2020 Backdoor Roth Conversion - Does this work?

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Topic Author
HappyPeaceful
Posts: 23
Joined: Mon Mar 29, 2021 1:31 am

2020 Backdoor Roth Conversion - Does this work?

Post by HappyPeaceful »

Bogleheads:

I am trying to do a 2020 Backdoor Roth Conversion for my wife. I have been informed that the conversion into Roth will not happen before May 18th.

She deposited $6k into her tIRA on May 12th, using a check. The $6k is showing, but transfer can happen only after the actual amount is credited into the account.

I realize we started the process late, so much of this could have been handled better.

I have earmarked $12k - $6k for 2020 (conversion to be done before May 17th) and 2021 each (date: TBD).

Assuming I am able to transfer the amount on May 18th (after tax day) - aka "Conversion #1":

1) Will I be able to report it in my 2020 tax filing?

2) Can I do Conversion #2 another $6k Backdoor Roth conversion for 2021? I am seeking reassurance that I haven't missed the opportunity to get $6k of tax-free funds

3) Assuming I can do Conversion #2, can I do this, say on June 1st, as opposed to wait until December 31st?


Thank you in advance.
SerenityBlue
Posts: 143
Joined: Sat Jul 07, 2018 8:34 pm

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by SerenityBlue »

As far as I'm aware, there aren't any limits or deadlines associated with performing Roth IRA conversions. It would be best to contribute/hold each of these contribution amounts in separate IRA accounts so you can tell the provider to convert the entire amount in the account accordingly and tax-wise the paperwork is clean for which year those contributions were for and you know what earnings you need to pay taxes on.

https://www.morningstar.com/articles/10 ... r-trapdoor
https://www.marketwatch.com/story/roth- ... 2018-06-07
Topic Author
HappyPeaceful
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Joined: Mon Mar 29, 2021 1:31 am

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by HappyPeaceful »

SerenityBlue:

Thank you for your note. Also, for the two articles - read both.

My plan is to do the "Conversion #1" on May 18th, and keep the tIRA "clean" - that way I am ready to do "Conversion #2" pretty quickly.

Also, "Conversion #1" money is in a Money Market Fund, so I'll have a few cents of growth, if at all. So, no problem with taxes.

Does this work?

Thanks a ton!


Regards.
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by HomeStretch »

Step 1 of a backdoor Roth is making a non-deductible tIRA contribution for tax year 2020 by the IRS contribution deadline of 5/17/21. Your spouse is all set as this step has been completed. She needs to report this on a 2020 Form 8606

Step 2 of a backdoor Roth is converting the non-deductible tIRA contribution to Roth IRA. She can do this conversion anytime as there is no deadline for a conversion. It is preferable to do the conversion sooner rather than later so the earnings can grow tax free in a Roth IRA. If the non-deductible contribution has earnings while in the tIRA, those earnings are taxable but convert them to Roth IRA too (taxes should be minimal). You want the tIRA balance to be zero at 12/31 in any year of conversion in order to avoid pro-rated taxes. The conversion in 2021 will be reported on your spouse’s 2021 Form 8606.

Your spouse can make a non-deductible tIRA contribution for tax year 2021 now (if she wants to) and convert that too (she can even do just one conversion of both contributions + earnings, if any). She doesn’t need to wait until the conversion of the 2020 contribution is completed.
Topic Author
HappyPeaceful
Posts: 23
Joined: Mon Mar 29, 2021 1:31 am

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by HappyPeaceful »

HomeStretch wrote: Fri May 14, 2021 10:24 am Step 1 of a backdoor Roth is making a non-deductible tIRA contribution for tax year 2020 by the IRS contribution deadline of 5/17/21. Your spouse is all set as this step has been completed. She needs to report this on a 2020 Form 8606

Step 2 of a backdoor Roth is converting the non-deductible tIRA contribution to Roth IRA. She can do this conversion anytime as there is no deadline for a conversion. It is preferable to do the conversion sooner rather than later so the earnings can grow tax free in a Roth IRA. If the non-deductible contribution has earnings while in the tIRA, those earnings are taxable but convert them to Roth IRA too (taxes should be minimal). You want the tIRA balance to be zero at 12/31 in any year of conversion in order to avoid pro-rated taxes. The conversion in 2021 will be reported on your spouse’s 2021 Form 8606.

