Menu

Damn this Roth stuff

Home Retirement Accounts Damn this Roth stuff

  •  Snag75 
    Participant
    Status: Physician
    Posts: 142
    Joined: 12/09/2018

    Ok, so for a multitude of reasons I’m late to the game in figuring out about Roth contributions. I should have contributed/converted more in the past, including last year, when I had lower tax brackets.  It wasn’t until late fall  that I learned about Roth and back-door Roth, and not until mid-Nov about pro rata rule, etc.  Once I realized that pro rata would apply to me (have <$100K in IRA funds which I’ve had for over a decade now), I considered opening solo-K (I have a little 1099 income), rolling over all my IRA funds into it, and doing a backdoor-Roth.  It seemed like a daunting task to sort out late into the year when I was new at it all, but then I looked at my prior couple tax returns and thought there was a good chance I would still be able do a front-door Roth (relatively low income with lots of deductions).  It was an easy answer to put it off since I also had several other time sensitive items to sort out, including replacing insurances for policies I wanted to close, etc.

    Now I’m looking at my tax returns and realizing that my 2018 AGI will likely be quite a bit higher than I had estimated.  I’m not exactly sure how, but combined with less deductions and high refunds last year, and not realizing what deductions do NOT go into my AGI, I think I won’t be eligible for front-door Roth anymore. 🙁

    So questions:
    1. Can one still do backdoor-Roth for prior tax year (before April)?

    2. Given the pro-rata ratio I have, is it still worth it (meaning, despite being taxed on almost all the $5500, I would still have no taxes on that gains, right)?

    3. If I did backdoor, my plan was to have a separate tIRA account with Fidelity for this (current IRA funds are not with Fidelity, but my employer 457B is) and do Roth there.  Would that somehow add basis to my outside IRA funds which are held with my current FA’s group?

    4. Future plan is to fire FA and move my other IRA funds into either solo-K (with Fidelity) or my employer’s governmental 457B so I can do future bd-Roths with ease.  The latter would be easier, but wondering if having a solo-K available for rollovers would be better to have anyway, since I don’t know if I’ll always have 1099 income to justify opening it?  I also would prefer not to complicate things with more accounts than I need (and would I need some kind of “number” for my “business” to open the solo-K?), esp since I’m new to all this.  But once my stuff is in the 457B, I think it’s stuck there (the holdings are fine) until I terminate with the employer — is that bad?

     

    Obviously my first 3 ?’s are the more time-sensitive ones.  And I would want to start working on my taxes first to be certain what my AGI is before starting the backdoor process, but then I’d need to complete the process before completing my taxes.

    Thanks!

    #184387 Reply
     jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1676
    Joined: 03/01/2018

    You can still make a nondeductible 2018 contribution. But obviously you can’t do a 2018 conversion. That’s fine though.

    When are you going to move your tIRA? That’s the thing you keep avoiding, but you should just get it done. This will all be easier if you do.

    If I were you, I would:

    1. Move your tIRA. Roll it over to an employer plan that you have now.
    2. Make your $5500 nondeductible tIRA 2018 and $6000 nondeductibe (presumably) tIRA 2019 contributions to an IRA not under the umbrella of your FA. You have until your tax filing deadline to make the 2018 contribution.
    3. Convert those contributed dollars to Roth.
    4. As long as you got step 1 done by 12/31/19 there will be no pro rata taxation.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #184391 Reply
     Snag75 
    Participant
    Status: Physician
    Posts: 142
    Joined: 12/09/2018

    If I’m understanding correctly:

    So you’re saying I can’t do the classic “backdoor Roth” for 2018, but I can contribute the same amount to a tIRA for 2018 and then convert it (essentially ending up with the same thing)?

    And I can do all this now, but then what do I put down for my 2018 taxes?  Just the tIRA contribution (and then taxes for the Roth rollover will all be 2019)?

    With this plan, how am I more behind than if I had done the backdoor Roth properly as planned?  Some additional tax/gains?  Taxed at 2019 rate instead of 2018?

     

    Thanks!

    #184394 Reply
     Snag75 
    Participant
    Status: Physician
    Posts: 142
    Joined: 12/09/2018

    Mostly W2, just a few thousand a year 1099, at most.  Are you referring to opening a solo-K with Roth?

    #184397 Reply
     jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1676
    Joined: 03/01/2018

    You didn’t answer the question I asked above.

