Ag1 said:

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1) Does this have to be converted in the process too and therefore taxes paid on the investment gains?
2) If not, are there any tax consequences to leaving it in it's own traditional IRA account?

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The Rollover IRA will be aggregated with your Tradional IRA for determining what proportion of your conversion is taxable. If you don't mind paying taxes on the $7k, go ahead and just convert that with the non-deductible IRA and you'll be able to do "clean" Back Door conversions going forward.

You could also rollover the Rollover IRA back into your 401k (if the plan will allow), which would remove the Rollover IRA from your aggregate IRA balance. However, you can't do that for your 2018 contributions since you ended the year with a balance in the Traditional IRA. You could go ahead with a 2019 contribution/conversion after rolling the IRA to your 401k.

Hope that makes sense. Good luck.

Agree with everything above but remember that the conversion from traditional to Roth is not pushed back to 2018, even if your contribution is for 2018. It will go on your 2019 tax return, so you have a little time to plan for the taxes. The $7,000 in other IRA will have a different value on 12/31/2019 when the tax is calculated.

Just to be sure - you're above the Roth income limitation, right?

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The Rollover IRA will be aggregated with your Tradional IRA for determining what proportion of your conversion is taxable.

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Any idea if the conversion ends up as a tax statement or something? Seems like a complicated calculation when you consider there are potentially 3 different accounts (my new traditional IRA, my wife's new traditional IRA, and my existing rollover traditional IRA) that are rolling into two different Roth IRA accounts.

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If you don't mind paying taxes on the $7k, go ahead and just convert that with the non-deductible IRA and you'll be able to do "clean" Back Door conversions going forward.

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This makes sense to me and is probably the way I'll go so that things can be consolidated.

OldArmyBrent said:

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Agree with everything above but remember that the conversion from traditional to Roth is not pushed back to 2018, even if your contribution is for 2018. It will go on your 2019 tax return, so you have a little time to plan for the taxes.

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This is a good point that I did not realize, thank you.

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The $7,000 in other IRA will have a different value on 12/31/2019 when the tax is calculated.

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To be sure I am understanding right, the value of the existing IRA rollover will only be relevant on the conversion date, right?

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Just to be sure - you're above the Roth income limitation, right?

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The way I read is if your MAGI for MFJ is > 199k then you are ineligible. Prior to doing a conversion, I'll need to double check on the M part of MAGI now that 2018 is done, but, I believe my wife and I will end up north of 199k for the year.

TXTransplant said:

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My situation isn't quite as complicated as yours (I'm single and did not have an existing IRA), but this is exactly what I did with Fidelity last year. My existing Roth wasn't with Fidelity, so I had that moved. Then I opened a traditional Roth with Fidelity, put money in it, and basically as soon as the money was available to transfer, moved it to the Roth. It took about 3-4 business days before I could do the transfer. I also didn't select any funds for the Roth, so between that the relatively quick transfer, there were no earnings on the money while it sat in the traditional Roth.

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It sounds like you didn't have any tax liability, but did you receive any kind of tax statement from Fidelity related to the conversion?

The only tax statements you receive are a 1099R reflecting any distribution (including conversions) and 5498s reflecting the 12/31 IRA balances that you use to determine your aggregate balance.

Ag13 said:

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TXTransplant said:

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My situation isn't quite as complicated as yours (I'm single and did not have an existing IRA), but this is exactly what I did with Fidelity last year. My existing Roth wasn't with Fidelity, so I had that moved. Then I opened a traditional Roth with Fidelity, put money in it, and basically as soon as the money was available to transfer, moved it to the Roth. It took about 3-4 business days before I could do the transfer. I also didn't select any funds for the Roth, so between that the relatively quick transfer, there were no earnings on the money while it sat in the traditional Roth.

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It sounds like you didn't have any tax liability, but did you receive any kind of tax statement from Fidelity related to the conversion?

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I haven't, yet, but it usually takes until the end of Jan for me to get any of my various tax statements. I should know here pretty soon. I set all of this up Spring of last year.

