If you understand the rules of both of these steps, putting them together is no problem. Getting Phased Out. Line 13 is the same as line 3, so tax due is zero. Looks like I will have to open SEP IRA to do so since I didn’t open individual 401K prior to the end of the year. See below for more details. On Sunday January 3rd I put in an order for an IRA contribution. In step 3, you select the Roth IRA account you want to move the money into (it did it automatically for me as I only have one.). Every year the IRS decides the max contribution amounts for Roth IRAs. January is backdoor Roth IRA season. But before opening this account, determine if you are eligible for it by using one of the online modified adjusted gross income calculators. It is taxable. The pro-rata rule isn't the only … Just convert it now and make sure you fill out your 8606 right. While everything else is about improving your financial position (primarily getting you to financial independence), 529s are for college funding. I was quite peeved. Some docs like residents or even attendings in the lower paying specialties who are married to a non-earner can just contribute to a Roth IRA directly. 12) 0 Any questions about it? Perhaps the best explanation is the cream in the coffee example. In dollars, let’s take a look at this example. No, you aren’t subject to a penalty for opening a Roth IRA just because your employer has a 403(b). Essentially, this helps you to get around Roth IRA income limits. I understand that it will take a few years until I can really start investing meaningfully in the Vanguard account anyway because of minimum requirements (3k). I was just reading through this fantastic article on back door Roths and came across this comment. Will my older trad IRA (with untaxed money in it) be any hindrance to this plan? I fear I have really screwed up my attempt at the backdoor Roth conversion. They closed my wife’s before 12 months went by!!! I agree with Harry that if you can isolate your wife’s basis that will be the best course. I do this the very next day after I make the contribution. I can’t find a single Vanguard NTF fund at TD Ameritrade…there are no-commission ETF’s and no-load mutuals but I can’t find any Vanguard NTF’s…I was wanting to do what you are suggesting there, but was put-off by TDA’s $49.99 fee for No-Load funds (which most the Vanguard’s are). Since it is all cream, I pay no taxes. If so, you will have to pay some taxes on your 2013 conversion, which may not be a big deal depending on what exactly you mean by “in process now” with regard to getting your SEP balance to zero. So on Day 2, you go to your traditional IRA and hit the “convert to Roth IRA button”. Honestly I’ve seen you write about this a lot of times, but I’ve always felt if something seemed a little sketchy or non-traditional that it probably wasn’t a good idea and would come back to bite me in some way, shape or form… so despite understanding the logic, I’ve never done it. When you make Traditional IRA contributions, they are tax-deferred by default. Thank you in advance. The following, though written for tax year 2018, comes directly from the IRS … Backdoor Roth IRA… This year I made the traditional IRA contribution very late and the fund wasn’t available to convert to a Roth IRA until today which is the first of the new year. I must be missing a concept here. We’ve avoided the back-door ROTH because my wife and I both have substantial SEP-IRAs from an S-corp with other employees. With Fidelity I discussed opening SEP IRA contributing for 2018, then opening individual 401k/ traditional IRA –> roth conversion for 2019 + rolling over my 2018 SEP IRA contribution to my individual 401k to avoid any problem with the Pro-Rata Calculation. Vanguard has no additional fees, but doesn’t let you use the cheaper admiral funds. At least, this is how I understand the schematic from Harry Sit. I could put money into traditional IRA’s, but if I put a lot in to it – it will make it impossible to do the Roth conversion anymore (pro-rata), right? Some physicians have even opened an Individual 401(k) at Fidelity or eTrade (the Vanguard Individual 401(k) doesn’t accept IRA rollovers) in order to facilitate a Backdoor Roth IRA. This rule basically says that if the sum of a bunch of legal steps is illegal, then you can’t do it. Only you can decide how much money is significant to you. Each year in which you can’t fully contribute to a Roth IRA by the regular, front-door way, take advantage of the backdoor Roth. You can have an individual 401K at Vanguard, although you’ll probably need to open one elsewhere to do an initial rollover of your SEP since Vanguard’s doesn’t accept them. Advisors have told me that they have had to help clients fix dozens of these that tax preparers have done improperly. I wouldn’t wait for a lower bracket, since the increase in value is a far bigger factor. Married physicians should be using a personal and spousal Roth IRA, and will usually need to fund both indirectly (i.e. If your