Backdoor Roth

[Noyac]

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There has been some mention of this in other threads. For those that do this currently I would like a bit more discussion on this. I wish I knew about it when I was younger.

Scenario:
Let's say you have your work retirement accts which are 401K, 403B and 457B. In addition to that you have a Traditional IRA, a Brokerage IRA and a Roth from long ago. Since we can't contribute to our Roth any longer due to our income that Roth acct just sits there doing very little. How do you get your Traditional IRA and Brokrage IRA monies into that Roth IRA without paying capital gains taxes? Let's assume it's a large amout of money (ie: $100-200,000).

 

[WholeLottaGame7]

There has been some mention of this in other threads. For those that do this currently I would like a bit more discussion on this. I wish I knew about it when I was younger.

Scenario:
Let's say you have your work retirement accts which are 401K, 403B and 457B. In addition to that you have a Traditional IRA, a Brokerage IRA and a Roth from long ago. Since we can't contribute to our Roth any longer due to our income that Roth acct just sits there doing very little. How do you get your Traditional IRA and Brokrage IRA monies into that Roth IRA without paying capital gains taxes? Let's assume it's a large amout of money (ie: $100-200,000).

https://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

 

[abolt18]

Another step by step, with over 800 comments of discussion. I suppose Ctrl+f would be invaluable.

http://whitecoatinvestor.com/backdoor-roth-ira-tutorial/

 

[Noyac]

I've read both of those links. Neither one describes how to transfer a large sum of funds from a Traditional IRA to a Roth without paying capital gains. One way may be through a 401K. But figuring this out is difficult.
Both of these links seem to discuss how to contribute your "yearly" max and then convert it to the Roth at the end of the year leaving your Traditional IRA empty at the start of the next year. Then repeating the process for the next year.

 

[Mman]

I've read both of those links. Neither one describes how to transfer a large sum of funds from a Traditional IRA to a Roth without paying capital gains. One way may be through a 401K. But figuring this out is difficult.
Both of these links seem to discuss how to contribute your "yearly" max and then convert it to the Roth at the end of the year leaving your Traditional IRA empty at the start of the next year. Then repeating the process for the next year.

I think you basically have to pay the cap gains tax. The point of the backdoor Roth is that your traditional IRA contribution is not deductible when you earn a high enough salary, but still gets gains taxed on the back end. By converting it instantly to a Roth which grows tax free you save having to pay tax on those gains in the future.

If the money has been sitting for years as a traditional IRA and making gains, tax will be due on those gains whenever you take them out (either to spend in retirement or to convert to a Roth). And the exact tax you pay on the lump sum conversion depends on if you were able to deduct the contributions in the previous years they were made. Example, if you took a tax deduction to contribute to a traditional IRA and then later convert that (plus it's gains) to a Roth you need to pay tax on the full amount and not just the gains.

 

[Noyac]

Thats where the Form 8606 comes in.
I am trying to figure out now where the 401K comes into play and if it has any additional benefit in converting Traditional to Roth. Stay tuned.

 

[caligas]

Mman explained it well. Usually when people are talking about the back door Roth they are talking about contributing to a traditional IRA with immediate or very quick transfer of the funds into a Roth IRA such that capital gains are minimal to nonexistent.

 

[sethco]

Can you roll over your current IRA into your 401k or 403b? Read your 401k/403b plan document, as you may be able to, especially if was a previous 401k. As an aside, how do you have access to a 457? I thought you were in private practice or are you hospital employed?

 

[Noyac]

Can you roll over your current IRA into your 401k or 403b? Read your 401k/403b plan document, as you may be able to, especially if was a previous 401k. As an aside, how do you have access to a 457? I thought you were in private practice or are you hospital employed?

W-2

 

[Gaseous Clay]

There has been some mention of this in other threads. For those that do this currently I would like a bit more discussion on this. I wish I knew about it when I was younger.