I can pull up my Roth account history, though, and it says the Roth conversion was exactly my contribution ($5500), so I wouldn't expect any kind of tax issues.

The traditional IRA did earn 17 cents in interest during the six days my contribution sat it in. The interest was paid out at the end of the month, after I transferred the money. That isn't enough to trigger a 1099, though.

Edited this post and my previous one because I kept referring to the traditional IRA as a Roth, but that's not what I meant. I think what I meant was understood, but I wanted to correct it for clarity's sake.

In summary: moved existing Roth to Fidelity, opened a traditional IRA with Fidelity, deposited $5500 in traditional IRA (without selecting any funds), and as soon as the funds were available, moved them to the Roth. Time from initial deposit in traditional to conversion to Roth was about six days.

I will repeat this process for my 2019 contribution.

I am going to piggyback off of this thread as my situation is very similar. First year for my wife and I to be over the Roth contribution limit and looking to clarify a few items in leveraging the backdoor Roth option.

Key information:
- No 2018 or 2019 IRA contributions have been made.
- Both my wife and I have 401k plans through our employer.
- We both currently have Traditional and Roth IRA accounts with Betterment with funds in them.
- The funds in my wife's Trad IRA are from a previous 401k rollover and total ~$2000.
- The funds in my Trad IRA are a combination of 401k rollover and direct contributions from when I did not have a 401k plan through a previous employer. Total ~$25,000.

Questions/Assumptions:
- My understanding is we can still contribute to our 2018 IRA limits till April 15 but since the conversion is based on calendar year, it would occur in tax year 2019. Although there is a limit on the amount of money that can be contributed to an IRA for a given year, there is no limit on the amount converted from Traditional to Roth. Is that correct?

- Pro Rata Rule Issues - Because both Traditional IRAs have existing pre-tax funds, my understanding is a Roth conversion would make the entire balance subject to being taxed. There is not a way to earmark 2018 dollars vs. previous year. Correct?

- Would a workaround / cleaner approach be to open new Trad and Roth IRAs with a different provider (Vanguard) to only deal with contributions for 2018 forward?

DonaldFDraper said:

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I am going to piggyback off of this thread as my situation is very similar. First year for my wife and I to be over the Roth contribution limit and looking to clarify a few items in leveraging the backdoor Roth option.

Key information:
- No 2018 or 2019 IRA contributions have been made.
- Both my wife and I have 401k plans through our employer.
- We both currently have Traditional and Roth IRA accounts with Betterment with funds in them.
- The funds in my wife's Trad IRA are from a previous 401k rollover and total ~$2000.
- The funds in my Trad IRA are a combination of 401k rollover and direct contributions from when I did not have a 401k plan through a previous employer. Total ~$25,000.

Questions/Assumptions:
- My understanding is we can still contribute to our 2018 IRA limits till April 15 but since the conversion is based on calendar year, it would occur in tax year 2019. Although there is a limit on the amount of money that can be contributed to an IRA for a given year, there is no limit on the amount converted from Traditional to Roth. Is that correct?

- Pro Rata Rule Issues - Because both Traditional IRAs have existing pre-tax funds, my understanding is a Roth conversion would make the entire balance subject to being taxed. There is not a way to earmark 2018 dollars vs. previous year. Correct?

- Would a workaround / cleaner approach be to open new Trad and Roth IRAs with a different provider (Vanguard) to only deal with contributions for 2018 forward?

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- My understanding is we can still contribute to our 2018 IRA limits till April 15 but since the conversion is based on calendar year, it would occur in tax year 2019. Although there is a limit on the amount of money that can be contributed to an IRA for a given year, there is no limit on the amount converted from Traditional to Roth. Is that correct? ALL CORRECT

- Pro Rata Rule Issues - Because both Traditional IRAs have existing pre-tax funds, my understanding is a Roth conversion would make the entire balance subject to being taxed. There is not a way to earmark 2018 dollars vs. previous year. Correct? NOT EXACTLY. On your wife's a pro-rata portion would be taxed (i.e. $2,000 of value from rollover with no basis, and a $5,500 non-deductible contribution, 26.666% (2,000/7,500) of any conversion would be taxable. On your conversion, a much higher portion would be taxed because you have more value with no basis.

