Backdoor Roth IRA

[Matt]

One of the biggest frustrations to high earning people is how to build retirement assets when their income precludes them. Due to salary phases outs many tax incentives do not qualify for such earners, including the Traditional and the Roth IRAs. However, there is a way to create Roth IRA accounts using the Backdoor Roth method.

When describing such retirement accounts many people focus on the immediate tax events, but really the distinction is on the back end, when you distribute from them in retirement. Making this distinction allows you to understand the Backdoor Roth concept more easily. Traditional IRAs do offer a Tax Deduction for present year if you meet the salary requirements, but they still exist without the deduction if you do not.

• Traditional IRA distributions are taxed as regular income when you make qualified distributions from them in retirement.
• Roth IRA distributions are not taxed as regular income when you make qualified distributions from them in retirement.

When we look at IRS tables, there are income limits for contributions to both types of account – Traditional levels are lower than Roth levels. However, the important thing to remember is that the limits on the Traditional IRA apply only to the deductibility of present day taxes. If your income falls within the levels set out below, you do not need to worry about a Backdoor Roth. If you want a Roth, just contribute directly to it.

For the sake of clarity, I will not go into discussion on limits of IRAs here, I do recommend reading the resource onRoth IRAs in The Forum for more information on this.

Before you consider a Backdoor Roth, consider your other IRA’s
If you hold Traditional IRA’s and are planning a Backdoor Roth Conversion watch out – the IRS calculation for the conversion can kill the deal for you. The way the calculation works is they look at all of your Traditional IRA accounts in total, and proportionally rollover into the Roth, here’s an example where it can go wrong:

• You have a deductible IRA from 10 years ago that is worth $100,000
• You put $5,500 into creating a Backdoor Roth

The calculation for the transfer would work as follows:

Backdoor Roth formula for those with other pre-tax IRAS

In this example, because the person has another IRA already, there would be tax due on about 95% of the $5,500 conversion – this is because even though you want to convert the new money only, the IRS makes you think of all of it in one. So if you were in this scenario and attempted a backdoor Roth you would have to pay taxes on $5213.45 of the $5,500 that you converted!

Roll the old IRA’s into your company 401(k)
Because the IRS uses the sum of other IRA balances in this formula, if you were to remove them from the equation you can eliminate the impact of taxes. A way to do this is to roll your other IRA balances into your company 401(k) plan. Doing so allows you to honestly claim that you have zero IRA balances, and the formula for tax due would be calculated as follows:

Alternative solution to paying the taxes – roll your other IRAs into your 401(k) to reduce that to zero, then do the math again…

If you are doing this, it is worth thinking about impact of investment choices of your work based plan – if you have few options that have high fees they will certainly impact the value of such a move.

Alternatively, you could just covert everything you have into the Roth – but that will incur a high taxable event in most cases as your income is putting you in a high bracket, and you will have tax due from the conversion. Perhaps worthwhile for de minimis account sizes.

Considerations aside – how to create a Backdoor Roth
Once you have decided if a Backdoor Roth is right for you, by reading the above and discussing it with your financial professional the implementation is really very simple:

1. Contribute to a Traditional IRA
2. When check has cleared/ACH arrived into the Traditional IRA, you immediately use those funds to buy a position in a Roth.

There are some tax reporting needs for this, and you can still trip up by using the wrong terms,so you really need to be working with a good CPA to help you do this correctly. And if you are earning over the Roth salary limits and are interested in saving taxes then you really should have a good CPA on your team, I wouldn’t recommend trying this strategy based on this post alone, and remember, if you have other IRA assets that you haven’t paid taxes on yet, proceed with extreme caution.

 

[RWC75]

Interesting post!

Question: Can you use this to double up on Roth IRA contributions? I.e. you're over the limit to get the tax deduction for IRA contributions, but still have access to a Roth?

