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Started By
Message
Backdoor Roth for 2020 Income
Posted on 1/23/20 at 1:05 pm
Posted on 1/23/20 at 1:05 pm
For 2019 we're good, by a few bucks. We definitely won't be for 2020.
I m still making auto-contributions to Roth so far in 2020.
Knowing these aren't gonna fly, do I cut those off, put into a traditional ira now, then do the conversion next January?
Because I would get a deduction for putting my after tax money in a traditional, does that more or less offset the tax hit for the roth conversion?
I just want to get ahead of this now.
I m still making auto-contributions to Roth so far in 2020.
Knowing these aren't gonna fly, do I cut those off, put into a traditional ira now, then do the conversion next January?
Because I would get a deduction for putting my after tax money in a traditional, does that more or less offset the tax hit for the roth conversion?
I just want to get ahead of this now.
2
Posted on 1/23/20 at 1:44 pm to deeprig9
Put them in to traditional IRA now and set it up to do an auto conversion to your Roth on the same day you make your contributions.
You likely don’t qualify for a deduction on traditional Ira, so you will have a “non deductible Ira” and you just convert it to Roth.
You likely don’t qualify for a deduction on traditional Ira, so you will have a “non deductible Ira” and you just convert it to Roth.
This post was edited on 1/23/20 at 1:47 pm
Posted on 1/23/20 at 2:01 pm to AugustaTiger
Investopedia says you can only do 1 roth conversion per year.
This post was edited on 1/23/20 at 2:03 pm
Posted on 1/23/20 at 2:08 pm to AugustaTiger
I have a traditional already, can I just contribute to that, and just convert $6000 of it into roth by end of year, without having to convert the whole thing?
Or should I open a second dedicated traditional ira for this specific purpose?
Or should I open a second dedicated traditional ira for this specific purpose?
Posted on 1/23/20 at 2:14 pm to deeprig9
Followup- if i don't qualify for trad ira deduction, then whats the point of being taxed a second time with the conversion, imvesting 50 cents on the dollar just to avoid future taxes on it, I have to think about all the future gains lost weighed against a tax on the future distributions. Hmm.
Posted on 1/23/20 at 3:11 pm to deeprig9
quote:
I have a traditional already, can I just contribute to that, and just convert $6000 of it into roth by end of year, without having to convert the whole thing?
Or should I open a second dedicated traditional ira for this specific purpose?
You can't just pick and choose which dollars get converted. You will have to prorate the conversion.
$54k existing IRA where you received taxable deduction in prior years
$6k current IRA but phased out so no deduction
$60k total traditional IRA
Convert $6k from traditional to Roth and $600 (or 10%) is backdoor and the rest would be taxable on conversion.
Posted on 1/23/20 at 3:16 pm to deeprig9
quote:
Followup- if i don't qualify for trad ira deduction, then whats the point of being taxed a second time with the conversion, imvesting 50 cents on the dollar just to avoid future taxes on it, I have to think about all the future gains lost weighed against a tax on the future distributions. Hmm.
If you didn't get the deduction, you aren't taxed a second time because there is no recapture on conversion to Roth.
If you did get the deduction, you aren't taxed a second time because you are just "repaying" the deduction you initially took.
Where are you getting 50 cents on the dollar, anyway? It is recaptured at ordinary rates which tops out at 37%. If you are in the top tax bracket, I agree it might not make sense to convert recapture at that rate.
Posted on 1/23/20 at 3:24 pm to deeprig9
Well a couple of things:
IF you already have a traditional IRA with an decent amount in it, then the backdoor Roth isn't really a good option for you. . You would be subject to the pro rata rule and owe taxes on a portion of the conversion. Either you can take what's in your trad IRA and roll it into a 401k, then contribute the 6k to trad IRA and convert the next day to avoid the pro rata implications.
In general it's better to contribute a lump sum and then convert it the next day. If you need to save to reach the $6k amount then probably better to park it in a high yield savings account. You can auto contribute to a trad IRA and then convert once you hit the 6k threshold (you can only do one conversion per year), but if you have any earnings within the trad IRA during that time, you'll owe additional taxes on the gains.
Well your contributing post tax dollars, and if you're doing it right won't be taxed on the conversion.
IF you already have a traditional IRA with an decent amount in it, then the backdoor Roth isn't really a good option for you. . You would be subject to the pro rata rule and owe taxes on a portion of the conversion. Either you can take what's in your trad IRA and roll it into a 401k, then contribute the 6k to trad IRA and convert the next day to avoid the pro rata implications.