- Would a workaround / cleaner approach be to open new Trad and Roth IRAs with a different provider (Vanguard) to only deal with contributions for 2018 forward? NO. The pro-rata rules aggregate across all self-directed IRAs including at different institutions. The best workaround is to roll the IRA account to a 401(k), if that is possible in your case. Alternatively, look for a lower tax year to execute the conversion.

Thanks for the info! Very helpful. A few follow up questions if you don't mind.

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- Pro Rata Rule Issues - Because both Traditional IRAs have existing pre-tax funds, my understanding is a Roth conversion would make the entire balance subject to being taxed. There is not a way to earmark 2018 dollars vs. previous year. Correct? NOT EXACTLY. On your wife's a pro-rata portion would be taxed (i.e. $2,000 of value from rollover with no basis, and a $5,500 non-deductible contribution, 26.666% (2,000/7,500) of any conversion would be taxable. On your conversion, a much higher portion would be taxed because you have more value with no basis.

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~ Is it possible / advantageous to convert the current funds prior to making any additional contributions?

~ Once you make the initial conversion and pay any applicable pro-rata taxes, future conversions should NOT be subjected to the pro-rata because the previous funds no reside in the Roth IRA and the Trad IRA would have a zero balance?

~ Within the Betterment interface, I have the ability to convert an exact amount of funds vs. the entire account. I understand I cannot really specify the specific dollars being convert but would it limit my tax impact if I make the annual maximum contributions then only convert $5500 for 2018 then $6000 for 2019?

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- Would a workaround / cleaner approach be to open new Trad and Roth IRAs with a different provider (Vanguard) to only deal with contributions for 2018 forward? NO. The pro-rata rules aggregate across all self-directed IRAs including at different institutions. The best workaround is to roll the IRA account to a 401(k), if that is possible in your case. Alternatively, look for a lower tax year to execute the conversion.

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~ Understood. Could you further explain "look for a lower tax year to execute the conversion"?

If income/deductions are stable one year to the next, and you are squarely in the middle of a tax bracket, that comment doesn't apply.

In case any of this does apply, here is a more thorough explanation of what I meant:

If you know income is higher in 2019 than you expect it to be in 2020, it may be worth waiting, especially if your marginal tax rate will be material lower in the later tax year. This is most beneficial for those on the edge of the 24% and 32% tax brackets, as it is a pretty big tax spread if you can pick it up.

Some business owners, consultants, sales professionals can control the timing of some income and expenses (i.e. accelerate or push a month or so) to artificially adjust which tax year either income or expenses fall into, which can further increase control around timing when to take gains (or losses), pursue Roth Conversions, etc... While the new tax laws limit the ability to use personal deductions in the same way, charitable contributions can sometimes be strategically used to move your marginal tax bracket.

This year there is also a new tax wrinkle/opportunity called Qualified Business Income. If you happen to be in the phase out for that, it may be better to try to control taxable income to be fully in or out of the phase out by bunching charitable deductions some years and income events (like Roth conversions) in others. More importantly, it would be generally horrendous if a Roth Conversion kicked someone into the phase out for QBI as marginal rates would be easily into the 40%+ range. This all gets pretty complicated, and doesn't apply to many.

~ Is it possible / advantageous to convert the current funds prior to making any additional contributions?
I don't believe it would be advantageous. I'm about 80% sure it would get aggregated anyway.

~ Once you make the initial conversion and pay any applicable pro-rata taxes, future conversions should NOT be subjected to the pro-rata because the previous funds no reside in the Roth IRA and the Trad IRA would have a zero balance?
CORRECT. At some institutions you may need/want to leave a few hundred dollars in the IRA to keep it open.