- Contribute $5500 post-tax to a Roth IRA
- Contribute $5500 post-tax to a Traditional IRA
- Once the Traditional IRA deposit clears, rollover to the Roth

... giving you $11,000 per year in potential Roth IRA contributions? Or is there some rule that would prohibit the rollover during the same year that you've maxed out your Roth IRA?

 

[Matt]

Interesting post!

Question: Can you use this to double up on Roth IRA contributions? I.e. you're over the limit to get the tax deduction for IRA contributions, but still have access to a Roth?

- Contribute $5500 post-tax to a Roth IRA
- Contribute $5500 post-tax to a Traditional IRA
- Once the Traditional IRA deposit clears, rollover to the Roth

... giving you $11,000 per year in potential Roth IRA contributions? Or is there some rule that would prohibit the rollover during the same year that you've maxed out your Roth IRA?

No. Your annual max is $5500 across all IRA contributions:

EG You cannot put $2000 into each type of Trad, Roth, Non-deductible Trad. as in total that is $6000 and over your limit.

You're going to have to stick with Roth+401(k) for now, unless you have an inservice clause in your 401(k) that allows you to rollover to Roth during employment.

 

[Ryan-o]

If you are doing this, it is worth thinking about impact of investment choices of your work based plan – if you have few options that have high fees they will certainly impact the value of such a move.

Could you eventually move your assets back into an IRA in the future in case your 401k options aren't great?

Also from my understanding there seems to be a distinction between a deductible and non-deductible IRA account... If you do a backdoor Roth using a non deductible IRA then you don't have to worry about any tax consequences.

 

[Matt]

Could you eventually move your assets back into an IRA in the future in case your 401k options aren't great?

Yeah, 401k rollovers happen all the time. Vast majority occur when you change jobs, a very few plans might allow an 'in service' rollover, which means you can do this while still employed.

Also from my understanding there seems to be a distinction between a deductible and non-deductible IRA account... If you do a backdoor Roth using a non deductible IRA then you don't have to worry about any tax consequences.

Yes, you would have no tax consequences because you didn't have a tax benefit on the way into the non-deductible account. These accounts are for high income employees. Self employed probably wouldn't do this, and moderately paid employees wouldn't either.

 

[skuldyie]

Hmm, interesting. Looks like I may have to consider looking into setting up a backdoor Roth next year and it'd be pretty simple to track since I don't have an existing IRA.

 

[SC Trojan]

I've done the backdoor Roth IRA for the past two years. It's really quite simple. I used Fidelity and had a minor issue (my problem) and started to explain to them what I was doing and the CSR said "Oh, you mean the 2-Step Roth IRA?" so it's definitely something they are aware of and OK with.

One thing to note, is there is some debate on the legality of the Roth IRA. I don't know specifics but what it amounts to is that there is some part of the tax law that basically says if you do something specifically to circumvent tax law then they could make you pay the taxes on it. Because of this, some have suggested opening a regular IRA, holding the money in it for a bit of time (1 month perhaps) then converting it to a Roth. That way you can always claim that you just changed your mind. I think the risks are REALLY low though so to each his own.

HERE is a pretty good tutorial for entering the backdoor Roth IRA into Turbotax. Likely it will change a bit with the new version, but this should give you a general idea.

 

[Scott]

Matt and all,
I came across the below article recently about a derivative of the above IRA backdoor method which was recently deemed ok by the IRS (Notice 2014-54). Due to timing, we won't be able to maximize the full benefits of this until next year, but this is a great change.

http://www.forbes.com/sites/ashleaebeling/2014/10/15/roth-road-to-riches/
http://www.forbes.com/sites/ashleaebeling/2014/10/15/aftertax-401k-rollovers-advanced-version/

 

[Sesq]

The hard part of that one is an employer plan that permits after tax contributions and in-service withdrawals. If my employer did I would be all over it.

 

[Scott]

The hard part of that one is an employer plan that permits after tax contributions and in-service withdrawals. If my employer did I would be all over it.

I don't even care if they allow in-service withdrawals, as long as I can do after-tax contributions. You can do rollovers when you leave or retire.

