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Roth conversion
Old 03-23-2019, 06:58 PM   #1
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Roth conversion

If you had 65k in 2 traditional IRAs and currently doing back door roths yearly would you consider paying the taxes now and converting them all at once? Or wait it out til retirement and try to convert a large sum. Or convert chunks over the next several years? Torn thinking about years of tax free growth vs waiting til retirement 14yrs and converting lump sums and controlling the income tax bracket more closely. We want to do the right thing. We will be living off of Roth and brokerage accounts more than likely from 51 to 59.5.
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Old 03-23-2019, 07:12 PM   #2
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It's a case-by-case decision, and not likely to be helpful to make a suggestion without fully knowing your situation. And I have a hard enough time with trying to do my own correctly that I wouldn't want to try someone else's.

Generally speaking you want to smooth out your taxes over the years. It probably wouldn't make much sense to convert at 25% now if you could convert at 12% later, in that time between ER and collecting SS. But there are also things like ACA subsidies to think about. I retired at a similar age and my plan is to continue small conversions up to age 65, then 5 years of somewhat larger conversions to try to finish conversion before starting SS at (probably) 70.

There could be other factors like making a larger conversion in a downturn, where you'd pay less taxes and let the recovery happen in the tax free Roth, if you can figure out the market timing for that.
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Old 03-23-2019, 07:34 PM   #3
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Originally Posted by Penny6 View Post
If you had 65k in 2 traditional IRAs and currently doing back door roths yearly would you consider paying the taxes now and converting them all at once? Or wait it out til retirement and try to convert a large sum. Or convert chunks over the next several years? Torn thinking about years of tax free growth vs waiting til retirement 14yrs and converting lump sums and controlling the income tax bracket more closely. We want to do the right thing. We will be living off of Roth and brokerage accounts more than likely from 51 to 59.5.
If you had TIRA with 65k, then how do you do a backdoor roth? A back door roth is typically defined as doing a non-deductible TIRA contribution that is followed by a roth conversion. If you have an existing TIRA you will need to consider the tax basis in all of your TIRA's when doing the roth conversion, not just the basis in your most recent contribution. The IRS considers all of your TIRAs as one TIRA no matter how many accounts you may actually have.
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Old 03-23-2019, 08:15 PM   #4
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I left a job to become a sahm and converted a 403b to TIRA. We have crossed limit for direct Roth contributions so we have been doing TIRA contributions then backdoor into ROTHs for the last couple of years. We want to get the chunk in to grow tax free for potential future gap years use or possible inheritance purposes.
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Old 03-23-2019, 08:31 PM   #5
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Originally Posted by Penny6 View Post
I left a job to become a sahm and converted a 403b to TIRA. We have crossed limit for direct Roth contributions so we have been doing TIRA contributions then backdoor into ROTHs for the last couple of years. We want to get the chunk in to grow tax free for potential future gap years use or possible inheritance purposes.
Sure. But the problem bingybear is aluding to is that if you have a TIRA from your 403b with zero basis and then do a backdoor Roth by making a non-deductible TIRA, then your subsequent conversion to Roth is considered to be taken pro-rata from both portions of your TIRA (or both TIRAs if you're using separate accounts).

Suppose you have $95K in your 403b-originated TIRA and you contribute $5K to another TIRA and then convert that $5K to a Roth.

What you think you're doing is moving $5K from that second TIRA into your Roth. But the IRS looks at it as one virtual $100K TIRA and that you converted $4,750 (5% of $95K) from your 403b-originated TIRA and converted $250 (5% of $5K) of your second TIRA.

And unfortunately the law doesn't give you the choice, and the law doesn't care which TIRA account the funds actually came from.

Further unfortunately, if you've been doing this for several years, I'm not sure if there's any clean way to undo it. If you want to do things properly, you probably need to go back and amend the past several years of income taxes to reflect things accurately. You'll at least need to file Form 8606 for the applicable years, as well as amend your federal income taxes, because you'll owe ordinary income tax on the portion of the conversion that was attributed to the 403b portion - so in the example above you'd owe ordinary income taxes on an additional $4,750 of income.

