Back door roth

[deleted875186]

This may be a stupid question, but trying to set up a back door Roth, and unclear about the tax bill.


Planning on opening a traditional IRA at Vangaurd. If I fund the account with 6000$ from personal funds (post tax income), and then roll over to a Roth IRA immediately, do I still have a tax bill from the roll over? Seems as though I would be getting taxed twice in this scenario?

Alternatively I could just roll over a portion of my old employer 401 with traditional pretax dollars to a Roth IRA and pay the tax bill on the rollover. In this case I would being paying tax once?

Am I missing something?

What would be a better use of my money?

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[abolt18]

This may be a stupid question, but trying to set up a back door Roth, and unclear about the tax bill.


Planning on opening a traditional IRA at Vangaurd. If I fund the account with 6000$ from personal funds (post tax income), and then roll over to a Roth IRA immediately, do I still have a tax bill from the roll over? Seems as though I would be getting taxed twice in this scenario?

Alternatively I could just roll over a portion of my old employer 401 with traditional pretax dollars to a Roth IRA and pay the tax bill on the rollover. In this case I would being paying tax once?

Am I missing something?

What would be a better use of my money?

Backdoor Roth IRA 2022: A Step by Step Guide with Vanguard - Physician on FIRE

A step by step guide that shows you how to successfully complete a Backdoor Roth IRA contribution via Vanguard in 2022 (for a mutual fund or brokerage IRA).

www.physicianonfire.com

How to Do a Backdoor Roth IRA [Step-by-Step Guide] | White Coat Investor

This Backdoor Roth IRA tutorial takes you step-by-step through the contribution process, including Form 8606, tax implications, common mistakes, and lots more.

www.whitecoatinvestor.com

You will learn everything you need to know from these.


But long story short, if you use post-tax $$$ to do a contribution to your traditional IRA then do a Roth conversion, you will NOT pay additional taxes on it.

IMO there isn't a better use for your money. You can do $6K for you and $6K for your spouse if you're married. Spouse doesn't have to have their own earned income.

 

[doctalaughs]

Backdoor Roth IRA 2022: A Step by Step Guide with Vanguard - Physician on FIRE

A step by step guide that shows you how to successfully complete a Backdoor Roth IRA contribution via Vanguard in 2022 (for a mutual fund or brokerage IRA).

www.physicianonfire.com

How to Do a Backdoor Roth IRA [Step-by-Step Guide] | White Coat Investor

This Backdoor Roth IRA tutorial takes you step-by-step through the contribution process, including Form 8606, tax implications, common mistakes, and lots more.

www.whitecoatinvestor.com

You will learn everything you need to know from these.


But long story short, if you use post-tax $$$ to do a contribution to your traditional IRA then do a Roth conversion, you will NOT pay additional taxes on it.

IMO there isn't a better use for your money. You can do $6K for you and $6K for your spouse if you're married. Spouse doesn't have to have their own earned income.

You didn’t answer his main question. You can’t do any after-tax conversion to roth starting Jan 1st if this bill passes. They are closing both the normal and mega backdoor roth avenues.

 

[deleted875186]

Backdoor Roth IRA 2022: A Step by Step Guide with Vanguard - Physician on FIRE

A step by step guide that shows you how to successfully complete a Backdoor Roth IRA contribution via Vanguard in 2022 (for a mutual fund or brokerage IRA).

www.physicianonfire.com

How to Do a Backdoor Roth IRA [Step-by-Step Guide] | White Coat Investor

This Backdoor Roth IRA tutorial takes you step-by-step through the contribution process, including Form 8606, tax implications, common mistakes, and lots more.

www.whitecoatinvestor.com

You will learn everything you need to know from these.


But long story short, if you use post-tax $$$ to do a contribution to your traditional IRA then do a Roth conversion, you will NOT pay additional taxes on it.

IMO there isn't a better use for your money. You can do $6K for you and $6K for your spouse if you're married. Spouse doesn't have to have their own earned income.

This is excellent thank you.

So if the bill passes then all Roth conversions are no longer legal, so I should definitely do this for this year.

If I contribute 6k for me and 6k for my spouse, do I need separate accounts for me and for her? Or is it just a 12k limit on my tax returns for 2021 for Roth controbutions regardless of whether the Roth IRA is in my or her name??

 

[abolt18]

This is excellent thank you.

So if the bill passes then all Roth conversions are no longer legal, so I should definitely do this for this year.

If I contribute 6k for me and 6k for my spouse, do I need separate accounts for me and for her? Or is it just a 12k limit on my tax returns for 2021 for Roth controbutions regardless of whether the Roth IRA is in my or her name??

Separate accounts. Go make the accounts right now. Takes like 5 minutes. Set up your bank on vanguard's website for a transfer (that takes a few days) so that you're getting the wheels in motion to do your contributions. Also create the Roth IRA accounts for both of you. Super easy. You can create the account then elect to contribute later.