 

[Matt]

I don't even care if they allow in-service withdrawals, as long as I can do after-tax contributions. You can do rollovers when you leave or retire.

Almost makes me want to leave retirement and get a job!

 

[Sunny]

I recently read about this too and unfortunately my 401k does not allow after tax contributions. My previous employer did and now I'm kicking myself for not knowing about this earlier so I could take advantage!

 

[SC Trojan]

So when I read this thread I started to get really excited at the prospect of lots more money in a Roth IRA. Then I read this Fidelity article, seems to suggest that you have to roll-over proportional amounts of before tax and after tax moneys. This really kills it for me because I've already built-up a significant amount of money in a traditional 401(k) and I can't withdraw that money while I still work for my company. If you are just starting out, you could take advantage of this by eschewing the traditional 401(k), putting all your money into an after tax account, withdrawing it and then rolling it into a Roth IRA.

https://www.fidelity.com/insights/retirement/irs-401k-rollover-guidance

 

[Matt]

So when I read this thread I started to get really excited at the prospect of lots more money in a Roth IRA. Then I read this Fidelity article, seems to suggest that you have to roll-over proportional amounts of before tax and after tax moneys. This really kills it for me because I've already built-up a significant amount of money in a traditional 401(k) and I can't withdraw that money while I still work for my company. If you are just starting out, you could take advantage of this by eschewing the traditional 401(k), putting all your money into an after tax account, withdrawing it and then rolling it into a Roth IRA.

https://www.fidelity.com/insights/retirement/irs-401k-rollover-guidance

You are missing a key concept here.

Why is it more favorable to eschew a 401(k) aka a tax deduction when earning?

 

[SC Trojan]

Well everyone's situation is different. But if you don't yet have any money in a traditional 401(k) then you might be able to come out way ahead using this technique. I'll illustrate:

Scenario A: Max out traditional 401(k) ($18 K) then save an additional $34 K (before tax)
In this scenario you would not pay any taxes on the $18K, and the $34 K would be taxed as ordinary income which I'll assume is 33% marginal tax rate (just an estimate). So after taxes you have
401(K) = $18 K
Brokerage Account = $23 K
Total = $41 K

Now both grow at let's say 7% / year for 30 years. That would mean after 30 years they are worth
401(K) = $137 K
Brokerage Account = $173 K
Total = $310 K

But both will be subject to some form of taxation. Let's assume your marginal tax rate remains 33%, and that capital gains is at 20%. After taking out taxes you now have:
401(k) = $92 K
Brokerage Account = $143 K
Total = 235 K

Scenario B: Max out After Tax 401(k) then roll over to Roth IRA $52 K (before tax)
In this scenario you will have to pay ordinary income taxes on the entire $52 K, again I assume 33% marginal tax rate. So after taxes you have
Roth IRA = $35 K

Again it grows at 7% / year for 30 years. That would mean after 30 years it is worth
Roth IRA = $265 K

But there are no taxes owed, you get to keep all $265 K. Essentially you just saved the capital gains tax on the original $34 K because with the Roth you are not taxed on capital gains.

Now, I'll fully admit there are a LOT of moving parts here. The biggest one is that you are making a bet on current versus future tax rates. Also, I'm somewhat skeptical that in 30 years the government will keep its promise on not taxing Roth IRAs. I feel like the "popular" opinion might be that we shouldn't be allowing this "loophole" for millionaires to not pay any taxes on their savings. You also have to make a personal judgement call on whether the tax savings today is just downright more necessary than the tax savings in 30 years. With all that being said, the math works out to an overall savings for big savers in the long run.

 

[Matt]

Your theory is a sound one. The issues that I have with it is as follows:

1. You don't need to wait 30 years to exit. If you are putting in $52K a year for 30 years you'll have an IRA that Mitt Romney would be envious of. I personally drift deferred into free annually - IE on a 'good year' where I paid 33% or higher in tax I would defer, and the next, or within a few, I would drop down the income to a lower rate and rollover. I'll be doing this again this year with a partial rollover.

