Backdoor Roth questions

[mrsdoe]

I've been reading some past threads including this one and the link recommended pandce.proboards.com/thread/513981/who-backdoor-roths thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html but I could still use some help since I've never contributed to a Roth IRA or done a conversion before. Talk to me like I'm 5.

1. We have not already funded our 2016 Roth IRAs because h and I weren't sure if we would phase out since we had some bonus $$ at the end of the year. We thought we could contribute for 2016 in 2017, but from reading the article linked above it looks like you can contribute for past years but conversions are always counted for the current tax year. So is it possible to fund the 2016 Roth now and convert it right away, and then also contribute and convert for 2017 this year as well?

2. For 2017, if you have to do a backdoor Roth do you fund it all at once and then convert? Or do you contribute to an Ira throughout the year and then convert once you reach the $5500 limit? In which case you'd have to pay taxes on any gains?

3. Lastly, we have no iras at the moment but we do have old 401k accounts we would like to roll over (edit meaning to a traditional Ira). If we wait to roll them over into an Ira after the conversion that seems to work for this year but what about future years when we can't convert just $5500? If we put our iras (from old employers) into say a fidelity account and then opened an Ira with schwab for example would this be an easy clean way to do it?

Right now I have $$$ sitting in savings I planned to fund 2016 with and I'm wondering if I should say screw it cut my losses and just start doing this for 2017 going forward. Thanks

[Poppy]

1) Yes. Between the two of you, you can do $22k at basically the same time ($5.5k/person for both 2016 and 2017).

2) Better to convert immediately so you don't have to worry about the gains. Lots of people put the trad IRA contribution in a money market account for this reason.

3) Careful! I believe that if you roll your 401(k) in 2017, it will "count" and you'll have to prorate your conversion. I think on form 8606 it asks for IRA balance at the end of the year. Why do you want to roll over? You could either leave your old 401(k)s where they are or possibly roll them into your current 401(k) plans.

[steamboat185]

3. Lastly, we have no iras at the moment but we do have old 401k accounts we would like to roll over (edit meaning to a traditional Ira). If we wait to roll them over into an Ira after the conversion that seems to work for this year but what about future years when we can't convert just $5500? If we put our iras (from old employers) into say a fidelity account and then opened an Ira with schwab for example would this be an easy clean way to do it?
- it is my understanding you will get hit with taxes this way. I had to move my old 401k's from an IRA into my current 401k to avoid getting hit with taxes.

[Poppy]

And yes, agree with steamboat185. It doesn't matter where the accounts are held. You have to report all IRAs together.

So basically, if you want to continue to do backdoor in future years, you need to avoid rolling 401(k)s into IRAs. And again, even if you do your contribution/conversion before your 401(K) rollover this year, the order doesn't actually matter, it's balances at the end of the year. So don't roll over your 401(k) in 2017, basically.

[mrsdoe]

Mar 13, 2017 12:16:52 GMT -5 Poppy said:

1) Yes. Between the two of you, you can do $22k at basically the same time ($5.5k/person for both 2016 and 2017).

2) Better to convert immediately so you don't have to worry about the gains. Lots of people put the trad IRA contribution in a money market account for this reason.

3) Careful! I believe that if you roll your 401(k) in 2017, it will "count" and you'll have to prorate your conversion. I think on form 8606 it asks for IRA balance at the end of the year. Why do you want to roll over? You could either leave your old 401(k)s where they are or possibly roll them into your current 401(k) plans.

So on #1 even if I converted everything at once the only taxes are on gains? Not sure I want to convert 22k now but for ease it may be worth it. You can always withdraw principal or is there a waiting period for that? We prob have more cash than we should in our efund but it's a peace of mind thing.

Why convert? Well I feel like everyone always says the options are better in an Ira. I don't know whether the options in the old acts are good or not (and I wouldn't roll anything over til I did more research). I'm looking at my hs and the only options are Tiaa cref and expense charges are .6%+. right now my old 401k is in a jpm target date fund.

I don't know how great current options are in our current plans. H is current plan is invested in a Tiaa target date fund w expenses 1%+ and the other options seem to be only Tiaa funds as well. I am in Vsmpx, vtsnx, vweax,vipix.

