IRA confused.

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Topic Author
Litfury
Posts: 64
Joined: Sat Aug 10, 2013 8:43 pm

IRA confused.

Post by Litfury »

Long time member and lurker. Rare poster here. I appreciate any help!

So on January 1st I contributed the max to both my wife and I's Roth IRA accounts. I recently took a job which will definitely put us over the Roth IRA income limits (hooray?). I called Fidelity to ask what my options were and they basically told me my two options were to take the 6,000 distribution which sounds like there will be no penalty since the market has been tanking anyways (they send me some form to fill out to do this). Or I could roll it into a non-deductible traditional IRA as a recharacterization. I asked if I could just then roll that back into the Roth IRA as a backdoor roth. They told me that I cannot do a backdoor roth because I have an old Rollover non roth IRA that I did from a previous employer 401k.

Any advice or recommendations would be appreciated/what would you do in this scenario? Also if the Fidelity rep was wrong in any way I would appreciate advice regarding that. Thanks.

I did read the wiki here regarding non deductible traditional IRAs and it made it sound as if it was almost better to just contribute to a taxable account due to less restrictions. (I do also have a separate taxable account already).
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: IRA confused.

Post by aristotelian »

They are correct, your traditional IRA balance would be subject to the pro rata tax when you attempt the conversion. Unless you can roll your IRA into your 401k your best option would be to take the distribution
Silk McCue
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Joined: Thu Feb 25, 2016 6:11 pm

Re: IRA confused.

Post by Silk McCue »

Fidelity is correct. The existing IRA is going to interfere with the Backdoor Roth process due to the pro rata rule but would not be an issue for your wife unless she has the same existing IRA. Ideally you would be able to roll the problematic IRA into your current employer and eliminate the issue.

Please read this Wiki if you haven’t already.

https://www.bogleheads.org/wiki/Backdoor_Roth

Cheers
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retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: IRA confused.

Post by retiredjg »

Litfury wrote: Fri Jan 21, 2022 9:23 am Long time member and lurker. Rare poster here. I appreciate any help!

So on January 1st I contributed the max to both my wife and I's Roth IRA accounts. I recently took a job which will definitely put us over the Roth IRA income limits (hooray?). I called Fidelity to ask what my options were and they basically told me my two options were to take the 6,000 distribution which sounds like there will be no penalty since the market has been tanking anyways (they send me some form to fill out to do this). Or I could roll it into a non-deductible traditional IRA as a recharacterization. I asked if I could just then roll that back into the Roth IRA as a backdoor roth. They told me that I cannot do a backdoor roth because I have an old Rollover non roth IRA that I did from a previous employer 401k.

Any advice or recommendations would be appreciated/what would you do in this scenario? Also if the Fidelity rep was wrong in any way I would appreciate advice regarding that. Thanks.

I did read the wiki here regarding non deductible traditional IRAs and it made it sound as if it was almost better to just contribute to a taxable account due to less restrictions. (I do also have a separate taxable account already).
Well, you can do the backdoor Roth with that rollover IRA on the side....but you don't want to. I see 3 options.

1. Have your contributions returned to you - as if you never made the contribution in the first place. Put the money in taxable instead.

2. Re-characterize and don't do a Roth conversion (very poor choice in my estimation)

3. Re-characterize. Roll the rollover IRA into a current work plan and then use the backdoor method. OK choice if you want to use the backdoor Roth process. However, get very familiar with the tax paperwork first. A lot of people mess this up and many tax-preparers do too.
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: IRA confused.

Post by MrJedi »

Rolling the Rollover IRA back into a 401k would clean things up.

If the IRA is a low balance it might be worthwhile to just take the tax hit and convert all of it to Roth to allow backdoor Roth going forward. If not low balance, probably not a good option since it sounds like your income is starting to go up even more.

Otherwise taking it out and using a taxable account with tax efficient funds like total stock market is not a terrible compromise.
mdchemist
Posts: 23
Joined: Tue Jan 14, 2020 3:14 pm

Re: IRA confused.

Post by mdchemist »

retiredjg wrote: Fri Jan 21, 2022 9:49 am
Litfury wrote: Fri Jan 21, 2022 9:23 am Long time member and lurker. Rare poster here. I appreciate any help!

So on January 1st I contributed the max to both my wife and I's Roth IRA accounts. I recently took a job which will definitely put us over the Roth IRA income limits (hooray?). I called Fidelity to ask what my options were and they basically told me my two options were to take the 6,000 distribution which sounds like there will be no penalty since the market has been tanking anyways (they send me some form to fill out to do this). Or I could roll it into a non-deductible traditional IRA as a recharacterization. I asked if I could just then roll that back into the Roth IRA as a backdoor roth. They told me that I cannot do a backdoor roth because I have an old Rollover non roth IRA that I did from a previous employer 401k.