That means it is not a ROTH vs TRAD argument for life (or 30 years) it is a year by year question. You don't need to gamble so much about future rates as you can look at what you pay this year and think about next year and plan accordingly.

2. Regarding the 20% cap gains rate -consider what your actual income tax rate would be in retirement. Remember that the Cap gains rate is 0% for those in the 15% bracket or lower, which goes as high as $73,800 for a married couple. Frankly, I live on a lot less that that so it is a very viable number.

 

[SC Trojan]

Agreed, a lot of moving parts here and depending on your exact situation it could be a win or a lose. I think for me it would be a win, but because of the equal percentage rule I mentioned I'm not really eligible.

In general I agree with the "I'll take my tax savings now" mentality. I've heard lot of arguments that a Roth 401(k) is better than a traditional 401(k) because they have the same annual contribution limits but the Roth is in after tax money while the traditional is in before tax. Therefore you are essentially getting a ~33% increase in your annual contribution limit if you go the Roth route. For me though, I worry about whether politicians will monkey with the Roth in the future, so I'll take my guaranteed tax break today rather than be disappointed if I don't get it in the future.

 

[Matt]

Agreed, a lot of moving parts here and depending on your exact situation it could be a win or a lose. I think for me it would be a win, but because of the equal percentage rule I mentioned I'm not really eligible.

In general I agree with the "I'll take my tax savings now" mentality. I've heard lot of arguments that a Roth 401(k) is better than a traditional 401(k) because they have the same annual contribution limits but the Roth is in after tax money while the traditional is in before tax. Therefore you are essentially getting a ~33% increase in your annual contribution limit if you go the Roth route. For me though, I worry about whether politicians will monkey with the Roth in the future, so I'll take my guaranteed tax break today rather than be disappointed if I don't get it in the future.

This equal percentage rule you cite being an issue is confusing to me.

All you have to do is pay taxes on money that goes into a Roth - if you have a 401(k) you deferred taxes, as you would have with a Trad IRA. If you go 401(k) to Trad then there is no taxable event as you rollover the deferral until distribution.

I think that either you are confusing something here, or I am missing something...

Do you actually want to rollover to a Roth? Is it that you would like to but are worried about the tax event? Sorry, but I'm really not following your approach here...

 

[SC Trojan]

My company allows me to transfer after tax money out of my 401(k), but not before tax money. Since I have some before tax money in the account already I can't transfer out in proportional amounts before tax and after tax.

If I ever leave the job I could do just as you mentioned, but I'm hoping to be with my company for a long time.

 

[Matt]

OK - I guess I am still missing something:

You started out saying you were excited about a Roth rollover - then disappointed by your interpretation of the proportional rules.

You then suggest that to avoid this you can:

If you are just starting out, you could take advantage of this by eschewing the traditional 401(k), putting all your money into an after tax account, withdrawing it and then rolling it into a Roth IRA.

So in your ideal world you'd have a Roth or not? :

For me though, I worry about whether politicians will monkey with the Roth in the future, so I'll take my guaranteed tax break today rather than be disappointed if I don't get it in the future.

I guess you are saying you are OK with the deferred status of the 401(k) but in an ideal world would like to rollover the taxable contributions to a Roth for tax free growth, I'd suggest that you look into that a bit more deeply. As it might be possible. A second set of eyes on your plan might help.

The proportional transfer issue you mention is to ensure that people do actually pay taxes on their deferred money, as such I think that you might want to explore both your plan documents and the code more closely, as the recent changes in it are in favor of the individual, and a good thing. Here is some more reading:

https://www.kitces.com/blog/irs-notice-2014-54-acquiesces-on-splitting-after-tax-401k-contributions-for-roth-conversion/

 

[SC Trojan]

Sorry I guess I'm not being too clear and I'm going back and forth a bit.

Here's my situation:
Right now I max out my 401(k) before tax. I feel that getting savings now is better than a promise of savings in the future.