Scenario:
Let's say you have your work retirement accts which are 401K, 403B and 457B. In addition to that you have a Traditional IRA, a Brokerage IRA and a Roth from long ago. Since we can't contribute to our Roth any longer due to our income that Roth acct just sits there doing very little. How do you get your Traditional IRA and Brokrage IRA monies into that Roth IRA without paying capital gains taxes? Let's assume it's a large amout of money (ie: $100-200,000).

Certainly not an expert but I handle my own finances competently IMO.

There is no way you can make this conversion without paying taxes. It is recommended to make such a conversion if you feel your tax bracket will be higher when you retire. I am a huge proponent of a Roth for multiple reasons but mainly because taxes are done (assuming the Gov't doesn't f*ck with it later on), you can pass your Roth account to heirs tax free, and there is no RMD at any age.

I did make the Roth conversion back in 2010 when I finished residency. I had maxed out my 457 for 3 years and maybe had somewhere along the lines of 5-10k from my intern year 401k. I estimate I converted $65k or so? At the time I was allowed to spread the tax hit over 2 years. At the end of the day, I may have paid more in tax back then but my Roth account is well into the 6 figures and I am 38 years old and continue to add $5500 each year to it.

Also, the tax will be a lot more than capital gains. Remember, you socked away pre-tax 401k/403b/457b money and are trying to convert it to post tax retirement money. I maybe wrong but the gov't isn't going to give you a free pass on this. Good luck and please pass along any info that contradicts anything I've posted.

 

[facted]

Also, the tax will be a lot more than capital gains. Remember, you socked away pre-tax 401k/403b/457b money and are trying to convert it to post tax retirement money. I maybe wrong but the gov't isn't going to give you a free pass on this. Good luck and please pass along any info that contradicts anything I've posted.

I believe you will pay capital gains on any gains that have accrued in the taxable accounts, as well as regular income tax on the initial contributions into these accounts.

A roth certainly has benefits, but I find it hard to believe my income tax bracket will be higher after I retire than it is today.

 

[Mman]

A roth certainly has benefits, but I find it hard to believe my income tax bracket will be higher after I retire than it is today.

As a physician, you are likely unable to deduct a contribution to a traditional IRA and you still have to pay capital gains when you withdraw. If you just immediately convert it to a backdoor Roth contribution, you can't deduct the contribution but at least you don't get hit with capital gains at the end. A high income individual should never leave a traditional IRA contribution in a traditional IRA.

 

[Noyac]

As a physician, you are likely unable to deduct a contribution to a traditional IRA and you still have to pay capital gains when you withdraw. If you just immediately convert it to a backdoor Roth contribution, you can't deduct the contribution but at least you don't get hit with capital gains at the end. A high income individual should never leave a traditional IRA contribution in a traditional IRA.

So if I am understanding this correctly, I should make a full contribution to my Traditional IRA and at the end of the year convert that $6500 (I'm 50 now) over to my Roth. I will pay capital gains on this conversion but they shouldn't be that much. My Traditional will be $0 at the end of the year and I start over the next year.

But since my Traditional has a lot of money in it now, I need to do something with it. I may need to transfer to my 401K which will accept this. Then I can start with a $0 balance in the Traditional. I don't think I will have to pay capital gains if I move this over to a 401K since I pay that when I withdraw at retirement. And my tax bracket will most like.y be much less.

 

[facted]

As a physician, you are likely unable to deduct a contribution to a traditional IRA and you still have to pay capital gains when you withdraw. If you just immediately convert it to a backdoor Roth contribution, you can't deduct the contribution but at least you don't get hit with capital gains at the end. A high income individual should never leave a traditional IRA contribution in a traditional IRA.

You are correct. I misspoke. It's true that you can't deduct contributions to a traditional IRA for high income individuals. However, if you can contribute to a 401k or 403b you should make sure to maximize those contributions (18k) before contributing to a traditional IRA and then coverting that to a roth.

