Backdoor into Roth IRA

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LeRainDrop
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Backdoor into Roth IRA

Postby LeRainDrop » Sat Dec 29, 2012 12:01 pm

Friends, I just spent a fair amount of time researching how to get money into a Roth IRA if your income is *too high* to contribute directly, commonly known as "backdoor conversion." I somewhat recently read references to this practice elsewhere in this forum, and wanted to investigate because I previously believed that if your income exceeded these threshholds you could not contribute to any IRA. That belief was wrong! There is no income limit for contributing to a nondeductible Traditional IRA, and from there, you can use the backdoor mechanism for converting it into a Roth IRA. If only I had taken the time to research this earlier, I would not have missed the last five years of opportunity to contribute :(

Anyhow, rather than explain it all here, I thought I'd share a link to the article that I found to be most helpful in guiding me through the process. The comments on the article also helped me resolve more of my questions. http://thefinancebuff.com/the-backdoor- ... ow-to.html

VinTek
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Re: Backdoor into Roth IRA

Postby VinTek » Sat Dec 29, 2012 12:09 pm

LeRainDrop wrote:Friends, I just spent a fair amount of time researching how to get money into a Roth IRA if your income is *too high* to contribute directly, commonly known as "backdoor conversion." I somewhat recently read references to this practice elsewhere in this forum, and wanted to investigate because I previously believed that if your income exceeded these threshholds you could not contribute to any IRA. That belief was wrong! There is no income limit for contributing to a nondeductible Traditional IRA, and from there, you can use the backdoor mechanism for converting it into a Roth IRA. If only I had taken the time to research this earlier, I would not have missed the last five years of opportunity to contribute :(

Why didn't you just ask us about this? Some of us have been doing this for quite some time. In fact, you've lost out on more than five years because if you'd been doing non-deductable TIRAs for a long time, you'd have been able to convert the whole thing to a Roth the first year it became possible. You'd have taken a tax hit on the earnings/growth of the account earned in that period but you would have been able to convert your original contribution without a tax hit because you never took a deduction on it in the first place.

LeRainDrop
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Re: Backdoor into Roth IRA

Postby LeRainDrop » Sat Dec 29, 2012 1:56 pm

VinTek wrote:Why didn't you just ask us about this? Some of us have been doing this for quite some time. In fact, you've lost out on more than five years because if you'd been doing non-deductable TIRAs for a long time, you'd have been able to convert the whole thing to a Roth the first year it became possible. You'd have taken a tax hit on the earnings/growth of the account earned in that period but you would have been able to convert your original contribution without a tax hit because you never took a deduction on it in the first place.

Thanks, VinTek, you're right that I should have asked earlier and really missed out for not doing so. I completely lost those years, though, because I thought I could only contribute to my 401(k), and now I can't go back and take advantage of the IRA/Roth IRA, too. At least I caught 2012 in time, so it was actually four years that I skipped using any IRA vehicle. (Not that I lost the money itself, but just that it's limited to growth in taxable accounts only now.) Your post is a good reminder to actively seek the wisdom of the many people on the forum who have more years of experience and success! I enjoy reading people's questions and advice, but sometimes I'm shy to ask my own questions.

VinTek
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Re: Backdoor into Roth IRA

Postby VinTek » Sat Dec 29, 2012 3:41 pm

LeRainDrop wrote:
VinTek wrote:Why didn't you just ask us about this? Some of us have been doing this for quite some time. In fact, you've lost out on more than five years because if you'd been doing non-deductable TIRAs for a long time, you'd have been able to convert the whole thing to a Roth the first year it became possible. You'd have taken a tax hit on the earnings/growth of the account earned in that period but you would have been able to convert your original contribution without a tax hit because you never took a deduction on it in the first place.

Thanks, VinTek, you're right that I should have asked earlier and really missed out for not doing so. I completely lost those years, though, because I thought I could only contribute to my 401(k), and now I can't go back and take advantage of the IRA/Roth IRA, too. At least I caught 2012 in time, so it was actually four years that I skipped using any IRA vehicle. (Not that I lost the money itself, but just that it's limited to growth in taxable accounts only now.) Your post is a good reminder to actively seek the wisdom of the many people on the forum who have more years of experience and success! I enjoy reading people's questions and advice, but sometimes I'm shy to ask my own questions.