But when I saw this thread I originally thought I could have my cake and eat it too. I thought I could max out my 401(k) before taxes AND contribute another $34 K after tax and roll it into a Roth. Since I plan on saving $34 K outside of my retirement plan, this would essentially save me the capital gains tax on that additional $34 K.

For me, the problem is that because of the proportional rules and the fact that I can only withdraw money while still working from the After Tax account, it doesn't seem like that's an immediate option. I could just collect money in the After Tax account and when I leave the company or retire then roll over both my before tax and after tax money. Theoretically, that is a good option, but I'm a bit weary of leaving a lot of money in the After Tax account just because if the tax law changes with regards to this, I would be left with a lot of money in an After Tax account without the Roth benefit.

The article you linked has a section describing where I'm at, 2nd paragraph after "Planning Implications Of IRS Notice 2014-54 And The 401(k) After-Tax Roth Conversion Strategy"

 

[Matt]

I'm a bit weary of leaving a lot of money in the After Tax account just because if the tax law changes with regards to this, I would be left with a lot of money in an After Tax account without the Roth benefit.

Isn't that a no lose situation (vs your plan to save it anyway)?

 

[SC Trojan]

If you assume I cannot roll over to a Roth IRA (which the more I think about it the more I think in the long term I could) then I'd prefer a brokerage account to the After Tax 401(k). The two reasons are that the brokerage account earnings will be at capital gains tax rates versus ordinary income tax rates for the After Tax 401(k) and just due to the fact that the regular brokerage account is far more liquid.

Here's a good article that explains the pros / cons (also a list here)

Still, my whole premise is based on me being worried about this not working in the long run and being stuck with an After Tax account. If I can roll it over to a Roth IRA, then you're right I should just do it. I think I'm going to let the dust settle on this IRS ruling for a bit of time then probably put some money into the After Tax account. Maybe just not the whole $34 K.

 

[Matt]

If you assume I cannot roll over to a Roth IRA (which the more I think about it the more I think in the long term I could) then I'd prefer a brokerage account to the After Tax 401(k). The two reasons are that the brokerage account earnings will be at capital gains tax rates versus ordinary income tax rates for the After Tax 401(k) and just due to the fact that the regular brokerage account is far more liquid.

Here's a good article that explains the pros / cons (also a list here)

Still, my whole premise is based on me being worried about this not working in the long run and being stuck with an After Tax account. If I can roll it over to a Roth IRA, then you're right I should just do it. I think I'm going to let the dust settle on this IRS ruling for a bit of time then probably put some money into the After Tax account. Maybe just not the whole $34 K.

Well, we need to also remember its not just $34K too. Its hundreds of thousands over the next few years.

I guess I am wondering where you are heading with it all anyway, how many years of $50k+ are we really talking about here? From a practical lifestyle perspective, if you can afford $50K now (and for many years to come as you say upthread) then you should have significant income left over for taxable accounts?

Personally, I would always have a taxable option while employed in order to capture losses against Ordinary Income.

It's an interesting discussion for sure, as I am thinking about things from different perspectives, which is harder to do via this medium. I do find myself thinking of retirement as having a very low income tax level (on another thread I mention how mine is a few percentage points) I'm not overly concerned about withdrawal rates, since I don't ever think of them as similar to the real earning years.

 

[Sesq]

So when I read this thread I started to get really excited at the prospect of lots more money in a Roth IRA. Then I read this Fidelity article, seems to suggest that you have to roll-over proportional amounts of before tax and after tax moneys. This really kills it for me because I've already built-up a significant amount of money in a traditional 401(k) and I can't withdraw that money while I still work for my company. If you are just starting out, you could take advantage of this by eschewing the traditional 401(k), putting all your money into an after tax account, withdrawing it and then rolling it into a Roth IRA.

https://www.fidelity.com/insights/retirement/irs-401k-rollover-guidance

The pro-rata rule for Roth conversion only applies to balances in your IRA, not 401(k). So, unless you have traditional IRA's (perhaps rollover's from past employers), you can convert your nondeductible IRA and/or after-tax distributed 401(k) amounts without allocating any of the basis to the tax deferred balances in the 401(k). In fact, one of the cures for backdoor IRA eligibility is to roll over any traditional IRA balances into a 401(k) plan of some sort.