 

[Arch Guillotti]

So if I am understanding this correctly, I should make a full contribution to my Traditional IRA and at the end of the year convert that $6500 (I'm 50 now) over to my Roth. I will pay capital gains on this conversion but they shouldn't be that much. My Traditional will be $0 at the end of the year and I start over the next year.

But since my Traditional has a lot of money in it now, I need to do something with it. I may need to transfer to my 401K which will accept this. Then I can start with a $0 balance in the Traditional. I don't think I will have to pay capital gains if I move this over to a 401K since I pay that when I withdraw at retirement. And my tax bracket will most like.y be much less.

Move the money out of the traditional and zero it out.

Contribute to the Roth at the beginning of the year and roll it over at any point after that (although some will tell you to wait a little while).

 

[facted]

So if I am understanding this correctly, I should make a full contribution to my Traditional IRA and at the end of the year convert that $6500 (I'm 50 now) over to my Roth. I will pay capital gains on this conversion but they shouldn't be that much. My Traditional will be $0 at the end of the year and I start over the next year.

But since my Traditional has a lot of money in it now, I need to do something with it. I may need to transfer to my 401K which will accept this. Then I can start with a $0 balance in the Traditional. I don't think I will have to pay capital gains if I move this over to a 401K since I pay that when I withdraw at retirement. And my tax bracket will most like.y be much less.

have you maxed out your 401k at 18k for the year? Depending on your age (you wrote you're 50), you could theoretically make a $6000 catch-up as well into the 401k. This $24k would be tax deductible this year while you're in a high income bracket. After retirement, it would be taxed, of course, but at a lower bracket than you're currently in most likely.

Why do you have to do anything with your traditional IRA? Do you really want to pay taxes on it right now and shrink the money in the account as opposed to letting it grow in the market? I'm not sure I see the benefit of rolling over a large traditional IRA to a Roth if you're in a high income bracket at this point and expect to be in a lower one in retirement. You'll be shrinking the account and you'll be likely paying a higher tax rate.

It also sounds like you could really use the help of a financial planner or a good financial friend.

 

[facted]

Move the money out of the traditional and zero it out.

Contribute to the Roth at the beginning of the year and roll it over at any point after that (although some will tell you to wait a little while).

What would be the benefit of this?

 

[Noyac]

However, aren't long term capital gains taxed at 15%?

 

[facted]

However, aren't long term capital gains taxed at 15%?

Per this: http://www.bankrate.com/finance/taxes/plan-for-taxes-due-on-a-roth-ira-conversion-1.aspx

The full conversion is taxed at ordinary income rate, not capital gains.

 

[Noyac]

What would be the benefit of this?

There are three key steps here. Don’t miss any of them.


1) Get rid of any SEP-IRA, SIMPLE IRA, traditional IRA, or rollover IRA money. The total sum of these accounts on December 31st of the year in which you do Step 3 must be zero to avoid a “pro-rata” calculation that can eliminate most of the benefit of a Backdoor Roth IRA. You can get rid of these accounts in 3 ways:

• Withdraw the money (not recommended, as the money would be subject to tax and/or penalties, not to mention DECREASING your tax-advantaged/asset-protected investment space.)
• Convert the entire sum to a Roth IRA (only recommended if it is a relatively small amount and you can afford to pay the taxes out of current earnings or taxable investments with relatively high basis.)
• Roll the money over into a 401K, 403B, or Individual 401K. 401Ks don’t count in the aforementioned pro-rata calculation. Some physicians have even opened an Individual 401K at Fidelity (Vanguard’s Individual 401K doesn’t accept IRA rollovers) in order to facilitate a Backdoor Roth IRA.