A second effect which you'll need to know is that your basis in your Roth is different between a clean backdoor Roth and a pro-rata backdoor Roth that you evidently have done. You can google "pro-rata Roth conversion" and probably get some more information.

I'm sad to be the bearer of bad news.
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Old 03-23-2019, 10:32 PM   #6
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Wouldn't this have already been taken care of in the years that OP performed Roth conversions or made non-deductible IRA contributions?

In both of these cases a correctly filled out IRS form 8606 is part of the process and would be available as part of her income tax return for the year.

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Old 03-23-2019, 10:41 PM   #7
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Wouldn't this have already been taken care of in the years that OP performed Roth conversions or made non-deductible IRA contributions?

In both of these cases a correctly filled out IRS form 8606 is part of the process and would be available as part of her income tax return for the year.

-gauss
'annual 8606 filer since 2009'
I think the concern is that, based on what OP has written here so far, she or her tax preparer did not fill out Form 8606 at all or did not fill it out correctly.

OP, do any of your federal income tax returns for the past several years include a Form 8606?
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Old 03-23-2019, 11:08 PM   #8
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I converted last year and will convert this year to the maximum of the 24% bracket. A big factor was the influence of the effect of Medicare premiums, RMDs, the start of SSI, and the probable movement from the married brackets to the single brackets. Now is the time for me to do this before Medicare and SSI. Once RMDs kick in I won't have any options left. After this year I will only convert to the 22% tax bracket. I ran out a long term spreadsheet, ran the numbers in iORP and FIRECALC. Considering no-one knows the future, use your best assumptions and make your best call.
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Old 03-23-2019, 11:27 PM   #9
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Originally Posted by Penny6 View Post
If you had 65k in 2 traditional IRAs and currently doing back door roths yearly would you consider paying the taxes now and converting them all at once? Or wait it out til retirement and try to convert a large sum. Or convert chunks over the next several years?
Can you afford to pay taxes on the amounts you convert now?

Generally, traditional IRA's are the better option if you expect to be in a lower tax bracket in retirement. Roth is better if you expect to be in a higher tax bracket.

We're in the 12% bracket now and expect to be in the same bracket after retiring (in less than five years). The difference between a tIRA and a Roth is minimal in our situation. However, tax rates are at historical lows and will likely increase in the future. I would also like to avoid being forced to take RMD's later in retirement. We can afford to pay taxes now, so I am converting 10K-20K each year (as much as I can to stay within our 12% bracket). I should have the majority of my tIRA converted by the time we retire, and can live on the remainder of my tIRA over the first few years of retirement.
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Old 03-24-2019, 10:51 AM   #10
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Originally Posted by SecondCor521 View Post
Sure. But the problem bingybear is aluding to is that if you have a TIRA from your 403b with zero basis and then do a backdoor Roth by making a non-deductible TIRA, then your subsequent conversion to Roth is considered to be taken pro-rata from both portions of your TIRA (or both TIRAs if you're using separate accounts).

Suppose you have $95K in your 403b-originated TIRA and you contribute $5K to another TIRA and then convert that $5K to a Roth.

What you think you're doing is moving $5K from that second TIRA into your Roth. But the IRS looks at it as one virtual $100K TIRA and that you converted $4,750 (5% of $95K) from your 403b-originated TIRA and converted $250 (5% of $5K) of your second TIRA.

And unfortunately the law doesn't give you the choice, and the law doesn't care which TIRA account the funds actually came from.

Further unfortunately, if you've been doing this for several years, I'm not sure if there's any clean way to undo it. If you want to do things properly, you probably need to go back and amend the past several years of income taxes to reflect things accurately. You'll at least need to file Form 8606 for the applicable years, as well as amend your federal income taxes, because you'll owe ordinary income tax on the portion of the conversion that was attributed to the 403b portion - so in the example above you'd owe ordinary income taxes on an additional $4,750 of income.

