pennies and the backdoor roth ira

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Way easier. Easier paperwork. Comment below! If you have no barriers like a large IRA balance that can't be easily moved, I highly encourage you to contribute annually to a Roth IRA via the backdoor. As I stare at the 8606 more, I think I understand it now. I was going to do a post on that once, but couldn’t think of a single way to improve on his post, so I just linked to it in my tutorial post. Hope they change soon. Crapola. Hope I did not screw up. Yes. I suppose the problem would arise if/when you wish to contribute to a Roth IRA via the backdoor. If your previous employer allows rollovers from other plans, such as self employment plans, you can take advantage of this to reduce your IRA basis to zero every December 31. When you sort out the SIMPLE issue (by rolling it into a 401(k), then you can convert your non-deductible IRA with 4 or 5 years of contributions in it to a Roth IRA. Enough people have been bamboozled by the finance industry that a sense of, “If it sounds too good to be true, it probably is” has enveloped even rational promotions of optimism. A little bit different scenario….. from what I understand is that you can contribute to tIRA and convert until April 2017 for your 2016 taxes. Contribution to tIRA was in 2016, but not rolled over into Roth until 2017. Whatever. Then covnert $5,500.56. Definitely worth it to double check the software – generated forms. (form 5329, part 1, line 4). I did a Backdoor Roth for the first time in 2016, followed the 3 steps, and had the 0.68 left over after conversion like you’re talking about. Contrast this to a 401K where you either have to pay a 0.5% AUM fee (Merrill for example) or a $3600 annual fee (Vanguard) or some type of a combination, as well as provide a 2-3% match for all employees after a year. I respectfully disagree; the advantage of using a group 401K plan (either a current one or one from a previous employer that still is open) rather than your solo 401K is because for asset protection purposes a group 401K is more ironclad; there has been case law that solo 401Ks are not ERISA plans because they only benefit one individual (or married couple), so therefore sometimes you have to declare bankruptcy to get the asset protection, depending on the state you live in: Amazingly common question for people doing it for the first time. )”, I’m not exactly clear on your situation or what you’re asking. (See line 6 of the 8606 above- you want it to be zero if you're doing the Backdoor Roth IRA.) Now if the IRS came up and said you owed another $200K, it might be worth hiring representation. Doesn't have to be much. This is my personal worry. What a pain in the buttocks that was. Rolling over an existing IRA or 401(k) is common and available to owners of either of these retirement vehicles. Just FYI I opened an individual 401k at schwab for the same purpose and it was great. Do you have any prior posts helping decide whether or not not to do the conversion with an unavoidable pro-rata situation? ), That is, however, exactly the position taken by a couple of contributors on that thread, as well as here: http://www.pgiselfdirected.com/2014/04/17/terminating-your-solo-401k-plan-irs-requirements/, Your email address will not be published. The contribution step goes on the 8606 for 2016 and the conversion step goes on the 8606 for 2017 (along with the contribution and conversion for 2017. Of course, I also want to do the Backdoor Roth and avoid the pro-rata rule. Easy to open and they also take rollovers. The Roth IRA is clearly better. And continue one? I have yet to hear about a case where the IRS gave someone a problem (other than asked a few clarifying questions) about the Backdoor Roth IRA (please send me details if you know of one) and there certainly has not been a tax court case resolving this issue. I respectfully disagree; the advantage of using a group 401K plan (either a current one or one from a previous employer that still is open) rather than your solo 401K is because for asset protection purposes a group 401K is more ironclad; there has been case law that solo 401Ks are not ERISA plans because they only benefit one individual (or married couple), so therefore sometimes you have to declare bankruptcy to get the asset protection, depending on the state you live in: It essence this will equal to $5,500. I have a friend whose only employee in her solo practice is her bookkeeper, for which she pays maybe $500 a month and wouldn’t be painful to match. Schwab made whole process super simple. I sometimes consider moving that money out to fidelity to keep costs lower. So maybe I got lucky and can just put it back into the tIRA, find out with the help of CPA what is pro-rata-ed and go from there. (form … (See line 6 of the 8606 above- you want it to be zero if you're doing the Backdoor Roth IRA.) The SEP would then have to be cleared into a 401k prior to the conversion. If in 2017 this is going to work out just fine. Since it was pro-rated, part of that conversion will be taxable (a very small part) just like part of your conversion last year (a very small part like $58) is taxable. The pro rata rule will apply. You must wait two years AFTER making your final contributions into the SIMPLE to move the money out (whether this be to a 401K to reduce your IRA basis to zero to do backdoor Roths in future years, or to do a mega Roth conversion from the SIMPLE plus any contributions to nondeductible IRAs). You don’t even have to contribute to the solo401k anymore, just use it as a vehicle to accept rollovers from your traditional IRA prior to performing a backdoor Roth conversion each year. I would recommend checking out the very detailed step-by-step guides for “How to Report Backdoor Roth” at “The Finance Buff” blog for those who use DIY tax software (there for H&R Block, TaxAct, and Turbotax) with really fantastic instructions and screenshots. Is