Backdoor Roth - Doing It Right?

[FocusedInfinity]

Between getting hitched this year and stumbling into some unexpected income, it's come to my attention that I'm not going to be under the IRS income limits to contribute directly to a Roth IRA. Anyone who has familiarity with this situation mind spot checking me? The brokerage is Fidelity just in case anyone has specific advice on how to do it on their website.

-All my retirement assets are in my Roth or 401k - no traditional IRA to trigger the tax implications there.
-I've contributed $1000 to the Roth IRA already this year. I left it in cash.
-I intend to withdraw say $1020 from the Roth IRA since I'm not exactly sure how much that $1000 earned.
-I intend to take that $1020, tack on an additional $3980, and contribute that to a Traditional IRA.
-I intend to roll the Traditional IRA over into the original Roth IRA.

Thanks in advance for any advice!

FI

 

[gauss]

-I intend to withdraw say $1020 from the Roth IRA since I'm not exactly sure how much that $1000 earned.
-I intend to take that $1020, tack on an additional $3980, and contribute that to a Traditional IRA.
-I intend to roll the Traditional IRA over into the original Roth IRA.


FI

I don't think that you want to just withdraw the money, but rather perform a Recharacterization to a traditional IRA.

Fidelity has a form for this named "Recharacterize Your IRA Contributions (PDF)" located on this page. It is located about 1/3 of the way down the page under the "forms by category" tab.

I believe that Fidelity will correctly calculate the earnings for you -- you just give them the date and amount of the contribution that you wish to recharacterize. You will need to open a traditional IRA also.

Another option is to remove your excess contributions with the "IRA Return of Excess Contribution Request (PDF)" form that is located near the first form.

-gauss

 

[RockyMtn]

Don't think you want to recharacterize as then there is a waiting period before you can make another mover back to the Roth. Take the $1000 and whatever it has earned as excess contribution. Open a Traditional IRA and deposit the $1000 plus interest and whatever it take to get you to the $5000 limit. Then you can do the backdoor Roth.

 

[lemming]

I thought the income limits for a Roth and a TIRA were the same. (nope-wrong)
If you have a plan at work you are limited in your contributions,recharacterizing won't work.

ADDED
http://money.usnews.com/money/blogs...011/10/21/401k-and-ira-changes-coming-in-2012

It looks like you have more room to do a Roth then a Traditional .

 

[RockyMtn]

I thought the income limits for a Roth and a TIRA were the same.
If you have a plan at work you are limited in your contributions,recharacterizing won't work.

You can contribute to a TIRA at any income level you just don't get the tax deduction. When you convert to Roth you will not owe any taxes on the $5000 as it is a post tax contribution. The only thing you would owe taxes on are any earnings, if any, prior to converting to the Roth.

 

[ronocnikral]

I had this problem last year, and I am trying to remember what was done...

I believe I recharacterized to a non-deductible IRA and then converted that. There are timing rules, but I can't remember if they apply only to reconversions or not. I'll have to check my tax documents....

 

[gauss]

I believe I recharacterized to a non-deductible IRA and then converted that. There are timing rules, but I can't remember if they apply only to reconversions or not. I'll have to check my tax documents....

My quick reading of Pub 590 suggested that the time limit for a Roth Conversion -> Recharacterization -> Reconversion would be the greater of
a) the next tax year (from the year of the Recharacterization)
b) 30 days from the Recharacterization.

I don't think this would apply to the OP scenario since he did not start with a Roth conversion, but rather a Roth contribution.

-gauss



I

 

[Alan]

Don't think you want to recharacterize as then there is a waiting period before you can make another mover back to the Roth. Take the $1000 and whatever it has earned as excess contribution. Open a Traditional IRA and deposit the $1000 plus interest and whatever it take to get you to the $5000 limit. Then you can do the backdoor Roth.

+1, I think this is the simplest way to achieve what you want.

 

[ronocnikral]

My quick reading of Pub 590 suggested that the time limit for a Roth Conversion -> Recharacterization -> Reconversion would be the greater of
a) the next tax year (from the year of the Recharacterization)
b) 30 days from the Recharacterization.

I don't think this would apply to the OP scenario since he did not start with a Roth conversion, but rather a Roth contribution.

-gauss



I

That is my understanding as well. But didn't have time to do the research.

Has the OP called the institution which houses their funds to ask these questions? I would get their answer and then do some further research.

 

[PatrickA5]

I do the backdoor Roth contribution every year (since 2010 when the IRS did away with the income qualification limits for conversions). I've been putting my $6K into a traditional IRA (Fidelity), wait a couple days for the system to allow the conversion and then immediately converting the full amount to the Roth. Usually, there are no earnings to worry about because my Trad IRA contribution goes into an account paying zippo interest.

In your case, it would probably be best just to ask Fidelity for your contribution (and earnings) returned. Then do a non-deductible traditional contribution and immediately convert it to the Roth.

 

[kaneohe]

too lazy to do the work but my impresion too is that there is a waiting period if you convert from TIRA to Roth and then recharacterize that conversion. However if you recharacterize a contribution (as opposed to a conversion), I remember words to the effect that it is as if you had never done the first contribution (e.g. to the Roth) but had simply made the contribution to the other IRA (TIRA in this case). If that is true, then there would not be a waiting period for the conversion since it wasn't a re-conversion.

