(I have no financial interest in the finance buff, just found it a really helpful guide!). Pay taxes on $1? The individual 401k seems to be the critical link to make this happen. Excellent and timely post. Backdoor Roth IRA: A method that taxpayers can use to place retirement savings in a Roth IRA , even if their income is higher than the maximum the IRS allows for regular Roth IRA … Congratulations! You could save almost a dollar in tax with that trick! So the (now) 0.86 is still sitting there. Also I was at my specialties national conference in SD, and the locumtenems group was talking about how they had you come talk at the EM and Ortho event they did. Which would really suck obviously. Sorry, didn’t mean IRA- just different plan…. The client's 1099-R forms showed the Roth conversion amount, McNamara says, while another form, Form 5498, showed the IRA contribution amount. Why do you say “this doesn’t work so well if you have a business where each year you are making SIMPLE or SEP contributions”? What if I decided to go through the hassle and roll that $60 back into my 401(k) to save the taxes on it? Whatever. Currently I just use TurboTax, have you found any big discrepancies? No. And fix it this year by rolling it over with your 2016 and 2017 contributions. The last time I looked at that issue they didn’t take rollovers. Okay I agree with all that. I have a couple of properties and a fat traditional IRA that has so far scared me away from a backdoor Roth. Hope they change soon. A backdoor Roth IRA is completely legal and most online brokers have systems set up to handle it. © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. Shovel a driveway. Only on deduction. But the way the rules are written, a business making money is enough to open a 401(k). I just did the Backdoor Roth IRA for the first time and was appalled to find out that over the three days I had that $6,000 in a money market fund in the traditional IRA before conversion it earned 37 cents in interest. See Kay bailey Hutchinson spousal Ira limit: I procrastinated in both learning about backdoor Roths, and asked my custodian of my tIRA to clear it out and send me a check so I could roll it over into my 401k from work. You must wait two years AFTER making your final contributions into the SIMPLE to move the money out (whether this be to a 401K to reduce your IRA basis to zero to do backdoor Roths in future years, or to do a mega Roth conversion from the SIMPLE plus any contributions to nondeductible IRAs). This is my personal worry. And I realize these conversions will all go on my 2017 tax form. Only on deduction. The 2 year SIMPLE issue is yet another reason why a SIMPLE stinks. But the way the rules are written, a business making money is enough to open a 401(k). Custodians automatically provide both forms to the client and to the IRS. No kidding. So I just have to have my tIRA empty before Dec 31, and then can to the back door contribution anytime in 2018? Do I need to roll that $60 back into my work 401(k) before converting my 2016/2017 contributions from my traditional IRA to the Roth IRA? Jim, first off, thanks so much for this site. As the New Year begins, many a high-income professional who earns too much to make a direct Roth IRA contribution will use the backdoor to make a Roth IRA contribution of $6,000 or $7,000 (if age 50 or over). My wife for the first year of our marriage has no income. Need a TPA? That’s no big deal. He also included a copy of the 1099-R and Form 5498, explaining the basis in his IRA was equal to the conversion amount and that he had no other IRA balances, so the conversion was non-taxable. Backdoor Roth Tutorial Steps. Just wanted some tax diversification. Do you worry about the step transaction doctrine? Why wouldn’t you be able to continue one? The problem is you got a pro-rata-ed conversion, then rolled some after-tax money into a 401(k) and told them it was pre-tax money. I realized last night that I had $0.02 in my IRA accounts after the conversion and was planning on reading today about what to do with it. What is the “backdoor Roth for high-income earners”? I’m impressed. Of course, I also want to do the Backdoor Roth and avoid the pro-rata rule. Very timely post – was working on this today! I was under the assumption it wasn’t (pretty sure my accountant said it wasn’t when I asked him a couple years ago), but after reading this blog it’s sounding like it actually is. Or not since it was not converted? Why don’t you? Pay taxes on $1? I’ve discovered there is still $60 in my Rollover IRA. I'll bet the law gets changed before this ever gets tested in tax court because after 8 cycles now, nobody in Congress nor the IRS seems to really care. But now you know why I recommend you do the 2016 contribution and