Backdoor Roth Guidance

[BergLust]

Hi All - I've been considering how to do a backdoor Roth with my current account(s) situation. I have a Roth IRA that I can no longer fund because my income exceeds the maximum limit. I have 401K with my current employer. Finally, I have a rollover (traditional) IRA with TD Ameritrade that was created with funds rolled in from a previous employer 401K. My understanding is that in order to successfully execute a backdoor roth IRA of $5,500 (maximum) I need to have a zero balance in an traditional IRA account. Do I have my facts correct?

Today I contacted the administrator of my current company's 401K and asked if I could do a "reverse rollover"...meaning, rolling funds into my 401K from the TD Ameritrade rollover (traditional) IRA...so that my traditional IRA balance is zero and I can then execute a backdoor roth IRA. The plan administrator said they do allow reverse rollovers with no fees, penalties, etc.

Before I execute this series of events I wanted to reach out to this forum to see if there is something I'm missing or may not be considering. Perhaps I'm no considering some benefit of leaving things the way they are and foregoing the backdoor Roth. Only thing I can think of is that i lose the number of different investment options available in TD Ameritrade and am forced to choose from the investment options my employer provides in the 401K...but I'm not so concerned about that. Are there other things that I should consider? or...am I somehow misunderstanding the rules/process?

 

[fidler4]

This article has been referenced before on this forum regarding backdoor Roths. https://www.kitces.com/blog/how-to-...ation-rule-and-the-step-transaction-doctrine/

 

[Travelfreek]

I don't have experience with this but I'm also interested since we have substantial pre-tax IRAs and want to explore converting during years when our taxable income is lower.

 

[Sunset]

I don't have experience with this but I'm also interested since we have substantial pre-tax IRAs and want to explore converting during years when our taxable income is lower.

If you are converting when your income is lower then you can simply convert, IRA to ROTH as there is no age limit/restriction. For many folks that happens when they retire, but you can do it at any age. The key is to not have a lot of income.

I think OP wants to park his IRA money in a 401K, so he has no IRA, then can do an IRA contribution and immediately roll it into a ROTH. Getting around the income restriction for contributing to a ROTH.

 

[Travelfreek]

Oh, that makes sense.

 

[BergLust]

If you are converting when your income is lower then you can simply convert, IRA to ROTH as there is no age limit/restriction. For many folks that happens when they retire, but you can do it at any age. The key is to not have a lot of income.

I think OP wants to park his IRA money in a 401K, so he has no IRA, then can do an IRA contribution and immediately roll it into a ROTH. Getting around the income restriction for contributing to a ROTH.

This is exactly the situation.

 

[NgineER]

Hi All - I've been considering how to do a backdoor Roth with my current account(s) situation. I have a Roth IRA that I can no longer fund because my income exceeds the maximum limit. I have 401K with my current employer.

Have you looked into After-tax 401(k) contributions? If allowed by your company, these can be rolled over to a Roth IRA above the $5500 limit. My Mega allows for 9% of my Salary which puts me well beyond the limit.

I don't know about the rules in your situation, but I imagine that what you are doing would work.

 

[WithAPurpose]

I was in the same situation last year and will be again this year. I also have a rollover Trad IRA and want to make a backdoor Roth. I made my $5500 non-deductible contribution, but exceeded the threshold that made sense to convert. I also have existing basis in my rollover IRA (thanks combat zone), so my details are slightly different. You can skip the 'reverse rollover' if you don't mind an extra form... see my example In your situation, if your rollover IRA has $45,000 and you make a $5,000 contribution to your TD Ameritrade traditional IRA, you could then convert that $5,000 Traditional IRA into a Roth and have the benefits of the Roth account. When tax time comes, you will fill out the Form 8606 to calculate your taxable basis of your conversion. If I assume that your entire rollover was pre-tax (no basis) then 10% ($5,000 (conversion amount)/$50,000 (total traditional balance)) of your $5000 conversion is taxable =$500 to you in this year. You now have $4,500 basis in the $45,000 traditional rollover IRA. If you follow my math, you can insert your own values and get the number that would apply to you. But you end up with your desired amount in the Roth account(yay!!), you didn't pay taxes on the entire amount(yay!!), and you have an added paperwork trail you will need to complete as long as you have any traditional IRA with any basis(boo!!). At least this is my understanding and what I plan to act on this year (now that I have space under to personal taxation threshold). Anyone see errors that I've made? I'd be happy to hear inputs as well. W.A.P.

 

[kaneohe]

I was in the same situation last year and will be again this year. I also have a rollover Trad IRA and want to make a backdoor Roth. I made my $5500 non-deductible contribution, but exceeded the threshold that made sense to convert. I also have existing basis in my rollover IRA (thanks combat zone), so my details are slightly different. You can skip the 'reverse rollover' if you don't mind an extra form... see my example In your situation, if your rollover IRA has $45,000 and you make a $5,000 contribution to your TD Ameritrade traditional IRA, you could then convert that $5,000 Traditional IRA into a Roth and have the benefits of the Roth account. When tax time comes, you will fill out the Form 8606 to calculate your taxable basis of your conversion. If I assume that your entire rollover was pre-tax (no basis) then 10% ($5,000 (conversion amount)/$50,000 (total traditional balance)) of your $5000 conversion is taxable =$500 to you in this year. You now have $4,500 basis in the $45,000 traditional rollover IRA. If you follow my math, you can insert your own values and get the number that would apply to you. But you end up with your desired amount in the Roth account(yay!!), you didn't pay taxes on the entire amount(yay!!), and you have an added paperwork trail you will need to complete as long as you have any traditional IRA with any basis(boo!!). At least this is my understanding and what I plan to act on this year (now that I have space under to personal taxation threshold). Anyone see errors that I've made? I'd be happy to hear inputs as well. W.A.P.