~ Within the Betterment interface, I have the ability to convert an exact amount of funds vs. the entire account. I understand I cannot really specify the specific dollars being convert but would it limit my tax impact if I make the annual maximum contributions then only convert $5500 for 2018 then $6000 for 2019?
The tax impact is pro-rata. If you convert $5,500 in 2018, you are still using up some of the basis. Then, when you convert $6,000 in 2019, you are using up more. As long as you never fully convert, basis will need to be tracked. At some point that is an administrative burden worth eliminating. If there is growth in the interim, you are costing yourself more because that will be growth you are converting, which is taxable. Of course no one can predict what will happen, but 2/3 of the time market is up over a year and that would cost you taxes to spread it out.

Thank you for all the information. Extremely helpful.

I'm going to investigate rolling the funds into my current 401k. Fortunately, my fees are pretty low so it's probably the best option to avoid taxes. Then just eat the taxes on my wife's account.

I don't envision our income varying much year over year. If anything, it will likely increase.

We will be converting our current residency into a rental property this year, which should open up additional tax benefits, but not a guaranteed deal and unsure the full impact on taxes.

Good news - My 401k Plan does allow Roll Ins.

Bad news - The lowest available expense ratio is higher than I remember at 0.47%.

I'll have to run a cost comparison on the one time tax hit vs. expense ratio over time. The brain drain factor makes me want to just eat the taxes but my penny pinching won't allow me.

Question - Looking at Form 8606 for Nondeductible IRAs, it only addresses IRA contributions for the relevant tax year. Since December 31, 2018 has past, any conversion would occur on tax year 2019 and thus any 2018 IRA contribution made now would become part of the amount to be converted. Is that correct?

https://www.irs.gov/pub/irs-dft/f8606--dft.pdf
https://www.irs.gov/forms-pubs/about-form-8606

https://www.whitecoatinvestor.com/forums/topic/missed-conversion-deadline-best-strategy-for-back-door-roth/

Ag13 said:

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Any idea if the conversion ends up as a tax statement or something? Seems like a complicated calculation when you consider there are potentially 3 different accounts (my new traditional IRA, my wife's new traditional IRA, and my existing rollover traditional IRA) that are rolling into two different Roth IRA accounts.

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You file a Form 8606 to report the income and that form walks through the calculation. 2016 errors are generating notices right now. TurboTax is not great at this form, so IRS notices are not uncommon. If you do get a notice, it is easily cleared up with a letter and a properly completed form. I've written a few in the last few months.

You just mention income limits for Roth. Just want to make sure you know it's AGI.

People backdooring based on gross is a common misstep on r/FI.

RangerRick9211 said:

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You just mention income limits for Roth. Just want to make sure you know it's AGI.

People backdooring based on gross is a common misstep on r/FI.

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Actually Modified AGI (MAGI) which is slightly different

I think this information just solved my problem for 2018. If I am correctly calculating our MAGI, we are under the $199k limit thanks to Traditional 401k and HSA contributions.

We will likely be over the limit in 2019.

Here is a great tutorial.

https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/



Regarding knowing the limits. When in doubt, use the backdoor Roth. There is no cost and you simply have to fill out a single sheet of paper. Having to recharacterize and convert is a pain in the rear.

I think so long as the money was put in as an after tax contribution, there is no reporting requirements. So long as you don't try to deduct the contribution for 2018, there is no harm no foul about waiting till 2019 to convert. I don't think there is any reporting to the IRS for 2018, and you'll fill out the 5606 for 2019.

Makes sense. In prep for doing the conversion for tax year 2019, the accounting will be cleaner / simpler is I contribute all new 2019 IRA funds within the calendar year. Correct?

Then if I convert the current Traditional IRA during 2019 thus making the balance is $0.00 on December 31, 2019, I can put $0.00 in Box 6 on Form 8606?

Bumping.

Completed the roll-in of my Traditional IRA into my current 401k. My Traditional IRA has a zero balance so I should be good to do my first backdoor ROTH IRA. Just need to do it within the calendar year for 2019 - correct?