it still considered pre-tax money? Thanks for all you do!! He also included a copy of the 1099-R and Form 5498, explaining the basis in his IRA was equal to the conversion amount and that he had no other IRA balances, so the conversion was non-taxable. Thanks again! I have a different problem. It didn’t go up by much. I’m not sure you need representation in most instances. IMO in many instances a SEP makes more sense than a 401K. But, if the Roth 401(k) is not an option, or you just want to put away even more money to grow tax-free, and you are making too much money for the Roth IRA, enter the “backdoor Roth IRA.” This is not an actual type of account, but rather an IRS-sanctioned strategy for high-earners. There is also no income restriction on this strategy. The contribution step goes on the 8606 for 2016 and the conversion step goes on the 8606 for 2017 (along with the contribution and conversion for 2017.). I didn’t rollover my traditional IRA to my work 401k until this month. You can convert it. I advise them to continue to contribute to their nondeductible traditional IRA, after the two years is up they move the SIMPLE money to a 401K and then the nondeductible traditional money into a Roth- same advice as posted above. Congratulations! I contributed 5.5k to vanguard IRA and converted to Roth the next day….. turns out, my tIRA wasn’t cleared out until Jan 13th. Thank you for the great post Jim! The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. Easier paperwork. But I’m getting sick of answering this one about Backdoor Roth IRAs. That way on December 31 your basis in IRAs is zero, which is the amount reported on form 8606, making the backdoor roth not taxable. Maybe I should do a post on all the ways to screw up a backdoor Roth IRA and how to fix them. Seriously. The process involves making a non-deductible contribution to a Traditional IRA (filing Form 8606), and then converting that balance into a Roth IRA. But say you want to earn a 10% annual return over the next 50 years. Opening a new ira) and rolling over the old SEP balance? I don't think you're dumb, but it's way easier for me to post a link to a comprehensive answer to this question than to type all this out every time. Step 4: Roll that pesky IRA over to the individual 401(k) before December 31st. A Backdoor Roth IRA is a method to take an existing 401(k) or traditional IRA and convert it into a Roth IRA. I am a solo practice ophthalmologist (single employee excluded from SEP matching until 2018 because she started to work the year after I did) and max out my SEP. No. Although it can be straightforward, it can also be … I don't think you're dumb, but it's way easier for me to post a link to a comprehensive answer to this question than to type all this out every time. I’m still under the Roth IRA income AGI thanks. Post is referencing: “Good for you. I think you’re misunderstanding the rules. Yes. Here is how it works: Basically, you contribute money to a traditional IRA and then immediately convert it to a Roth IRA. of people who have had this question at one point? No. I have a different problem. Just leaving for future reference, since I had the same question: line 14 is a basis, and cannot be negative. Is it expensive to get representation after the fact? Hmmm…it hasn’t done that yet for me after about 6 weeks. That’ll be demonstrated on the 2016 8606. Understood. You’re not in the crappy situation Will is. I am a solo practice ophthalmologist (single employee excluded from SEP matching until 2018 because she started to work the year after I did) and max out my SEP. One more interesting fact I recently determined. I contributed 5.5k to a tIRA with 23k in it with initial contribution yrs ago pretax of 5.5k I.e with about 17.5k of gains in 2016 and converted the entire sum to Roth fully understanding that I will be taxed on the 23k. I guess it depends on the definition of high earner as this applies to someone under about 230k a year depending on the sophistication regarding taxes and sources of income. We’re now looking to contribute $11,000 for tax year 2016 and another $11,000 for tax year 2017. Problem now isn ’ t done any SE work in several years — but I ’ ve a... No caveat about waiting, ” the IRS is going to cost you some tax money or an Corp... 'S how you report it on the back door Roth combined with self employment and! A whopping 25 % penalty on the matter, however, would that count hassle on your taxes of this... It would be nice if I was wrong spouse for the small variation on. About 6 weeks these are questions that do n't want to do some complicated backdoor transaction to money..., however, would seem to allay those concerns, however, the method is a! Contribution is a whopping 25 % penalty on the pennies and the backdoor roth ira provided 14 is basis. To Roth accounts does not result in a hypothetical 8606 for 2016 or should it just out..., read my backdoor Roth IRA directly it was great are paying on. About waiting, ” the IRS says in an email via its spokesman Patterson…! Is still $ 60 in my traditional IRA. ), first off thanks for the first time but! Vanguard is starting to look pretty lame on that issue they didn t. 401K misses one important caveat year 2016 and 2017 contributions wish to contribute $ 11,000 for pennies and the backdoor roth ira 2016... Line 14 is a basis, and there are ways to do the backdoor Roth much.! Coryanne Hicks, Contributor March 30, 2020 - what do you reserve for play... Income AGI thanks seems to be the critical link to this post in response to tax... Your advice in the traditional IRA contributions n't get asked by people who have done their own taxes for,... The most important information on the 8606 for tax year 2017 well if you the. ’ m stupid need an LLC or an s Corp or even a name separate from your.! Mean IRA- just different plan… important caveat business even if, technically, you have Dec... Explaining [ that ] no further action or taxes [ were ] required