Backdoor Roth IRA Conversion Questions

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user1234567
Posts: 24
Joined: Mon Nov 24, 2014 7:51 pm

Backdoor Roth IRA Conversion Questions

Post by user1234567 »

I'm looking to perform a backdoor roth ira conversion but have some questions.

Portfolios:

Mine:
  1. Rollover IRA - $200k - (from previous jobs 401k)
  2. Roth IRA - $30k - (contributions throughout the years including $5k in 2020)
  3. Traditional IRA 1 - $9k ($5k contribution tax year 2016, 8606 filed)
  4. Traditional IRA 2 - $9k ($5k contribution tax year 2019, 8606 filed)
Wife:
  1. Traditional IRA - $7k ($6k contribution tax year 2020, 8606 filed and $1k 2021 contribution). No gains
It seems like the overall steps would be:

1. Move Rollover IRA and Traditional IRA 1 and 2 gains into my workplace's 401k:
  1. Rollover IRA - $200k
  2. Traditional IRA 1 - $4k
  3. Traditional IRA 2 - $4k
2. Do Roth conversation for remaining Traditional IRA amounts:
  1. Traditional IRA 1 -$5k
  2. Traditional IRA 2 - $5k
  3. Traditional IRA wife - $7k
Questions:
  1. For the pro rata year end balance rule, do I have to do step 1 and 2 in separate years? So move my Rollover IRA and Traditional IRA gains now and do actual conversation in 2021?
  2. What about 2021 contributions? Can I max out now for my wife and myself before doing the conversion (as in do it between steps 1 and 2)?
  3. What would my overall tax burden be for the conversion? Since it's only non-deductible traditional contributions after step 1, it should be zero right?
shess
Posts: 2163
Joined: Wed May 17, 2017 12:02 am

Re: Backdoor Roth IRA Conversion Questions

Post by shess »

I think your 8606 reference means that you made $5k after-tax contributions to your traditional IRA in 2016 and 2019?

Regardless, the pro rata rule only cares about the traditional IRA balance on 12/31 of the tax year in question. So you can do things in any order that pleases you. Personally, I felt better about rolling things into the 401k FIRST, then converting everything left into Roth. For your Rollover IRA it's easy, just rollover 100%. For the others, you might just shift them to something cash-like, then rollover such that you leave a little more than the $5k behind (if you leave a little less, you can NEVER recover that basis, so I'd rather convert a little more than cut it too fine).

But like I said, your tax forms only care about the 12/31 balance. You could convert the exact dollar amount of basis to Roth, then rollover 100% of what's left to the 401k. If it were November, I'd worry about that approach, since some random thing could mess up your plans and leave you stuck with a pro-rata conversion, but you have plenty of time to clear up any mistakes.

WRT contributions for this year, you can do it whenever you want, it works exactly the same. Doing contribution and conversion in the same tax year makes things more understandable in some ways, but there's no requirement to do so, and it doesn't really even simplify your taxes or record keeping. When I was working, I batched mine up, I'd make 2 years of contributions in Q1, one for current tax year, one for previous tax year, then convert all of it at once.

WRT overall tax burden, after-tax contributions will generate no tax burden in conversion. So if you ordered things by converting the exact amount THEN rolling pre-tax amounts to the 401k, you could get it exactly right. Personally, I rolled over the pre-tax amounts first, and left behind ~$100 of pre-tax in the tIRAs, which generated $25 or something of taxes. I'm fine with that result, given that the overall process involves hundreds of thousands of dollars moving around!

Note that you can also consider folding the Rollover IRA into your 401k, and then simply converting everything left to Roth. Yes, you'll pay taxes on the 2*$4k, but I think that's a tractable problem, and you get the benefit of a bit more in your Roth.
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FiveK
Posts: 15693
Joined: Sun Mar 16, 2014 2:43 pm

Re: Backdoor Roth IRA Conversion Questions

Post by FiveK »

b2bserver wrote: Fri May 07, 2021 6:32 pmFor the pro rata year end balance rule, do I have to do step 1 and 2 in separate years? So move my Rollover IRA and Traditional IRA gains now and do actual conversation in 2021?
Not sure if that is a typo or you are thinking about tax year vs. calendar year. In any case, you may do both in the same year, including 2021.
What about 2021 contributions? Can I max out now for my wife and myself before doing the conversion (as in do it between steps 1 and 2)?
Yes.
What would my overall tax burden be for the conversion? Since it's only non-deductible traditional contributions after step 1, it should be zero right?
Filling out a draft Form 8606 for each of you before you do any of the steps you describe should give you more confidence in what you will be doing.

