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Backdoor and Roth Recharacterization help

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  • Avatar UroloJay 
    Participant
    Status: Resident
    Posts: 7
    Joined: 01/13/2016

    My wife and I have both maxed out our Roth IRAs during residency. Prior to graduation this year, I signed a contract to start Fall 2020 that included a signing bonus, which put us over the income limits to allow Roth contributions. Prior to the job offer, we had each already placed $1,000 into our Roth IRAs. Since that time, we have re-characterized each to non-deductible traditional IRAs. To further complicate things, I rolled over a small pre-tax amount from my residency into this newly re-characterized traditional IRA. All now at Vanguard.

    Thus, current account balances are:

    My non-deductible Traditional/Rollover IRA:
    $1,000 Roth 2019 contribution (re-characterized to trad)
    $118.17 2019 Roth earnings (re-characterized to trad)
    $1,726.67 Rollover traditional (contributions made 2013 plus earning)

    Wife non-deductible Traditional IRA:
    $1,000 Roth 2019 contribution (re-characterized to trad)
    $104.46 2019 Roth earnings (re-characterized to trad)

    Bottom line: We’d like to do a backdoor Roths for each of us. We can technically contribute $5,000 more to each of our IRAs this year (we stopped making contributions when we realized the complication above, but can catch up before the end of the year). Taxes have been paid on each of our $1,000 contributions, but not on the earnings nor the  $1,726.67 which was rolled over.

    Questions:
    1. Are we even allowed to do a backdoor Roths given we re-charactered in July 2019 and we are only allowed 1 re-characterization within 12 months (am I right about this)?

    2. If we can do a backdoor, I’m unsure how to treat the earnings and rollover amount ($1,726.67) and whether or not the pro-rata rule would apply. Can I simply make the remaining $5,000 contributions for each of us, and then pay taxes on the rollover amount and prior earnings?

    3. Or, am I totally sunk on this? If I can’t do it this year, then at the very least want to make sure I set myself up to do it next year.

    There are probably other angles I’m not considering. Any and all help is welcome.

    #238445 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 4240
    Joined: 01/08/2016
    1. Are we even allowed to do a backdoor Roths given we re-charactered in July 2019 and we are only allowed 1 re-characterization within 12 months (am I right about this)?

    Click to expand…

    i dont see what that has to do with anything. but yes you still do a bdrIRA

    I’m unsure how to treat the earnings and rollover amount ($1,726.67) and whether or not the pro-rata rule would apply. Can I simply make the remaining $5,000 contributions for each of us, and then pay taxes on the rollover amount and prior earnings?

    Click to expand…

    they are not the same thing. you still have 5k to add. you need to convert it all over.

     

    in summary…..add 5K remaining in contributions. convert all tIRA over to Roth. pay taxes. form 8606.

    #238447 Reply
    Avatar UroloJay 
    Participant
    Status: Resident
    Posts: 7
    Joined: 01/13/2016

    Thanks for the help. Bottom line that you provided is what I needed, just wanted to make sure I wasn’t missing something.

    #238457 Reply

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