Backdoor Roth IRA

[Matt]

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).

I'd run this past a CPA, but it might be easier to fully fund the nondeductible and roll out the full amount.

 

[DazeEnd]

Is there any solid guidance on how long you should wait between contributing to a traditional IRA and converting to a Roth? I plan to do my first backdoor Roth in January, and I've seen advice all over the place. Some say convert immediately or next day to minimize taxes. Some suggest waiting up to six months to minimize IRS scrutiny. Does anyone have a suggestion based on more than just guessing?

 

[ukinny2000]

I have never found any, so for myself personally I do the change as soon as the funds are settled. My feeling is that if the IRS decides that backdoor-ing is no longer kosher, it likely won't matter if the conversions are done T+1 or T+180. Doing it T+1 means no headaches on accumulated interest or anything in the IRA

 

[SC Trojan]

Is there any solid guidance on how long you should wait between contributing to a traditional IRA and converting to a Roth? I plan to do my first backdoor Roth in January, and I've seen advice all over the place. Some say convert immediately or next day to minimize taxes. Some suggest waiting up to six months to minimize IRS scrutiny. Does anyone have a suggestion based on more than just guessing?

Essentially there is a clause in the IRS code that says you cant do things to intentionally circumvent their limits. If you wait 6 months then you have a slightly better case. I don't think its an issue because this is clearly allowed due to the ability convert traditional to roth IRA.

 

[Matt]

The area for concern would be whether the process would trigger step transaction doctrine:

https://en.wikipedia.org/wiki/Step_transaction_doctrine

I've seen a number of people write on the topic, nobody knows the real answer, though a recent post by Kitces suggested leaving the nondeductible IRA for a year, rolling it, and then starting a new nondeductible as being safer. Frankly, any repeated event (and this is an annual gig in this example) comes with risk.

The least risky from a step doctrine would be to build up a substantial nondeductible and then a single rollover transaction, though that brings with it the accumulation of taxable gain.