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Non-deductible traditional IRA to Roth conversion

Home Retirement Accounts Non-deductible traditional IRA to Roth conversion

  • Avatar gas passer 
    Participant
    Status: Physician
    Posts: 7
    Joined: 07/30/2019

    My wife and I both have traditional IRA accounts with a cost basis of $59k. All of this was non-deductible (post-tax) and recorded on Form 8606 each year. Both accounts have some gains. I’d like to do what’s necessary to allow future backdoor Roth IRAs. I *think* I can do the following:

    1. Rollover the gains to our 403b/401k accounts (will verify the plan accepts this type of rollover). No tax here.
    2. Roth conversion of the remainder, which is the non-deductible basis. No tax here either.
    3. $0 left in the traditional IRA at the end of the year. In subsequent years, make the standard backdoor Roth contributions.

    Does that sound about right? Are there scenarios where this isn’t worth the effort?

    #237214 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4452
    Joined: 01/08/2016

    Yup

    #237234 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8141
    Joined: 01/09/2016

    Having an IRA with basis (nondeductible TIRAs) will not impact your backdoor Roth’s, tax-wise. However, there is no logical reason to have non-deductible TIRAs with any kind of balance, so you’re doing a smart thing by taking the above steps. Just curious – what was the purpose of contributing to them/reporting annually but not going through with the conversion?

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

    #237241 Reply
    Liked by Peds
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 519
    Joined: 06/12/2017

    You’ve got it. Best of luck.

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

    #237243 Reply
    Avatar gas passer 
    Participant
    Status: Physician
    Posts: 7
    Joined: 07/30/2019

    Thanks everyone!

    This only happened because I had no idea what I was doing. I had Roth contributions set up automatically as a resident. When I became an attending and exceeded the income limits, I didn’t stop those until too late. I recharacterized to traditional, and then continued to dutifully contribute to that tIRA. I didn’t know about backdoor Roth back then, but now realize the error. I’m just glad there’s a way to deal with this without major tax consequences.

    One more logistical question – I think it doesn’t matter what order this happens in, but it seems easiest to convert the basis first and then rollover the rest?

    #237279 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1910
    Joined: 02/01/2016

    One more logistical question – I think it doesn’t matter what order this happens in, but it seems easiest to convert the basis first and then rollover the rest?

    Click to expand…

    Since you can no longer recharacterize Roth conversions. It is far safer to do the rollover and verify that is has successfully completed. You don’t want to be stuck with a pro-rata of a mostly taxable Roth conversion.

    #237313 Reply
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    Avatar gas passer 
    Participant
    Status: Physician
    Posts: 7
    Joined: 07/30/2019

    One more logistical question – I think it doesn’t matter what order this happens in, but it seems easiest to convert the basis first and then rollover the rest?

    Click to expand…

    Since you can no longer recharacterize Roth conversions. It is far safer to do the rollover and verify that is has successfully completed. You don’t want to be stuck with a pro-rata of a mostly taxable Roth conversion.

    Click to expand…

    Ah that makes sense. Thanks!

    #237339 Reply

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