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Keeping the backdoor open – how do I empty out an rollover IRA as a resident?

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  • Avatar DocHope 
    Participant
    Status: Resident
    Posts: 1
    Joined: 03/08/2019

    Finishing up my financial bootcamp, and trying to “fix mistakes” right now…

    My husband has retirement accounts from his prior employers that we are trying to straighten out/make better investments. We put the funds into an rollover IRA with the plan to convert to his Roth IRA for 2019. There will be a few thousand dollars leftover — but we need to find somewhere else to invest it to avoid the pro rata rule. In reading the Backdoor Roth IRA Ultimate Guide and Tutorial, the best answer seems to be to open a solo 401(k). But he’s a grad student and I’m a resident so we don’t have a company and we can’t do this… unless I’m missing something? Can I do this?

    Thanks in advance for the help, and like the other new users, sorry if this is a super naive question! I tried to read a bunch of forum threads to find the answer, but most people seem to have another non-IRA account available through a spouse, etc. that was a better answer for them.

    #196881 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016

    No need to apologize and welcome to the forum!

    When does your husband expect to start working? Four options are:

    • Contribute to TIRA this year and wait until next year to convert to a Roth (assuming he’ll be able to participate in a plan that accepts rollovers before 12/31/20)
    • Keep funds in the TIRA in cash for a couple of years until the above is true.
    • Pay the pro-rata tax for a few years while you’re in a low tax bracket. Not that big a deal – you’re just prepaying taxes that you’ll eventually pay at higher rates.
    • And, probably my favorite is to convert those old accounts to Roth IRAs while you’re both in a low tax bracket. You’ll probably never be this low again.

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

    #196886 Reply
    birddog birddog 
    Participant
    Status: Physician
    Posts: 26
    Joined: 02/05/2019

    I am admittedly not an expert like others on the forum (J Fox, WCI, POF, etc.) would be in this area. However, could you obtain an EIN by doing a 1099 activity such as surveys or even something as simple as driving for a ride share service like Lyft or Uber to get some 1099 income? Then you would be able to open a solo 401(k) to roll your traditional IRA into that and avoid the pro rata rule. Personally, I opened my individual/solo 401(k) through Charles Schwab and found that they were very helpful in walking me through the process and also they do not charge any account maintenance fees even if the balance is low. They had a nice selection of index funds (with very low expense ratios and a minimum purchase of only $1 for these funds) available for the 401(k).

    J Fox , WCI, or others – please correct me if I am wrong.

    #196984 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3618
    Joined: 01/08/2016
    Disability Insurance
    funds into an rollover IRA with the plan to convert to his Roth IRA for 2019. There will be a few thousand dollars leftover

    Click to expand…

    so you guys are minimal income, and the rollover IRA is a few thousand dollars?

    this is a no brainer. convert the whole thing, pay the tax, move on.

    #196993 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016

    I am admittedly not an expert like others on the forum (J Fox, WCI, POF, etc.) would be in this area. However, could you obtain an EIN by doing a 1099 activity such as surveys or even something as simple as driving for a ride share service like Lyft or Uber to get some 1099 income? Then you would be able to open a solo 401(k) to roll your traditional IRA into that and avoid the pro rata rule. Personally, I opened my individual/solo 401(k) through Charles Schwab and found that they were very helpful in walking me through the process and also they do not charge any account maintenance fees even if the balance is low. They had a nice selection of index funds (with very low expense ratios and a minimum purchase of only $1 for these funds) available for the 401(k).

    J Fox , WCI, or others – please correct me if I am wrong.

    Click to expand…

    Do I understand you are not asking for yourself since you already have a solo-k? Yes, it is possible to undertake the above activities as a side business and set up and contribute to a solo-k as a result of being in business. I am not a fan of doing a few surveys on a 1-time basis simply for the purpose of setting up a solo-k.

    • With option A, you are in business to make a profit, even if only for a few years.Perfectly fine.
    • With option B, you want to set up a solo-K and are completing a few surveys as a means to an end with no intent to be “in business”. Questionable.

    It is a blurry line, I realize.

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

    #196998 Reply
    Liked by spiritrider
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1085
    Joined: 02/15/2016

    I’m confused by your question. Are you actually making contributions this year? The pro rata really doesn’t matter if you only have deductible contributions from a rollover IRA. If you’re not contributing anything, just convert the thing whenever and pay almost no taxes on the conversion.

    #197193 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016

    I’m confused by your question. Are you actually making contributions this year? The pro rata really doesn’t matter if you only have deductible contributions from a rollover IRA. If you’re not contributing anything, just convert the thing whenever and pay almost no taxes on the conversion.

    Click to expand…

    Actually, the pro-rata matters very much in this situation, at least impo. I feel certain that I am misunderstanding what you are saying and apologize for being slow to pick up. Could you possibly clarify with an example and give me a chance to sort it all out?

    TY!

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

    #197203 Reply
    Liked by spiritrider
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1085
    Joined: 02/15/2016

    I’m confused by your question. Are you actually making contributions this year? The pro rata really doesn’t matter if you only have deductible contributions from a rollover IRA. If you’re not contributing anything, just convert the thing whenever and pay almost no taxes on the conversion.

    Click to expand…

    Actually, the pro-rata matters very much in this situation, at least impo. I feel certain that I am misunderstanding what you are saying and apologize for being slow to pick up. Could you possibly clarify with an example and give me a chance to sort it all out?

    TY!

    Click to expand…

    I’m mostly looking for clarification from the OP.  With the husband’s rollover IRA, those are all deductible contributions.  Presumably, there are no non-deductible contributions in the husband’s IRA.  OP has given us no info. on whether they’re making IRA contributions, but even if they were, I have a hard time believing a grad student + resident make more than $193k per year.  They can make direct Roth IRA contributions for 2019 and then just convert the remaining rollover IRA in 2020.  No other account needed to move the rollover IRA.  It’s probably wise to convert it now anyways.  The pro rata will matter in the future but not now.

    #197288 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016
    I’m mostly looking for clarification from the OP.  With the husband’s rollover IRA, those are all deductible contributions.  Presumably, there are no non-deductible contributions in the husband’s IRA.  OP has given us no info. on whether they’re making IRA contributions, but even if they were, I have a hard time believing a grad student + resident make more than $193k per year.  They can make direct Roth IRA contributions for 2019 and then just convert the remaining rollover IRA in 2020.  No other account needed to move the rollover IRA.  It’s probably wise to convert it now anyways.  The pro rata will matter in the future but not now.

    Click to expand…

    Ah – got it!

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

    #197300 Reply
    Liked by spiritrider
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1709
    Joined: 02/01/2016
    Earnest refinancing bonus

    Yeah everybody replying is correct, but the relevant info to @peds and @jhwkr542 needs to be clarified.

    Is the “few thousand” what is in the Rollover IRA? Or is it what is available to make a Roth Contribution and what is their Roth MAGI?

    #197306 Reply
    Liked by jfoxcpacfp

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