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Back Door Roth Conversion Time
Old 03-17-2020, 10:39 AM   #1
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Back Door Roth Conversion Time

In June 2016, when Britain dropped out of the European Union, BREXIT, I asked the question on line, I know the market is going to drop, how can I take advantage of that? I was advised that it was a great time to do a Roth Conversion. This seems to be another one of those situations.

AAPL closed at 327.20 on Feb 12 and it closed at 242.21 on Mar 16, about a 26% drop which should recover when the market does.

Moving 50 shares of AAPL from your Traditional IRA to your Roth was a $16,360 conversion in February. Assuming a 30% combined Federal, State, and Local tax rate, the dollar cost would have been $4,908 or 30% of the shares so only 35 shares would be in your Roth.

Doing the same conversion today would only be $12,110, $3,633 in taxes. Using the shares for taxes would result in the same 35 shares in your Roth.

Doing the conversion with zero taxes withheld and paying the taxes from an alternative source, a Back Door Roth Contribution, would allow the entire 50 shares to move to the Roth while saving you about $1,275 in taxes.
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Old 03-17-2020, 11:10 AM   #2
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I am still holding off on our conversion this year. I think (fear) I'll be able to save even more on taxes for the same number of shares.
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Old 03-17-2020, 01:44 PM   #3
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This just sounds like timing a regular Roth conversion to me. I thought the "Back Door Roth Contribution" was contributing to a non-deductible IRA and then quickly converting that money to a Roth and you could not have any other money in a traditional IRA to do this "Back Door Roth Contribution".
Doing a Roth conversion of equity shares during a pullback will either result in a) fewer taxes or b) more shares converted for the same total $.
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Old 03-17-2020, 02:06 PM   #4
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Quote:
Originally Posted by N02L84ER View Post
This just sounds like timing a regular Roth conversion to me. I thought the "Back Door Roth Contribution" was contributing to a non-deductible IRA and then quickly converting that money to a Roth and you could not have any other money in a traditional IRA to do this "Back Door Roth Contribution".
Doing a Roth conversion of equity shares during a pullback will either result in a) fewer taxes or b) more shares converted for the same total $.
I think the OP just mis-titled this thread based on the discussion on the first post. Agree, no sense doing a traditional "one day" back door at this time.

For those of us with old, heavily appreciated traditional IRAs that we plan to keep invested, this is a good time as any. It isn't exactly the same as predicting the market, although it has some elements of that.
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Old 03-17-2020, 02:24 PM   #5
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Quote:
Originally Posted by N02L84ER View Post
This just sounds like timing a regular Roth conversion to me. I thought the "Back Door Roth Contribution" was contributing to a non-deductible IRA and then quickly converting that money to a Roth and you could not have any other money in a traditional IRA to do this "Back Door Roth Contribution".
Doing a Roth conversion of equity shares during a pullback will either result in a) fewer taxes or b) more shares converted for the same total $.

There is an annual limit on the amount that you can “contribute” to a Roth account each year.

To the best of my knowledge there is no limit on how much Traditional IRA you can convert to Roth, AND, to the best of my knowledge there is no rule that says the taxes on a conversion must come from the converted assets. This gives you the ability to pay those taxes from another source, basically “contributing” the tax dollars to your Roth, AND, the tax dollars paid do not count toward your annual contribution limit.

You can only contribute $6,000 to your Roth in 2020, but you can do a $100,000 Roth conversion and pay the $30,000 or $35,000 in taxes from another source so that the entire $100,000 ends up in your Roth.
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