 

[aneftp]

Backdoor Roth IRA 2022: A Step by Step Guide with Vanguard - Physician on FIRE

A step by step guide that shows you how to successfully complete a Backdoor Roth IRA contribution via Vanguard in 2022 (for a mutual fund or brokerage IRA).

www.physicianonfire.com

How to Do a Backdoor Roth IRA [Step-by-Step Guide] | White Coat Investor

This Backdoor Roth IRA tutorial takes you step-by-step through the contribution process, including Form 8606, tax implications, common mistakes, and lots more.

www.whitecoatinvestor.com

You will learn everything you need to know from these.


But long story short, if you use post-tax $$$ to do a contribution to your traditional IRA then do a Roth conversion, you will NOT pay additional taxes on it.

IMO there isn't a better use for your money. You can do $6K for you and $6K for your spouse if you're married. Spouse doesn't have to have their own earned income.

All true unless you have old accounts like me subject to pro rata rules.

 

[IMGASMD]

All true unless you have old accounts like me subject to pro rata rules.

Can someone EIL5 to me about pro rats rules?

I have a few IRA accounts, some of them been growing for a few years. If I convert this year, what’s the tax liability on those? What do I gain/lose if I convert before Dec 31st?

 

[abolt18]

You didn’t answer his main question. You can’t do any after-tax conversion to roth starting Jan 1st if this bill passes. They are closing both the normal and mega backdoor roth avenues.

He actually didn't specifically ask anything about the tax bill or how it affects these things. He only referenced it.

 

[PainDrain]

How does one do a mega Roth?

 

[pgg]

Can someone EIL5 to me about pro rats rules?

I have a few IRA accounts, some of them been growing for a few years. If I convert this year, what’s the tax liability on those? What do I gain/lose if I convert before Dec 31st?

If you have other traditional IRA accounts (including pre-tax accounts like a SEP-IRA) you have a problem.


The pro-rata rule applies to Roth conversions, if the balance of ALL traditional IRA accounts in your name is greater than zero on Dec 31st of the year you did the conversion. In this scenario, you'll be liable for taxes on the Roth conversion, at a rate proportional to whatever fraction of your pre-tax IRAs you converted. It's a dealkiller.

If you earn over the income limit, you can deposit $6000 of after tax money into a traditional IRA account. Then this after tax money can get rolled into a Roth, with no taxes due if and only if you do not have money in other traditional IRA accounts.

The way around the pro-rata rule is to zero out all traditional IRA accounts you have prior to Dec 31st. The simple way to do this is to roll all of your pre-tax traditional IRA accounts into a pre-tax traditional 401(k) - this is not a taxable event. I do this every year with my SEP-IRA. It's a little bit of a hassle because the custodian of the SEP-IRA has to process my paper request form, cut a check, and send it directly to the custodian of my 401(k). It takes a few weeks.

 

[anonperson]

This may be a stupid question, but trying to set up a back door Roth, and unclear about the tax bill.


Planning on opening a traditional IRA at Vangaurd. If I fund the account with 6000$ from personal funds (post tax income), and then roll over to a Roth IRA immediately, do I still have a tax bill from the roll over? Seems as though I would be getting taxed twice in this scenario?

If you use post tax money, you are only taxed on the growth of the $6000 prior to making the conversion.

I'll use my example.

I deposited $6000 post tax to a traditional ira. It was invested in VTI. After a few weeks (due to my laziness) I converted the amount. In that span, the account has grown to $6075.

So when I submitted form 8606, I essentially had to pay taxes on this amount.

This example is also to remind you to put the money in a money market account or something similar and convert and then invest in what you want to minimize this tax annoyance.

 

[IMGASMD]

If you have other traditional IRA accounts (including pre-tax accounts like a SEP-IRA) you have a problem.


The pro-rata rule applies to Roth conversions, if the balance of ALL traditional IRA accounts in your name is greater than zero on Dec 31st of the year you did the conversion. In this scenario, you'll be liable for taxes on the Roth conversion, at a rate proportional to whatever fraction of your pre-tax IRAs you converted. It's a dealkiller.

If you earn over the income limit, you can deposit $6000 of after tax money into a traditional IRA account. Then this after tax money can get rolled into a Roth, with no taxes due if and only if you do not have money in other traditional IRA accounts.

The way around the pro-rata rule is to zero out all traditional IRA accounts you have prior to Dec 31st. The simple way to do this is to roll all of your pre-tax traditional IRA accounts into a pre-tax traditional 401(k) - this is not a taxable event. I do this every year with my SEP-IRA. It's a little bit of a hassle because the custodian of the SEP-IRA has to process my paper request form, cut a check, and send it directly to the custodian of my 401(k). It takes a few weeks.

So I actually have one SEP-IRA and one rollover IRA(What can I say, I am a collector…..) and few 401K(x4) and 403b(x1) around. (Yes, please see above.)

One with my current job (401k). Any suggestions as to how to get out of this mess, so I can convert both IRA accounts this year before the door closes?

If I am reading it correctly, I should ask my current job to see if they will take on my IRAs, then contribute 6k, then convert?

Thanks

 

[pgg]

So I actually have one SEP-IRA and one rollover IRA(What can I say, I am a collector…..) and few 401K(x4) and 403b(x1) around. (Yes, please see above.)