The way I read the bold portions, I don't think you are clear on the distinction about how to allocate basis in Roth IRA conversions (IRA only).

 

[Matt]

The pro-rata rule for Roth conversion only applies to balances in your IRA, not 401(k). So, unless you have traditional IRA's (perhaps rollover's from past employers), you can convert your nondeductible IRA and/or after-tax distributed 401(k) amounts without allocating any of the basis to the tax deferred balances in the 401(k). In fact, one of the cures for backdoor IRA eligibility is to roll over any traditional IRA balances into a 401(k) plan of some sort.

The way I read the bold portions, I don't think you are clear on the distinction about how to allocate basis in Roth IRA conversions (IRA only).

Thanks for this. I was feeling the same way, but with everything else that has been going on wasn't totally certain about that (still not, but I'm leaning towards agreeing with this post) that was the reason I was going back and forth a lot with @SC Trojan on this, and asked about how much he was really going to put in, and to have someone take a look at his plan and the code.

Due to workload, that was kind of a barometer of how important it was for me to get fully up to speed with the new regs here by moving them to the top of the crazy list I have right now

 

[SC Trojan]

Sesq, thanks a lot for the clarification. You are right, I was misinterpreting the pro rata rules. Matt, sorry if that is what you were getting at and I was just dense on it.

I think it is time to increase my After Tax contributions

 

[Matt]

Sesq, thanks a lot for the clarification. You are right, I was misinterpreting the pro rata rules. Matt, sorry if that is what you were getting at and I was just dense on it.

I think it is time to increase my After Tax contributions

I was getting at it, but I wasn't totally sure to be frank. I felt it was off, but hadn't had chance to really dive into it. End of the day, I enjoyed the discussion, and if you can now get a ton more money set aside, thats a win for everyone.

 

[Sesq]

Glad to help, if belated. This is a pet issue of mine, so I follow it closely. I wish my employer had the "mega" backdoor option (via after tax contributions and in-service withdrawals). In the meantime we do avail ourselves of the "regular" backdoor IRA which is better than nothing.

 

[T-towner]

I'm in the process of doing a backdoor roth and need some advice. Can anyone help me out, please? My situation is I started with a traditional ira that was opened many years ago at Schwab using 401k savings from previous employer. At the end of 2014, I opened a traditional IRA 3 month CD at Discover for 2014 and opened another in early January for 2015. Both were for $6500 since I'm over 50. These are both after-tax and non-deductible IRA's. My idea was to convert all three into a single Roth mutual fund somewhere. I didn't fully understand at that time that I should go straight to the conversion to a Roth so I've waited until one has matured already. I'm still in the grace period of renewal and the other renews on April 30. I decided to go with Vanguard for the Roth and contacted them about the process to transfer my three traditional ira's to them. They said I could either convert to a Roth for each traditional IRA where they exist now and then transfer to Vanguard, or I could transfer to Vanguard as traditional IRA's, then convert to a Roth there. My question is which approach to go with? Because I have CD's at Discover I have to go through the 14 day paperwork through snail mail route. My CD's will renew in that time. Of course the penalty is just the little bit of interest so no problem. I'm also worried about what happens on the Vanguard side when it transfers. Their offering on Traditional IRA CD's may incur some commissions. I've read that I need to pay for taxes and fees out of pocket but not sure how to handle all these steps the right way. I am bumbling around in the dark and not sure of how to proceed. Any and all help would be much appreciated.

