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Missed conversion deadline, best strategy for back door Roth

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  • Avatar Phishfood 
    Participant
    Status: Physician
    Posts: 3
    Joined: 03/15/2018

    Hey all, new poster.

     

    Have a question on best strategy moving forward. Total financial no ice.

    New jobs, just opened first IRA for spouse Dec 2017 and contributed $5500 with plans for backdoor. Had issue with Vanguard online access and couldn’t open Roth IRA until February 2018. Went to try to do back door and 1. Had accrued $13 in the money market account so now have $5513 to deal with, and 2. Just found out I missed the conversion deadline for 2017 taxes.

    Best way to handle things moving forward, with goal of trying to get to a point of doing straight $5500 contribution\conversion zeroing out the tIRA each year? And how to handle the pro rata? She has an employee 401k we can roll into?

    -Phishfood

     

    #109961 Reply
    cgossage cgossage 
    Participant
    Status: Financial Advisor, Website Sponsor, Spouse
    Posts: 485
    Joined: 09/12/2017

    Don’t worry.  You didn’t miss anything.  There is a contribution deadline for the 2017 tax year which is April 17, 2018.  You don’t have to convert in the same tax year you contribute and it is perfectly fine to convert in 2018.  In fact, you could make your 2018 contribution as well and convert them both together.  Yes, you will have income of $13 when you file you 2018 taxes, but otherwise you are in good shape.  Just make sure to classify your 2017 contributions as non-deductible on form 8606 when you file your 2017 taxes.

    Clint Gossage CFA, CFP, CPA
    cmgfin.com

    #109998 Reply
    Liked by Craigy, adventure
    Avatar Phishfood 
    Participant
    Status: Physician
    Posts: 3
    Joined: 03/15/2018

    THANK YOU for your response. It is reassuring, but I still have SO many questions.

    It was my impression that there was a December 31 deadline for Roth conversions. I thought I had read that on a blog posting, or in the comments, from WCI, as well as several places on the internet. For example:

    https://finance.zacks.com/can-roth-conversion-applied-previous-tax-year-2134.html (first paragraph: The deadline for executing a Roth IRA conversion for a given tax year is Dec. 31 of that year. This can cause some confusion, since you generally have until April 15 of the following year to add new money to a Roth or traditional IRA. But that only applies to new contributions, not to conversions.)

    I am a total luddite but am working feverishly toward understanding this stuff and it comes with growing pains. It sounds like what you are saying is that, for my wife, who we have put $5500 into her tIRA but won’t be able to do the backdoor Roth until later, we will report the $5500 in the tIRA  + $13 in income for the 2017 taxes, and then in 2018 we will make our next “on time” (so to speak) contribution to her tIRA, and then convert all $11k + what little extra accrued into the Roth all at once for the next year’s (2018) taxes and pay tax on the little bit of accrued income.

    Am I getting things right?

    -Phishfood

    #110101 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3988
    Joined: 01/08/2016

    You haven’t missed anything, other than what about your rIRA?

    Either way, keep the 2017 5500. Add the 2018 5500 for her now. Convert both of them at the same time this year (2018). Report for taxes when you file next year (2019) on the 8606. It will be 1100 instead of 5500, plus the tax on 13 (your poor $3-4 you’ll lose).

     

    Going forward (2019), do the contribution and conversion in the same year. We all do it in January. Then you don’t have this headache.

    #110149 Reply
    q-school q-school 
    Participant
    Status: Physician
    Posts: 2515
    Joined: 05/07/2017

    Don’t worry.  You didn’t miss anything.  There is a contribution deadline for the 2017 tax year which is April 17, 2018.  You don’t have to convert in the same tax year you contribute and it is perfectly fine to convert in 2018.  In fact, you could make your 2018 contribution as well and convert them both together.  Yes, you will have income of $13 when you file you 2018 taxes, but otherwise you are in good shape.  Just make sure to classify your 2017 contributions as non-deductible on form 8606 when you file your 2017 taxes.

