Backdoor Roth and Roth conversions - no current Roth or IRA

[Dash man]

Does everyone agree that's it a no-brainer to go ahead and setup a back-door ROTH this year? Only have 2 years to contribute earned income ($7K each) since I'm retiring in 2 years.

G-Man, I suggest you and your wife each open a traditional IRA and a Roth IRA. Contribute $7,000 each to the tIRA, then immediately convert it to the Roth IRA. This is a backdoor Roth contribution and starts the five year clock running. You need this to access your Roth conversions, which can only be accessed without taxes on earnings after the Roth has been open for five years. Once that five years pass and you’re over 59 1/2 there will be no more tax on withdrawals.
If you can, you should build up some after tax funds in a brokerage account that will eventually be used to pay tax on your future Roth conversions. Choosing to pay the taxes on your conversions by withholding from the converted funds is not the most efficient way to convert because you have to withdraw additional funds for taxes, then you also pay tax on that.
Hope this helps.

 

[G-Man]

G-Man, I suggest you and your wife each open a traditional IRA and a Roth IRA. Contribute $7,000 each to the tIRA, then immediately convert it to the Roth IRA. This is a backdoor Roth contribution and starts the five year clock running. You need this to access your Roth conversions, which can only be accessed without taxes on earnings after the Roth has been open for five years. Once that five years pass and you’re over 59 1/2 there will be no more tax on withdrawals.
If you can, you should build up some after tax funds in a brokerage account that will eventually be used to pay tax on your future Roth conversions. Choosing to pay the taxes on your conversions by withholding from the converted funds is not the most efficient way to convert because you have to withdraw additional funds for taxes, then you also pay tax on that.
Hope this helps.

Thanks Dashman..

Do I need to contribute $7K all at once or can I add a certain amount throughout the year until it reaches $7K? I realize I need to immediately rollover the post-tax dollars in the TIRA immediately to the Roth IRA when contributing to the TIRA.

I will create a Roth IRA for my wife as well and do the same thing. Incremental rollovers until I reach the max of $7K.

 

[Dash man]

Thanks Dashman..

Do I need to contribute $7K all at once or can I add a certain amount throughout the year until it reaches $7K? I realize I need to immediately rollover the post-tax dollars in the TIRA immediately to the Roth IRA when contributing to the TIRA.

I will create a Roth IRA for my wife as well and do the same thing. Incremental rollovers until I reach the max of $7K.

Nothing wrong with incremental tIRA contributions and immediate conversions.

 

[madatrub]

FWIW, I use backdoor yearly due to Roth income limits. My process is:

Contribute biweekly at $800/month into tIRA.
Once I max, Execute a backdoor conversion
Pay taxes on whatever I gained from the time I accrued $7000

This keeps it simple for me since the deductions are automatic, and allows me to just execute once.

 

[gauss]

#1) I would NOT recommend just rolling over the entire 401k balance to a traditional IRA in one step. OP is interested in drawing penalty free before age 59 1/2 (via the rule of age 55) which only applies to 401ks - not IRAs.

#2) I do not see the advantage of the Roth IRA in this case. OP has access to a Roth 401k in his employer plan that allows in-plan conversions. Would just need to make sure that partial conversions are allowed.

An added benefit to keeping it in the employer plan (as opposed to moving to IRAs) is that the taxes will be simpler. The employer is required to track the taxable basis and calculate the taxable amount of any distribution. In an IRA, these tasks and the associated record keeping fall to the taxpayer.

-gauss

 

[G-Man]

G-Man, I suggest you and your wife each open a traditional IRA and a Roth IRA. Contribute $7,000 each to the tIRA, then immediately convert it to the Roth IRA. This is a backdoor Roth contribution and starts the five year clock running. You need this to access your Roth conversions, which can only be accessed without taxes on earnings after the Roth has been open for five years. Once that five years pass and you’re over 59 1/2 there will be no more tax on withdrawals.
If you can, you should build up some after tax funds in a brokerage account that will eventually be used to pay tax on your future Roth conversions. Choosing to pay the taxes on your conversions by withholding from the converted funds is not the most efficient way to convert because you have to withdraw additional funds for taxes, then you also pay tax on that.
Hope this helps.