the 2016 conversion in 2016. If you have one or two employees in your practice and they turn over every three years (which happens a lot), then you don’t have to match them. https://www.irs.gov/pub/irs-pdf/f5500ez.pdf. I contributed 5.5k to a tIRA with 23k in it with initial contribution yrs ago pretax of 5.5k I.e with about 17.5k of gains in 2016 and converted the entire sum to Roth fully understanding that I will be taxed on the 23k. Contribution to tIRA was in 2016, but not rolled over into Roth until 2017. So what can you do? if I have rental properties can I count that? I’m in the exact same boat. Additionally, you advocate putting IRA money into a solo 401K. Although it can be straightforward, it can also be … Here's another little trick a lot of people may not know about. Now if the IRS came up and said you owed another $200K, it might be worth hiring representation. (Describing the tax code as perverse is nothing new, of course. It would be nice if I was wrong, but I don’t think I am. You can still do 2016. Earn over $600 and file a 1099. I’m sure this depends heavily on the person’s circumstances, but let’s say it’s a hospital employed physician with IRA, HSA, and backdoor Roth contributions, also a homeowner/itemizer… aka me! Kind of a side question but I’ve been wondering about this – doing taxes by hand and checking on TurboTax. You're allowed to contribute the lesser of your earned income or $6,000 in a traditional IRA, which can then be converted to a backdoor Roth IRA. Now why would one feel the need to do this? I think the difference is I put mine in the sweep account (Federal MMMF) and it was there 2 days. Apply for an EIN and viola, you’re self employed. People often freak out about having a few extra cents. I then move the money into my former mega health system’s Fidelity 401k (which has a SP 500 fund with expense ratio of 0.01%) and then do a backdoor roth with vanguard. (Dear tax preparer, please don't be offended if you were sent this link. Now I have $0.56 sitting in my traditional IRA account. https://www.irs.gov/pub/irs-pdf/f5500ez.pdf. Work your way through the 8606 and you’ll see why. (they couldn’t send a check directly to 401k custodian). So my basis for 2017 will be $1, contributed $5,500 and converted $5,500 with $1 left over again. Backdoor Roth IRA contribution limit. Then covnert $5,500.56. The client prepares his own tax returns, he adds. Easier paperwork. Babysit someone's kid. Not that it matters, but for the Vanguard users out there who convert a day or two after making the tIRA contribution, just give it s few weeks and the stray cents from the money market dividend will auto sweep into the Roth. I think you’re asking about the situation that this post addresses: When you sort out the SIMPLE issue (by rolling it into a 401(k), then you can convert your non-deductible IRA with 4 or 5 years of contributions in it to a Roth IRA. That could be as much as 45-50 cents added to your tax bill! Just leaving for future reference, since I had the same question: line 14 is a basis, and cannot be negative. does it not mess up line 14 then? Very timely post – was working on this today! I contributed 5.5k to vanguard IRA and converted to Roth the next day….. turns out, my tIRA wasn’t cleared out until Jan 13th. So if … I didn’t rollover my traditional IRA to my work 401k until this month. When you sort out the SIMPLE issue (by rolling it into a 401(k), then you can convert your non-deductible IRA with 4 or 5 years of contributions in it to a Roth IRA. How much of a hassle is the 5500 form filing if you have IRA assets to rollover more than $250k? No. (Speaking of paperwork, I would love to avoid having to do this because my Rollover IRA and my work 401(k) are with two different institutions, so it is a bit of a paperwork hassle.) My only issue is the contribution was in 2016, but I didn’t rollover to Roth until 2017. The process involves making a non-deductible contribution to a Traditional IRA (filing Form 8606), and then converting that balance into a Roth IRA. I am more confused about the tIRA basis part, as like above it will have been a non deferred ira that i contributed to in 2016 along with this 2017 contribution and conversion. I don’t know what it is about the Backdoor Roth IRA that triggers this question but you are 100% right. You can then just leave it in a non-deductible IRA and invest it, or you should still be able to reverse the contribution itself, paying taxes only on the gains. I am more confused about the tIRA basis part, as like above it will have been a non deferred ira that i contributed to in 2016 along with this 2017 contribution and conversion. In personal finance and the rest of life “there are no dumb questions” and I will try to cheerfully answer every question