 

[Matt]

I'm in the process of doing a backdoor roth and need some advice. Can anyone help me out, please? My situation is I started with a traditional ira that was opened many years ago at Schwab using 401k savings from previous employer. At the end of 2014, I opened a traditional IRA 3 month CD at Discover for 2014 and opened another in early January for 2015. Both were for $6500 since I'm over 50. These are both after-tax and non-deductible IRA's. My idea was to convert all three into a single Roth mutual fund somewhere. I didn't fully understand at that time that I should go straight to the conversion to a Roth so I've waited until one has matured already. I'm still in the grace period of renewal and the other renews on April 30. I decided to go with Vanguard for the Roth and contacted them about the process to transfer my three traditional ira's to them. They said I could either convert to a Roth for each traditional IRA where they exist now and then transfer to Vanguard, or I could transfer to Vanguard as traditional IRA's, then convert to a Roth there. My question is which approach to go with? Because I have CD's at Discover I have to go through the 14 day paperwork through snail mail route. My CD's will renew in that time. Of course the penalty is just the little bit of interest so no problem. I'm also worried about what happens on the Vanguard side when it transfers. Their offering on Traditional IRA CD's may incur some commissions. I've read that I need to pay for taxes and fees out of pocket but not sure how to handle all these steps the right way. I am bumbling around in the dark and not sure of how to proceed. Any and all help would be much appreciated.

It sounds a little confusing - I think in order to get clarity you need to break things down a little, can you confirm if I understand correctly:

• IRA1 created when you rolled over 401(k) - Traditional IRA. No tax paid.
• IRA2 Traditional [non deductible] 2014 $6500 + a little earned interest
• IRA3 Traditional [non deductible] 2015 $6500 + a little earned interest

If the above is accurate, IRA2 and IRA3 are easy. But IRA1 might be something to think about.. what is the growth on that? The amount you initially funded in the 401(k) is called Basis. That basis would carry through to IRA1. Is the difference between the current value of IRA1 and the basis of the 401(k) something substantial?

The actual rollover process isn't something to overly worry about, but if there was a lot of appreciation then you might have to manage the taxes from that IRA.

In the interim, for clarity, I would propose that you do not renew/refresh the CDs. The amount of income lost for pausing that will be trivial.

 

[T-towner]

Hi, thanks for your reply. Yes, you have the situation correct. IRA1 is pretax and the others are non deductable. Sadly IRA1 has had significant loss over time. Opened with around $24K and currently has balance of around $7,052.

IRA1 = $7,052 in money market fund
IRA2(2014) = $6505 - 3 month Trad CD
IRA3(2015) = $6505 - 3 month Trad CD

I realize I'll owe some tax on this transaction, but I think the long term model of the Roth will work well with our overall retirement mix. My CPA had recommended it and I am grateful for this thread and this site because it has really helped.

I'd like to pursue it if I haven't made any missteps yet. When I talked to Vanguard, they set up a shell account to transfer the traditional IRA's to and then I could do the conversion to ROTH from that account. I guess I'm not clear about if there are fees on these transfer transactions how I avoid paying those fees with traditional IRA money. I'm probably making too big a deal out of this.

 

[Matt]

Hi, thanks for your reply. Yes, you have the situation correct. IRA1 is pretax and the others are non deductable. Sadly IRA1 has had significant loss over time. Opened with around $24K and currently has balance of around $7,052.

IRA1 = $7,052 in money market fund
IRA2(2014) = $6505 - 3 month Trad CD
IRA3(2015) = $6505 - 3 month Trad CD

I realize I'll owe some tax on this transaction, but I think the long term model of the Roth will work well with our overall retirement mix. My CPA had recommended it and I am grateful for this thread and this site because it has really helped.

I'd like to pursue it if I haven't made any missteps yet. When I talked to Vanguard, they set up a shell account to transfer the traditional IRA's to and then I could do the conversion to ROTH from that account. I guess I'm not clear about if there are fees on these transfer transactions how I avoid paying those fees with traditional IRA money. I'm probably making too big a deal out of this.

Yeah, so you'd owe taxes on the basis of the $7052 at your regular income level. Personally I look at the tax brackets and try to only roll when its a low one for me.