    A backdoor Roth IRA does not increase or decrease tax. There is no increase or decrease in your tax if you follow my steps above.

    Had you done a backdoor Roth in 2018 you would have increased tax. Because your conversion would be subject to pro rata taxation.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #184422 Reply
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 188
    Joined: 06/12/2017
    Future plan is to fire FA

    Click to expand…

    It’s about time! The fact that your advisor never discussed the merits of opening a Solo 401(k) in order to free you up to do BackDoor Roth is appalling. This just highlights the fact that doctors who don’t want to DIY need to find an advisor who specializes in working with physicians.

    If I did backdoor, my plan was to have a separate tIRA account with Fidelity for this (current IRA funds are not with Fidelity, but my employer 457B is) and do Roth there.  Would that somehow add basis to my outside IRA funds which are held with my current FA’s group?

    Click to expand…

    It would add to your basis no matter where you open it. However, the IRA Aggregation Rule is a thorn in the side when you try to siphon off only the after-tax money; but, when you transfer money into an employer plan (either a Solo 401(k) or your current employer’s plan), the IRS no longer aggregates all IRA monies. Instead, they assume that pre-tax money is transferred into the plan first. Thus, leaving behind only your after-tax money in the new IRA you opened for 2018. Best of luck with getting this all squared away.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    http://www.fswealthadvisors.com | (717) 496-0900

    #184433 Reply
     ZZZ 
    Participant
    Status: Spouse
    Posts: 174
    Joined: 06/18/2018
    Splash Refinancing Bonus

    Yikes. I’d suggest sitting down with a financially savvy friend and taking a look at your finances and taxes. If you’re struggling with these questions, I suspect you’re doing lots of other things suboptimally.

    Maybe this is one of those things that should be added to the WCI “10 (plus) ways to know you’re a competent DIY investor.” — You can successfully complete a backdoor Roth.

    You’re not alone, the number of people that struggle/screw up the Backdoor Roth despite the abundance of well done step-by-step guides that lay out exactly how to complete a few amazingly simple tasks is disheartening. Good on you for trying to figure it out, but this should prompt you to pause and reevaluate your entire financial and tax picture.

    #184435 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6656
    Joined: 01/09/2016

    No, it’s not too late, but you need to do a little focused reading to wrap your head around the workings of backdoor Roths. They are not that complicated once you understand the purpose and how they work. These articles will be helpful:

    Yes, I definitely recommend the solo-k. You are correct to be concerned that you may not have a predictable IC income stream in the future and the solo-k will serve as a receptacle for future rollovers if/when you change jobs and need to preserve your ability to do backdoor Roth’s w/o having to worry about the pro-rata rule. See Small Business Retirement Plans, Part 3: 401k’s for guidance.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #184516 Reply
     Snag75 
    Participant
    Status: Physician
    Posts: 142
    Joined: 12/09/2018

    You didn’t answer the question I asked above.

    A backdoor Roth IRA does not increase or decrease tax. There is no increase or decrease in your tax if you follow my steps above.

    Had you done a backdoor Roth in 2018 you would have increased tax. Because your conversion would be subject to pro rata taxation.

    Click to expand…

    You asked when I was going to move my tIRA?  So again, I was going to see if I could get it together before 12/31/18 but it took me a few weeks to realize what my options were to do so and time was very tight (was already mid-Dec with limited business days to make all the steps happen), then I looked at my 2017 tax return and thought I could do front-door.

    Yes, I see how with pro rata I would have been paying tax on most of my gains if I had contributed in 2018, is that right, only small percentage would have had tax-free gains, so basically like as if I contributed to a non-deductible IRA, is that right?  That’s why I didn’t do it.

    With your method, I would not paying tax on gains as long as I convert both sets of contributions (2018 and 2019) to Roth right away, correct?  The 2019 would be for purpose of future back-door (as long as I get tIRA funds moved before 12/31/19).  So how is the 2018 NOT considered backdoor (is it essentially a delayed backdoor)?

    And I guess if I’m contributing post-tax funds and converting right away, there is no tax that would be owed with this maneuver?

    Finally, you recommended rolling over tIRA funds to employer account — this is government 457B (not 401K).  Do you consider any advantage to opening a solo-K instead of rolling over to employer funds?

    Thanks jacoavlu!