Isn't this backwards? 5K basis/50K total means 10% NON-taxable =
90% TAXABLE?

 

[SecondCor521]

Hi All - I've been considering how to do a backdoor Roth with my current account(s) situation. I have a Roth IRA that I can no longer fund because my income exceeds the maximum limit. I have 401K with my current employer. Finally, I have a rollover (traditional) IRA with TD Ameritrade that was created with funds rolled in from a previous employer 401K. My understanding is that in order to successfully execute a backdoor roth IRA of $5,500 (maximum) I need to have a zero balance in an traditional IRA account. Do I have my facts correct?

Today I contacted the administrator of my current company's 401K and asked if I could do a "reverse rollover"...meaning, rolling funds into my 401K from the TD Ameritrade rollover (traditional) IRA...so that my traditional IRA balance is zero and I can then execute a backdoor roth IRA. The plan administrator said they do allow reverse rollovers with no fees, penalties, etc.

Before I execute this series of events I wanted to reach out to this forum to see if there is something I'm missing or may not be considering. Perhaps I'm no considering some benefit of leaving things the way they are and foregoing the backdoor Roth. Only thing I can think of is that i lose the number of different investment options available in TD Ameritrade and am forced to choose from the investment options my employer provides in the 401K...but I'm not so concerned about that. Are there other things that I should consider? or...am I somehow misunderstanding the rules/process?

I think you have it about right. I did exactly what you describe for exactly the same reasons a few years ago.

The one thing you want to be cautious about is that I believe - it's been a while since I looked at it carefully - that the IRS forms ask you for the balance of all of your IRAs on 12/31 of 2017 in this case. Since the rollover from your traditional IRA to your 401(k) might take a bit of time, you want to be darn sure that part of the process is done before you do the backdoor Roth part of it.

If you still have, even accidentally, a t-IRA balance on 12/31/17, and you've gone ahead and done the backdoor Roth part, it gets messy IIRC...taxes, and you have ratios of stuff to keep track of for a long time, possibly forever.

But besides that little wrinkle, yeah, it works as you think it does and is straightforward to do.

 

[BergLust]

Have you looked into After-tax 401(k) contributions? If allowed by your company, these can be rolled over to a Roth IRA above the $5500 limit. My Mega allows for 9% of my Salary which puts me well beyond the limit.

I don't know about the rules in your situation, but I imagine that what you are doing would work.

I have indeed. I can do after tax contributions, however I'm not sure if I can do in-service distributions. It used to be that the plan would not allow in-service distributions (without penalty), but my company has recently changed some of the plan rules so I'm still digging into this.

 

[NgineER]

Even if you can't do in-service distributions, you should be able to roll it over into a Roth 401k. The money needs to be in a separate sub account however.

 

[WithAPurpose]

Isn't this backwards? 5K basis/50K total means 10% NON-taxable =
90% TAXABLE?


Yes, you're right I got that backwards. that makes 90% taxable. Thanks Kaneohe for correcting my misleading math.

 

[Sunset]

OP - If you look around you can find a brokerage that will allow you to set up a self-401K account, and the important thing, is you want one that allows you to rollover your IRA into it. One of the big name ones does allow it.

These are normally set up for your self employment but it's ok to have one even if your self employment doesn't actually make any money, you can still do the rollover which is what you really want.

Self employment can be as simple as sole proprietorship which means you do work for money using your own name, you don't need an LLC or anything even remotely complex.

There is paperwork to mail back and forth so it's not something you want to delay as it will take weeks to set up.

 

[BergLust]

This article has been referenced before on this forum regarding backdoor Roths. https://www.kitces.com/blog/how-to-...ation-rule-and-the-step-transaction-doctrine/

Thanks a lot. This is helpful!

 

[BergLust]

Have you looked into After-tax 401(k) contributions? If allowed by your company, these can be rolled over to a Roth IRA above the $5500 limit. My Mega allows for 9% of my Salary which puts me well beyond the limit.

I don't know about the rules in your situation, but I imagine that what you are doing would work.

Coming back to this - There are certain cases for in-service withdrawals...but unfortunately my company still does not allow after-tax 401k contributions. Boo! Thanks for the idea though.

 

[BergLust]

OP - If you look around you can find a brokerage that will allow you to set up a self-401K account, and the important thing, is you want one that allows you to rollover your IRA into it. One of the big name ones does allow it.

These are normally set up for your self employment but it's ok to have one even if your self employment doesn't actually make any money, you can still do the rollover which is what you really want.

Self employment can be as simple as sole proprietorship which means you do work for money using your own name, you don't need an LLC or anything even remotely complex.

There is paperwork to mail back and forth so it's not something you want to delay as it will take weeks to set up.

This is quite an interesting approach that I haven't thought of before. The more reading about it I do the more interesting it becomes. Are there any drawbacks that you can think of? I did read that this plan does not receive any ERISA asset protection....and creditor protection is limited by the state in which one lives. I live in Washington and it seems that Washington is limited to creditor protection of $125k.

If I create a sole proprietorship for a business that is not making money (yet or ever), then it seems there is almost no additional tax work to do. Does this seem correct?

 

[BergLust]

Can anyone think of advantages or disadvantages for a solo 401(k), other than what I posted above? I'm wondering if it's worth having a self employed sole proprietorship. it doesn't seem like a lot of work...but I have no experience with this.