Simplified EG if you are paying 20% tax to $50K level, and then the rate popped up to 30% (it doesn't, I'm simplifying) if your income was $45K I'd not roll the full $7052, I'd roll only $5K of it so I don't push myself into a higher bracket.


In terms of moving to Vanguard. That's OK, but it isn't game changing at these levels. Some people hear things like Roth/Vanguard/Rollover and think all must happen to make it work. But you can also rollover from Traditional to Roth in any other brokerage, and later transfer to Vanguard if you really want to.


I personally have a Roth at Vanguard and a Roth (rolled over) at Fidelity. I opened a Traditional (and SEP IRA) at Fidelity back in the day and just rolled it over in house - they have nice cheap ETFs also, and I can pay the same or less than Vanguard for the funds that I want there.


If I move from Fidelity to Vanguard there will be an ACAT transfer fee (nothing to do with taxes/whatnot, just Fidelity penalizing me for leaving) for perhaps $150-200. As such, I keep accounts at both brokerages at this time, and don't lose out.


If the brokerage were you are currently located can offer low cost ETFs (tell me the name of the firm and I can offer suggestions) then you might want to just stay with them, but rollover if you see fit.

 

[Duffmankc]

Hi, thanks for your reply. Yes, you have the situation correct. IRA1 is pretax and the others are non deductable. Sadly IRA1 has had significant loss over time. Opened with around $24K and currently has balance of around $7,052.

IRA1 = $7,052 in money market fund
IRA2(2014) = $6505 - 3 month Trad CD
IRA3(2015) = $6505 - 3 month Trad CD

I realize I'll owe some tax on this transaction, but I think the long term model of the Roth will work well with our overall retirement mix. My CPA had recommended it and I am grateful for this thread and this site because it has really helped.

I'd like to pursue it if I haven't made any missteps yet. When I talked to Vanguard, they set up a shell account to transfer the traditional IRA's to and then I could do the conversion to ROTH from that account. I guess I'm not clear about if there are fees on these transfer transactions how I avoid paying those fees with traditional IRA money. I'm probably making too big a deal out of this.

FYI - I just closed a Discover IRA that I had in one of their 5 year CDs that recently matured and am in the process of rolling it into Vanguard. I didn't want the CD to renew and I didn't think Vanguard was going to move fast enough if I initiated the transfer with them to get it done within the grace period. So, after talking with someone at Discover, I initiated a distribution with Discover and had them send me a check. You can upload a scanned version of their distribution request form to their secure document upload feature online.
However, even though I got the document uploaded before the grace period ended (about 2 days before), I still received a letter after the grace period ended that they renewed by CD. Then 2 days later, I received another letter saying that they were distributing the funds as requested, however, the took a $178 early withdrawal penalty since they incorrectly renewed my CD. I had ~5,500 in the account, so $178 is a relatively large fee - I think its 6 months of interest on the 5 year CD. I contacted them and they admitted their error, however, in order to get the fee back they have to open a new IRA to refund the fee into which they will then issue another distribution to me - its a bit of a mess and I'll be interested to see how all of this gets reported at year end.

 

[Beltway Explorers]

The TurboTax tutorial that SC Trojan posted made me wonder about IRA conversion timing and calendar years. This year we are in the phase out range for the Roth IRA (we can only contribute about $1,500 based on my calculations). My husband only has his TSP through the federal government so I'd like to put the extra $4,000 into an IRA and then convert it to a Roth IRA. If I wait until our final paychecks this year to make sure I did my calculations correctly, the conversion most likely won't be processed until January.

Does the year of the conversion matter? Or can if I accidentally put too much into the Roth can I roll it back to a regular IRA and then later convert it? That seems like a bit of a headache though so I was thinking of going a bit low (say $1,000 outright) and then converting the rest.

For our personal situation, I'm taking unpaid maternity leave for three months next year so we should qualify for the full Roth IRA contribution so we will only need to convert his IRA account once in 2016. Vanguard owns our existing Roth IRA accounts (and my IRAs that I rolled over from previous employers).