There's a good Fidelity article on how to pay for Roth conversions.

 

[Dash man]

There's a good Fidelity article on how to pay for Roth conversions.

Do you have a link? That would help folks out.

 

[G-Man]

Do you have a link? That would help folks out.

https://www.fidelity.com/viewpoints/retirement/roth-ira-conversion-after-50

 

[SevenUp]

Backdoor Roth - Bogleheads for the backdoor Roth process, and Roth IRA conversion - Bogleheads for that choice, are good wiki articles.

The latter includes links to a couple of spreadsheet tools that can be useful for those so inclined.

 

[G-Man]

I opened up the Traditional and Roth IRA with Fidelity tonight. Funded it as well. Will wait several days to transfer the funds from the TIRA to the Roth.

Will setup my wife in next several days.

Thanks everyone for the advice so far.

 

[Dash man]

I opened up the Traditional and Roth IRA with Fidelity tonight. Funded it as well. Will wait several days to transfer the funds from the TIRA to the Roth.

Will setup my wife in next several days.

Thanks everyone for the advice so far.

There’s no reason to wait to transfer the funds to the Roth. Any earnings will require taxes. I know it won’t be much, I just like the least complications possible. [emoji38]

 

[G-Man]

There’s no reason to wait to transfer the funds to the Roth. Any earnings will require taxes. I know it won’t be much, I just like the least complications possible. [emoji38]

I just added the dollars to the TIRA. I thought it needed a couple days to settle before I can transfer it to the Roth IRA.

 

[Dash man]

I just added the dollars to the TIRA. I thought it needed a couple days to settle before I can transfer it to the Roth IRA.

I know I did it the same day when I used to do it. I guess it depends on your broker.

 

[G-Man]

Some of the representatives at Fidelity are not educated on the Roth back door process. They are telling me that the TIRA are pre-taxed dollars and when I transfer over to the Roth IRA I need to pay taxes on that money.

 

[G-Man]

I know I did it the same day when I used to do it. I guess it depends on your broker.

I tried and it will not allow me yet.

 

[G-Man]

I also need to figure out what low cost index fund I want to invest the Roth IRA dollars in. Any suggestions?

 

[SevenUp]

Some of the representatives at Fidelity are not educated on the Roth back door process. They are telling me that the TIRA are pre-taxed dollars and when I transfer over to the Roth IRA I need to pay taxes on that money.

Fidelity will issue a 1099-R documenting the transfer of money from traditional to Roth.

You will need to file Form 8606 documenting the fact that your contribution to the traditional IRA was not deducted - note: make sure you don't deduct it on line 20 of https://www.irs.gov/pub/irs-pdf/f1040s1.pdf - and thus none of the transfer (assuming no gains) is taxable.

Fidelity has no idea of how you file your taxes. They may have to warn you about potential taxability as a "cover their legal rear end" action.

Do make sure you understand how Form 8606 should look. Too often tax software's Q&A leads people to file an incorrect version.

 

[SevenUp]

I also need to figure out what low cost index fund I want to invest the Roth IRA dollars in. Any suggestions?

FSKAX is one reasonable choice.

 

[G-Man]

Fidelity will issue a 1099-R documenting the transfer of money from traditional to Roth.

You will need to file Form 8606 documenting the fact that your contribution to the traditional IRA was not deducted - note: make sure you don't deduct it on line 20 of https://www.irs.gov/pub/irs-pdf/f1040s1.pdf - and thus none of the transfer (assuming no gains) is taxable.

Fidelity has no idea of how you file your taxes. They may have to warn you about potential taxability as a "cover their legal rear end" action.

Do make sure you understand how Form 8606 should look. Too often tax software's Q&A leads people to file an incorrect version.