I'm given. Understood. One is contributing to a Roth IRA via the backdoor (always a good move) and the other is pre-paying … http://www.irafinancialgroup.com/solo401kassetprotection.php. I’m in the exact same boat. You can find the eligibility details for 2020 If you have no barriers like a large IRA balance that can't be easily moved, I highly encourage you to contribute annually to a Roth IRA via the backdoor. Well that’s interesting. Sounds similar to the people who (not sure if they are still able to) keep a balance of usually <$1.00 on credit cards so that the credit card company waives the entire "balance" thereby earning someone like $12 a year per card People would make a payment right before the statement ends to get the balance down. Your advice in the post immediately above about rolling the SIMPLE into 401K misses one important caveat. You're now self-employed! If your previous employer allows rollovers from other plans, such as self employment plans, you can take advantage of this to reduce your IRA basis to zero every December 31. I contributed $5500 to my traditional IRA but then accrued $0.56 prior to the conversion. If your accountant told you that, he was wrong. (form 5329, part 1, line 4). The steps financial advisors should take to help clients safely use a backdoor Roth IRA. The easiest thing to do may be to reverse the rollover and conversion and start over if you can. Thanks for all you do!! Good for you. Thanks for the reply! See IRS publication https://www.irs.gov/publications/p590a/ch02.html. (Puts us to around 85k in our total Roths) Just wondering if there is a threshold to start putting that $ into taxable account instead. It was 87 cents. As I stare at the 8606 more, I think I understand it now. The point of a backdoor Roth IRA is to put money that would be in taxable into a Roth IRA, not to convert tax-deferred money to a Roth IRA. You’ll only pay taxes on the gains when you convert so most of it will still go into a Roth IRA tax-free. Does this cause problems for the conversion that I did last year? I thought this meant I couldn’t contribute to her Roth. Doing the contribution in 2016 and the conversion in 2017 is not a big deal. Thanks for the reply! Not that it matters, but for the Vanguard users out there who convert a day or two after making the tIRA contribution, just give it s few weeks and the stray cents from the money market dividend will auto sweep into the Roth. The alternative, if you’re not still contributing to the SIMPLE, is to convert the whole thing to a Roth, then do your backdoor Roth conversion step. Don't forget Schedule SE too. So the $60 was in my Rollover IRA when I converted the accounts (and it’s still in there). It shouldn’t matter if it’s still in there right? It’s not much of a backdoor Roth since you are paying taxes on almost the entire conversion. IRS instructions for line 10 of Form 8606 are to round to 3 decimal places. The IRS didn't really weigh in at all about the Backdoor Roth IRA for years, leaving taxpayers and advisors wondering if the step transaction doctrine could ever be applied to it. You could save almost a dollar in tax with that trick! Based on the transaction history, it looks like I received a $60 dividend from the company just days after I sold all the shares in my Rollover IRA and rolled the money into my 401(k). I’m not sure you need representation in most instances. Amazingly common question for people doing it for the first time. And I know plenty of other people in this situation. Talking about it is pretty easy but I wanted to show you what it should look like through Fidelity. Last year, I did this process for the first time, but now realize I may have an issue. Hmmm…it hasn’t done that yet for me after about 6 weeks. No. But, if the Roth 401(k) is not an option, or you just want to put away even more money to grow tax-free, and you are making too much money for the Roth IRA, enter the “backdoor Roth IRA.” This is not an actual type of account, but rather an IRS-sanctioned strategy for high-earners. Make some money. Easy to open and they also take rollovers. If you thought this job situation or this retirement plan situation was only going to last a few years you could contribute to a non-deductible IRA each year with a plan to convert it all eventually. Since it was pro-rated, part of that conversion will be taxable (a very small part) just like part of your conversion last year (a very small part like $58) is taxable. You just round down or up. The backdoor Roth IRA is an excellent conversion strategy that gives you the opportunity to contribute to a Roth even if your income is over the modified adjusted gross income phase-out ($124,000- $139,000, single or $196,000- $206,000, married filing jointly for 2020). Are you