Don't worry about it. And don't be shy. We're all here to help.

bpgui
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Re: Backdoor into Roth IRA

Postby bpgui » Sat Dec 29, 2012 7:54 pm

I've been doing this for years. Like VinTek said, we could have helped you out if we knew you needed it. :)

I disagree with the article's Step 3: Wait. There is no reason to do so. I do the conversion the same day my contribution hits the account.

I do wonder if the gov't will close the loophole and reinstate an income limit on conversions.

LeRainDrop
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Re: Backdoor into Roth IRA

Postby LeRainDrop » Sat Dec 29, 2012 8:40 pm

bpgui wrote:I disagree with the article's Step 3: Wait. There is no reason to do so. I do the conversion the same day my contribution hits the account.

Thanks, bpgui, I'm pretty impatient, so I'll probably end up waiting just a week. Unless, if my contribution hits on Monday (I just put in the order today), then I'll convert immediately with hopes that the conversion goes through in calendar year 2012, though that speed seems unlikely. I feel like a total dope for missing this before!

LeRainDrop
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Re: Backdoor into Roth IRA

Postby LeRainDrop » Wed Jan 02, 2013 11:04 pm

Just letting you all know that my contribution to the TIRA went through on December 31, but Vanguard's system did not generate the confirmation of the transaction until January 2. So, I called Vanguard this afternoon and was promptly connected with a "retirement specialist," who walked me through the Roth conversion process. Yes, that was so simple!

VinTek
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Re: Backdoor into Roth IRA

Postby VinTek » Wed Jan 02, 2013 11:14 pm

Congratulations!

I'm glad you got into it. It may not seem like much now, but it should be fairly sizable by the time you take it out.

The real question is what will happen when the backdoor conversion goes away. I'd been doing the non-deductible Traditional IRA for years before the backdoor was available. But with potential changes to the tax code (lowering of tax rates but elimination of deductions while raising capital gains taxes to marginal income rates), it might or might not make sense for me to continue making contributions to a non-deductible IRA in future years. Lots of variables to consider. Time will tell.

dkfrugal
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Re: Backdoor into Roth IRA

Postby dkfrugal » Tue Feb 19, 2013 6:21 pm

I just recently found out about the backdoor ROTH, and I too wish I had known about this community sooner. I just set up my IRA accounts over the weekend and at the very least I can still catch my 2012 Contribution. I've been reading the IRS website, and from what I know, there's no changes to 2013 regarding conversions, am I correct on this???

Bichon Frise
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Re: Backdoor into Roth IRA

Postby Bichon Frise » Thu Feb 28, 2013 8:49 am

dkfrugal wrote:I just recently found out about the backdoor ROTH, and I too wish I had known about this community sooner. I just set up my IRA accounts over the weekend and at the very least I can still catch my 2012 Contribution. I've been reading the IRS website, and from what I know, there's no changes to 2013 regarding conversions, am I correct on this???


2013 is still young, but no income limits or any other limit or test needs to be met for a conversion from TIRA to RIRA.

Many people think it will go away, but I'm skeptical it will ever happen.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

LeRainDrop
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Re: Backdoor into Roth IRA

Postby LeRainDrop » Thu Feb 28, 2013 1:09 pm

Is there a limit on how many times you can do the conversion in a single calendar year? Basically, my 2012 contribution did not actually get converted until January 2, 2013, so I'm wondering if I have to wait until the beginning of 2014 in order to make my 2013 non-deductible contribution and convert to a Roth. (Note, I feel no desire to wait more than a day or so between contributing a converting.) Thanks!

Bichon Frise
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Re: Backdoor into Roth IRA

Postby Bichon Frise » Thu Feb 28, 2013 1:44 pm

LeRainDrop wrote:Is there a limit on how many times you can do the conversion in a single calendar year? Basically, my 2012 contribution did not actually get converted until January 2, 2013, so I'm wondering if I have to wait until the beginning of 2014 in order to make my 2013 non-deductible contribution and convert to a Roth. (Note, I feel no desire to wait more than a day or so between contributing a converting.) Thanks!


You can make your 2013 non-deductible IRA contribution now and convert it right away. So, you can do as many conversions and as many dollars as you (or your pocket book) can tolerate.

There are limitations put on the recharacterization of conversions though.

If you care, here is some discussion with excellent links on recharacterization.

http://www.early-retirement.org/forums/ ... 61045.html
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!


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