I use TurboTax. I found this great article on how to report a backdoor Roth IRA in TurboTax. It looks like TurboTax will fill out Form 8606 based on how you answered questions in TurboTax. I hope this is helpful to others.

https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/

 

[SevenUp]

Do make sure you understand how Form 8606 should look. Too often tax software's Q&A leads people to file an incorrect version.

I use TurboTax. I found this great article on how to report a backdoor Roth IRA in TurboTax. It looks like TurboTax will fill out Form 8606 based on how you answered questions in TurboTax. I hope this is helpful to others.
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/

Yes - it's that "how you answered questions in TurboTax" part that sometimes trips folks up.

Backdoor Roth Archives - The Finance Buff has links to similar articles for other tax software.

 

[Gumby]

Some of the representatives at Fidelity are not educated on the Roth back door process. They are telling me that the TIRA are pre-taxed dollars and when I transfer over to the Roth IRA I need to pay taxes on that money.

And they are generally correct about that. But, in this case, you will be funding the tIRA with non-deductible dollars. So, when you eventually sell to convert to Roth, you will have as a basis the full amount of the money you put in. You will only need to pay tax on any increase in the account value between the time you buy into it and the time you sell to contribute to a Roth.

They have no way of knowing that you won't be deducting the tIRA contribution on your taxes this year. Most people do. So they assume you have zero basis and the full Roth conversion will be taxable. But they don't make that determination next year when you pay taxes. You do (subject to the IRS looking over your shoulder).

I'm not certain about Fidelity, but with Vanguard, you tell them when you convert how much, if any, you want withheld for taxes. You'd probably just tell them zero.

 

[G-Man]

This youtube video below is has confused me on when the 5 year clock start for me to withdraw money from my Roth IRA tax free.

I just opened a ROTH IRA yesterday and will do the back door roth conversion in a day or two. Those funds will not be available for me to withdrawn tax-free until age 61 (5 years from now).

Based on this youtube video, the back door ROTH conversions for next year will not be available for me to withdrawn until age 62.

I thought once you opened a ROTH IRA and do a conversion, the 5 year clock starts and any subsequent conversions does not start a new 5 year clock on those conversions.

Please help.

 

[Dash man]

This youtube video below is has confused me on when the 5 year clock start for me to withdraw money from my Roth IRA tax free.



I just opened a ROTH IRA yesterday and will do the back door roth conversion in a day or two. Those funds will not be available for me to withdrawn tax-free until age 61 (5 years from now).



Based on this youtube video, the back door ROTH conversions for next year will not be available for me to withdrawn until age 62.



I thought once you opened a ROTH IRA and do a conversion, the 5 year clock starts and any subsequent conversions does not start a new 5 year clock on those conversions.



Please help.

Ages 59 ½ or older:

If you’ve met requirements for the five-year rule, you can withdraw money from your Roth without any taxes or penalties.

If you haven’t yet met requirements for the five-year rule, your earnings will be subject to income taxes (but not penalties)

You can access contributions anytime after 59 1/2, just the earnings are taxed.

 

[cathy63]

This youtube video below is has confused me on when the 5 year clock start for me to withdraw money from my Roth IRA tax free.

I just opened a ROTH IRA yesterday and will do the back door roth conversion in a day or two. Those funds will not be available for me to withdrawn tax-free until age 61 (5 years from now).

Based on this youtube video, the back door ROTH conversions for next year will not be available for me to withdrawn until age 62.

I thought once you opened a ROTH IRA and do a conversion, the 5 year clock starts and any subsequent conversions does not start a new 5 year clock on those conversions.

Please help.

All of the funds in your Roth IRA will be available tax and penalty free on January 1, 2027. That's the start of the 6th tax year after the one in which you opened the account and you'll be 59 1/2 by then.

 

[G-Man]

All of the funds in your Roth IRA will be available tax and penalty free on January 1, 2027. That's the start of the 6th tax year after the one in which you opened the account and you'll be 59 1/2 by then.

Can someone point me to the tax code. Trying to prove to my friend that this is how it works.