pennies and the backdoor roth ira

Congratulations! What if I decided to go through the hassle and roll that $60 back into my 401(k) to save the taxes on it? Then go mow some lawns in the summer. 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. Or am I missing something? Read line 6 of Form 8606. That’s the whole point of the 8606. Why wouldn’t you be able to continue one? 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. I am more confused about the tIRA basis part, as like above it will have been a non deferred ira that i contributed to in 2016 along with this 2017 contribution and conversion. Once you have employees, it’s time to get professional help with your retirement plan. Pay taxes on $1? Read line 6 of Form 8606. Congratulations! Amazingly common question for people doing it for the first time. Currently I just use TurboTax, have you found any big discrepancies? Now what? I haven’t done any SE work in several years — but I might tomorrow, given an attractive opportunity. Does this affect my spouse’s accounts or just mine? I’m sorry. No. I think the difference is I put mine in the sweep account (Federal MMMF) and it was there 2 days. Also, is it possible for me to do this “business 401k rollover” you describe if the Simple IRA is still openly receiving contributions? I did that. 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. If in 2017 this is going to work out just fine. Part is pre-tax and part is post tax. I just did the Backdoor Roth IRA for the first time and was appalled to find out that over the three days I had that $6,000 in a money market fund in the traditional IRA before conversion it earned 37 cents in interest. 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. Babysit someone's kid. You can still do contributions just fine. So what can you do? I have a couple of properties and a fat traditional IRA that has so far scared me away from a backdoor Roth. Good for you. You're now self-employed! You can start a business. A spousal Roth IRA for a high earner also needs to go through the backdoor. (Dear tax preparer, please don't be offended if you were sent this link. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. Based on the transaction history, it looks like I received a $60 dividend from the company just days after I sold all the shares in my Rollover IRA and rolled the money into my 401(k). Opening a new ira) and rolling over the old SEP balance? Can you solve it by starting a (very small) business? I’ve discovered there is still $60 in my Rollover IRA. You just round down or up. With tiny amounts, it is often simplest just to convert them and pay any tax due. I requested this around Dec. 20th. Yes. (I have no financial interest in the finance buff, just found it a really helpful guide!). Thank you for the great post Jim! I recently learned I was wrong. 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. I am more confused about the tIRA basis part, as like above it will have been a non deferred ira that i contributed to in 2016 along with this 2017 contribution and conversion. … I suppose the problem would arise if/when you wish to contribute to a Roth IRA via the backdoor. I’m sorry guys. Mow your neighbor's lawn. Contributed $5,500 and converted $5,500 with $1 left over. Do you have any prior posts helping decide whether or not not to do the conversion with an unavoidable pro-rata situation? You’re not in the crappy situation Will is. You're allowed to contribute the lesser of your earned income or $6,000 in a traditional IRA, which can then be converted to a backdoor Roth IRA. I sometimes consider moving that money out to fidelity to keep costs lower. 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. Sometimes better than a taxable account, but often not and often not by much. 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. 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. The steps financial advisors should take to help clients safely use a backdoor Roth IRA. 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. If you take the other position, it leads to the outcome I described as “perverse”: that the plan would have to be shut down as soon as the SE person retired. I know the vast majority of your clients don't do Backdoor Roth IRAs.). Your solo 401(k) to receive the tIRA is interesting — I stumbled across this purely by accident, but not long after posting the Solo 401(k) idea on Bogleheads for discussion (see https://www.bogleheads.org/forum/viewtopic.php?f=2&t=209961.). … Your advice in the post immediately above about rolling the SIMPLE into 401K misses one important caveat. 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). An individual must … I guess “most” doesn’t mean always. One is contributing to a Roth IRA via the backdoor (always a good move) and the other is pre-paying … You could fix that in 2017 just by filling out the 8606 right. 