Menu

I want to use tax refund to fund backdoor Roth

Home Tax Reduction I want to use tax refund to fund backdoor Roth

  • Avatar OSman 
    Participant
    Status: Physician, Dentist
    Posts: 22
    Joined: 12/20/2018

    Another Roth ?…

    I don’t currently have the funds but am expected to get a hefty return this year. I want to use that to fund 2018 Roth contributions. Is this possible or is the moment I file the return become too late since I won’t have a 1099-r from vanguard for the time I file?

    OSman

    #189205 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3335
    Joined: 01/08/2016

    you can contribute to the IRA up until April tax time for 2018. the conversion will take place in 2019 which means you will have nothing to report until tax time next year for this year.

     

    #189206 Reply
    Avatar OSman 
    Participant
    Status: Physician, Dentist
    Posts: 22
    Joined: 12/20/2018

    Won’t I need to fill out part I of 8606 for 2018 taxes though?

    #189207 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2887
    Joined: 01/14/2017

    Yes you will need to file a Form 8606 for 2018 for a non-deductible IRA contribution. Can you not just put the contribution in now and wait on the refund to fill up whatever bucket that contribution came from?

    #189218 Reply
    Avatar hightower 
    Participant
    Status: Physician
    Posts: 1324
    Joined: 12/07/2016

    Another Roth ?…

    I don’t currently have the funds but am expected to get a hefty return this year. I want to use that to fund 2018 Roth contributions. Is this possible or is the moment I file the return become too late since I won’t have a 1099-r from vanguard for the time I file?

    OSman

    Click to expand…

    I don’t think you can fund a 2018 contribution after you file your taxes.  But, I’m not a tax expert, so I could be wrong.  I am guessing you’d need to file a corrected tax form or something to do it.

    Regardless, if I may ask, do you not have any savings at all (emergency fund for instance?)?  If this is the case, you should focus your energy this year on beefing up your savings so that you have the liquidity you need for things like this in the future.  This would not be an issue if you had an emergency fund of 3-6 months expenses.

    Also, why are you getting a “hefty return?”  Ideally you should structure your taxes so that you just about break even or actually owe a small amount at tax filing time.  Otherwise, you’re giving the government a free loan with money that could be used for something else, like funding your Roth;)

    #189221 Reply
    Avatar OSman 
    Participant
    Status: Physician, Dentist
    Posts: 22
    Joined: 12/20/2018

    Yes you will need to file a Form 8606 for 2018 for a non-deductible IRA contribution. Can you not just put the contribution in now and wait on the refund to fill up whatever bucket that contribution came from?

    Click to expand…

    Another Roth ?…

    I don’t currently have the funds but am expected to get a hefty return this year. I want to use that to fund 2018 Roth contributions. Is this possible or is the moment I file the return become too late since I won’t have a 1099-r from vanguard for the time I file?

    OSman

    Click to expand…

    I don’t think you can fund a 2018 contribution after you file your taxes.  But, I’m not a tax expert, so I could be wrong.  I am guessing you’d need to file a corrected tax form or something to do it.

    Regardless, if I may ask, do you not have any savings at all (emergency fund for instance?)?  If this is the case, you should focus your energy this year on beefing up your savings so that you have the liquidity you need for things like this in the future.  This would not be an issue if you had an emergency fund of 3-6 months expenses.

    Also, why are you getting a “hefty return?”  Ideally you should structure your taxes so that you just about break even or actually owe a small amount at tax filing time.  Otherwise, you’re giving the government a free loan with money that could be used for something else, like funding your Roth;)

    Click to expand…

    All valid questions:

    Re Emergency funds: I am first year out of residency and have been focusing all spare cash toward paying off credit cards. Before you ask I will go ahead and answer the question as to why credit card debt is so high…. Unfortunately OMFS is a long, expensive road. Especially in Boston. It really throws you off to have to go to medical school for two years in the middle of residency. Nevertheless that is just an excuse. What really happened is my wife suddenly lost her job during my medical school time. The medical school I attended did not adjust budgets however so I couldn’t just borrow more cash as a student loan to cover living expenses. The single guy living in the med school dorm had the same budget as the married guy with a child such as myself. Nevertheless, the bulk of our credit card debt was developed over this time. All in all at the end of residency the CC burden was to the amount of ~45k so have been trying to tackle this pretty aggressively. We are currently down to our last 5K of high interest earning CC balance. The rest has been paid off or refinanced to a much more manageable/reasonable rate. Call it Naïve but I guess I figured during this “danger time”, in the event of a true emergency I could use my newly found credit line as a last resort emergency fund (as I have been paying off the cards I have been leaving the lines open to help improve my %credit utilization). You’re point is valid though. E fund set up is high on the priority list. My moonlighting gig will be coming to fruition here in the next couple months also so that should help get that set up quicker.