Your spouse can make a non-deductible tIRA contribution for tax year 2021 now (if she wants to) and convert that too (she can even do just one conversion of both contributions + earnings, if any). She doesn’t need to wait until the conversion of the 2020 contribution is completed.
Thanks, HomeStretch.

I am thinking of helping DW do the 2020 Roth conversion (Conversion #1) before even starting Conversion #2 -- just keeps it clean that way.

With this intent, do the steps below make sense:

To keep things simple - let's say, I keep all Roth IRA money in a Money Market Fund*.

1) Do "Conversion #1" at the earliest possible date, say May 18th--per Fidelity, this is the date by which the funds will be cleared. Resultant: Roth IRA has $6k balance.

2) Make the next $6k contribution to tIRA on May 24th (by which time tIRA has zero balance), and Conversion #2 on May 31st. Resultant: Roth IRA has $6k + $6k balance.

*Of course, intent is to invest this kitty ASAP, to drive tax-free growth.

Thank you!


[Edited: dropped ">> Is my understanding correct?"; made formatting edits for clarity]
HomeStretch
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Re: 2020 Backdoor Roth Conversion - Does this work?

Post by HomeStretch »

Yes that makes sense if you want to complete one backdoor Roth before starting another.
Topic Author
HappyPeaceful
Posts: 23
Joined: Mon Mar 29, 2021 1:31 am

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by HappyPeaceful »

HomeStretch wrote: Fri May 14, 2021 11:46 am Yes that makes sense if you want to complete one backdoor Roth before starting another.
Thank you!
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by nolesrule »

Separate conversions in the same account won't really make things cleaner as far as the paperwork or 8606 reporting because the custodian will only issue a single 1099-R for the year which will include all distributions/conversions in total.
Topic Author
HappyPeaceful
Posts: 23
Joined: Mon Mar 29, 2021 1:31 am

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by HappyPeaceful »

Bogleheads,

Thank you for your inputs on this.

As a newbie who owes it to the Bogleheads for teaching...

For Backdoor Roth Conversions, the clarity I have got is summarized below:

1) It is important to contribute into the tIRA in the relevant tax year (maximum: $6k/year)

2) The Roth IRA conversion (the Backdoor Conversion) of this contribution can be done in a subsequent year - even many years later - as long as tax liability are appropriately addressed; this conversion doesn't need to be crammed into the same year as the contribution

3) By converting into the Roth IRA in quick order after the tIRA contribution (and say, the tiRA is invested in a Money Market Fund) -- avoids or at least reduces the tax liability (and so doing it reasonably quickly, is a good idea!)

4) Following the above steps and keeping the tIRA clean (I have only lived in the US for 6 years; never had an IRA earlier) -- with zero funds, allows this conversion to be done every year -- with zero or minimal tax to pay -- to get tax-free growth, by investing wisely

Trust this understanding is good.

Thank you!


With gratitude,

A learner for life
HomeStretch
Posts: 11415
Joined: Thu Dec 27, 2018 2:06 pm

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by HomeStretch »

If you haven’t already read it, the BH wiki page on ‘Backdoor Roth’ may be helpful:
https://www.bogleheads.org/wiki/Backdoor_Roth
Topic Author
HappyPeaceful
Posts: 23
Joined: Mon Mar 29, 2021 1:31 am

Re: 2020 Backdoor Roth Conversion - Does this work?

Post by HappyPeaceful »

nolesrule wrote: Fri May 14, 2021 1:30 pm Separate conversions in the same account won't really make things cleaner as far as the paperwork or 8606 reporting because the custodian will only issue a single 1099-R for the year which will include all distributions/conversions in total.
Got it. Thanks.
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