[mokes]

1. We have not already funded our 2016 Roth IRAs because h and I weren't sure if we would phase out since we had some bonus $$ at the end of the year. We thought we could contribute for 2016 in 2017, but from reading the article linked above it looks like you can contribute for past years but conversions are always counted for the current tax year. So is it possible to fund the 2016 Roth now and convert it right away, and then also contribute and convert for 2017 this year as well?
You can contribute for the previous tax year until the tax deadline, but conversions must be completed by 12/31 for that tax year. So you can still convert all of the funds, but any pre-tax contributions will then count as income in this tax year (2017).*

2. For 2017, if you have to do a backdoor Roth do you fund it all at once and then convert? Or do you contribute to an Ira throughout the year and then convert once you reach the $5500 limit? In which case you'd have to pay taxes on any gains?
You can do either, but yes, you'll pay taxes on gains. When I was doing a conversion, I would just deposit the full amount in December and convert immediately.

3. Lastly, we have no iras at the moment but we do have old 401k accounts we would like to roll over (edit meaning to a traditional Ira). If we wait to roll them over into an Ira after the conversion that seems to work for this year but what about future years when we can't convert just $5500? If we put our iras (from old employers) into say a fidelity account and then opened an Ira with schwab for example would this be an easy clean way to do it?
You can convert any amount you'd like, however, when you have both pre- and post-tax funds, you'll have to pay taxes on the percentage of pre-tax money you convert. (So if you have $10k pre-tax and $10k post-tax, and you convert $10k, you can't just say you're converting the post-tax dollars -- it's considered one pot that you convert from equally. So you'd pay taxes on 50% of the money, or $5k.) Keeping them in separate accounts doesn't avoid the taxes, as it's based on your total IRA balances across accounts.

You could, however, roll the old 401(k) into any current 401(k) you might have -- assuming you're happy with the offerings/fees -- and keep your IRAs post-tax dollars only.

*Edited for clarity

[mrsdoe]

mokes when you say it will count as income this tax year do you mean it will be counted against me twice? That's the part I'm having trouble with. None of the funds I'm converting are in existing iras or pretax vehicles. I've already paid taxes on the $22k. Sorry to be dense here - this is my biggest confusion and what your saying seems to be different from what was said upthead.

[Poppy]

This all gets so confusing. I will try to explain what I know as simply as I can. There are two pieces that you report. Contributions and conversions.



Contribution: You can contribute up until 4/15 of the year following the year you're contributing for. When you contribute, you specify the tax year that the contribution should be applied to. You can contribute up to $5,500 per person per year. When you make a non-deductible contribution to a traditional IRA, you will report your "basis," that is, the amount you have already paid tax on (because it was non-deductible) on form 8606. As long as you have a basis in your IRA, you have to report it every year. You report the contribution on your form 8606 when you file taxes for the year the contribution was applied.





Conversion: You can do a conversion at any time. Conversions are reported based on calendar year, so you do not report a conversion made in March 2017 on your 2016 return (you report it on your 2017 return). To calculate the earnings on which the conversion is taxed, you use this equation:
(Amount converted)*(fraction of total that was pre-tax money)

where the fraction that was pre-tax money is:
(1 - ((basis) / (Total amount in ALL traditional/SEP/Simple IRAs at the end of the year) + (Amount converted)))



Your conversion is prorated. You pay taxes on the fraction of your conversion that was pre-tax money. Then you have to continue to report your basis in perpetuity (and your new basis is also prorated because you converted some of it).

But, if your total amount in your accounts at the end of the year is 0 (because you converted everything and didn't roll any new money over), and you didn't have any growth before you converted so the amount converted equals the basis, you don't have to pay any taxes on the conversion.

[mokes]

Mar 13, 2017 13:36:38 GMT -5 mrsdoe said:

mokes when you say it will count as income this tax year do you mean it will be counted against me twice? That's the part I'm having trouble with. None of the funds I'm converting are in existing iras or pretax vehicles. I've already paid taxes on the $22k. Sorry to be dense here - this is my biggest confusion and what your saying seems to be different from what was said upthead.

Sorry, I was forgetting you're making a nondeductible contribution, so the tax consequence is 0 anyway.

This also threw me off:
"We thought we could contribute for 2016 in 2017, but from reading the article linked above it looks like you can contribute for past years but conversions are always counted for the current tax year."

Conversions are counted in the current tax year ... but if you're converting post-tax dollars only, it doesn't really matter.

[mrsdoe]

Poppy so I could fund the Ira to a mm acct or something to ensure no gains and convert - but if I am converting 100% post tax I don't have to continue reporting In perpetuity? (Hearing the word perpetuity scares me!)