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. Now I have $0.56 sitting in my traditional IRA account. If you don’t wait for two years there is a whopping 25% penalty on the value of the SIMPLE! You’re not in the crappy situation Will is. The Backdoor Roth IRA IS a no-brainer because you’re comparing a tax-free Roth IRA to a taxable account or a non-deductible traditional IRA and the Roth IRA always wins that comparison. People often freak out about having a few extra cents. Open a solo 401k and put your $600 there. That backdoor Roth post has helped countless people. Mow your neighbor's lawn. If you are in the 22% or under marginal federal income tax bracket, then you should contribute to a Roth IRA. That’s a Roth conversion, not a backdoor Roth, but also can be useful and will certainly give you some tax diversification. It didn’t go up by much. I’m missing your point. Straighten out your financial life today! Can you show an example of how this would look on the 8606. (they couldn’t send a check directly to 401k custodian). The easiest thing to do may be to reverse the rollover and conversion and start over if you can. I had thought since she did not work I could not contribute to her Roth IRA, since she has no income, unless I did a conversion. I’m impressed. But I found out recently that the IRS has at least said something about it, although what they said really didn't surprise me. “After some coaching on my end,” McNamara, a CPA and the cofounder of Marrick Wealth in Irvine, Calif., says, “my client was able to respond to the IRS with a letter explaining the nondeductible IRA contribution and subsequent Roth conversion. Give me a break. Do I need to roll that $60 back into my work 401(k) before converting my 2016/2017 contributions from my traditional IRA to the Roth IRA? 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. Hers went into Prime MMF for just a day, which isn’t technically the sweep account, and then the 11 cents automatically followed into the Roth RIA. Thanks so much. Do you worry about the step transaction doctrine? First off thanks for the heads up on the back door Roth combined with self employment. 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. (Speaking of paperwork, I would love to avoid having to do this because my Rollover IRA and my work 401(k) are with two different institutions, so it is a bit of a paperwork hassle.) Shovel a driveway. (form 5329, part 1, line 4). You can still do 2016. That wasn't so hard, was it? You need to know what it is. You can contribute 20% of your $10-600 if you like (report it on Form 1040, line 28), but it's not required. There is no pretax money in my case. Also I was at my specialties national conference in SD, and the locumtenems group was talking about how they had you come talk at the EM and Ortho event they did. Why do you say “this doesn’t work so well if you have a business where each year you are making SIMPLE or SEP contributions”? My +1 was to Nate. Here is how it works: Basically, you contribute money to a traditional IRA and then immediately convert it to a Roth IRA. Not much. I didn't actually convert it. Now I'm afraid the IRS is going to come after me and repossess my dog. Maybe it just rounds out as someone noted you’re only supposed to round to 3 figures on line 10. (Speaking of paperwork, I would love to avoid having to do this because my Rollover IRA and my work 401(k) are with two different institutions, so it is a bit of a paperwork hassle.) What do I do for 2016? Most audits they’re just asking some questions and for some additional documentation. Step 2: Make some money. Or is this $60 no longer considered pre-tax money because it got pro-rataed, such that I can just convert it into my Roth IRA? Nobody cares about that 37 cents. Comment below! I’m also in the same boat as Mike. Do you worry about the step transaction doctrine? Now if you don’t think you’ll be using a SIMPLE IRA for long, then sure, contribute to a non-deductible IRA for a few years. You can find the eligibility details for 2020 At any rate, you’ll probably owe tax on $1 in 2016 once you work through the 8606. I didn't actually convert it. I’ve discovered there is still $60 in my Rollover IRA. Part is pre-tax and part is post tax. Hers went into Prime MMF for just a day, which isn’t technically the sweep account, and then the 11 cents automatically followed into the Roth RIA. 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. The first is a no-brainer, the second requires some careful calculations and assumptions and even then may turn out to be the wrong move. I’m not sure you need representation in most instances. I had the pleasure of finding out that financial services grind to a halt during the holidays. In personal finance and the rest of life “there are no dumb questions” and I will try to cheerfully answer every question I'm given. I have a different problem. I suppose the problem would arise if/when you wish to contribute to a Roth IRA via the backdoor. Oh, you’re very clear in your posts, Jim…… Its my fault because I’m stupid. Really appreciate it. https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/. If I sent you a link to this post in response to your question, please don't take personal offense. But for a Backdoor Roth IRA, it is done instead of being able to open a Roth IRA directly. This trick doesn't work so well if you have a business where each year you are making SIMPLE IRA or SEP IRA contributions. Ive been reading the post about the late backdoor contributions, but I’m not sure that applies because the way the 8606 is filled out implies both the contribution and conversion occurred in 2017 for the 2016 tax year, noir straddles across two years. It essence this will equal to $5,500. Limits on Ira usage based on being below the cutoff still apply. But