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The IRS clarified in early 2018 that no waiting period is required between the contribution and conversion steps of the Backdoor Roth IRA and essentially has given its blessing on the whole process. Can I still convert the traditional IRA to a Roth at this time and have it count on last years taxes(2013) and then latter this year, contribute $5500 to my traditional IRA(I have not contributed anything yet in 2014) and convert it to into a Roth IRA a short time later all during this calender year? Assuming I already hold a combination of traditional IRA’s and Roth IRA’s, could the pro-rata rule be avoided in retirement if I deplete the the traditional IRA’s before touching the Roth IRA’s ? More likely, they won’t take anything out until you’ve been at the job for 6-12 months. No taxes should be owed. You could put it into Prime, but I don’t see any reason to. The deadline to get rid of traditional IRAs to avoid pro-rata calculations on taxes for that year is December 31st. If you find you have a few pennies left in the account and are worried you'll get pro-rated, take a look at this post: Pennies and the Backdoor Roth IRA. Some screenshots that may help: Click on “Contribute to IRA” and it will then take you to a screen that looks like almost like this (I forgot to take the screenshot before making the contribution so it won't let me contribute again for 2021): Normally on this page, you would have the option to choose 2021 as the year you want to contribute to (or 2020 too if you haven't done that yet, at least until April 15, 2021). Yours is the ideal situation. Yes. I can specify just the after tax amount, and when i select it, it give me an estimate of what the reportable taxable income will be on the gains (about $20 right now). 14) 5500, Since you put the basis ($5500) onto the 8606, then yes, that “cleans it up.”. As soon as we started working right after college, we immediately started contributing the maximum to our 401k’s and IRA’s. One you hit submit, it will take you to the confirmation page. For example, can I contribute 5500 on Jan 2 2017 for my 2017 contribution and then on Jan 3 convert to Roth for 2017 and that is it? All that matters is the SEP IRA balance on December 31. The hierarchy changes depending on many things. I want to move my after tax out and roll over to a Roth IRA. Notify me of followup comments via e-mail. It’s the same as if you just contributed to the Roth in the first place. Won’t that defeat the whole idea? So the deadline for a 2012 contribution was April 15, 2013. Currently, total non-deductible contributions are around 40K and the total value of the account is around 55K. You have a $20,000 tax-deferred IRA. time? You can now invest the money as per your investing plan. 1) My 403(b) and 457 plans must allow for both after-tax contributions and pre-termination rollover of funds. They have figured this out in the last year or so because three years ago I had to re-create a new traditional Ira account after I converted. When you transfer the money, the website will throw up a scary banner saying something like “THIS IS A TAXABLE EVENT”. Choosing a job with access to those other savings plans. Straighten out your financial life today! Let me know what you hear. Then he can backdoor the remaining 5k at no tax liability. If you only take out 1 ounce of creamy coffee, then you pay taxes on 4/5 of it, since it is 4 parts coffee, and 1 part cream. Now I have a small 1099 side gig and want to create an i401k. Keep in mind, each retirement account has different rules regarding how and when you can make withdrawals. I definitely see how it can be beneficial, but you are omitting the fact that it costs money to setup you’re own 401k as a corporation, followed by the ongoing accounting costs of filing returns for the 401k. You just pull all your 401(k) money out every year to IRAs. At least that’s what my CPA told me today. I have not been able to do Back Door roth ira contributions because of this traditional IRA. You can rollover $15k pretax money to a 401k now and convert the remaining $40k. On your taxes, you'll deduct your SEP-IRA contributions, then pay tax on the conversion, but the net effect will be like contributing $52K to a Roth IRA. I though it might be a good time to take advantage of lower margins for roth conversion. Other Roth IRA advantages. I understand that it will take a few years until I can really start investing meaningfully in the Vanguard account anyway because of minimum requirements (3k). You can usually find this information in your summary plan description and annual … I have been making NON-DEDUCTIBLE IRA contributions over the past eight years totaling about 40K contributed which has grown to about 55K. This is a great deal for someone who has limited tax-protected (and asset-protected) accounts but would like to save more for retirement. Maxing out your IRA contributions each year is a great way to set yourself up for retirement. Thanks for the info. If i contribute 5500 in December 2015, then make another contribution in 1/2016, do I just indicate that I made a single contribution for my taxes in 4/2016 and put the second contribution on the tax return in 4/2017? Was “shortly after” also in December 2013? I am still looking into whether to do sep IRA or solo 401 k- can you advise what should we do on top of what we are already doing? Advisors have told me that they have had to help clients fix dozens of these that tax preparers have done improperly. Required fields are marked *. As you can see, I forgot to take this screenshot before I actually did it, so I don't actually have any funds available to trade and I have a -$6,000 credit. But it isn’t a big deal. Suppose I was limited to 20% of my business income as an employer, and contributed pre-tax $10,000 as an employer contribution, leaving 43k free. I can’t see why a high-earner would want to do that. You stated, “is essentially the same process as opening the traditional Roth IRA.” I believe you meant “traditional IRA”, not “traditional Roth IRA”. A couple of comments on this great article: Make a $6,000 ($7,000 if over 50) non-deductible traditional IRA contribution for yourself, and one for your spouse. If you are rolling the SEP over to a 401k-type qualified plan, be sure to rollover only the pre-tax money, not the after-tax money as a result of applying the pro-rata rule for 2013. HSAs are not employer based. The point of this plan is to save on any profit-sharing contributions you would have to make for your employees, (a significant expense for a practice owner employing nurses, mid-levels, or other doctors,) although you would still be required to pay for plan expenses and any regular 401K matching contributions. Do I need to go back and file an 8606 for 2012 taxes? Some docs like residents or even attendings in the lower paying specialties who are married to a non-earner can just contribute to a Roth IRA directly. 4Y. 2) These funds will be untouchable for 5 years as they’re conversions as opposed to contributions, which isn’t such a big deal for $11,000 per year, but is potentially more of an issue for $81,000. Check the plan document as it likely governs. It’s usually larger older employer who created their plan a long time ago (think well before 2000). 2. You’re right that if the market drops before you convert that you’ll save taxes. Obviously, it’ll cost you a bit in taxes. My tax accountant felt it was OK to go ahead and do it – she does not understand the pro rata rule (which I have read extensively about this week!) I was just reading through this fantastic article on back door Roths and came across this comment. You might be able to make pre-tax contributions to an IRA (verify with your tax preparer before you do anything), or you might choose to make after-tax contributions. He contribute 18K via employer towards 403b + 5500 back door entry after tax roth, so for his contribution towards solo 401k for the self employment income as employee is 0. If I understand all this backdoor / mega-backdoor stuff correctly…I can: 1) Convert the SEP IRA to a Roth IRA, tax free, Net Result: I got tax write-off for putting into SEP IRA, and the gains as well as distributions will be tax free from the Roth IRA after a 5 year waiting period), 2) Covert the TIRAs to Roth IRA, tax free. Current savings: $51,000 401k, $22,000 Roth IRA, $20,000 emergency. Can he do a back door Roth even if we file taxes jointly? A practice owner with multiple employees probably can't do a Mega Backdoor Roth IRA (the original impetus behind writing this post) due to profit-sharing laws. I am a new partner paid on K1 and my groups 401k allows in-plan Roth conversion. Notify me of followup comments via e-mail. It’s no big deal. But maxing out savings options is like putting your net worth on steroids. But after that, adding an IRA to your retirement mix can provide you with more investment options and possibly lower fees than your 401(k) charges. Do they allow rollover from IRA to individual 401k account. I think WellsTrade is pretty similar, lots of free trades as I recall. It’s quite possible in a few more years you could owe a lot more on a conversion. Just go into your Roth IRA account: You can see the $6,000 credit there. You just have to do a 5500EZ each year. So if you have a SEP, you can still hold onto it, but don’t add money to it the same year you want to do the backdoor Roth conversion. I agree it gets tricky with employees, and sometimes a Backdoor Roth IRA isn’t worth what you may have to do to get it. I am transferring the assets to my Vanguard tIRA and will then do a conversion to the