    #184806 Reply
     Snag75 
    Participant
    Status: Physician
    Posts: 142
    Joined: 12/09/2018
    If I did backdoor, my plan was to have a separate tIRA account with Fidelity for this (current IRA funds are not with Fidelity, but my employer 457B is) and do Roth there.  Would that somehow add basis to my outside IRA funds which are held with my current FA’s group?

    Click to expand…

    It would add to your basis no matter where you open it. However, the IRA Aggregation Rule is a thorn in the side when you try to siphon off only the after-tax money; but, when you transfer money into an employer plan (either a Solo 401(k) or your current employer’s plan), the IRS no longer aggregates all IRA monies. Instead, they assume that pre-tax money is transferred into the plan first. Thus, leaving behind only your after-tax money in the new IRA you opened for 2018. Best of luck with getting this all squared away.

    Click to expand…

    I get the concept of pro rata, but not the details of how it would end up (perhaps a moot point for me now, since I didn’t do the backdoor in the end).

    Like, if I put $5000 into tIRA and then transfer that $5000 into Roth, but say only 5% ($250) will get counted as after-tax contribution (because of how much I have in another IRA somewhere else), what exactly happens?  All the $5000 remains in the Roth, but only 5% of it will have tax-free growth?  Somehow the company holding the Roth fund “knows” how much will be eligible for tax-free growth?  Or does only $250 end up in the Roth?

     

    #184809 Reply
     Snag75 
    Participant
    Status: Physician
    Posts: 142
    Joined: 12/09/2018

    Yikes. I’d suggest sitting down with a financially savvy friend and taking a look at your finances and taxes. If you’re struggling with these questions, I suspect you’re doing lots of other things suboptimally.

    Maybe this is one of those things that should be added to the WCI “10 (plus) ways to know you’re a competent DIY investor.” — You can successfully complete a backdoor Roth.

    You’re not alone, the number of people that struggle/screw up the Backdoor Roth despite the abundance of well done step-by-step guides that lay out exactly how to complete a few amazingly simple tasks is disheartening. Good on you for trying to figure it out, but this should prompt you to pause and reevaluate your entire financial and tax picture.

    Click to expand…

    No, it’s not too late, but you need to do a little focused reading to wrap your head around the workings of backdoor Roths. They are not that complicated once you understand the purpose and how they work. These articles will be helpful:

    As I said, I learned about how backdoor Roths work (and already read several articles), as well as pro rata (same), but by the time I did it was late in the year.  It takes time to educate oneself, but everyone learned everything they know at some point, right?  My point was end of last year.

    The main issue is not “screwing up” the Backdoor Roth, like I said, it was not realizing how much higher my income this year ended up compared to last (it varies each month, and my base increases a little every year, but somehow the total was more than I expected this year).  Last year (and all prior years) I could have done a front-door Roth.  I thought I was within range to do it this year too, but appears I was incorrect.  Now it seems better that I didn’t as it gave me more time to decide on where to move tIRA vs deal with pro rata, as long as I get stuff done in the next couple months.

    Yes, I definitely recommend the solo-k. You are correct to be concerned that you may not have a predictable IC income stream in the future and the solo-k will serve as a receptacle for future rollovers if/when you change jobs and need to preserve your ability to do backdoor Roth’s w/o having to worry about the pro-rata rule. See Small Business Retirement Plans, Part 3: 401k’s for guidance.

    Click to expand…

    Why would you recommend solo-K over employer’s government 457B?  If I terminate from employer, can’t I leave all the funds there, or better to have in a 401K for some reason.

    The other thought I had was, if I have the option for a solo-K now, would it make sense to take advantage of getting one with a Roth and put my 1099 income (just a few thousand a year) in there?  Sounds like E*Trade is the only one that allows rollovers AND Roth, and then I wonder how complicated it would be tax-wise to have a solo-K (right now seems easier to roll into 457B, but I’d want to consider other long-term advantages of other options.  Thanks!

    #184810 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6656
    Joined: 01/09/2016
    As I said, I learned about how backdoor Roths work (and already read several articles), as well as pro rata (same), but by the time I did it was late in the year.  It takes time to educate oneself, but everyone learned everything they know at some point, right?  My point was end of last year.