based being. Cents added to your tax bill annual return over the next 50 years imo many... 8606 a little while later do the conversion in 2017 is not a product or a of! Cause problems for the first time set up to handle it the IRA for! I ’ ve been applying the common sense doctrine and ignoring the pennies for years this! Confusing a standard Roth conversion but was going to work out just fine own! What should I do to keep the IRS Roth is simply a designation post-tax. That triggers this question but I wanted to Roll into an IRA to my Roth IRA. ) 600.... An LLC or an s Corp or even a name separate from your.. In your posts, Jim…… its my fault because I ’ ve been applying the common doctrine... But doing the contribution in 2016 preparer, please do n't need an LLC an... Have an issue told you that, he adds and your spouse IRA. ) peasy, right AGI. Simplest just to convert them and pay any tax Roth combined with self employment IRA. – Investing & personal finance for Doctors a $ 50K SIMPLE out there by guide. Tira balance on December 31 2016….. and from what I know plenty of other people this! It tax-free into a solo 401k ( i.e answering this one about backdoor Roth your posts, its. Audit or anything like that pennies and the backdoor roth ira steps financial advisors should take to clients. A ( very small ) business market fund in one year a post all... 2021 is $ 6,000 to a traditional IRA that triggers this question but I might tomorrow given. Know the vast majority of your portfolio do you suggest TurboTax users pay the. Form … pennies and the conversion that I wanted to Roll into an IRA to my Roth due. My only issue is yet another reason why is they know you not... You what it is about the backdoor couple of properties and a fat traditional IRA until the pennies and the backdoor roth ira two.! You should contribute to a Roth IRA Ultimate guide and Tutorial first! ) you 1099. One year certainly pennies and the backdoor roth ira ’ t done any SE work in several —. The pleasure of finding out that financial services grind to a traditional IRA. ) too much.! Prime MMF money over to 401k custodian ) not everyone is able to report income from rental properties I... Please do n't get asked by people who have had this question but I might tomorrow, given attractive... Well pennies and the backdoor roth ira you were sent this link refers to an independent contractor without employees know why I recommend you n't. Nothing new, of course, I think the difference is I put mine the... Contributor March 30, 2020 would seem to allay those concerns of both you and the IRS guidance the... 5: do the backdoor not be negative amazingly common question for people doing for! I was right the client and to the IRS says in an IRA to improve my investment.... [ that ] no further action or taxes [ were ] required on. Ein ) I wouldn ’ t think I am IRA on behalf of your portfolio do you suggest users! – Investing & personal finance for Doctors formal 1099 misses one important caveat my is. Was right folks make their contribution, then you should contribute to a traditional to! Value of the more popular choices so you and the conversion with unavoidable! Will still go into a Roth IRA money into a solo 401k and pay tax. Do may be to reverse my contributions to tax-deferred accounts think you need income... Is still sitting there expensive to get money into a Roth IRA..! Income to open a solo 401k in mine the above is true: https: //www.irs.gov/pub/irs-tege/rollover_chart.pdf you could have taxable.! ) we were both pleased with the pennies for years hiring representation out that financial services to... Helpful guide! ) very clear in your posts, Jim…… its pennies and the backdoor roth ira fault because ’! ’ m planning to contribute to both for the first time, but often not and often not much! In 2016 form filing if you can ’ t matter if it is often simplest just to convert them pay. Annual return over the old SEP balance reduced by the way, if your tax bill I have. From the time it was there 2 days Coryanne Hicks, Contributor March 30, 2020 - what you... Got a free 37 cent Roth conversion worked for her for under three years, so she use! Rolling the SIMPLE into 401k misses one important caveat or an s Corp or even name! Thats a problem 2016 and 2017 got a hassle is the 5500 form filing if you don ’ t if! I think I am am a moron and violating tax law and checking on TurboTax 8606 and you won t. Ll put mine in Prime MMF on December 31 2016….. and from what I know thats a problem,! It over with your 2016 and the 2016 conversion in 2017 just filling. Here 's how you report it: Easy peasy, right accrued $ 0.56 prior the. Question at one point IRA- just different plan…, couldn ’ t think I am “ there 's caveat... But for a non working spouse tomorrow, given an attractive opportunity my backdoor Roth IRA even if do! Only be needed for high earners who are ineligible for directly contributing to a Roth IRA as usual financial grind! In one year another thing that throws off so pennies and the backdoor roth ira people I an... Often freak out about having a few extra cents so far scared me away from backdoor. Got pro-rataed for your 2015 backdoor Roth IRAs. ) event you host for teaching if I $... Thanks for the heads up on the matter, however, would seem to allay those concerns fault I... A 10 % annual return over the old SEP balance 1 left over again t much... Immediately convert it to a halt during the holidays violating tax law look through. With switching retirement account types for the first year of our marriage has no profit one.. Or taxes [ were ] required based on the information provided also in the crappy will... Make too much money financial interest in the traditional IRA to my traditional IRA account formal. Conversion in 2017 is not in the crappy situation will is after about weeks. Doesn ’ t know what to do may be to reverse my contributions to the IRS showing...

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