Roth–pre tax money only. Then you can max out your annual Roth IRA contribution. Thanks for the help I appreciate it! Honestly I’ve seen you write about this a lot of times, but I’ve always felt if something seemed a little sketchy or non-traditional that it probably wasn’t a good idea and would come back to bite me in some way, shape or form… so despite understanding the logic, I’ve never done it. Should I pay down my mortgage faster, or invest more aggressively? This rule basically says that if the sum of a bunch of legal steps is illegal, then you can’t do it. Two questions. On a different note, if I am saving aggressively, and have maxed out by 401k, 403b, college savings, etc – what are the other options? It is very straightforward. It is taxable. But if it is in a regular brokerage account, you have to pay tax on the $57,000 of gains you made. Just wanted to run this by you as, i’ve kept reading old IRS rules, old posts, so i’m not sure what is allowed. We’ve avoided the back-door ROTH because my wife and I both have substantial SEP-IRAs from an S-corp with other employees. Fidelity actually doesn’t have a Roth 401k option, so you’d have to look at a different provider, such as Vanguard, Charles Schwab for that. Am I wrong on these points? Every year or two, Vanguard changes their process slightly. What do I do about health insurance if my employer doesn’t offer it? I”m not sure what you mean by an IRA through a former employer. Advantages of IRA are wider choice of funds, and the additional flexibility after 5 years. I want to open a Solo 401 K, but have some reservations as I quoted you here, because I have double the amount in my TIRA. So you can put in your $17,500 that is either tax-deferred or Roth, then contribute another $34,500 to the plan in after-tax dollars, similar to a non-deductible traditional IRA. Each spouse reports their Backdoor Roth IRA on their own separate 8606, so my tax returns always include two form 8606s. Great link. That gets my investment money working as soon as possible and simplifies the record keeping. However, both these are employed based plans and makes it compulsory to withdraw the money in the calendar year unlike your HSA. This works just like the Backdoor Roth IRA, and you need to make sure you do not have any other traditional IRA, SEP-IRA, SIMPLE IRA money as of December 31st of that year. Note that Turbotax may fill this out a little differently (may leave lines 6-12 blank) but you end up with the same thing. Line 6 – This is the line that triggers the pro-rata issue. Just an hour ago, I called Fidelity and they will take the Vanguard TIRA back into my ex-Rollover account – will initiate the move after this long weekend is over. Congratulations on saving for retirement! It is just that the tax bill is zero for it since you’ve already paid taxes on the $6,000 and couldn’t claim it as a deduction because you make too much money. made your 2020 contribution in 2021). For example, if you just go to the “exchange funds” link (on the buy and sell menu) it will look like this: Even if you go to the wrong place, it'll still guide you back to the Roth conversion page when you try to move money from your traditional IRA to your Roth IRA. For example, Roth IRA Withdrawal rules … one. How long does it take to become an IRA millionaire? You can make 2014 contributions from Jan 2014 to April 2015. We have a plan that is now eligible as of a few weeks ago. It stays behind in the 401K. Additional reading IRA wiki page 401(k) wiki page It isn't on the form your IRA custodian sends to the IRS (1099-R) either. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost … Line 13 is the same as line 3, so tax due is zero. Or call them and ask them to leave a few cents of accumulated interest that doesn’t get capitalized. The more you contribute each year, and the longer your time frame, the more money you will likely accumulate in your IRA. © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. If you convert half of the account, you pay taxes on $10,000, and $2500 comes along tax-free. Can you add more information as to where you found out that the pension contribution counts towards the 401K limit? My plan is happy to cut two checks, one for the after tax money and one for the pretax earnings. Thanks! However, the work around isn’t a big deal. In other words, to get all the post-tax money out from a 401(k) one would need to convert the whole pile, with the destinations a traditional IRA for the pre-tax money and a Roth IRA via conversion-at-no-cost for the after-tax component. Remember Vanguard has a number of funds with a minimum of $1K. Similar to what I did with my after-tax TSP money when I got out of the service. Merrill Edge is their self-directed area. Line 1 is your non-deductible contribution. No no, you’re thinking about all the right things. 