2) Make a $5500 ($6500 if over 50) non-deductible traditional IRA contribution for yourself, and one for your spouse. You can use the same traditional IRA accounts every year, they just spend most of the time with $0 in it. Most fund companies, including Vanguard, don’t close the account just because there is nothing in it. I do this every January 2nd. I just place it into the Prime Money Market Fund to keep the math simple. Since it yields something like 0.04% and doesn’t go down in value, the sum when you convert will be exactly the same as when you contribute. No gains, no losses.

3) Convert the non-deductible traditional IRA to a Roth IRA by transferring the money from your traditional IRA into your Roth IRA at the same fund company. If you don’t already have a Roth IRA there, you’ll need to open one. This can be done in a minute or two online at Vanguard, and is essentially the same process as opening the traditional IRA. It is very straightforward. When you transfer the money, the website will throw up a scary banner saying something like “THIS IS A TAXABLE EVENT.” That’s true. It is taxable. It is just that the tax bill is zero for it since you’ve already paid taxes on the $5500 and couldn’t claim it as a deduction because you make too much money. You can now invest the money as per your investing plan.

 

[facted]

I just ran a simple calculation. Let's assume the following:

You have 10k today in a traditional IRA, which you've had for years and that money is tax-sheltered since you put in the contributions in years where you could deduct based on income. You are in a 35% income tax bracket. You have two options. Convert to a ROTH or keep in a traditional IRA.

1) Traditional IRA:
Let's assume a gracious rate of return of 8% annually for 20 years. At the end of this time, you'll have $49,268. Let's assume you then retire and are in a 15% tax bracket. You would owe $7500 in tax and be left with 42,500. If you were in a 25% bracket, you'd be owing 12,500 and be left with 38,500.

2) Convert to a Roth:
Today, you owe a tax of 35% on the 10k. That leaves you with $6500 in the Roth. Leaving that $6500 to grow @ 8% for 20 years gets you to $32,000. Granted, you owe no tax. However, you're still below both the %15 and %25 bracket situations from just having left in the traditional IRA to start with.

There is actually a great calculator for this here: https://www.calcxml.com/calculators/roth-ira-conversion-calculator

Part of the calculation would also depend on how you would fund the conversion (do you pay the tax liability out of the roth account or do you pay cash out of your bank account).

I'm not seeing the catch. Why convert in the first place if you're paying 35% now? Yes, you won't be taxed on gains if you make a killing, but then again, you're destroying your principal to start with and compounding will bite you.

Clearly, if you do not already have a traditional IRA, you should just pay the tax now to convert to a ROTH as you won't get any new tax benefit this year (although I would argue you should max out your 401k first). However, if the account is already existing, and the money was tax sheltered since you started it in years where you could take the deductions, then it makes no senses to lose that and pay such a high bracket tax on it now.

 

[Noyac]

Yep, it's not an easy decision.

 

[deleted126335]

Roth's are great if you are a resident and have extra cash to pay taxes or a fresh attending who only has an attending salary for part of a year. Or called up to the military to fulfill an obligation and take the associated income hit and have the cash in savings. or take a leave of absence for any reason: fellowship, personal time, whatever.
If you are a top bracket investor contributing or converting to a Roth is probably not the best choice.

 

[Mman]

So if I am understanding this correctly, I should make a full contribution to my Traditional IRA and at the end of the year convert that $6500 (I'm 50 now) over to my Roth. I will pay capital gains on this conversion but they shouldn't be that much. My Traditional will be $0 at the end of the year and I start over the next year.

I contribute to traditional IRA in January. I leave this in cash or some sort of equivalent rather than invested in a fund so that it doesn't accrue any gains. A week later I convert it to a Roth and then invest it. There is no requirement for any particular length of time that the money needs to be left in the traditional IRA before being converted. Some people recommend a month, certainly no need to leave it for a year. I think the only real requirement by the IRS is that they not be one single transaction. I believe a week duration is long enough to show them as 2 distinct events.

So my traditional IRA only has a non-$0 balance for the week of time after the contribution and before the conversion. Then the money is permanently into the Roth.