say you want to earn a 10% annual return over the next 50 years. E.g. I just left the few cents in the traditional IRA until the following year. 5500/5501 rounds to 1 (0.9998). Obviously it’s fine to use the SEP throughout the year as long as you clean it out by the end of the year. But now you know why I recommend you do the 2016 contribution and the 2016 conversion in 2016. You do have to do a 5500, but my understanding is that for a solo 401(k), you can do a 5500EZ which looks awfully easy. Thanks! If you can’t empty it out, it’s better NOT to do the conversion until the next year. Here's another little trick a lot of people may not know about. Easy to open and they also take rollovers. Just wanted some tax diversification. It shouldn’t matter if it’s still in there right? Many of my friends start out with a SIMPLE when their practice is small/ growing/ not earning much and then switch to a 401K (multiple employees would make the higher SEP IRA matching non-worthwhile). Seriously. 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. This means that the total combined contributions that can be made for the year to your IRA and your spouse’s IRA can be as much as $11,000 ($12,000 if only one of you is age 50 or older or $13,000 if both of you are age 50 or older). Step 1: Get an Employer Identification Number (EIN). I try to be very clear when writing or speaking about this that you must empty that IRA out by December 31st of the year you do the conversion. It'll still be free since it isn't going to grow to 50 cents in a money market fund in one year. 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. What’s the point of a non-deductible IRA when you could have a Roth IRA? I have a 401k from a prior employer that I wanted to roll into an IRA to improve my investment options. Can I still do the backdoor Roth for 2016 or would the pro rata rule apply? Thank you for the great post Jim! Step 4: Roll that pesky IRA over to the individual 401(k) before December 31st. Are you able to report income from a business even if you don’t receive a formal 1099? What percentage of your portfolio do you reserve for "play money"? Do I need to roll that $60 back into my work 401(k) before converting my 2016/2017 contributions from my traditional IRA to the Roth IRA? As such I don’t have to do some complicated backdoor transaction to get her yearly contribution. I procrastinated in both learning about backdoor Roths, and asked my custodian of my tIRA to clear it out and send me a check so I could roll it over into my 401k from work. Otherwise you’ll get “pro-rata’ed.” If a Roth is something you’re not interested, then going straight SEP may be advantageous. I thought this meant I couldn’t contribute to her Roth. So in 2016 I still had money in the tIRA. Last time I rolled over in Vanguard required a schwab account. Crapola. You just have to fill out the 8606 a little differently. They aren’t the same thing. I’m not sure you need representation in most instances. Report it on Schedule C (lines 1, 5, 7, and 31) at the end of the year. Now I'm afraid the IRS is going to come after me and repossess my dog. Your spouse’s IRA contribution for the year to a traditional IRA. The backdoor Roth is a technique, not an official account type. I’ve been applying the common sense doctrine and ignoring the pennies for years, glad to know I was right. There is always the option to just convert that tax-deferred IRA and pay the taxes on it, but if it is really large, that's probably not a good idea. Wow! Babysit someone's kid. Why don’t you? Straighten out your financial life today! )”, I’m not exactly clear on your situation or what you’re asking. And continue one? 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: (Contribute $6,000 to a traditional IRA, then convert it tax-free into a Roth IRA.). The problem is you got a pro-rata-ed conversion, then rolled some after-tax money into a 401(k) and told them it was pre-tax money. That backdoor Roth post has helped countless people. Work your way through the 8606 and you’ll see why. ), 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. That’s the whole point of the 8606. Interesting. You’re confusing a standard Roth conversion with a Backdoor Roth IRA. You can still do contributions just fine. What a pain in the buttocks that was. What should I do to keep the IRS at bay? As I just did the conversion I just want to make sure I did not mess it up. Yes. Apply for an EIN and viola, you’re self employed. These are questions that don't get asked by people who have done their own taxes for years. But the way the rules are written, a business making money is enough to open a 401(k). Easier paperwork. 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. You now have a taxable transaction, since you will round that up to $1.00. HR Block software screwed up my 8606 this year and it took way more effort than it should have to fix it. Then, in early April 2016, I opened a new traditional IRA account and contributed $5500 for the tax year 2015 and my spouse opened a new traditional account and also contributed $5500 for 2015. If you have one or two employees in your practice and they turn over every three years (which happens a lot), then you don’t have to match them. 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).
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