See Backdoor Roth - Bogleheads including various references for more.
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retiredjg
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Re: Backdoor Roth IRA Conversion Questions

Post by retiredjg »

b2bserver wrote: Fri May 07, 2021 6:32 pm [*] For the pro rata year end balance rule, do I have to do step 1 and 2 in separate years? So move my Rollover IRA and Traditional IRA gains now and do actual conversation in 2021?
No. You can do both in the same year. The important thing is that traditional IRAs are empty on 12/31 of any year in which you do a Roth conversion.

[*] What about 2021 contributions? Can I max out now for my wife and myself before doing the conversion (as in do it between steps 1 and 2)?
You can do those contributions any time.

[*] What would my overall tax burden be for the conversion? Since it's only non-deductible traditional contributions after step 1, it should be zero right?
Should be $0 or near $0. There might be a little growth that occurs before you get the Roth conversions done.
Topic Author
user1234567
Posts: 24
Joined: Mon Nov 24, 2014 7:51 pm

Re: Backdoor Roth IRA Conversion Questions

Post by user1234567 »

FiveK wrote: Fri May 07, 2021 8:58 pm
What would my overall tax burden be for the conversion? Since it's only non-deductible traditional contributions after step 1, it should be zero right?
Filling out a draft Form 8606 for each of you before you do any of the steps you describe should give you more confidence in what you will be doing.

See Backdoor Roth - Bogleheads including various references for more.
Great idea on the draft 8606! I did read the link but I couldn't understand some of it. Maybe it'll make more sense after doing the 8606.

shess wrote: Fri May 07, 2021 6:57 pm I think your 8606 reference means that you made $5k after-tax contributions to your traditional IRA in 2016 and 2019?

Regardless, the pro rata rule only cares about the traditional IRA balance on 12/31 of the tax year in question. So you can do things in any order that pleases you. Personally, I felt better about rolling things into the 401k FIRST, then converting everything left into Roth. For your Rollover IRA it's easy, just rollover 100%. For the others, you might just shift them to something cash-like, then rollover such that you leave a little more than the $5k behind (if you leave a little less, you can NEVER recover that basis, so I'd rather convert a little more than cut it too fine).
Correct, the 2016 and 2019 traditional IRAs were non deductable. Those were actually Roth IRAs contributions that I had to recharacterize last min due to income limits.

Can you expand on the "shifting to something cash like" part?
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Backdoor Roth IRA Conversion Questions

Post by FiveK »

b2bserver wrote: Wed May 19, 2021 9:02 pm Great idea on the draft 8606! I did read the link but I couldn't understand some of it. Maybe it'll make more sense after doing the 8606.
If, for example, you get the same results doing it by hand and by using the 'Form8606' tab in the personal finance toolbox, there is a good chance you do understand it. :)
shess wrote: Fri May 07, 2021 6:57 pm Regardless, the pro rata rule only cares about the traditional IRA balance on 12/31 of the tax year in question. So you can do things in any order that pleases you. Personally, I felt better about rolling things into the 401k FIRST, then converting everything left into Roth. For your Rollover IRA it's easy, just rollover 100%. For the others, you might just shift them to something cash-like, then rollover such that you leave a little more than the $5k behind
Can you expand on the "shifting to something cash like" part?
It (selling all your stocks and bonds and leaving the proceeds in your IRA as "cash") is one way to reduce the chance that market fluctuations will spoil your plans of rolling over exactly the pre-tax amount to the 401k, and leaving exactly the after-tax amount for Roth conversion.
(if you leave a little less, you can NEVER recover that basis...)
That part is debatable, but probably not worth worrying about.
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