traditional IRA account has at least $6,000, you can freely roll over more money than the yearly contribution. My parents helped me open an IRA when I was 10. Some Things To Know About The Backdoor Roth IRA. This should total 56,000 401k+ 6,000 roth IRA, which I assume is decent for first full year out of residency. I am working as a locum tenen now and will receive a 1099. Note that Turbotax may fill this out a little differently (may leave lines 6-12 blank) but you end up with the same thing. That would mean each transfer in/rebalance could really rack up the commission charges. I would probably do the SEP first if I were in my peak earnings years. The market drops considerably so my ‘cost basis’ would (hopefully) be close to zero when I convert (rather than about 15K as it is now) such that my tax liability would also be near zero. With a Roth IRA, you put in money after paying income tax on it, and then those dollars grow tax-free. The pro-rata rule only matters for conversions. Each had "compensation income" in 2020 sufficient to allow the maximum IRA or Roth IRA contribution ($6,000, or $7,000 if age 50 or older by year-end) and is eligible to contribute the … Step 4 confuses a few people. © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. The form can get more complicated if you are doing other Roth conversions at the same time or if you made a contribution for the previous year (i.e. On the other hand, married should be receiving an income between $183,000 and $193,000 annually. This site uses Akismet to reduce spam. I’m not sure how to do it but I’ll look into it. Backdoor Roth IRA Basics As an individual contractor what will be my best option for purchasing health insurance for family? Can I have my teenagers work in my office doing filing and making copies and get them some earned income? Do I need to go back and file an 8606 for 2012 taxes? Once you have gone through the backdoor process of opening a Roth IRA, your contributions and distributions to the account will follow that of a normal Roth IRA account. It shouldn’t create any issues to do that. If you find you have a few pennies left in the account and are worried you'll get pro-rated, take a look at this post: Pennies and the Backdoor Roth IRA. I am transferring the assets to my Vanguard tIRA and will then do a conversion to the Roth–pre tax money only. (Line 14 on 2021 form = Line 2 of 2022 form), Line 15b – You didn't take money out of an IRA to help you survive a disaster, so $0. If you rollover the whole SEP, you will eventually pay taxes twice on part of the money. You don’t get a deduction for the contribution and don’t pay taxes on the conversion. Isn’t that amazing? Make sure you file IRS Form 8606 every year you do this. I don’t see such an advantage for $5500/yr to cause me to essentially forgo my SEP when I get 51k tax advantaged space. Since you didn't take any money out of your traditional IRA this year except the conversion, this is $0. Here is my article on individual 401(k)s but be aware that their websites often say one thing and their representatives another. I don’t think there is any fee. Only recommended if it is a relatively small amount and you can afford to pay the taxes out of current earnings or taxable investments with relatively high basis. Back door IRAs can be complicated, so you need to answer all the questions correctly. Do Checks Expire Or Can You Use It for As Long As You Have Your Bank Account? https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/. Line 4 – Remember this is asking about 2022, not 2021 and since you won't make the mistake of doing your contribution late again, this will be zero. On Line 2, your basis is zero because you had no money in a traditional IRA on December 31 of last year (if you've been carrying a non-deductible IRA for years this may not be zero). However, an old SEP IRA from a different bank was not yet 0–in process now. It’s a sole proprietorship. Background: That’s just the way the tax laws work. However, both these are employed based plans and makes it compulsory to withdraw the money in the calendar year unlike your HSA. That had to occur on Wednesday (January 6th). So YOUR 1099 will say the same thing, that you have $5500 in taxable distributions? 14) 5500, Since you put the basis ($5500) onto the 8606, then yes, that “cleans it up.”. It will also offer a step-by-step guide on how to convert from IRA to Roth IRA. Make a $6,000 ($7,000 if over 50) non-deductible traditional IRA contribution for yourself, and one for your spouse. Those concerns, valid or not, are no longer an issue. If I contributed to a traditional IRA TODAY and converted it next week would it be for the ’13 or ’14 tax year? So I thought I’d put together a basic step-by-step tutorial people can refer to when they do this. As you can see, a Roth conversion of a non-deductible traditional IRA contribution without any gains is a taxable event, it's just that the tax bill is zero for it. 2. 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