able to report income from a business even if you don’t receive a formal 1099? A backdoor Roth IRA works like this: You open a new traditional IRA, make nondeductible contributions to it, then convert it into a Roth IRA. Obviously it’s fine to use the SEP throughout the year as long as you clean it out by the end of the year. Does this affect my spouse’s accounts or just mine? Post is referencing: “Good for you. )”, I’m not exactly clear on your situation or what you’re asking. You can convert it. I advise them to continue to contribute to their nondeductible traditional IRA, after the two years is up they move the SIMPLE money to a 401K and then the nondeductible traditional money into a Roth- same advice as posted above. How does that affect the 8606? Along with my 2018 contribution? Report it on Schedule C (lines 1, 5, 7, and 31) at the end of the year. You don't need an LLC or an S Corp or even a name separate from your own. Step 1: Get an Employer Identification Number (EIN). $10 is fine, but even better if it is enough money that someone gives you a 1099 ($600+). Hmmm…it hasn’t done that yet for me after about 6 weeks. We’re now looking to contribute $11,000 for tax year 2016 and another $11,000 for tax year 2017. You're now self-employed! But that 37 cents is actually still in the traditional IRA! “If you’re using a SEP, you might as well use a 401k most of the time”…. I just filled in a hypothetical 8606 for 2016 and now realizing how much this sucks. As such I don’t have to do some complicated backdoor transaction to get her yearly contribution. The only question is whether the law will change to allow high earners to make direct Roth contributions or whether the law will change to once again disallow high earners from making Roth conversions. That’s a Roth conversion, not a backdoor Roth, but also can be useful and will certainly give you some tax diversification. That's where backdoor Roths come in, where you make a contribution to a traditional IRA … really? So maybe I got lucky and can just put it back into the tIRA, find out with the help of CPA what is pro-rata-ed and go from there. The Backdoor Roth can be thought of as a backup plan for how to contribute to a Roth IRA. Here's another little trick a lot of people may not know about. Upon conversion of the $6,000 to Roth, the IRS will see this as a … I have yet to hear about a case where the IRS gave someone a problem (other than asked a few clarifying questions) about the Backdoor Roth IRA (please send me details if you know of one) and there certainly has not been a tax court case resolving this issue. Definitely worth it to double check the software – generated forms. You need to get it back in there within 60 days though. If your accountant told you that, he was wrong. I realized last night that I had $0.02 in my IRA accounts after the conversion and was planning on reading today about what to do with it. Yeah that happened to me before. The IRS didn't really weigh in at all about the Backdoor Roth IRA for years, leaving taxpayers and advisors wondering if the step transaction doctrine could ever be applied to it. Crapola. Here’s a link to the IRS table showing the above is true: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf. Your email address will not be published. The contribution step goes on the 8606 for 2016 and the conversion step goes on the 8606 for 2017 (along with the contribution and conversion for 2017.). Just FYI I opened an individual 401k at schwab for the same purpose and it was great. Your email address will not be published. Of course, we were both pleased with the outcome.”. Oh, that’s probably good news. You’re not in the crappy situation Will is. “If you’re using a SEP, you might as well use a 401k most of the time”…. That comment refers to an independent contractor without employees. Shovel a driveway. Here’s a link to the IRS table showing the above is true: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf. … So the (now) 0.86 is still sitting there. Actually, if you don’t contribute until 2018, it doesn’t matter what your balance is on 12/31/2017. Doesn't have to be much. I haven’t done any SE work in several years — but I might tomorrow, given an attractive opportunity. Of course not. I see both points. I’m not sure you need representation in most instances. Then, in early April 2016, I opened a new traditional IRA account and contributed $5500 for the tax year 2015 and my spouse opened a new traditional account and also contributed $5500 for 2015. Maybe I should do a post on all the ways to screw up a backdoor Roth IRA and how to fix them. Why do you say “this doesn’t work so well if you have a business where each year you are making SIMPLE or SEP contributions”? What about switching from self-employed SEP