Any advice or recommendations would be appreciated/what would you do in this scenario? Also if the Fidelity rep was wrong in any way I would appreciate advice regarding that. Thanks.

I did read the wiki here regarding non deductible traditional IRAs and it made it sound as if it was almost better to just contribute to a taxable account due to less restrictions. (I do also have a separate taxable account already).
Well, you can do the backdoor Roth with that rollover IRA on the side....but you don't want to. I see 3 options.

1. Have your contributions returned to you - as if you never made the contribution in the first place. Put the money in taxable instead.

2. Re-characterize and don't do a Roth conversion (very poor choice in my estimation)

3. Re-characterize. Roll the rollover IRA into a current work plan and then use the backdoor method. OK choice if you want to use the backdoor Roth process. However, get very familiar with the tax paperwork first. A lot of people mess this up and many tax-preparers do too.
The OP said the market has been down since they made the contribution so I think there is another hybrid 1&3 option of have the contributions returned, rollover the current rollover IRA into a 401(k), then make a fresh 6k contribution to a traditional IRA and convert to Roth IRA. This would make sense if your current Roth IRA value is less than your contribution because you will wind up with 6k in the Roth IRA instead of whatever the current <6k value is.
Luckywon
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Joined: Tue Mar 28, 2017 10:33 am

Re: IRA confused.

Post by Luckywon »

Assuming your basis has declined due to the market, I think that if you hold off making the distribution until either until your contribution returns to 6k basis, or you come upon any deadline to do this without penalty, you might save a little money.

If the market continues to decline, you will be no worse off than if you took the distribution immediately. If your basis does return to 6k this year, you may potentially save taxes on the gains from this point up to the 6k basis.

I may be wrong about this, as I'm just thinking this through and it may not be worth the trouble to monitor your basis, but it would be interesting to know if there is a theoretical advantage to waiting in this situation where your contribution has declined in value.
Topic Author
Litfury
Posts: 64
Joined: Sat Aug 10, 2013 8:43 pm

Re: IRA confused.

Post by Litfury »

Thanks so much for all of the expedient responses and great advice.
Based on the above I am going to take the money back out for myself. Then when I can contribute to 401k (starting in March, company requires a lag time before starting contributions) I’ll see if I can rollover the Ira into 401k.
My wife’s I should be able to just do a back door Roth IRA already as she has no rollover Ira.

Thanks for all the responses!

Also, I put this money into the ROTH Ira but it’s actually just in a money market at the moment as I had not actually invested it yet, (rest of Roth IRA is in s and p 500), so it really hasn’t lost any money yet.
Luckywon
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Joined: Tue Mar 28, 2017 10:33 am

Re: IRA confused.

Post by Luckywon »

Litfury wrote: Fri Jan 21, 2022 10:03 am Also, I put this money into the ROTH Ira but it’s actually just in a money market at the moment as I had not actually invested it yet, (rest of Roth IRA is in s and p 500), so it really hasn’t lost any money yet.
I wonder how the custodian will calculate the basis. It may be a function of how your whole account has performed since you made the contribution. IOW if your whole account has declined it may show a reduction even if you didn't invest the$6k. Not that this will cost you any money, but there may still be the opportunity to save tax on potential gains up to your original basis if you wait as I discussed above. Again, more of a theoretical thing, given the amounts involved.
Duckinator
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Joined: Tue Jun 30, 2020 11:16 am

Re: IRA confused.

Post by Duckinator »

The latest podcast from https://www.theretirementandirashow.com/ "Excess Roth IRA Contributions: EDU #2203" deals with this subject. They get down in the weeds a bit but worthwhile. IIRC the withdrawal needs to be coded a specific way.
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: IRA confused.

Post by retiredjg »

Luckywon wrote: Fri Jan 21, 2022 10:29 am
Litfury wrote: Fri Jan 21, 2022 10:03 am Also, I put this money into the ROTH Ira but it’s actually just in a money market at the moment as I had not actually invested it yet, (rest of Roth IRA is in s and p 500), so it really hasn’t lost any money yet.
I wonder how the custodian will calculate the basis. It may be a function of how your whole account has performed since you made the contribution. IOW if your whole account has declined it may show a reduction even if you didn't invest the$6k. Not that this will cost you any money, but there may still be the opportunity to save tax on potential gains up to your original basis if you wait as I discussed above. Again, more of a theoretical thing, given the amounts involved.
I do believe what is returned will be based on the performance of the Roth IRA account as a whole. Your contribution still being in money market will not change that. You might get less than $6k back or recharacterized.
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