One with my current job (401k). Any suggestions as to how to get out of this mess, so I can convert both IRA accounts this year before the door closes?

If I am reading it correctly, I should ask my current job to see if they will take on my IRAs, then contribute 6k, then convert?

Thanks

Yes

Start by finding out if one of your 401(k) accounts accepts rollovers. I think most do but I've heard some don't.

The "401(k)" I roll into is actually TSP, which is functionally the same. I send this form:

https://www.tsp.gov/forms/tsp-60.pdf

to Schwab, where my SEP-IRA is, and they send a check and the form to TSP. And a few weeks later the rollover is done.

The tIRA deposit and Roth conversion can happen any time during the 2021 calendar year. The ONLY date that matters with regard to the pro rata rule is that your IRA accounts must have a balance of $0 on Dec 31st. It doesn't matter what the IRA balances are on the day you do the Roth conversion.

 

[aneftp]

If you have other traditional IRA accounts (including pre-tax accounts like a SEP-IRA) you have a problem.


The pro-rata rule applies to Roth conversions, if the balance of ALL traditional IRA accounts in your name is greater than zero on Dec 31st of the year you did the conversion. In this scenario, you'll be liable for taxes on the Roth conversion, at a rate proportional to whatever fraction of your pre-tax IRAs you converted. It's a dealkiller.

If you earn over the income limit, you can deposit $6000 of after tax money into a traditional IRA account. Then this after tax money can get rolled into a Roth, with no taxes due if and only if you do not have money in other traditional IRA accounts.

The way around the pro-rata rule is to zero out all traditional IRA accounts you have prior to Dec 31st. The simple way to do this is to roll all of your pre-tax traditional IRA accounts into a pre-tax traditional 401(k) - this is not a taxable event. I do this every year with my SEP-IRA. It's a little bit of a hassle because the custodian of the SEP-IRA has to process my paper request form, cut a check, and send it directly to the custodian of my 401(k). It takes a few weeks.

That’s the tricky part. And why I’m kinda of stuck with my sep ira and rollover ira. (I have 30k in nondeductible ira as well ($8000 cost basis)

I can roll into employer sponsor 401/403k equivalent. Than do the backdoor Roth. But I’m losing a lot of my stock picking ability being tied to whether the employer sponsor plans have to offer.

It’s simply not worth it for me ti trade in my high grade stocks like apple Microsoft etc stocks I have in my own individual ira to roll into employer sponsor ira to avoid the pro rata rule. All for $6000 backdoor roth

The reason I have the 30k in non deductible ira was I was setting up for the mega backdoor Roth in 2010 year. (One time rollover and pay taxes in 2010 and 2011). But i never got around to that. And than they changed the rules in 2011 allowing backdoor Roth for smaller amounts yearly.

 

[Shimmy8]

So is this definitely done for 2022??

 

[anonperson]

So is this definitely done for 2022??

The bill that contains the limit still has to get approved by the Senate.

Could still get potentially changed/altered.

Overall doesn't look good but let's see how it shakes out.

 

[deleted875186]

The bill that contains the limit still has to get approved by the Senate.

Could still get potentially changed/altered.

Overall doesn't look good but let's see how it shakes out.

This is in the bill that projected to fail in the senate i believe.

 

[cincincyreds]

That's my understanding. So far we can still do the backdoor Roth IRA next year.

 

[FutureInternist]

If you use post tax money, you are only taxed on the growth of the $6000 prior to making the conversion.

I'll use my example.

I deposited $6000 post tax to a traditional ira. It was invested in VTI. After a few weeks (due to my laziness) I converted the amount. In that span, the account has grown to $6075.

So when I submitted form 8606, I essentially had to pay taxes on this amount.

This example is also to remind you to put the money in a money market account or something similar and convert and then invest in what you want to minimize this tax annoyance.

Fund the trad IRA late Fri afternoon and then do the conversion early Mon morning… since Fidelity etc usually take 24 hrs to process the funds, this keep you from making any $ on the IRA money

 

[deleted875186]

Thanks everyone, very helpful, just converted 6k for me and my spouse.

 

[cincincyreds]

This may be a stupid question, but trying to set up a back door Roth, and unclear about the tax bill.


Planning on opening a traditional IRA at Vangaurd. If I fund the account with 6000$ from personal funds (post tax income), and then roll over to a Roth IRA immediately, do I still have a tax bill from the roll over? Seems as though I would be getting taxed twice in this scenario?

Alternatively I could just roll over a portion of my old employer 401 with traditional pretax dollars to a Roth IRA and pay the tax bill on the rollover. In this case I would being paying tax once?

Am I missing something?

What would be a better use of my money?

As far as 2022, the backdoor roth ira is in limbo. But for 2021, yes. What you do is open up a nondeductible ira and put 6k in it, more if you're over 50. Then the next day you convert it to a roth ira and pay tax on the amount that 6000 went up in one day. Easy to do with Vanguard or Fidelity. You can call customer service and they will do it for you. Then for taxes you send your accountant forum 8806 i belive.