The question of how to best deal with money that has been there for years is totally distinct from how to treat future contributions/conversions. I am not sure on the best way to deal with that and it probably depends on your particular situation.

 

[Mman]

If you are a top bracket investor contributing or converting to a Roth is probably not the best choice.

Unless you are frugal and have already maxed out any better tax advantaged account you have. It's superior to just investing it in a taxable account.

 

[aneftp]

Backdoor Roth IRA are a complicated matter especially if you have significant pretax 401k/SEP/Solo 401k/403/457b etc.

Say I'm gonna to have a tax liability of upwards to 500-600K to try to do the conversion in my early 40s. Is it worth it?

You see when you have 7 figures plus pretax in retirement, it gets extremely complicated cause all that money grows pretax and shielded in that account. Do you cough up 40-55% tax (especially in high income state like California (13.25% state income taxes) plus obamacare surtaxes? just to convert?

Sure there is a 20 plus year horizon where I eventually retire and the Roth conversion may make sense. But none of the financial gurus I've talked to can come up with a consensus what to do. There are pro and con's (lost opportunity cost with forking over a significant amount of money in terms of taxes up front) where I can use that money to invest at a 15-20% long term capital gains rate.

 

[facted]

Backdoor Roth IRA are a complicated matter especially if you have significant pretax 401k/SEP/Solo 401k/403/457b etc.

Say I'm gonna to have a tax liability of upwards to 500-600K to try to do the conversion in my early 40s. Is it worth it?

You see when you have 7 figures plus pretax in retirement, it gets extremely complicated cause all that money grows pretax and shielded in that account. Do you cough up 40-55% tax (especially in high income state like California (13.25% state income taxes) plus obamacare surtaxes? just to convert?

Sure there is a 20 plus year horizon where I eventually retire and the Roth conversion may make sense. But none of the financial gurus I've talked to can come up with a consensus what to do. There are pro and con's (lost opportunity cost with forking over a significant amount of money in terms of taxes up front) where I can use that money to invest at a 15-20% long term capital gains rate.

Just curious, what are the pros that the financial people are telling you?

If you're interested, you can do some great calculations here: https://www.calcxml.com/calculators/roth-ira-conversion-calculator

If you're in a high tax area and in a high income bracket, there is just no reason to do the conversion in my opinion, no matter your timeline. You won't make it up.

 

[pjl]

Start early when doing this. Ideally, convert any traditional IRA to roth while a CA2/1st half CA3. If you have a large chunk in the Roth account, my personal feeling is that it depends how long you will work as to whether to convert it. Short time=leave it, long time=convert it. I do not know of any way to get rid of capital gains tax on the conversion of old IRAs.

You can convert much cheaper if you retire early and have low income during the first years of retirement.

I just fund traditional IRA and convert every year, or every other year before April (can do x2 years at a time if not done in previous year). Also, you are allowed to do this for a stay at home spouse.

With regards to the 401k, I do Roth with all my personal contribution, even though I am in highest tax bracket. It gets more money out of taxable (18k Roth 401k=significantly more than 18k traditional 401k). The company contribution of 35 thousand is traditional 401k. For me, I will never need the amount of money I make to live on, so it is going to grow invested somewhere, it may as well be tax free withdraws at the end.



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[facted]

With regards to the 401k, I do Roth with all my personal contribution, even though I am in highest tax bracket. It gets more money out of taxable (18k Roth 401k=significantly more than 18k traditional 401k). The company contribution of 35 thousand is traditional 401k. For me, I will never need the amount of money I make to live on, so it is going to grow invested somewhere, it may as well be tax free withdraws at the end.

18k into a roth a year at 35% tax bracket has you down to $11,700 if you fund the move (ie: pay the tax bill) out of the roth.

11,700 over 20 years at 8% gets you to 54,533.
Leaving the 18k in a 401k at the same 20 years, 8% and then paying 25% on the way out gets you to 63k.