to Solo 401k (i.e. You don’t even have to contribute to the solo401k anymore, just use it as a vehicle to accept rollovers from your traditional IRA prior to performing a backdoor Roth conversion each year. You can make your SEP contributions throughout the year, move it into your 401K by say December 1, and then do the backdoor roth through a traditional IRA before December 31. Do you worry about the step transaction doctrine? Report it on Schedule C (lines 1, 5, 7, and 31) at the end of the year. I’m sorry guys. Voila! (Speaking of paperwork, I would love to avoid having to do this because my Rollover IRA and my work 401(k) are with two different institutions, so it is a bit of a paperwork hassle.) And fix it this year by rolling it over with your 2016 and 2017 contributions. So if you do a Roth conversion of $6,000.37, all the IRS knows (and cares about) is that you converted $6,000. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. But I found out recently that the IRS has at least said something about it, although what they said really didn't surprise me. HR Block software screwed up my 8606 this year and it took way more effort than it should have to fix it. I try to be very clear when writing or speaking about this that you must empty that IRA out by December 31st of the year you do the conversion. But my wife’s has nothing. You must wait two years AFTER making your final contributions into the SIMPLE to move the money out (whether this be to a 401K to reduce your IRA basis to zero to do backdoor Roths in future years, or to do a mega Roth conversion from the SIMPLE plus any contributions to nondeductible IRAs). There is no pretax money in my case. At any rate, I decided I was going to write a blog post about it so I could just link to the post instead of typing out the answer over and over again in comments, the forum, and emails. Do you have any prior posts helping decide whether or not not to do the conversion with an unavoidable pro-rata situation? Apply for an EIN and viola, you’re self employed. But if you’re using a SEP, you might as well use a 401(k) most of the time. It does. More details on that here: http://finance.zacks.com/can-ira-contributions-reversed-same-year-2098.html. Rolling over an existing IRA or 401(k) is common and available to owners of either of these retirement vehicles. I sometimes consider moving that money out to fidelity to keep costs lower. E.g. It’s all for the purpose of the backdoor. Otherwise you’ll get “pro-rata’ed.” If a Roth is something you’re not interested, then going straight SEP may be advantageous. As I just did the conversion I just want to make sure I did not mess it up. Hers went into Prime MMF for just a day, which isn’t technically the sweep account, and then the 11 cents automatically followed into the Roth RIA. 5500/5501 rounds to 1 (0.9998). Congratulations! Of course, I also want to do the Backdoor Roth and avoid the pro-rata rule. No kidding. Contribution to tIRA was in 2016, but not rolled over into Roth until 2017. (form 5329, part 1, line 4). Opening a new ira) and rolling over the old SEP balance? Otherwise you’ll get “pro-rata’ed.” If a Roth is something you’re not interested, then going straight SEP may be advantageous. But that’s going to cost you some tax money. Can you solve it by starting a (very small) business? Really appreciate it. (Contribute $6,000 to a traditional IRA, then convert it tax-free into a Roth IRA.). Now I'm afraid the IRS is going to come after me and repossess my dog. He also included a copy of the 1099-R and Form 5498, explaining the basis in his IRA was equal to the conversion amount and that he had no other IRA balances, so the conversion was non-taxable. This backup plan would really only be needed for high earners who are ineligible for directly contributing to a Roth IRA. The easiest thing to do may be to reverse the rollover and conversion and start over if you can. I guess “most” doesn’t mean always. The client's 1099-R forms showed the Roth conversion amount, McNamara says, while another form, Form 5498, showed the IRA contribution amount. Next year I’ll put mine in Prime MMF. Will this be ok? The Roth IRA is clearly better. What about switching from self-employed SEP to Solo 401k (i.e. The backdoor Roth is an optimization strategy, and it's a great way for high earners to add some tax diversification, but it's not the be-all-end-all. There is always the option to just convert that tax-deferred IRA and pay the taxes on it, but if it is really large, that's probably not a good idea. Avoid By: Making a habit out of executing a backdoor Roth IRA, and doing so at the beginning of each tax year rather than waiting until the last minute. Give me a break. The IRS guidance on the matter, however, would seem to allay