traditional vs roth

[hopefullyoneday]

Ok I need this dumbed down for me. Last year (2017) I opened up a tradition ira and payed with after tax dollars as I was going to claim it on my taxes. Turns out I may have made too much last year and my deduction might be phased out to zero. So do I need to convert it over to a roth or does it do it automatically or is there a reason to leave it labeled as traditional. I have tried to read articles online but now it is all twisted in my head. Thanks
Greg

 

[RE2Boys]

1. Traditional IRA and Roth IRA are two completely separate types of retirement accounts each with their own rules. Nothing between the two happens automatically.
2. If you take the T_IRA deduction on your 2017 tax return, it is considered to be paid with before tax dollars (never paid tax on that income). If you do not take the T-IRA deduction, it considered to be paid with after tax dollars, already paid tax on those dollars. What kind of contribution you make is determined when you file your 2017 income tax return.
3. The default assumption by the IRS is that the T-IRA was funded with before tax dollars.
4. Their is no income limit for contributing to a T-IRA. However, there is income limits for taking the deduction.
5. If any part of the T-IRA contribution is not deductible due to income limits, it is your responsibility to track and report these contributions to the IRS using Form 8606 when you file your income tax return. This tells the IRS that some of your contributions have already been taxed and any future withdrawals will only be partially taxed.

 

[hopefullyoneday]

Great explanation, now to go a little further. Since I payed with after tax dollars and I wont be able to claim any deduction on it would it be better to change it to a roth? so my earnings will grow tax free and I wont have to take withdrawls at 70 1/2. Because unless I misunderstood a traditional ira you have to pay tax on the earnings and start taking withdrawls at 70 1/2.

 

[hopefullyoneday]

BTW I will be under the cap for income for contributing to the roth.

 

[NgineER]

Great explanation, now to go a little further. Since I payed with after tax dollars and I wont be able to claim any deduction on it would it be better to change it to a roth? so my earnings will grow tax free and I wont have to take withdrawls at 70 1/2. Because unless I misunderstood a traditional ira you have to pay tax on the earnings and start taking withdrawls at 70 1/2.

Yes,
If you can’t deduct it, roll it over into a Roth.

 

[Senator]

Ok I need this dumbed down for me. Last year (2017) I opened up a tradition ira and payed with after tax dollars as I was going to claim it on my taxes. Turns out I may have made too much last year and my deduction might be phased out to zero. So do I need to convert it over to a roth or does it do it automatically or is there a reason to leave it labeled as traditional. I have tried to read articles online but now it is all twisted in my head. Thanks
Greg

If you made a $6,500 contribution to your tITA, and now have a combined balance of $65K in all your IRA accounts, even if at a different brokerage, you will be taxed on 90% of the Roth Conversion. Even if it was only in your account for a day.

The Roth Conversion works best if that conversion amount is your only IRA money.

 

[pjigar]

But how much you can rollover from traditional IRA to Roth IRA depends on existing pre-tax contributions already made to the traditional IRA account. Basically rollover amount is prorated between pre-tax and post-tax contributions made to the traditional IRA. This article has some examples on prorated rollovers. https://www.rothira.com/what-is-a-backdoor-roth-ira

If you are going to hit such income limit regularly then you should consider (un)rolling over "entire pre-tax balance including gains"/"entire-balance-period" from traditional IRA to a 401K account this year. So next year, the entire balance i.e new contribution of traditional IRA will be post-tax and can be rolled over to the Roth IRA. I hope this makes sense.

 

[pb4uski]

If you made a $6,500 contribution to your tITA, and now have a combined balance of $65K in all your IRA accounts, even if at a different brokerage, you will be taxed on 90% of the Roth Conversion. Even if it was only in your account for a day.

The Roth Conversion works best if that conversion amount is your only IRA money.

Senator is right but I think the problem can be avoided by structuring the transactions as a recharacterization from the tIRA and a contribution to the Roth rather than as a rollover from the tIRA to the Roth.

Recharacterize the excess contribution to the tIRA ... it just reverses the excess portion of the tIRA contribution and the proceeds land in your taxable account

And then separately do a Roth contribution of the same amount from the taxable account.

 

[SevenUp]

Yes, you should do a recharacterization (https://www.bogleheads.org/wiki/IRA_recharacterization) instead of a backdoor Roth (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA).

 

[pjigar]

Senator is right but I think the problem can be avoided by structuring the transactions as a recharacterization from the tIRA and a contribution to the Roth rather than as a rollover from the tIRA to the Roth.

Recharacterize the excess contribution to the tIRA ... it just reverses the excess portion of the tIRA contribution and the proceeds land in your taxable account

And then separately do a Roth contribution of the same amount from the taxable account.

OP can't do Roth contribution due to income phase out.

 

[kaneohe]

OP can't do Roth contribution due to income phase out.

" hopefullyoneday: BTW I will be under the cap for income for contributing to the roth."

If OP is eligible for Roth, OP should just recharacterize the TIRA contribution to Roth. No tax involved.

 

[pjigar]

" hopefullyoneday: BTW I will be under the cap for income for contributing to the roth."

If OP is eligible for Roth, OP should just recharacterize the TIRA contribution to Roth. No tax involved.

Oops. Miss-read the OP! Sorry.