Of course, that assumes you're funding the move out of the roth with the account itself rather than paying cash for the tax bill, though paying cash for the bill eliminates the opportunity to invest that money as well.

Complicated math, but suffice to say, paying 35%+ tax on your conversion now is not the sound financial move and I've yet to find an online resource at least that recommends Roth conversions for high net worth individuals until pre-tax shelters have already been fully utilized.

 

[aneftp]

Just curious, what are the pros that the financial people are telling you?

If you're interested, you can do some great calculations here: https://www.calcxml.com/calculators/roth-ira-conversion-calculator

If you're in a high tax area and in a high income bracket, there is just no reason to do the conversion in my opinion, no matter your timeline. You won't make it up.

Basically it's a wash. The income difference between converting and not converting is insignificant (5-6K post tax adjusted to convert and not to convert)

It can't figure it out either...just like 3 of the finance guys I talked to. I seriously considered it back in 2010 when you had 2 years to pay off the roth IRA conversion taxes.

There are assumptions the calculator doesn't figure. If i'm coughing up 500K straight up to pay for the conversion (outside of my retirement). It fails to consider the gains I would make by investing it in regular investments. It's not "dead" money like when you put 500K into a home. You can use that money you would have paid the taxes to invest in investments outside of your retirement.

 

[facted]

Basically it's a wash. The income difference between converting and not converting is insignificant (5-6K post tax adjusted to convert and not to convert)

It can't figure it out either...just like 3 of the finance guys I talked to. I seriously considered it back in 2010 when you had 2 years to pay off the roth IRA conversion taxes.

There are assumptions the calculator doesn't figure. If i'm coughing up 500K straight up to pay for the conversion (outside of my retirement). It fails to consider the gains I would make by investing it in regular investments. It's not "dead" money like when you put 500K into a home. You can use that money you would have paid the taxes to invest in investments outside of your retirement.

You're definitely right that the cost of the conversion and the missed opportunity cost needs to be calculated. But even with that, I've yet to see the numbers that support a conversion. Did you try this calc: https://www.calcxml.com/calculators/roth-ira-conversion-calculator

It does ask how you will pay for the conversion (out of the account or cash)

 

[aneftp]

You're definitely right that the cost of the conversion and the missed opportunity cost needs to be calculated. But even with that, I've yet to see the numbers that support a conversion. Did you try this calc: https://www.calcxml.com/calculators/roth-ira-conversion-calculator

It does ask how you will pay for the conversion (out of the account or cash)

Yes. I use the calculator. Like I said. The post tax yearly income is insignificant whether to convert or not convert. Since it's insignificant. I'd rather keep the cash and reinvest it and pay the 15-20% capital gains.

Seriously I don't trust the Feds with taxes in the future. Democrat or republican.

You never know if in the future they may have a "surcharge" on post tax Roth IRA money. It's not a "tax". The Feds can make up what ever rules they want.

They already start charger higher income Medicare people "surcharge" on part B. $175k a year is the cutoff. So the Feds can make up an arbitrary income number in the future if u withdraw X amount more from Roth IRA to hit u with that surcharge.

 

[pjl]

18k into a roth a year at 35% tax bracket has you down to $11,700 if you fund the move (ie: pay the tax bill) out of the roth.

11,700 over 20 years at 8% gets you to 54,533.
Leaving the 18k in a 401k at the same 20 years, 8% and then paying 25% on the way out gets you to 63k.

Of course, that assumes you're funding the move out of the roth with the account itself rather than paying cash for the tax bill, though paying cash for the bill eliminates the opportunity to invest that money as well.

Complicated math, but suffice to say, paying 35%+ tax on your conversion now is not the sound financial move and I've yet to find an online resource at least that recommends Roth conversions for high net worth individuals until pre-tax shelters have already been fully utilized.