     

    Re Hefty tax return: Again I will say first year out of residency is to blame. I went from making 35K during the first 6 months of the year to 150k over the last 6 months. It is hard to tax plan when there is such an inconsistent income over the course of the year along with the fact that two different state returns are involved. I got caught with my pants down on my 2016 return and ended up owing a lot more than I expected. Out of fear of that happening again I have been having extra taken out each paycheck. Obviously I overshot… Not the worst problem to have I suppose. At the end of the day I am glad because I am not certain I would have appreciated the extra 12K spread out over multiple paychecks as much as I do as a lump sum that I know will go to good use.

     

    So I guess the solution may be to wait to file my tax return… I can slow down payments on that final bit of credit card balance and try to gather up the cash over the next couple months to fund the Roths (11k for spouse and myself) and then use the tax return to bang out that last bit of credit card. Even if I can’t max them out anything is better than nothing.

     

    OSman

    #189230 Reply
    Avatar justlearning 
    Participant
    Status: Other Professional, Spouse
    Posts: 112
    Joined: 08/15/2017

    i would just pay off the remaining CC and establish emergency fund and do back door roth for 2019 later in the year.

    #189238 Reply
    Avatar Gamma Knives 
    Participant
    Status: Physician
    Posts: 125
    Joined: 06/25/2017

    If you wife did not work your MAGI could be under $189,900 which would mean you can contribute to roth directly for 2018. This would be the simplest option. I believe there is nothing to report to IRS for the regular roth contribution. This would give you until the deadline to contribute.

    #189245 Reply
    Avatar OSman 
    Participant
    Status: Physician, Dentist
    Posts: 22
    Joined: 12/20/2018

    She eventually did regain employment and worked for the first 5 months of 2018 before we moved. So that unfortunately put us over the phase out range for Roth.

    #189248 Reply
    Avatar Gamma Knives 
    Participant
    Status: Physician
    Posts: 125
    Joined: 06/25/2017

    I think you would be able to file the 8606 after you get the return and make the contribution. (https://www.thebalance.com/forgot-to-file-form-8606-for-non-deductible-iras-3973986)

    #189251 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1617
    Joined: 02/01/2016

    You have until the tax filing deadline to make your non-deductible traditional IRA contributions regardless of when you actually file your taxes. So you can certainly file your return, get your refund and make the non-deductible traditional IRA contribution by the tax filing deadline. You can either include the Form 8606 for the non-deductible contribution with your tax filing or separately send it along later.

    There is technically a $50 penalty for late filing of Form 8606, but I have never heard of the IRS assessing it even several years late. If you really want to be safe, file an extension, file your return, get your refund, make your contribution by the tax filing deadline and separately file your Form 8606 by the extension deadline.

    People making deductible contributions can file their return early claiming the maximum deduction in order to get a bigger refund and use that extra amount to help maximize their IRA contributions.

    #189253 Reply
    Liked by jfoxcpacfp
    Avatar OSman 
    Participant
    Status: Physician, Dentist
    Posts: 22
    Joined: 12/20/2018

    Great. I will try these things and keep everyone updated on how it goes. My last idea may be dumb so bear with me… but since I only need to fill out Part I of form 8606 can I just prefill it out in my tax return as WCI demonstrates in his post (https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/) and then just contribute into the traditional IRA once I receive the refund?

    #189323 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7128
    Joined: 01/09/2016
    Disability Insurance

    Great. I will try these things and keep everyone updated on how it goes. My last idea may be dumb so bear with me… but since I only need to fill out Part I of form 8606 can I just prefill it out in my tax return as WCI demonstrates in his post (https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/) and then just contribute into the traditional IRA once I receive the refund?

    Click to expand…

    Yes, that is what @spiritrider was explaining how to do.

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

    #189337 Reply
    Avatar hightower 
    Participant
    Status: Physician
    Posts: 1324
    Joined: 12/07/2016

    Since you’re still paying off high interest credit card debt, I would not recommend you use your refund for a Roth this year.  You need cash on hand now.  With that kind of debt, your priorities should be: 1. Save up an efund first (this prevents you from going into any further debt) 2. Aggressively pay off your debt 3. Then you can start funding retirement accounts.

    It doesn’t make any sense to put money in a backdoor roth when you’re hanging on to thousands of dollars of high interest credit card debt.  That refund will be better used in either a savings account (efund) or put it towards your credit card bills.  That’s just my 2 cents.  I’m sure Dave Ramsey would agree, lol.

    #189346 Reply
    Liked by Tim, G, justlearning
    Avatar Indest 
    Participant
    Status: Resident
    Posts: 37
    Joined: 12/19/2018

    You can get up-to a $200 tax credit if you made less than 30k this yr (aka if you are a PGY-1) and contributed to a retirement account. It is 10% up to 200 on a max of $2000 you saved.

    Anyone may correct me if I am wrong.

    That said, if you do find your Roth, you might want to addend your fed taxes for some more $ lol.

    #190367 Reply

Reply To: I want to use tax refund to fund backdoor Roth

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

Notifications Mark all as read  |  Clear