    Click to expand…

    i was under the impression this changed as of jan 1 2018.  part of the tax revision.

    dec 31 became the deadline.

    or i could be mistaken.

    🙂

     

    #110154 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7794
    Joined: 01/09/2016
    i was under the impression this changed as of jan 1 2018.  part of the tax revision. dec 31 became the deadline. or i could be mistaken.

    Click to expand…

    12/31 is the deadline for recharacterizing Roth contributions in the future but that is not what the OP is dealing with. And the IRS clarified that, for 2017, taxpayers still have until 10/15/18 to recharacterize. This is the last year.

    The backdoor conversion is a 2-step process. The first step, contributing to a nondeductible IRA, has a tax-filing deadline (due 4/15/xx for the prior year, no extensions allowed). The second step is on a calendar year basis. It matters not if the conversion is done in a separate year. You can wait years until you decide to convert. You just don’t want to miss the annual contribution deadline or it’s gone forever. And if you wait years to convert, you either have to pay tax on the account’s growth or you’ve got to leave money sitting in cash and not growing. Not a good choice either way.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #110159 Reply
    q-school q-school 
    Participant
    Status: Physician
    Posts: 2515
    Joined: 05/07/2017
    i was under the impression this changed as of jan 1 2018.  part of the tax revision. dec 31 became the deadline. or i could be mistaken. 

    Click to expand…

    12/31 is the deadline for recharacterizing Roth contributions in the future but that is not what the OP is dealing with. And the IRS clarified that, for 2017, taxpayers still have until 10/15/18 to recharacterize. This is the last year.

    The backdoor conversion is a 2-step process. The first step, contributing to a nondeductible IRA, has a tax-filing deadline (due 4/15/xx for the prior year, no extensions allowed). The second step is on a calendar year basis. It matters not if the conversion is done in a separate year. You can wait years until you decide to convert. You just don’t want to miss the annual contribution deadline or it’s gone forever. And if you wait years to convert, you either have to pay tax on the account’s growth or you’ve got to leave money sitting in cash and not growing. Not a good choice either way.

    Click to expand…

    gracias

     

    #110163 Reply
    Liked by Tim
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7794
    Joined: 01/09/2016

    de nada

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #110183 Reply
    Liked by Tim
    cgossage cgossage 
    Participant
    Status: Financial Advisor, Website Sponsor, Spouse
    Posts: 485
    Joined: 09/12/2017

    THANK YOU for your response. It is reassuring, but I still have SO many questions.

    It was my impression that there was a December 31 deadline for Roth conversions. I thought I had read that on a blog posting, or in the comments, from WCI, as well as several places on the internet. For example:

    https://finance.zacks.com/can-roth-conversion-applied-previous-tax-year-2134.html (first paragraph: The deadline for executing a Roth IRA conversion for a given tax year is Dec. 31 of that year. This can cause some confusion, since you generally have until April 15 of the following year to add new money to a Roth or traditional IRA. But that only applies to new contributions, not to conversions.)

    I am a total luddite but am working feverishly toward understanding this stuff and it comes with growing pains. It sounds like what you are saying is that, for my wife, who we have put $5500 into her tIRA but won’t be able to do the backdoor Roth until later, we will report the $5500 in the tIRA  + $13 in income for the 2017 taxes, and then in 2018 we will make our next “on time” (so to speak) contribution to her tIRA, and then convert all $11k + what little extra accrued into the Roth all at once for the next year’s (2018) taxes and pay tax on the little bit of accrued income.

    Am I getting things right?

    -Phishfood

    Click to expand…

    You are.  The conversion deadline for the tax year is 12/31.  As jofoxcpacfp mentioned, the important deadline is the contribution deadline.  If you miss a contribution you miss it forever.  There isn’t any issue with converting in a tax year.  You are free to convert a TIRA balance that is several years old, the only issue you will pay tax at the time of conversion, which is why it’s recommended you immediately convert before the account appreciates.

    You don’t have to wait to do make your 2018 TIRA contribution to convert the $5,013 sitting in your account.  You can convert multiple time per year. I recommended contributing the 2018 amount and then converting the $11,013 it because it’s a little easier administratively to just convert once.