For the real answer, ask at fairmark.com (retirement subforum)and watch for answer by Alan S.

 

[gauss]

For the real answer, ask at fairmark.com (retirement subforum)and watch for answer by Alan S.

+1

 

[Alan]

too lazy to do the work but my impresion too is that there is a waiting period if you convert from TIRA to Roth and then recharacterize that conversion. However if you recharacterize a contribution (as opposed to a conversion), I remember words to the effect that it is as if you had never done the first contribution (e.g. to the Roth) but had simply made the contribution to the other IRA (TIRA in this case). If that is true, then there would not be a waiting period for the conversion since it wasn't a re-conversion.

This is what I did in 2010 when I made a contribution to a ROTH then got an unexpected large bonus which took our earnings over the limit for ROTH contributions.

I simply moved the money in the ROTH to my existing tIRA. I then did a rollover of the tIRA into a ROTH. It was easy, and if the OP contacts Fidelity they will tell him how to do the same.

 

[FocusedInfinity]

Thanks everyone for the help! Contacting Fidelity today to discuss options with them. I'll post back with how it got worked out.

Thanks again!
FI

 

[Ronnieboy]

I do the backdoor Roth contribution every year (since 2010 when the IRS did away with the income qualification limits for conversions). I've been putting my $6K into a traditional IRA (Fidelity), wait a couple days for the system to allow the conversion and then immediately converting the full amount to the Roth. Usually, there are no earnings to worry about because my Trad IRA contribution goes into an account paying zippo interest.

I have been doing something similar with Vanguard, but it has been gradual.

Put $1000 in traditional IRA, next day convert that to Roth IRA with no earnings to worry about. Repeat 10 times during the year for spouse and I.

Now my worry is how do I make sure the IRS sees this as a non-deductible IRA to Roth IRA non taxable event?

Is this something that I am filing on my tax forms or is Vanguard taking care of that?

I am dreading getting a letter from the IRS expecting taxes on $10k of 'conversions' for tax year 2011, because they received generic 1099-xxx from Vanguard that just shows IRA to Roth IRA conversion.

 

[pb4uski]

Suggest you talk to Vanguard about this to make sure you don;t get a nasty surprise. Worth a call to them to clarify it.

 

[Animorph]

You'll be claiming it on your taxes, with a basis cost for the non-deductible IRA's. Only any gains will be taxable. I will owe a few cents on the interest I earned in my backdoor conversion this year.

 

[Alan]

Suggest you talk to Vanguard about this to make sure you don;t get a nasty surprise. Worth a call to them to clarify it.

+1

Also, according to their website, you should be able to view the cost basis for your IRA's on-line. This year if you deposited $1,000 of after tax money into the IRA before converting, it should show a cost basis of $1,000.

 

[gauss]

You'll be claiming it on your taxes, with a basis cost for the non-deductible IRA's. Only any gains will be taxable. I will owe a few cents on the interest I earned in my backdoor conversion this year.

As Animorph describes, look to IRS Form 8606 where you keep track of your basis each year that you have contributions to non deductible IRAs.

 

[RE2Boys]

I have been doing something similar with Vanguard, but it has been gradual.

Put $1000 in traditional IRA, next day convert that to Roth IRA with no earnings to worry about. Repeat 10 times during the year for spouse and I.

Now my worry is how do I make sure the IRS sees this as a non-deductible IRA to Roth IRA non taxable event?

Is this something that I am filing on my tax forms or is Vanguard taking care of that?

I am dreading getting a letter from the IRS expecting taxes on $10k of 'conversions' for tax year 2011, because they received generic 1099-xxx from Vanguard that just shows IRA to Roth IRA conversion.

Guaranteed, you will get a 1099-R (maybe 10 of them) for the conversion of a T-IRA to Roth IRA. Only way to explain to the IRS is to properly fill out a form 8606 each year. That's the way you tell the IRS that you made a non-deductible T-IRA contribution.

Like several have pointed out, seek out Form 8606 and instructions.

If you don't submit an 8606, the IRS will assume contributions were deductible.

When doing conversions, the IRS look at ALL your T-IRA and SEP-IRAs that existed in your name, not just the temporary one you set up for the back door conversion. When you do a T-IRA to Roth conversion and have basis in any of your T-IRAs, the IRS looks at it as you've converted a percentage of ALL your T-IRAs and use up only that percentage of your basis. So if you have other T-IRAs, no matter how old, you most likely WILL be paying taxes on some percentage of the conversion.

 

[Alan]

When doing conversions, the IRS look at ALL your T-IRA and SEP-IRAs that existed in your name, not just the temporary one you set up for the back door conversion. When you do a T-IRA to Roth conversion and have basis in any of your T-IRAs, the IRS looks at it as you've converted a percentage of ALL your T-IRAs and use up only that percentage of your basis. So if you have other T-IRAs, no matter how old, you most likely WILL be paying taxes on some percentage of the conversion.

Exactly right.