converting non-deductible IRA to Roth

[mad9q]

Has anyone here converted a non-deductible IRA to a Roth?  We are not eligible for a deductible IRA and I am looking to open a non-deductible IRA and then immediately convert to a Roth.  Would love some advice on how to do this properly and avoid any issues with the IRS. 

[NoStacheOhio]

Just call Vanguard (or whoever you want), and tell them what you want to do. They should know what you're talking about, and be able to make it pretty painless.

[secondcor521]

I believe you'll be taxed and IIRC pay a 10% penalty on any earnings that occur within the non-deductible T-IRA between the time of your contribution and the recharacterization to the Roth IRA.  So either (a) put the investment inside the T-IRA in something that doesn't earn much, (b) be ready to pay taxes on any growth, and/or (c) do the recharacterization step as rapidly as possible.

[josh4trunks]

I believe you'll be taxed and IIRC pay a 10% penalty on any earnings that occur within the non-deductible T-IRA between the time of your contribution and the recharacterization to the Roth IRA.  So either (a) put the investment inside the T-IRA in something that doesn't earn much, (b) be ready to pay taxes on any growth, and/or (c) do the recharacterization step as rapidly as possible.

I thought the IRS clarified this in 2014/5 and your earning can just got to a traditional IRA?

EDIT
Here's the link. https://www.irs.gov/pub/irs-drop/n-14-54.pdf

[dandarc]

I believe you'll be taxed and IIRC pay a 10% penalty on any earnings that occur within the non-deductible T-IRA between the time of your contribution and the recharacterization to the Roth IRA.  So either (a) put the investment inside the T-IRA in something that doesn't earn much, (b) be ready to pay taxes on any growth, and/or (c) do the recharacterization step as rapidly as possible.

I thought the IRS clarified this in 2014/5 and your earning can just got to a traditional IRA?

That's for the MEGABackdoor Roth.  This is a Backdoor Roth.  And actually, there isn't a 10% penalty when you convert (not recharacterize on this one - convert).  Just taxes on any growth.

One gotcha OP - do you have any traditional IRA balance out there?  If so, you need to get that moved to a 401K before you do this, or revisit this plan.

The conversion will be pro-rated, so if you've got say $10K out in a tIRA already, and you do a backdoor Roth for $5K, you'll owe taxes on 2/3 of your conversion.  Probably not the result you're expecting.

[mad9q]

Thanks all for your thoughts and comments. 

I do not have a tIRA (or any retirement savings in my own name)  -- this will be a spousal IRA and I plan to recharacterize asap. 

[KarefulKactus15]

I dont understand why you are opening the tIRA then recharacterizing?  Why not go straight to the Roth?

Would like someone to explain the logic so I can understand what I obviously dont currently understand.




Also as a side note, I contributed to a Traditional all 2016.  Unfortunately I wrongly predicted my income and made above the deductible MAGI amount.     So I had to recharacterize all tIRA contributions to Roth for my wife and I.   I think recharacterizations share the same deadline as tax deadline.   

Fidelity and Vanguard were both very easy to work with and knew exactly what I needed done.   

[shawndoggy]

I dont understand why you are opening the tIRA then recharacterizing?  Why not go straight to the Roth?

Sometimes people make too much to make a roth contribution.  But there is no income limit on traditional ira contributions, just deductibility of contribution.  So if you make over 184K, no roth through the front door, but you can make a nondeductible traditional ira contribution and then immediately roll over that IRA into a roth.  Voila back door roth.

[erutio]

OP, look up Backdoor Roth.  What you are describing is call the Backdoor Roth, and it is a common and openly discussed process, and you can even find information on it on Vanguard's and Fidelity's websites. 

[erutio]

If you call up Vanguard, tell them exactly what you want to do, or say "backdoor Roth" and they will walk you through the process without incurring any taxable event.  First time I did it was 5 years ago, I call them and they were very helpful.  I've been doing it automatically online since then. 

[MDM]

See Backdoor Roth IRA - Bogleheads for many details.

[mad9q]

I dont understand why you are opening the tIRA then recharacterizing?  Why not go straight to the Roth?

Sometimes people make too much to make a roth contribution.  But there is no income limit on traditional ira contributions, just deductibility of contribution.  So if you make over 184K, no roth through the front door, but you can make a nondeductible traditional ira contribution and then immediately roll over that IRA into a roth.  Voila back door roth.

this is our situation.  thank you all for your comments and suggestions.

[MDM]

Having talked SO into maxing out 401k space at our last annual money discussion (SO is a bit phobic about it and will not meet on these things more often, so I handle them), it's time to go to the next step in tax sheltering! We are over deductible limits for all forms of IRA - so we call up Vanguard, fund the tIRA with post-tax cash, convert to Roth immediately. Then we file an 8606 with our taxes to let the government know - and we identify on that form both the contribution and the conversion? Is that it or am I missing a step?

The Bogleheads link and links therein are pretty much the definitive guides.  If you followed the advice (and step by step instructions) there, you should be OK. 

And when I explain the tax benefit: there is none on current taxes, that all comes when the gains for 5-10 years of growth come out tax free and with our ability to control when they become taxable income post retirement. Is that all correct?

Yes - except, unless you have a severe financial need before age 59.5, there should never be any future taxable income at all from this.