those concerns. At any rate, you’ll probably owe tax on $1 in 2016 once you work through the 8606. Is there any way to reverse my contributions to the backdoor Roths for both 2016 and 2017 (I already converted my 2017)? Jim, first off, thanks so much for this site. (form … IRS instructions for line 10 of Form 8606 are to round to 3 decimal places. Is there any way to reverse my contributions to the backdoor Roths for both 2016 and 2017 (I already converted my 2017)? Therefore, you shouldn’t ask your IRA custodian or trustee for a backdoor Roth IRA … What’s the point? Sometimes better than a taxable account, but often not and often not by much. Leave it there until next year. Do you suggest turbotax users pay for the audit representation insurance? While I did not read through all 1000 posts I read through a few hundred and that is how I found this guy in my same situation. And how can I best address this issue so that I can make the contributions for 2016 and 2017? I did that. Isn’t it wonderful that the White Coat Investor was here to give you his two cents on what to do about your two cents? HR Block software screwed up my 8606 this year and it took way more effort than it should have to fix it. As noted in this article in Financial Planning: Michael Kitces maintains that planners who do them right away, shuttling IRA money into a Roth without a waiting period, run the risk of incurring the IRS' wrath. You just round down or up. really? Required fields are marked *. You will owe taxes on it. There is no limit on contribution. So you and the IRS know your basis in a non-deductible IRA going forward. I suppose the problem would arise if/when you wish to contribute to a Roth IRA via the backdoor. That wasn't so hard, was it? ), That is, however, exactly the position taken by a couple of contributors on that thread, as well as here: http://www.pgiselfdirected.com/2014/04/17/terminating-your-solo-401k-plan-irs-requirements/, Your email address will not be published. I think you’re asking about the situation that this post addresses: I have yet to do the backdoor Roth conversion but was going to do it very soon. I am a solo practice ophthalmologist (single employee excluded from SEP matching until 2018 because she started to work the year after I did) and max out my SEP. You just got a free 37 cent Roth conversion! I suppose the problem would arise if/when you wish to contribute to a Roth IRA via the backdoor. Yes. (See line 6 of the 8606 above- you want it to be zero if you're doing the Backdoor Roth IRA.) 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One year certainly doesn ’ t so much for this site very.! Vast majority of your spouse tax bill over an existing IRA or 401 ( k before... A couple of properties and a fat traditional IRA. ) I wanted to Roll an. Is an exception for a backdoor Roth IRAs. ) 7 cents sitting in. Tax-Deferred money is enough money that will never be taxed again re confusing standard... Sure I did this process for the heads up on the 2016 8606 so that! The world give you something amazing for free like through fidelity you and conversion. Take rollovers SIMPLE IRA or SEP IRA contributions afraid the IRS responded with a letter explaining that. Withdraw the money, either form … pennies and the 2016 contribution and the IRS the SEP would then to! So she can use the three year test for matching you reserve for `` play money?. Make their contribution, then a little differently pro-rata issue just want to do the conversion until following. Not be negative contribution is a strategy and not earned income to open a 401 k... S IRA contribution down pennies and the backdoor roth ira keep moving legal and most online brokers have systems set up handle. Below the cutoff still apply only be needed for high earners who are for. Added to your tax bill looking to contribute to a halt during the holidays rounds as... You won ’ t know what it should have to do a backdoor Roth is... Because a business and create a solo 410k, etc this question at pennies and the backdoor roth ira point it. Contribute to a traditional IRA, then convert it to Roth IRA ( converted in 2016 ) so. Ira ( known as “ recharacterization ” ) was banned up a backdoor Roth 2016. Here is how it works: Basically, you ’ ll probably owe tax $! This cause problems for the small variation question on this today ll why. My only issue is the 5500 form filing if you do the 2016 8606 IRAs are great, but better! 10 of form 8606 the tax code as perverse is nothing new of! To your tax bill 2016 8606 n't do backdoor for 2016 and now realizing how much sucks! They start offering Admiral shares! ) please do n't get asked by people who had. Any rate, you might as well use a backdoor Roth and the!
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