For my wife's Traditional IRA, I understand there will be tax implications but we contribute the $6000 for 2019 then convert the entire account to ROTH and be good moving forward?

DonaldFDraper said:

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Bumping.

Completed the roll-in of my Traditional IRA into my current 401k. My Traditional IRA has a zero balance so I should be good to do my first backdoor ROTH IRA. Just need to do it within the calendar year for 2019 - correct?

For my wife's Traditional IRA, I understand there will be tax implications but we contribute the $6000 for 2019 then convert the entire account to ROTH and be good moving forward?

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Yes, but if you do your own taxes with TurboTax, make sure you read up on it before entering (actually Google "TurboTax backdoor Roth"). If you do what makes sense in the software, TurboTax will think your $6k contribution/rollover is taxable income. Doing it so that you aren't taxed isn't intuitive.

Someone can correct me if I'm wrong, but I ~think~ if you contributed anything this year to the traditional IRA (before you rolled it over), then that limits what you can put in the Roth. If you didn't contribute to your traditional IRA this year, then there is no issue putting the full amount in the Roth.

This is spot on. TurboTax is not good at this kind of thing.

One point of clarification - I don't think you necessarily need to do this by end of year, but the tax on conversion is based on the year in which it happens. It can't be attributed to a prior year like the contribution.

Yeah I got bit by turbo tax doing this. Got a letter from the IRS wanting taxes on the amount converted. I had to write them a letter explaining the transfer with supporting documents.

Great thread!

I currently do not have a Roth, and we are over the limit. Can you do a back door Roth if you didn't create one while you were under the limit?

Thanks!

I've used TaxAct the last few years but will keep an eye out when it comes time to file.

No contributions have been made for 2019 to either of our IRAs so should be good to go.

Tumble Weed said:

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Great thread!

I currently do not have a Roth, and we are over the limit. Can you do a back door Roth if you didn't create one while you were under the limit?

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Yep. Just create it when you contribute. Designate as a nondeductible traditional IRA contribution. My bank actually closes mine every year because it doesn't have a balance and goes too long with activity.

I have a couple of questions as well.

My wife and I both have set up a traditional IRA last year and made max contributions that were non-deductible with the intent of rolling them over to a Roth IRA this year. I read an article that said that you should keep the funds in your traditional IRA for close to a year so that it doesn't look like you are just contributing to the Traditional in order to immediately roll it over to the Roth. From reading this thread, it sounds like that isn't something to worry about and you should just immediately roll it over once the deposit hits the account?

So we both made non-deductible contributions to our Traditional IRAs on 12/31/18. We then have invested those funds and have some gains. When we do the roll over to the Roth IRA, I know that are gains will be taxed. But all we have to do is set up a Roth IRA for both of us, and then roll over the entire amount in our Traditional IRAs to our Roth IRAs by completing the Roth Conversion Form, correct?

Could we go ahead and make our 2019 non-deductible contributions to our Traditional IRAs and then roll over the entire amounts in our accounts in 2020? Or should we go ahead and do the roll over this year before making our 2019 non-deductible contributions to our Traditional IRAs?

Sorry for all the questions, but I haven't been able to find a ton online that answers them.

mavsfan4ever said:

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I have a couple of questions as well.

My wife and I both have set up a traditional IRA last year and made max contributions that were non-deductible with the intent of rolling them over to a Roth IRA this year. I read an article that said that you should keep the funds in your traditional IRA for close to a year so that it doesn't look like you are just contributing to the Traditional in order to immediately roll it over to the Roth. From reading this thread, it sounds like that isn't something to worry about and you should just immediately roll it over once the deposit hits the account?

So we both made non-deductible contributions to our Traditional IRAs on 12/31/18. We then have invested those funds and have some gains. When we do the roll over to the Roth IRA, I know that are gains will be taxed. But all we have to do is set up a Roth IRA for both of us, and then roll over the entire amount in our Traditional IRAs to our Roth IRAs by completing the Roth Conversion Form, correct?