    Click to expand…

    I was providing resources because of the nature of the questions you were asking. Assumption was, if you knew how backdoor Roth’s worked, you wouldn’t have asked them. I believe we’re all just trying to be helpful in different ways.

    Why would you recommend solo-K over employer’s government 457B?  If I terminate from employer, can’t I leave all the funds there, or better to have in a 401K for some reason.

    Click to expand…

    They are not mutually exclusive. Most people have no guarantee that they will work for the same employer for the rest of their lives and they often want control over their funds when it is possible. That may not be the case with you, so you’ll have to make the decision you are most comfortable with.

    Good luck 😉

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #184857 Reply
    Liked by Tim
     treesrock 
    Participant
    Status: Physician
    Posts: 231
    Joined: 08/14/2017

    OP, your collection of posts over the past month make me worried that your are rushing to correct past mistakes without having a clear plan of what you are doing, and each time you make a move you then rush to post a multitude of questions about how something may have been done incorrectly and how to fix it.

    I would advise you to slow down, and consult with a fee-only CPA to create a clear plan of how you want to move forward.  Why not hire Johanna?  Considering she has tried to help on multiple posts at this point, it would be a good idea to get a professional to review your entire situation so you stop making mistakes going forward.

    #184869 Reply
    Liked by Hank, G
     jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1676
    Joined: 03/01/2018

    here is my meager attempt to explain pro rata tax on another thread:

    https://www.whitecoatinvestor.com/forums/topic/backdoor-roth-rookie-mistake-and-advice/#post-182480

    That was another user that had no choice but to deal with the pro rata tax, but to the OP, pro rata doesn’t matter if they move the tIRA.

    @snag75 you still didn’t really answer my question.

    When are you going to move your tIRA?

    I would advise moving your tIRA to an employer plan rather than a solo k, for now. Keep things simple. Get your tIRA moved, get your backdoor Roths done for 2018 and 2019. Then, let’s talk about a solo 401k.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #184880 Reply
    Liked by Tim
     Snag75 
    Participant
    Status: Physician
    Posts: 142
    Joined: 12/09/2018
    As I said, I learned about how backdoor Roths work (and already read several articles), as well as pro rata (same), but by the time I did it was late in the year.  It takes time to educate oneself, but everyone learned everything they know at some point, right?  My point was end of last year.

    Click to expand…

    I was providing resources because of the nature of the questions you were asking. Assumption was, if you knew how backdoor Roth’s worked, you wouldn’t have asked them. I believe we’re all just trying to be helpful in different ways.

    I appreciate your attempts to help, for sure.  Though I didn’t really ask questions on how the bd-Roth worked — I think I pretty much get the concept (the pro rata stuff is harder to wrap one’s head around re: the details, but jacoavlu did a good job explaining to someone else above — now all we need are visuals! 😉 ). It seems others have similar levels of questions on this forum.
    Again, my question is that given my unexpectedly weird income year (due to a multitude of factors), I’m trying to make a game plan in case I cannot do a front door Roth as I had planned.  Jacoavlu gave a plan above that seems to make sense to me, just have some other details to work out as well (hence my other questions).

    Why would you recommend solo-K over employer’s government 457B?  If I terminate from employer, can’t I leave all the funds there, or better to have in a 401K for some reason.

    Click to expand…

    They are not mutually exclusive. Most people have no guarantee that they will work for the same employer for the rest of their lives and they often want control over their funds when it is possible. That may not be the case with you, so you’ll have to make the decision you are most comfortable with.

    Click to expand…

    My current employer allows me to choose funds, and at least at this point, they seem quite varied and robust (e.g. Vanguard index funds).  Is the concern in the future the choices might not fit my needs enough?  Can I not roll over 457B funds elsewhere if I want after I terminate (they’re with Fidelity)?

    I was thinking more as the types of plans themselves, do 401Ks have other advantages that would be worth having?  I copied below my last question about this:

    The other thought I had was, if I have the option for a solo-K now, would it make sense to take advantage of getting one with a Roth and put my 1099 income (just a few thousand a year) in there?  Sounds like E*Trade is the only one that allows rollovers AND Roth, and then I wonder how complicated it would be tax-wise to have a solo-K (right now seems easier to roll into 457B, but I’d want to consider other long-term advantages of other options.  Thanks!

    #185214 Reply

Reply To: Damn this Roth stuff

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

you're currently offline

Notifications Mark all as read  |  Clear