No, I put 18k AFTER TAX into the roth 401k account, PLUS the 5500 or whatever into the roth IRA.

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[aneftp]

No, I put 18k AFTER TAX into the roth 401k account, PLUS the 5500 or whatever into the roth IRA.

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Confused. U put $18k post tax (personal "employee" contribution" into 401k Roth IRA. Ur group/employee puts $35k pretax into regular 401k (traditional) U are basically at the 260k-270k IRS income limit

https://www.irs.gov/retirement-plan...ng-when-compensation-exceeds-the-annual-limit

Plus u are putting another $5500 into another Roth IRA?

 

[caligas]

It's certainly laughable how complicated all this is. A dozen nerdy MDs trying to sort it out. How's the average Trumper gonna ever figure it out?

 

[pjl]

18k limit for 401k is for employee contributions to either roth or standard.
plus
Employer contribution to 401k (non-roth) 35k (36k next year)
plus
5500 limit for IRA. Convert to Roth IRA via "backdoor roth." Since you already were taxed on contributions this is free exchange to a far better type of account, as long as you dont have capital gains.

Of note, the Roth 401k contributions are "post tax" and the IRA contributions are also "post-tax" for basically any of the attendings here.

They are different buckets for 401k and IRA. Also different is a 453b

https://www.irs.gov/retirement-plan...re-eligible-for-more-than-one-retirement-plan


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[aneftp]

18k limit for 401k is for employee contributions to either roth or standard.
plus
Employer contribution to 401k (non-roth) 35k (36k next year)
plus
5500 limit for IRA. Convert to Roth IRA via "backdoor roth." Since you already were taxed on contributions this is free exchange to a far better type of account, as long as you dont have capital gains.

Of note, the Roth 401k contributions are "post tax" and the IRA contributions are also "post-tax" for basically any of the attendings here.

They are different buckets for 401k and IRA. Also different is a 453b

https://www.irs.gov/retirement-plan...re-eligible-for-more-than-one-retirement-plan


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Gotcha.

Issue for me is I did the non deductible (back than $4000 contribution back in 2006-2007 for total of $8000 non deductible contribution) in anticipation of the 2010 tax law changes for Roth IRA conversion where I could spread the tax payments over two years (tax payments for my entire pretax tax sep/401k).

Didn't do it. Of course gotta deal with the pro rated conversion rules if I don't want to convert entire profolio. Since the non deductible IRA is such a small percentage of my entire retirement profolio. It didn't make much sense back in 2010 and it certainly doesn't make sense now with the profolio much higher. Essentially paying double taxes on my post tax non deductible contribution.

 

[doctalaughs]

Anyone do the "mega-backdoor" roth? I was a bit skeptical at first but my CPA assured me it was legal and for the last 2 years I was able to get about 30k extra into my roth each year despite being way beyond the income limit.

https://www.bogleheads.org/forum/viewtopic.php?t=137366



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[Arch Guillotti]

What would be the benefit of this?

Which part?

 

[Arch Guillotti]

I contribute to traditional IRA in January. I leave this in cash or some sort of equivalent rather than invested in a fund so that it doesn't accrue any gains. A week later I convert it to a Roth and then invest it. There is no requirement for any particular length of time that the money needs to be left in the traditional IRA before being converted. Some people recommend a month, certainly no need to leave it for a year. I think the only real requirement by the IRS is that they not be one single transaction. I believe a week duration is long enough to show them as 2 distinct events.

So my traditional IRA only has a non-$0 balance for the week of time after the contribution and before the conversion. Then the money is permanently into the Roth.

Same here.

 

[Timeoutofmind]

Which part?

For most people earning in our range...saving pretax>saving post tax (cuz we will likely retire in a lower tax bracket).
I don't understand all the drama.
It's not like there is some senario where u can save both pre and post tax on the same dollars...