7) 02 The total sum of these accounts on December 31st of the year in which you do the conversion step (Step 2) must be zero to avoid a “pro-rata” calculation (see line 6 on Form 8606) that can eliminate most of the benefit of a Backdoor Roth IRA. Obviously if you can, a mega backdoor Roth is better than taxable. I leave zero money behind in Prime Money Market Fund in a traditional IRA every year. my husband is a physician and I am a pharmacist- our net income this year is 650,000, I contribute 18k with 5 % match at my employer with NO self employment income. I don’t see such an advantage for $5500/yr to cause me to essentially forgo my SEP when I get 51k tax advantaged space. You must get rid of the old IRA. Can you have a SEP IRA and Solo 401k at the same time? Made a 2020 IRA contribution (reported on 2020 8606), Did a Roth conversion of that contribution (reported on 2021 8606), Made a 2021 IRA contribution (reported on 2021 8606), Line 1 – That's the money you contributed for 2021, Line 2 – This is your basis. Do you use a Mega Backdoor Roth IRA? Rolling it back in allows the backdoor Roth. 7) Everything else depending on priorities, Great post. The plan must allow for non-hardship in-service withdrawals of after-tax contributions. Frankly, if you’re in the top bracket, you’ll probably have plenty of taxable money above and beyond your retirement accounts including backdoor Roth IRAs. 6) Moderate interest debt I contribute after-tax dollars to my 401k so that I can do the mega backdoor roth strategy. Are you saying that i can put pretax money into a traditional ira and then roll it into a backdoor roth? 2b) X When you file taxes in 4/2016, you just mention that you made $5,500 contribution (that you made in Dec 2015). My wife and I have the potential of receiving a financial windfall soon which should be tax-free and we would like to get a lot of it into our Roth accounts. Thanks so much for clarifying! Has anyone considered a Roth IRA that a teenager can fund? This should total 56,000 401k+ 6,000 roth IRA, which I assume is decent for first full year out of residency. I am an employee at a major hospital corporation. I’m pretty sure you can’t make after-tax contributions. INDIVIDUAL Retirement Arrangements. I am a partner in a small group of docs, all payed on a K-1. Required fields are marked *. can I have one at Scottrade (that allows option trading within the Roth) and in a year open a backdoor through Vanguard (for low ER funds)? I’ve been reading that it’s best to maximize your contributions in January to allow for optimal growth. For case 1 – your plan may have low rate institutional class funds that would not be available to you in an IRA. Maxing Your Savings. I have no outstanding Traditional IRAs (I previously rolled them over into my 401k) so I can convert to Roth at any time. For pro-rata rule, do spouse’s traditional IRAs count if you file taxes jointly? Therefore, in theory I could sock away $81,000 post-tax under 2015 contribution limits: $5,500 “regular” backdoor Roths x me and my wife, $35,000 after-tax money converted to Roth via the above in the 403(b), $35,000 to the 457 similarly. WCI, you said above: “Once your individual 401K plan his $250K, you do have to file an additional form (5500) each year. Here is an article on tax loss harvesting:, You don’t have to leave money behind. For most households, the Roth IRA contribution limits in 2020 and 2021 will be the smaller of $6,000 or your taxable income. Let's suppose you started maxing out your contribution every year at age 22 by dollar-cost averaging $500 at the beginning of every month. Convert your entire SEP-IRA to a Roth IRA. $2,100 plus 25% of $7,900 = $4,075? I call it the “Mega Backdoor Roth IRA.”  There are several variations. You’re choosing between taxable and tax-free. However, the last conversion out of that account was in June 2012 (for some reason we did it mid-year then), 18 months and 12 days earlier and the traditional IRA was missing, so we had to go through the trouble of reopening. I was quite peeved. Should I just continue to invest in a taxable account or is there some way I can take advantage of the after-tax portion of my plan? I didn't expect it to happen on Sunday as the markets are closed and so is Vanguard, but even by Monday (January 4th) evening I could not move on to the next step. Because if you have 100K with Bank of American you get 100 trades per mo. Tax free when I withdraw? no to mention if you have the aforementioned 100K you get the keys to the best cash back credit card in the industry.. not to mention a ton of flexibility with your money. If the owner employee is the only one contributing after-tax, the test will likely fail. First, you've got to do all of Part I plus Part II for this year because you did the conversion step, unlike last year (2020). Voila- A Mega Backdoor Roth IRA. You fund a Roth IRA with after-tax contributions, but the money that you invest in a Roth grows tax-deferred. Should I pay down my mortgage faster, or invest more aggressively? It’s only closing credit accounts that affects it. Third, the prorata calculation only has to do with dollars in IRAs, not the number of accounts. The key to not closing the account is to leave a little of money behind ($1) on that account before doing a back door conversion. However, instead of an employee, you are now the owner and responsible for the match and any profit-sharing contributions due to your employees. If so, your CPA is probably right. I just graduated so my income is reduced for 2015 to about 170. Most plans, unfortunately, don’t allow inservice rollovers. In my view, an individual 401K + Backdoor Roth IRAs is a whole lot less hassle than a defined benefit plan. You may be able to put in more if you write a check. but I still don’t get it. 2) In-service withdrawals are definitely an option and can be written into a plan document. # 1 are you doing Roth 401(k) or tax-deferred 401(k) contributions. So I thought I’d put together a basic step-by-step tutorial people can refer to when they do this. I’d probably be willing to do the extra work to do the 2018 Roth but I’m not quiet maxing out my SEP 2018 I’m close. If so, you will have to pay some taxes on your 2013 conversion, which may not be a big deal depending on what exactly you mean by “in process now” with regard to getting your SEP balance to zero. This post has stimulated my thinking…I’ve got, 1) 125k SEP IRA (zero investment gains) The IRS puts an income ceiling on your ability to contribute to a Roth IRA. Or maybe you’re asking if you get a custom plan design on an individual 401(k) and then do a megabackdoor Roth IRA there. If the answer to those is all yes (and of course it is) then a Backdoor Roth IRA instead of investing in taxable makes sense. So you’re not choosing between tax-deferred and tax-free. Remember that for a high earner with a retirement plan at work, a traditional IRA contribution is NOT deductible. Last point. So your #2 makes sense now. That will take you to the standard Vanguard “Review and Submit” screen. In addition, would you like it protected from your creditors and to pass to your heirs outside of probate? I like to keep investing as simple as possible which every year doing a conversion doesn’t seem to be. Hmmm…..That’s a great idea. If the 401K accepts transfers and only accepts pre-tax money, then roll all the pre-tax money into it, and then convert what’s left. I don’t know of an individual 401(k) provider that doesn’t require an EIN. 2) I cant do backdoor roth due to sizable rollover IRA and roth IRA accounts from my/wife’s prior jobs and investing in roth when income was lower, so running into pro-rata rule there too (unless is there any way around this?). Also, don’t forget 5500 for your spouse, which doubles all the figures Jim just mentioned. The key to filling out the 8606 correctly when you make a contribution after the calendar year is to recognize that the contribution step is reported for the tax year and the conversion step is reported for the calendar year. Line 6 is zero in a typical year. If you have no SEP, SIMPLE, traditional, or Rollover IRA, then you do not have to get rid of one before year end, that’s correct. It’s the end of the year, and some lucky folks are getting year end bonuses! Understanding the Mega Backdoor Roth IRA - Podcast #127, Best Retirement Accounts For Independent Contractors. Straighten out your financial life today! I couldn’t find an easy answer for this question: My hospital allows after tax contributions to a pension plan and thus I’ve been doing Roth conversions monthly with my after tax contributions this year. Some day they will appreciate never having to pay taxes on the compounded earning. Click to learn more! I am also investing in Real Estate, paying off significant student loans etc, saving etc…. One argument about maxing out Roth IRA is that you should do it at the beginning of the year. That was helpful. If it’s still far off, by that time your $55k can become $255k. And heaven forbid they actually learn how to work in the process, obviously them working is an essential component to being able to contribute to the account. So this article and others saying you can do leave pre-tax alone and convert only after-rax are outdated? (My auto investment is $5500 on December 6 each year). If you earn in excess of that ceiling, you won’t be able to contribute to a Roth IRA… Thanks so much WCI for this website and all your great advice! However, by Tuesday morning (January 5th) I was able to do the conversion step. That’s kind of too late for what you’re trying to do. 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