What if they get rid of the backdoor option and I decide to then actually roll my 401k to an Ira and never do a Roth again - nothing there ever has to be reported because the conversion was done with 100% post tax $$ (assuming they were 2 different calendar years) ?

[mokes]

Mar 13, 2017 16:01:06 GMT -5 mrsdoe said:

What if they get rid of the backdoor option and I decide to then actually roll my 401k to an Ira and never do a Roth again - nothing there ever has to be reported because the conversion was done with 100% post tax $$ (assuming they were 2 different calendar years) ?

Whenever you're contributing to a nondeductible IRA (even if not converting), you'll want to file an 8606 so you have a record of your basis. That way you're not taxed on that post-tax money when you withdraw in retirement.

www.investopedia.com/terms/f/form-8606.asp 

[Poppy]

Mar 13, 2017 16:01:06 GMT -5 mrsdoe said:

Poppy so I could fund the Ira to a mm acct or something to ensure no gains and convert - but if I am converting 100% post tax I don't have to continue reporting In perpetuity? (Hearing the word perpetuity scares me!)

What if they get rid of the backdoor option and I decide to then actually roll my 401k to an Ira and never do a Roth again - nothing there ever has to be reported because the conversion was done with 100% post tax $$ (assuming they were 2 different calendar years) ?

Right!

If you don't report your basis every year, they assume all money in your IRA is pre tax so when you withdraw you will have to pay taxes on it (for a second time, if it's actually post-tax money from a non-deductible contribution).

If your IRA balance is zero at the end of the year when you do a conversion (so even if you had gains you converted those) then your basis is zero and you don't have to track it year to year. Or, if you roll over pre-tax money, eg from a 401(k) and do not have any non-deductible contributions, you don't have a basis and don't have to report it.

[mrsdoe]

Thank you all. Think I got that part at least on conversions. Now to figure out what to do w old 401ks.

[Poppy]

Mar 13, 2017 16:51:10 GMT -5 @juno said:

The thing that's pinging my radar right now that I don't know that answer to is when is the "pool" calculated for 8606 purposes? Is it at the end of the year? If so, rolling the 401ks this year might fuck up your 2017 conversion tax calculation and not be so clean. But if the rule is that you can cleanly convert before rolling then you should be fine. I just don't know that answer (though it seems from the wording in question 3 that you might have already looked into that?).

Form 8606 line 6:

Dec 31.

[Poppy]

Mar 13, 2017 17:07:34 GMT -5 @juno said:

Mar 13, 2017 17:02:23 GMT -5 Poppy said:

Form 8606 line 6:

Dec 31.

I thought I remembered that issue somewhere in the murky recesses of my reading.  So do you also take that to mean a rollover of traditional 401k funds anytime this year would fuck up any backdoor conversions done earlier this year?  

Yes.

[mrsdoe]

I figured leave them for now so I can do the Roth and I understand I have to report them no matter what if I open the Ira in 2017. I'm looking at the investment options for his Tiaa account and the less impressed I become. I was wrong when I said most expense ratios are ~.6 - their target date is 1.3%!!! All 3 of the employers have nearly identical offerings. I know Tiaa cref is just for nonprofits but what is the deal here seriously?

I'm looking at other options - they most are over 1% only a few under that:
Cref equity index qceqrx w .59 exp ratio
Cref global equities QCGLRX .71%
Cref growth QCGRRX .65%
Cref stock QCSTRX .72%
Tiaa access equity index .80

[Poppy]

Mar 13, 2017 20:27:27 GMT -5 mrsdoe said:

I figured leave them for now so I can do the Roth and I understand I have to report them no matter what if I open the Ira in 2017. I'm looking at the investment options for his Tiaa account and the less impressed I become. I was wrong when I said most expense ratios are ~.6 - their target date is 1.3%!!! All 3 of the employers have nearly identical offerings. I know Tiaa cref is just for nonprofits but what is the deal here seriously?

I'm looking at other options - they most are over 1% only a few under that:
Cref equity index qceqrx w .59 exp ratio
Cref global equities QCGLRX .71%
Cref growth QCGRRX .65%
Cref stock QCSTRX .72%
Tiaa access equity index .80

I have the same dilemma, it sucks. If you're really ambitious, you can often cobble together some halfway decent options by picking the best of the available of each account and using your Roth to make up the deficits to get you to your desired allocation. On the Bogleheads forum there are some people who really excel at helping with that stuff, if you're interested. I'm too lazy for that, myself. My current 401(k) suuucks though.