 

[doctalaughs]

For most people earning in our range...saving pretax>saving post tax (cuz we will likely retire in a lower tax bracket).
I don't understand all the drama.
It's not like there is some senario where u can save both pre and post tax on the same dollars...

Agree. Of course no one can predict the future but my general strategy is max pretax, then max roth (to 53k limit), then fund kids education funds then taxable vehicles.


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[btbam]

Same here.

I convert it the next day. The length of time doesn't matter, as long as the funds have cleared into your account. Even if the transactions are only a day apart it will still show up as two distinct transaction to the IRS.

 

[aneftp]

So what most of u guys do is "roll over or leave money in a protected 401k (solo 401k, company that accepts 401k rollover) to avoid the "pro-rata" potential tax on the backdoor roth $5500 (non deductible IRA) yearly conversion?

No one is really doing a huge 1-2 million plus Roth IRA conversion like the law allowed in in 2010?

Seems we are limited to $5500 non deductible yearly conversions and or access to 18k Roth 401k some companies offer?

Does that sound right?

 

[doctalaughs]

So what most of u guys do is "roll over or leave money in a protected 401k (solo 401k, company that accepts 401k rollover) to avoid the "pro-rata" potential tax on the backdoor roth $5500 (non deductible IRA) yearly conversion?

No one is really doing a huge 1-2 million plus Roth IRA conversion like the law allowed in in 2010?

Seems we are limited to $5500 non deductible yearly conversions and or access to 18k Roth 401k some companies offer?

Does that sound right?

Yes, putting those monies into 401k is to avoid the pro rata rule.

And the backdoor is limited to 5500.

The mega-backdoor that I use (only available if your 401k rules allow) is only limited by the 53k IRS limit.


Sent from my iPhone using SDN mobile

 

[DrBeaker]

I am a w2. I have been doing the 401A and 403. I meant to do the IRA thing much earlier, but better late than never. Just to make sure I got this right, I have opened an IRA account on Vanguard. I can put 5500 post-tax dollars into that account. Then wait about a week and transfer that to a roth. The traditional IRA account will have a zero dollar balance and the roth will have 5500. Then I can do the same thing after January 1 2017. Is this correct? Do I have it right?

 

[Mman]

I am a w2. I have been doing the 401A and 403. I meant to do the IRA thing much earlier, but better late than never. Just to make sure I got this right, I have opened an IRA account on Vanguard. I can put 5500 post-tax dollars into that account. Then wait about a week and transfer that to a roth. The traditional IRA account will have a zero dollar balance and the roth will have 5500. Then I can do the same thing after January 1 2017. Is this correct? Do I have it right?

yes.

Both the traditional IRA and Roth IRA can be in Vanguard. Same account log on, different individual accounts. Deposit your annual $5500 contribution to the traditional IRA. Then a week (or day or whatever) later transfer that to the Roth. I think with Vanguard you make the transfer by logging into the Roth account and funding it via transfer from the traditional account.

 

[aneftp]

I assume people with kids have maxed out their kids 529 before doing the backdoor Roth?

I know it's a personal decision what to do with ur money.

But I figure I am puttting away $8000 per kid post tax each year and will use the money for their college and maybe grad school education than the $5500 backdoor Roth I likely won't touch till age 59 or later.

Max 529 is $14k per kid per parent (federal limit before reporting gift totally more than 14k).

I already have their Florida prepaid college fully paid off as well.

 

[epidural man]

me likee this thread.

Thanks Noyac.

 

[btbam]

yes.

Both the traditional IRA and Roth IRA can be in Vanguard. Same account log on, different individual accounts. Deposit your annual $5500 contribution to the traditional IRA. Then a week (or day or whatever) later transfer that to the Roth. I think with Vanguard you make the transfer by logging into the Roth account and funding it via transfer from the traditional account.

I think you actually "exchange" the funds from the traditional IRA into the Roth. It's not super straightforward on their website, but I've always found their phone reps very helpful.