Backdoor Roth IRA contributions still allowed in 2012, right?

[tmm99]

I have been doing the conversion the last couple of years. I actually started putting money in the after tax TIRA a few years before in preparation. I used to have a before tax rollover IRA, but I rolled it over into my current 401K beforehand so I wouldnt have to worry about paying taxes when I started the conversion . Vanguard told me to just wait a day in between so I wait one day and convert the next day. It works for me. I don't know when they will change the rules on us, but until they do, I am planning to do the conversion every year.

 

[RE2Boys]

Yep, you can't cherry pick which T-IRA account your going to convert to a Roth IRA as far as the IRS is concerned. Even though you may have multiple T-IRA accounts, you need to treat them as one and file Form 8606 with your tax return to allocate the basis and the taxable vs non-taxable parts of your conversion. Of course, if you don't have a basis (non-deductible portion of your T-IRA). Then it's a moot point.

If you ever make a non-deductilbe contribution to a T-IRA, you MUST also file Form 8606 for that year of contribution, or the IRS will deem that the full conversion is taxable.

I've been holding off converting an old 401k account to a T-IRA as I've non-deductible contributions. Once I get the T-IRA converted to Roth, then I'll move the 401k to T-IRA to give me more flexibility.

 

[Ed_The_Gypsy]

RE2Boys, thanks!

That explains everything to me.

 

[ERD50]

ERD50: I had a small post-tax contribution in my 401K, and when I rolled it over to a Trad IRA, the broker would only accept the pre-tax portion, no blending (this may be by law).

ERD50.....I have no knowledge about this but I would have thought that somehow the post tax part could have been converted to a Roth....maybe it would have to be done separately?

Probably, but it was only ~ $2500, so I didn't bother to look into it at the time. Someone might be able to benefit from that though.


-ERD50

 

[SpencerM]

OK...so if we have existing regular IRA's with significant balances will this work? From my understanding if I try the 'backdoor Roth' contribution I will face the aggregation issue with the IRS and I will owe taxes even on a fresh deposit - fresh IRA.

Is this correct? Seems like this effectively would eliminate the benefit of the 'backdoor Roth contribution' for those who have not already converted existing regular IRAs. Am I missing something here?

Thanks, SM

 

[thefinancebuff]

OK...so if we have existing regular IRA's with significant balances will this work? From my understanding if I try the 'backdoor Roth' contribution I will face the aggregation issue with the IRS and I will owe taxes even on a fresh deposit - fresh IRA.

Is this correct? Seems like this effectively would eliminate the benefit of the 'backdoor Roth contribution' for those who have not already converted existing regular IRAs. Am I missing something here?

Thanks, SM

Yes it is correct. You will need to "hide" the existing pre-tax IRAs in a qualified plan (employer's or your own solo 401k) before you do the backdoor Roth. In my view without this crucial first step, you are really not doing the backdoor Roth. The definition for a backdoor Roth includes this step. Otherwise you are just doing a regular partial Roth conversion.

 

[SpencerM]

Yes it is correct. You will need to "hide" the existing pre-tax IRAs in a qualified plan (employer's or your own solo 401k) before you do the backdoor Roth.

FB, please explain "hiding" a pre-tax IRA. If you have a regular IRA, and a 403B/401K already, how do you do this??

SM

 

[thefinancebuff]

FB, please explain "hiding" a pre-tax IRA. If you have a regular IRA, and a 403B/401K already, how do you do this??

SM

Roll over the pre-tax money in your IRA into your 403b or 401k at work. Or if you have or create some self-employment income, you can set up a solo 401k and roll over into your solo 401k. That way you are not limited by the poor investment options in your employer's plan.

 

[Nova]

The following reference describes the post tax 401k (what ever you may have) dilema. I had a very small dollar amount (~$1K) of post-tax 401k compared to the "big pot" of all of my IRA funds. I recently did a rollover from an old 401k and the administrator cut me a check for the after tax (basis) portion of the 401k before they sent the balance of the funds to Fidelity. I called IRS twice regarding the after tax dollars. After two lengthy discussions with two seperate IRS specialist (I won't complain about how many people or how much time I spent on the phone) who both agreed that the after tax contributions (basis) could be deposited into my Roth IRA (one specialist said it must be done by the 401k administrator (who refused to reopen my closed account with them), the other said it could be sent to the Roth using a 60 day rollover. Neither IRS specialist said anything about the pro rata rule. Fidelity said they would do what I instructed them to do but said their "specialist" advised against such action because of the pro rata rule. BTW, the smaller the "basis" is in relation to the overall IRA (all of them combined if you have more than one), the more onerous the pro rata rule becomes: if the "basis" is only 1% of your total IRA funds, then for each dollar converted to a Roth, 99% will be treated a pre tax dollars. In my case, I had alread converted as much IRA to Roth as I could afford in 2011. I didn't want to muddy those waters, so I banked the $1K.

The Pro Rata Rule

 

[wanaberetiree]

A lot of comments here make sense, but I still can't say I know how to use so-called "backdoor Roth IRA" trick.

Here is the specific info:

- $300K in IRA (not 401-K)
- $10K in ROTH IRA
- AGI ~180K

I would love to contribute some $$ to non-deductible IRA (does it have a limit BTW?) and convert to Roth, but I don't want pay much in taxes.

What are my options?

 

[thefinancebuff]

A lot of comments here make sense, but I still can't say I know how to use so-called "backdoor Roth IRA" trick.

Here is the specific info:

- $300K in IRA (not 401-K)
- $10K in ROTH IRA
- AGI ~180K

I would love to contribute some $$ to non-deductible IRA (does it have a limit BTW?) and convert to Roth, but I don't want pay much in taxes.

What are my options?

The limit is $5,000 per person per year; $6,000 if you are over 50. If you still have access to a 401k plan, follow the steps here:

Backdoor Roth: A Complete How-To