Could we go ahead and make our 2019 non-deductible contributions to our Traditional IRAs and then roll over the entire amounts in our accounts in 2020? Or should we go ahead and do the roll over this year before making our 2019 non-deductible contributions to our Traditional IRAs?

Sorry for all the questions, but I haven't been able to find a ton online that answers them.

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I can't answer all of your questions, but re the part I bolded: my Roth is with Fidelity, and an ASAP rollover is exactly what they told me to do (although, I'm sure they have some big legal disclaimer to absolve them of any responsibility should that be bad advice). They specifically said to do it as fast as possible to avoid any taxable gains.

However, I don't believe there is any stipulation in the IRS rules that says you have to leave the money in the traditional IRA for any length of time. Seems to me, there would be no reason to go after someone for doing exactly what the law allows. The IRS could always close this loophole, if they think this strategy is a "problem".

Reading online, though, it seems where people get into trouble is when they have a traditional IRA that does have some untaxed/deductible contributions, and they want to roll over and contribute to a Roth. I never had an IRA until I opened one up to do the backdoor. And there has never been more in that IRA account than the maximum contribution that I can put in my Roth. So, for most of the time, my traditional IRA actually has no money in it (I do a lump sum contribution to my Roth via the rollover once a year). That keeps it pretty simple from an accounting perspective.

From my understanding, in order to be eligible for a Roth, you cannot have any funds in a traditional IRA (if you do, you would have to convert it to a Roth before you can do the back door).

I'm sure most (if not all) problems are created by inaccurate tax reporting. Which is why I posted earlier to be careful if you do a backdoor and also prepare your own taxes with TurboTax (or an equivalent). TurboTax really isn't set up to handle a backdoor Roth conversion, and doing it correctly isn't intuitive when working through prompts provided by the software.

Also, according to this article, Congress says it's ok.

https://www.forbes.com/sites/ashleaebeling/2018/01/22/congress-blesses-roth-iras-for-everyone-even-the-well-paid/#58944c817471

Yea, the article I read was probably not correct. I seem to remember the article stating that you likely did not need to wait but that they recommended waiting to be safe.

I'm thinking that I can likely just make another non-deductible contribution for 2019 in my IRA and my wife's IRA (and not invest those 2019 amounts) and then roll over all of the funds in our IRAs to our Roth IRAs (and pay taxes on our gains from our investments of the 2018 non-deductible contributions). That seems like it will be easier/quicker than rolling over our accounts, and then making our 2019 non-deductible contributions and then doing another roll over for the 2019 contributions.

We don't have any deductible contributions in our traditional IRAs. We both have 401ks, but I don't think they 401ks will have an effect on the rollover, correct?

mavsfan4ever said:

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Yea, the article I read was probably not correct. I seem to remember the article stating that you likely did not need to wait but that they recommended waiting to be safe.

I'm thinking that I can likely just make another non-deductible contribution for 2019 in my IRA and my wife's IRA (and not invest those 2019 amounts) and then roll over all of the funds in our IRAs to our Roth IRAs (and pay taxes on our gains from our investments of the 2018 non-deductible contributions). That seems like it will be easier/quicker than rolling over our accounts, and then making our 2019 non-deductible contributions and then doing another roll over for the 2019 contributions.

We don't have any deductible contributions in our traditional IRAs. We both have 401ks, but I don't think they 401ks will have an effect on the rollover, correct?

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You have until tax day 2020 to do your 2019 contribution. So, you could probably do 2019 and 2020 contributions at the same time sometime between Jan 1 and April 15 and just do one roll over for 2020.

And no, 401k accounts don't affect Roths.

Thanks for the responses.

And technically, I could contribute to my traditional IRA for 10 years and then roll over the entire account to a roth IRA at that time, correct? It just wouldn't be smart to do that because you will be paying taxes on all gains you have made up to that point. Therefore, it makes more sense to do a rollover each year?