Author Topic: Should I contribute to a Backdoor Roth?  (Read 554 times)

HockeyMan

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Should I contribute to a Backdoor Roth?
« on: March 23, 2019, 04:34:13 PM »
Hello all,

Seeking some advice from fellow Mustachians.

First, a bit about me. I'm 26 years old, work in the technology sector, and am fortunate to have a high paying job. In 2018, my Adjusted Gross Income (AGI) was ~$193,000, making me ineligible for a Roth IRA contribution.

In 2018, I had a 79% savings rate. I maxed out my 401k contributions ($18,500), contributed to a taxable investment account ($26,000), and contributed, for the first time, to a traditional IRA ($5,500). All of my investments are with Vanguard.

My current traditional IRA balance stands at $5,586.

I'm still new to retirement planning and investing, but have been reading about the Backdoor Roth IRA this week. Unless I'm missing some critical decision points, it seems like a no brainer. My plan is to open a Roth IRA account with Vanguard, make the backdoor Roth contribution for the full value of my Traditional IRA, and then file form 8606 to report this on my taxes (which should not be affected by the process if I understand correctly). After this transactions clears, I plan to front-load my 2019 tIRA contribution and follow the same Backdoor Roth contribution process.

Am I missing something?

MDM

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Re: Should I contribute to a Backdoor Roth?
« Reply #1 on: March 23, 2019, 05:09:19 PM »
You did not deduct the tIRA contribution, correct?

You should (have) file(d) form 8606 for 2018 to document the non-deducted tIRA contribution.

In 2019, you may contribute an additional $6000 to a tIRA.  Assuming no further growth of the $5586 and $6000, you could then convert $11,586 to Roth.  You will pay tax on $86 when you file your 2019 taxes.  That $86 will be calculated on the 2019 form 8606 you will also file.

See Backdoor Roth - Bogleheads for more.

Does that all make sense?

HockeyMan

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Re: Should I contribute to a Backdoor Roth?
« Reply #2 on: March 23, 2019, 06:43:12 PM »
That's correct. This was a non-deductible tIRA contribution and, to confirm, I did file form 8606 to report the non-deductible contribution.

Regarding timing, if I execute the Roth conversion for the $5586 today, will I need to update form 8606 to include in 2018 taxes or can I simply report on my 2019 return?

Appreciate the Bogleheads link. I'll check it out.


HockeyMan

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Re: Should I contribute to a Backdoor Roth?
« Reply #3 on: March 23, 2019, 06:54:51 PM »
Actually, I think that the Bogleheads link may have answered my question:

"The contribution can be made up until the April filing deadline of the following year. The conversion can be done any time after that. In this case, the nondeductible contribution is reported on Form 8606 for the tax year it applied to, but won't impact the taxes for that tax year. The conversion will be reported for the year in which it happened (along with the carried-forward basis). This timing would be useful for someone rolling over their Traditional / Rollover IRA to a 401K at year end where it is not completed by December 31. "

If I'm reading this correctly, I would report the conversion on my 2019 taxes and owe taxes on the $86 gain.


MDM

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Re: Should I contribute to a Backdoor Roth?
« Reply #4 on: March 23, 2019, 08:07:25 PM »
If I'm reading this correctly, I would report the conversion on my 2019 taxes and owe taxes on the $86 gain.
Correct.

HockeyMan

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Re: Should I contribute to a Backdoor Roth?
« Reply #5 on: March 23, 2019, 10:30:43 PM »
Thanks for the confirmation, MDM! My Roth conversions are complete!!! :)