Review of Roth IRA to tIRA + 2021 backdoor roth

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Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Review of Roth IRA to tIRA + 2021 backdoor roth

Post by uwbadgers »

I posted recently (viewtopic.php?f=1&t=334532&p=5701288#p5701288) of how we ended up with a large income increase and are about 100k over ROTH income limits.

This is the follow up plan.

I *think* I've got things figured out but wanted to lay it out and get some eyes on it before making it all happen.

These contributions were done January 2020.
His 2020 ROTH contribution---6k
Her 2020 ROTH contribution---6k
Neither of us had/have a tIRA with any balance before this.

A few days ago, using Vanguard, I completed a form that helped me recharacterize my non-allowed ROTH contribution to a Traditional IRA. To do this I created a tIRA and then through the forms moved the 6k from ROTH to newly created tIRA. This is what the form told me to do.

Today it went through as a total of $7,338.00 which I presume is the gains ($1,338) associated with this transfer . Vanguard says I'll get a tax form and report this on my taxes for 2020.

That all sound about right?

I plan to do this for my wife's account shortly as well.
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2021 and future plan

We saved up our 12k for ROTH for 2021 throughout last year but odds are high we won't be in the limit again. We would prefer to lump sum it now as we are motivated yearly to "fill" our retirement savings as soon as possible each year so that money is accounted for before other things........ and here's the plan to do that:

1. Contribute 6k to our newly created tIRA.
2. Do the same type of form but flip from tIRA to Roth IRA......this is the backdoor setup

I assume then for 2021 there is tax to pay on the 12k flip but that then allows tax free growth in ROTH, correct?
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I know there are like a million threads on this but being the first time want to make sure what I read and what I'm doing all match up.

Thanks in advance!
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Duckie
Posts: 8157
Joined: Thu Mar 08, 2007 2:55 pm

Re: Review of Roth IRA to tIRA + 2021 backdoor roth

Post by Duckie »

uwbadgers wrote:A few days ago, using Vanguard, I completed a form that helped me recharacterize my non-allowed ROTH contribution to a Traditional IRA. To do this I created a tIRA and then through the forms moved the 6k from ROTH to newly created tIRA. This is what the form told me to do.

Today it went through as a total of $7,338.00 which I presume is the gains ($1,338) associated with this transfer . Vanguard says I'll get a tax form and report this on my taxes for 2020.

That all sound about right?
Yes. The gains will be taxed. You'll also need to fill out a statement reporting the recharacterization.

You need to take a good read of Form 8606 and its instructions. The backdoor Roth method is reported on that form, Part I for the non-deductible contribution and Part II for the conversion. Even if you use tax software you need to know the form to make sure the software version comes out right.

For 2020 you'll each fill out Form 8606 Part I for the 2020 non-deductible contribution (probably just lines 1, 2, 3, and 14) and the recharacterization statement. For 2021 you'll each fill out Part I for the 2021 non-deductible contribution and Part II for the conversions.
We saved up our 12k for ROTH for 2021 throughout last year but odds are high we won't be in the limit again. We would prefer to lump sum it now as we are motivated yearly to "fill" our retirement savings as soon as possible each year so that money is accounted for before other things........ and here's the plan to do that:

1. Contribute 6k to our newly created tIRA.
2. Do the same type of form but flip from tIRA to Roth IRA......this is the backdoor setup
Yes, but use the correct term. It's a conversion, not a flip.
I assume then for 2021 there is tax to pay on the 12k flip but that then allows tax free growth in ROTH, correct?
The $12K will be non-deductible so if reported correctly on your Form 8606s that will not be taxed again, but any gains will be. If you convert quickly the gains will probably be under $1. One trick is to put the TIRA contributions into a money market. That way any gains will be minimal and there will be no losses. Losses can be a PITA.
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Re: Review of Roth IRA to tIRA + 2021 backdoor roth

Post by placeholder »

There will still be the gains from the 2020 recharacterization since I don't see anywhere that the op converted that to roth.
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: Review of Roth IRA to tIRA + 2021 backdoor roth

Post by uwbadgers »

placeholder wrote: Fri Jan 08, 2021 6:20 pm There will still be the gains from the 2020 recharacterization since I don't see anywhere that the op converted that to roth.
So I'm looking to do the conversion, of the recharacterized roth, right now, but with the total now $7,300, which is over the 6k I'd convert, what happens/what do I do with that remaining $1,300?

1. 2020 over income roth contribution---6k
2. Recharacterize that 6k ROTH to tIRA, gains came with---Total $7,300
3. Convert through backdoor that new tIRA to ROTH for 2020.....but now have 7.3k, not 6k?

Step 3 is where I am and confused......

And I need to do that step (I think) before I could do the "normal" Backdoor for 2021 because I need the iIRA to have no balance, right?

Thanks.
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Duckie
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Re: Review of Roth IRA to tIRA + 2021 backdoor roth

Post by Duckie »

uwbadgers wrote:So I'm looking to do the conversion, of the recharacterized roth, right now, but with the total now $7,300, which is over the 6k I'd convert, what happens/what do I do with that remaining $1,300?
You convert 100% of the TIRA to the Roth IRA. Do not use a dollar amount, use 100%. You will pay taxes on the $1.3K gains next year. The 2021 Form 8606 will report the conversion and taxable gains.
And I need to do that step (I think) before I could do the "normal" Backdoor for 2021 because I need the iIRA to have no balance, right?
Technically, you could wait to convert and do the 2021 non-deductible contribution first and then convert it all, but the sooner you convert the 2020 contribution, the better. So convert that now and deal with the 2021 contribution/conversion afterward. Since the conversion will happen in 2021 the TIRA needs to be empty as of 12/31/2021.
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