A second effect which you'll need to know is that your basis in your Roth is different between a clean backdoor Roth and a pro-rata backdoor Roth that you evidently have done. You can google "pro-rata Roth conversion" and probably get some more information.

I'm sad to be the bearer of bad news.
Great explanation of the issue that some folks are not aware.
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Old 03-24-2019, 08:30 PM   #11
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The 8606 has been filed appropriately on the money, the taxes were paid and it was considered income the year it was rolled over. I never said it was not. All money that has been added has been non deductible TIRA contributions and back door to the Roth IRA. We are now trying to if it is advantageous to roll it over in lump sum now or wait til later. Our effective tax brackets in '16 was 14.2% '17 was 14.5% 18' was 10.9%. We do have the money to pay any additional taxes we would incur. We do not want the headache of RMD with this account and are undecided about strategy for 401k (may leave it til RMD or convert to IRA, depends if he gets pension). We will have a sizeable brokerage and Roth account as well as 401k, a lump sum payout of a retirement account and a potential pension.
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Old 03-25-2019, 07:43 AM   #12
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The 8606 has been filed appropriately on the money, the taxes were paid and it was considered income the year it was rolled over. I never said it was not. All money that has been added has been non deductible TIRA contributions and back door to the Roth IRA. We are now trying to if it is advantageous to roll it over in lump sum now or wait til later. Our effective tax brackets in '16 was 14.2% '17 was 14.5% 18' was 10.9%. We do have the money to pay any additional taxes we would incur. We do not want the headache of RMD with this account and are undecided about strategy for 401k (may leave it til RMD or convert to IRA, depends if he gets pension). We will have a sizeable brokerage and Roth account as well as 401k, a lump sum payout of a retirement account and a potential pension.
I think at least my issue is that I understand a backdoor roth is where you do a non-deductible TIRA contribution and convert this to a roth without having other TIRA's that can add to the conversion taxes. If your TIRA has a low percentage of basis, this could cause you to almost double your taxes on the roth conversion.

If I understand what you've done is a roth conversion, not a backdoor roth.

I've never done a backdoor roth because I rolled 401k's to TIRAs before roths existed. I have done roth conversions through.
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Old 03-25-2019, 07:47 AM   #13
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If you expect to be in a higher tax bracket later, I would convert within a lower bracket now where you can.
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Old 03-25-2019, 07:52 AM   #14
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The Pro Rata rule comes into play with Traditional IRA and trying to do Back Door Roths.

Something is amiss.

You are also confusing Roth Conversions with Back Door Roth.
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Old 03-25-2019, 05:41 PM   #15
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You are also confusing Roth Conversions with Back Door Roth.

Yes I did more reading I had it wrong. The conversions are what have taken place yearly. The funds in the IRA are nondeductible contributions that are converted to ROTHS. I'm not super savy on all this but would like to be informed and have found this forum to be very helpful. TY for the input. It is alot of responsibility thinking about creating a future nest egg and also possible inheritance for our children 32 and 36yr old. We will both be first generation and want to be good stewards over these funds.
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Old 03-25-2019, 06:15 PM   #16
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You are also confusing Roth Conversions with Back Door Roth.

Yes I did more reading I had it wrong. The conversions are what have taken place yearly. The funds in the IRA are nondeductible contributions that are converted to ROTHS. I'm not super savy on all this but would like to be informed and have found this forum to be very helpful. TY for the input. It is alot of responsibility thinking about creating a future nest egg and also possible inheritance for our children 32 and 36yr old. We will both be first generation and want to be good stewards over these funds.
You might want to read up on the pro-rata rule and how it applies to your Roth conversions. I'm still not convinced that you understand it. But I realize I may be beating a dead horse so this will be my last post on the subject.
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