In general it's better to contribute a lump sum and then convert it the next day. If you need to save to reach the $6k amount then probably better to park it in a high yield savings account. You can auto contribute to a trad IRA and then convert once you hit the 6k threshold (you can only do one conversion per year), but if you have any earnings within the trad IRA during that time, you'll owe additional taxes on the gains.
quote:
en whats the point of being taxed a second time with the conversion
Well your contributing post tax dollars, and if you're doing it right won't be taxed on the conversion.
Posted on 1/23/20 at 4:51 pm to Puffoluffagus
I don't mind being taxed on the interim gains, say i gain 20% but after tax I only gained 12%, thats still better than savings. I just don't want the principle taxed twice.
So-
1- Open a separate traditional ira
2- fund it with after-tax money from my paycheck with scheduled contributions
3- when i get to the $6000 mark, initiate Roth conversion sometime this calendar year
Pay tax on any gains on that interim principal.
Pay tax or penalty on anything else?
So-
1- Open a separate traditional ira
2- fund it with after-tax money from my paycheck with scheduled contributions
3- when i get to the $6000 mark, initiate Roth conversion sometime this calendar year
Pay tax on any gains on that interim principal.
Pay tax or penalty on anything else?
Posted on 1/23/20 at 5:33 pm to deeprig9
You are completely missing that you have to prorate the conversion. It doesn't matter if you open a new IRA account, you have to look at all your IRA's. When you convert to Roth you have to take a proportionate amount of the traditional you already had where you got the tax deduction before you were phased out and a proportionate amount where you didn't get the deduction.
You are going to pay tax at ordinary rates on the portion you were previously able to deduct. This is not double tax, it is getting you back to even.
You are going to pay tax at ordinary rates on the portion you were previously able to deduct. This is not double tax, it is getting you back to even.
Posted on 1/23/20 at 5:38 pm to BamaAlum02
Im confused. Can you walk me through this with an example?
Posted on 1/23/20 at 5:40 pm to Puffoluffagus
quote:
IF you already have a traditional IRA with an decent amount in it, then the backdoor Roth isn't really a good option for you.
This is the case for me. Too much in the traditional IRA to make it worthwhile, which is a good problem to have I suppose. Naturally my first thought was to open a new IRA account just for the conversion but that doesn’t work either as you have to combine all the IRAs as if it’s just one.
Posted on 1/23/20 at 5:45 pm to CajunTiger92
Damn, that sucks. I guess at this point my questions have been answered. Backdoor doesn't really make sense for me. I just wanted a semi liquid investment account.
Posted on 1/23/20 at 5:47 pm to deeprig9
You could possibly roll your traditional IRA into your employer plan (401k) so then you wouldn’t have that account subject to bring prorated.
This post was edited on 1/23/20 at 5:48 pm
Posted on 1/23/20 at 5:55 pm to deeprig9
As some have pointed out, one option is to roll the Traditional IRA money into a 401k. That’s not something I care to do but it might work for someone else. Particularly if they prefer having the Traditional invested in mutual funds rather than Etfs and individual stocks.
Posted on 1/23/20 at 6:00 pm to CajunTiger92
What is the downside of rolling it into a 401k?
The only downside I could see is potentially more limited investment options and higher fees (assuming you have an active 401k to roll into.)
Can you roll your 401k back into a traditional IRA after converting your roth or is there a limit on rolling an active 401k into an IRA or number of rollovers in a year?
The only downside I could see is potentially more limited investment options and higher fees (assuming you have an active 401k to roll into.)
Can you roll your 401k back into a traditional IRA after converting your roth or is there a limit on rolling an active 401k into an IRA or number of rollovers in a year?
Posted on 1/23/20 at 7:43 pm to bod312
quote:
What is the downside of rolling it into a 401k?
The only downside I could see is potentially more limited investment options and higher fees (assuming you have an active 401k to roll into.)
That’s enough for me.
quote:
Can you roll your 401k back into a traditional IRA after converting your roth or is there a limit on rolling an active 401k into an IRA or number of rollovers in a year?
I don’t know but since you would like want to back door every year, sounds like it would be get complicated even if allowed.
Posted on 1/23/20 at 8:19 pm to bod312
You can't roll back out of a 401k without quitting or getting fired, I think. That would be a big deal breaker for me.
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