfer it all to the backdoor roth in one year due to the contribution limits, so I'd have to spread it out over this year and next.

So I guess my question is is it worth it to move my old 401k into my current one and start the backdoor roth process and continue to exploit that loophole as long as it's available? I'm not sure how much tax i'd owe, I'm sure TurboTax can handle this, though.

dandarc

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Re: Back door Roth - should I do this?
« Reply #1 on: February 13, 2015, 02:27:44 PM »
The standard way to do this is 3 steps:

1.  Roll both existing tIRAs into 401K
2.  Make non-deductible contribution to IRA
3.  Convert IRA to Roth

Assuming not much gain happens between 2 and 3, virtually no taxes to be paid today.

If you only roll the big tIRA, you'll have the full $9300 of the small IRA on which to pay taxes - the income was not taxed when you put it in (assuming you took the deduction), so it is taxed when you pull it out for a conversion or otherwise.  If you didn't convert the whole amount, the amount you'd pay taxes on would be pro-rated with the non-deductible contribution you made this year, I think.

So just roll both tIRAs into the 401K first, and make your life simpler.

seattlecyclone

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Re: Back door Roth - should I do this?
« Reply #2 on: February 13, 2015, 02:32:14 PM »
The $9,300 IRA: did you take a tax deduction for the contributions when you made them? If so, you would have to pay tax on the full balance if you roll it over to a Roth IRA. In that case I would recommend rolling both traditional IRA accounts into your 401(k) before attempting to do a backdoor Roth.

As to whether it's worth it, I think it generally is. That's money you shouldn't have to pay tax on again, provided you don't touch the gains until you're older.

jb14

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Re: Back door Roth - should I do this?
« Reply #3 on: February 13, 2015, 03:08:31 PM »
Yes, the 9300 IRA did have a tax deduction associated with it. I didn't realize I could roll any T-IRA into my 401k, thought it had to be from an old 401k! This is good news, makes it even easier!

If I roll both into my 401k, I won't have to pay any taxes on them now, only when I withdraw the funds in retirement, correct?

dandarc

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Re: Back door Roth - should I do this?
« Reply #4 on: February 13, 2015, 03:10:59 PM »
Yep - no tax for a rollover (do a trustee-to-trustee transfer), but you pay when you withdraw from the traditional account.

jb14

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Re: Back door Roth - should I do this?
« Reply #5 on: April 28, 2015, 10:57:27 AM »
Update, finally got my Traditional IRA rolled into my 401k. Only took a couple of months of going back and forth with T.Rowe Price and Vanguard to make sure  it wasn't skipping out of any taxes blah blah blah. Anyway it's done now as of April 28th, 2015. Started the process in early March of 2015.

A couple of questions for those of you who have done this.

Can I do the backdoor IRA conversion this year (2015)? Now that the traditional IRA is rolled into my 401k, am I ok, or do I need to wait until 2016?

Is there any reason why I couldn't do this all at Vanguard, or does it make any sense to "isolate" this IRA at another brokerage where I don't have an existing Roth IRA? I have one with Vanguard, will there be any problem down the road with them mixing?

Thanks for all the advice thus far.

NNate

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Re: Back door Roth - should I do this?
« Reply #6 on: April 28, 2015, 02:12:01 PM »
Update, finally got my Traditional IRA rolled into my 401k. Only took a couple of months of going back and forth with T.Rowe Price and Vanguard to make sure  it wasn't skipping out of any taxes blah blah blah. Anyway it's done now as of April 28th, 2015. Started the process in early March of 2015.

A couple of questions for those of you who have done this.

Can I do the backdoor IRA conversion this year (2015)? Now that the traditional IRA is rolled into my 401k, am I ok, or do I need to wait until 2016?

Is there any reason why I couldn't do this all at Vanguard, or does it make any sense to "isolate" this IRA at another brokerage where I don't have an existing Roth IRA? I have one with Vanguard, will there be any problem down the road with them mixing?

Thanks for all the advice thus far.

It's all about T-IRA balances at the end of the tax year (December 2015), so you can go ahead and do this now.

Also, no harm in doing it all at Vanguard - that's what I do every year.

PathtoFIRE

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Re: Back door Roth - should I do this?
« Reply #7 on: April 28, 2015, 02:19:58 PM »
Update, finally got my Traditional IRA rolled into my 401k. Only took a couple of months of going back and forth with T.Rowe Price and Vanguard to make sure  it wasn't skipping out of any taxes blah blah blah. Anyway it's done now as of April 28th, 2015. Started the process in early March of 2015.

A couple of questions for those of you who have done this.

Can I do the backdoor IRA conversion this year (2015)? Now that the traditional IRA is rolled into my 401k, am I ok, or do I need to wait until 2016?

Is there any reason why I couldn't do this all at Vanguard, or does it make any sense to "isolate" this IRA at another brokerage where I don't have an existing Roth IRA? I have one with Vanguard, will there be any problem down the road with them mixing?

Thanks for all the advice thus far.

It's all about T-IRA balances at the end of the tax year (December 2015), so you can go ahead and do this now.

Also, no harm in doing it all at Vanguard - that's what I do every year.

I'll also add that you are also still limited to making no more than $5500 in IRA contributions per year, even if they are nondeductible ($11000 if you have a spouse).

jb14

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Re: Back door Roth - should I do this?
« Reply #8 on: April 28, 2015, 09:13:40 PM »
Thanks guys, I'll get started on this ASAP.

Or maybe I'll wait, I hear there's a correction due any day now to the stock market ;)

Wolf359

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Re: Back door Roth - should I do this?
« Reply #9 on: April 29, 2015, 02:32:02 PM »
You said "our" and "we" in your original post.  Are you married?  Both you and your spouse can contribute to an IRA.

In fact, if your rollover IRA was in your SS#, you could still do the back door Roth on your spouse's SS#, depending upon what assets are in that name.

jb14

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Re: Back door Roth - should I do this?
« Reply #10 on: April 29, 2015, 09:06:27 PM »
Yup, you're right wolf359, next step is to do the same thing with my wife's accounts. I went first, had to see how difficult it was so I know what to look out for when she does hers.  We are married filing jointly, and income is above the limits for regular roths or deductible iras.