Backdoor Roth Question

[saltywalden]

Hello All, I'm new to the group and will post an introduction in the appropriate forum soon.

I'm looking to get some help from you all regarding the backdoor Roth conversion as I just became aware of its existence and want to take advantage of it but don't want to mess anything up.

My details:

I contribute maximum amount to an employer sponsored (TSP) retirement plan, DW has income but had no access to an employer sponsored plan in 2020. Together we make over the Roth income limit. Here is what I understand I can do, is this correct and is there any reason not to do this:

1. Open a Vanguard traditional IRA and put in $6,000 from my bank account and select that I'm contributing for 2020.
2. Open a Vanguard Roth IRA and immediately convert the $6,000 I just put in the tIRA into my Roth IRA.
3. Do it again for 2021.

Is it that simple? Is there anything I have to do on my taxes at this point other than just not claim the original tIRA contribution. Can DW do the same thing with another $6,000?

It seems too simple to be something I've never heard of until recently so I'm very concerned I'm missing something.

Thank you!

[Dash man]

Yes, plus you can do it again for your spouse.

[Onward]

You need to let the $6k sit in your Traditional IRA for a while. If you convert immediately it can raise red flags with IRS, due to it being "in effect" a Roth contribution, which your income disqualifies you from.

How long does it need to sit in your TIRA? Consensus seems to be at least a year.

That is what I have read and understand, at least.

[SecondCor521]

You can make the contribution on one day and then do the conversion the next day. There is no need to wait for anything other than for Vanguard to process the contribution.

Each tax year which you do the backdoor Roth, you will need to complete Form 8606, Parts I and II, and file it with your tax return.

You will of course need to do any backdoor Roth for 2020 by 4/15/2021, but I think you knew that.

You will of course have to have earned enough in 2021 to make the IRA contributions for 2021, but I think you knew that as well.

(There are some finer details if the money happens to earn some interest or dividends while it is in the traditional IRA for that day or two. Nothing you can't learn to handle, but if you're just starting out doing this you may want to leave the money in a money market and do the conversion quickly enough to where there isn't any real change in value from the $6K contribution.)

I think you can also open an empty Roth IRA in parallel with setting up the traditional IRA and making the traditional IRA contribution. That way you can have it ready to receive the conversion as quickly as possible.

I think you can also leave the traditional IRA open from year to year; there's no need to open a new one every year, but I think you may have known that also.

[saltywalden]

Thank you so much, this was super helpful!

It seems so convoluted, but I guess a lot of our tax laws are, I just couldn't help but think I must be doing something wrong.

My spouse has about $50k pre-tax dollars in an IRA from years ago, I think we'll just by-pass doing the backdoor Roth for her right now, seems like too much of a hassle to start down the pro rata path at the moment, maybe she'll be able to roll that into an employer plan in the future.

[RunningBum]

https://www.merriman.com/wealth-enha...on-your-taxes/ looks to have a good explanation of how to do your taxes for this. I have not done a backdoor Roth myself.

[karen1972]

The best way to think about this is in two parts.

BTW, the change in rules was done in like 2006 and went into effect 2010 so has been around a long time.

1. You are allowed to contribute to a traditional IRA regardless of income, just it is not always tax deductible and in this case you dont' want to take the tax deduction. That is what you are doing, putting in after tax dollars.

Also

2. You are allowed to do Roth conversions as long as you pay any taxes due at that time (thus if you put in after tax dollars, don't take the tax deduction, and don't make any profit, all the money is already taxed so the additional tax is on zero dollars, thus zero). NOTE: that is based on the fact you don't have any other IRAs open that may have you fall into the pro rata rules

So those 2 rules together make the backdoor IRA.

[Onward]

Here's why I think it's wise to let your funds sit in your TIRA for a year before converting:

Quote:

In the context of the backdoor Roth contribution, this means if the separate steps of non-deductible IRA contribution and subsequent conversion are done in rapid succession, there is a risk that if caught the IRS and Tax Court may suggest that the intent was to make an impermissible Roth contribution… and then disallow it (and potentially apply an excess contribution penalty tax of 6%), if the individual’s income was too high to qualify in the first place.

Kitces: How To Do A Backdoor Roth IRA (Safely)

[Dash man]

Quote:

Originally Posted by Onward Here's why I think it's wise to let your funds sit in your TIRA for a year before converting: Kitces: How To Do A Backdoor Roth IRA (Safely)

That article was in 2015 if I recall. This one is from 2018:

https://www.currentfederaltaxdevelop...tion-technique

[Love This Community]

You could do $12,000 for 2020 (6K for each spouse). You could also do $12,000 for 2021 (6K for each spouse).

I just went through this exercise. Open an IRA Account. Make sure funds are available after transfer. It took about 3-4 days for them to set up my new account, verify the bank accounts and make the funds available.

Open Roth IRA and then make the transfers. My accountant suggested that I do 4 separate transactions (6K each) so there is no confusion around at the time of filing the returns. I didn’t bother to validate this since it was just 4 clicks for me instead of 2.

Good luck!

[Onward]

Quote:

Originally Posted by Dash man That article was in 2015 if I recall. This one is from 2018: https://www.currentfederaltaxdevelop...tion-technique

Good info. I wish they had been more explicit about the timing of the conversion. IMO it's still a grey area, at best.

[bingybear]

Remember that you can have one TIRA at most. You may have several accounts, but 1 TIRA. you pay tax pro rata in your TIRA The back door roth assumes that you there is no TIRA except during a quick conversion.