    Clint Gossage CFA, CFP, CPA
    cmgfin.com

    #110201 Reply
    Avatar Phishfood 
    Participant
    Status: Physician
    Posts: 3
    Joined: 03/15/2018
    medical school scholarship sponsor

    Thanks for the reply. I absolutely want to, moving forward, have a single day or month that I do both of our contributions/conversions so it’s automated and simple. It was just that, this year, with both of us starting new jobs and then having to learn about and then open/contribute/convert tIRA’s and rIRA’s for both of us, our HSA, and her employee 401k, I got behind.

    This blog has been an enormous boon, but one side effect is that you learn about all the places where you can get absolutely and totally fleeced. It makes you trepidatious, and in trying so so hard to do everything right the first time, I got behind.

    As for my own rIRA since you asked, I opened my own tIRA, did my rIRA conversion, and pre-filled out my 8606 before 2017 ended. I wanted to have gone through it and understand the process before doing my wife’s. Obviously that didn’t work out so well. Oh well, live and learn. Every mistake is an opportunity to learn, and at least I am learning now early on when the pot is small so I can have it right years down the road.

    #110678 Reply
    Avatar CZJN 
    Participant
    Status: Other Professional
    Posts: 3
    Joined: 04/01/2019

    I am in a similar situation where I would like to contribute to my tIra and immediately convert to Roth for both 2018 and 2019.  I haven’t made the contribution for either tax years yet.  And Fidelity told me over the phone that the conversion deadline to a Roth was Dec 31, 2018 for 2018 contribution??  But a conversion supposedly can take place anytime.   I was told to make the 2019 contribution and conversion before Dec 31, 2019 as well…

    Secondly, I am only interested in converting 2018 and 2019 contributions to Roth, since there would be essentially no gain on that amount.  Can my previous balance from my tIRA be left alone, so I can avoid the tax penalty for that portion of the portfolio?  Is this partial and selective conversion feasible?

    Look forward to expert advise. Thx!

    #202971 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1793
    Joined: 02/01/2016

    You either misunderstood what the Fidelity CSR was telling you or they were wrong. 12/31/18 was the deadline for a Roth conversion to occur in 2018, but there is no deadline for conversion of any contribution.

    No your tIRA balance can not be “left alone”.

    The pre-tax balances in all traditional, SEP and SIMPLE IRAs on 12/31 of any tax year will subject any Roth conversion made that year to pro-rata taxation. If you are going to attempt any Backdoor Roth conversions in 2019 you need to be 100% sure that you will not have any substantial pre-tax balances on 12/31/2019.

    You should have already made preparations to rollover the pre-tax balances to a 401k, 403b or 457b plan before now. If you are reasonably sure you will be able to do this year, you can go ahead and make the 2018 non-deductible tIRA contribution by 4/15. However, do not make any 2019 contribution or any Roth conversion until you have rolled over any pre-tax balances.

    #202989 Reply
    Liked by Peds, Tim, ENT Doc
    Avatar CZJN 
    Participant
    Status: Other Professional
    Posts: 3
    Joined: 04/01/2019

    Hi thanks for the reply spiritrider!  Allow me to clarify what I meant by “left alone”.  Couldn’t my previous pre-tax balance of my tIRA funds stay in the same tIRA?

    #203484 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1793
    Joined: 02/01/2016

    No. As I said earlier, all pre-tax balances in all traditional, SEP and SIMPLE IRAs are treated as if they were in the same IRA as the total non-deductible basis.. There is no non-deductible only IRA or pre-tax only IRA.

    If you don’t remove all of those pre-tax balances by 12/31 of the year you do a Roth conversion, any conversion will be subject to pro-rata taxation.

    #203499 Reply
    Liked by Peds
    Avatar CZJN 
    Participant
    Status: Other Professional
    Posts: 3
    Joined: 04/01/2019

    Thanks!  Your fast clear and reply is a great help!

    #203502 Reply

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