This is my personal worry. The client's 1099-R forms showed the Roth conversion amount, McNamara says, while another form, Form 5498, showed the IRA contribution amount. Is there any way to reverse my contributions to the backdoor Roths for both 2016 and 2017 (I already converted my 2017)? 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. 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. Contributed $5,500 and converted $5,500 with $1 left over. Read line 6 of Form 8606. I contributed $5500 to my traditional IRA but then accrued $0.56 prior to the conversion. Just leaving for future reference, since I had the same question: line 14 is a basis, and cannot be negative. I just left the few cents in the traditional IRA until the following year. 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’m not exactly clear on your situation or what you’re asking. Here’s a link to the IRS table showing the above is true: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf. I’m in the exact same boat. But that’s going to cost you some tax money. You just got a free 37 cent Roth conversion! Several folks there seem to think it’s pretty close to the line, if not entirely across it, and there’s also some debate as to whether it’s legitimate to continue a Solo 401(k) if you don’t have ongoing economic activity. 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. Easier paperwork. 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. A backdoor Roth IRA contribution is a two-step process for high earners to get NEW money into a Roth IRA. A backdoor Roth IRA allows individuals with income above the maximum limit to contribute to Roth IRAs and enjoy the benefits of the type of account. If we don’t owe taxes on it, does the IRS even care that we made a contribution to a Traditional IRA and then later converted it to a ROTH? You need earned income to open a business and create a solo 410k, etc. Notify me of followup comments via e-mail. 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. Yes. Here's another thing that throws off so many people I wrote an entire post about it. 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). As I stare at the 8606 more, I think I understand it now. I suppose the problem would arise if/when you wish to contribute to a Roth IRA via the backdoor. Babysit someone's kid. Do you worry about the step transaction doctrine? Roth IRAs have no age limits, but this won’t help since the actual IRA contribution is being made to a traditional IRA, not a Roth IRA. The backdoor Roth IRA is an excellent conversion strategy that gives you the opportunity to contribute to a Roth even if your income is over the modified adjusted gross income phase-out ($124,000- $139,000, single or $196,000- $206,000, married filing jointly for 2020). You can still do 2016. Thank you. But if you have many (or even one) employee that you’d have to match with a SEP then a 401K might make more sense- but I’d run the numbers before making any blanket statements. Leave it there until next year. If you like, you can read the 941+ comments below the post where you will see variations of this question asked dozens of times.). 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). But maybe not. that would be an awesome post! If in 2017 this is going to work out just fine. Yeah that happened to me before. When did you do the conversion step? Talk to Congress. (And hope they start offering Admiral shares!). 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. Seriously. (I have no financial interest in the finance buff, just found it a really helpful guide!). At any rate, I decided I was going to write a blog post about it so I could just link to the post instead of typing out the answer over and over again in comments, the forum, and emails. Currently I just use TurboTax, have you found any big discrepancies? Backdoor Roth Tutorial Steps. Most audits they’re just asking some questions and for some additional documentation. Really appreciate it. That wasn't so hard, was it? Jim, first off, thanks so much for this site. No. I just left the few cents in the traditional IRA until the following year. Money contributed to Roth accounts does not result in a tax deduction, unlike contributions to tax-deferred accounts. Custodians automatically provide both forms to the client and to the IRS. Voila! 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. Three other employees have worked for her for under three years, so she can use the three year test for matching. A backdoor Roth IRA is a way for those who earn too much to contribute to a Roth IRA to still take advantage of one. You just round up or down and keep moving. Seriously. 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. Earn over $600 and file a 1099. So the (now) 0.86 is still sitting there. You can still do contributions just fine. Okay I agree with all that. You read 1000 comments? does it not mess up line 14 then? Doing the contribution in 2016 and the conversion in 2017 is not a big deal. Otherwise you’ll get “pro-rata’ed.” If a Roth is something you’re not interested, then going straight SEP may be advantageous. Talking about it is pretty easy but I wanted to show you what it should look like through Fidelity. When did you do the conversion step? You can convert it. See Kay bailey Hutchinson spousal Ira limit: Leave it there until next year. 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. Last year, I did this process for the first time, but now realize I may have an issue. Additionally, you advocate putting IRA money into a solo 401K. Right now we have around 50k in the Simple IRA and are contributing 11k as a backdoor Roth between the both of us this year. Could I still do it? In 2017, the reversion of the backdoor Roth IRA (known as “recharacterization”) was banned. Isn’t it wonderful that the White Coat Investor was here to give you his two cents on what to do about your two cents? Do you suggest turbotax users pay for the audit representation insurance? I imagine i’d have to pay taxes on any gains, just wondering if there are additional penalties I’d have to pay. The backdoor Roth IRA contribution is a strategy and not a product or a type of IRA contribution. Or am I missing something? These folks make their contribution, then a little while later do the conversion step. Just following up on the $60 remaining in my Rollover IRA and what you mean by “rolling it over” with my 2016 and 2017 contributions. 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. People often freak out about having a few extra cents. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. 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. I didn’t rollover my traditional IRA to my work 401k until this month. Unfortunately, no. (See line 6 of the 8606 above- you want it to be zero if you're doing the Backdoor Roth IRA.) )”, I’m not exactly clear on your situation or what you’re asking. 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. Of course not. I haven’t actually rolled the money over to 401k yet, I still have the check in my hands. 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). But it does work very well if the only reason you aren't doing a Backdoor Roth IRA is because you have a big fat SEP-IRA, rollover IRA, or traditional IRA that you are no longer making contributions to. That wasn't so hard, was it? But that’s going to cost you some tax money. Any increased risk of audit or anything like that? 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. It was 87 cents. Give me a break. A: It’s a way to get money into a Roth IRA even if, technically, you make too much money. And I know plenty of other people in this situation. You don't need an LLC or an S Corp or even a name separate from your own. But doing the conversion step with a $50K SIMPLE out there? Easy to open and they also take rollovers. (In short I would come to any event you host for teaching if I was in the area). 3. It essence this will equal to $5,500. You just have to fill out the 8606 a little differently. Is it still considered pre-tax money? You can make your SEP contributions throughout the year, move it into your 401K by say December 1, and then do the backdoor roth through a traditional IRA before December 31. But I found out recently that the IRS has at least said something about it, although what they said really didn't surprise me. I think you’re misunderstanding the rules. I then move the money into my former mega health system’s Fidelity 401k (which has a SP 500 fund with expense ratio of 0.01%) and then do a backdoor roth with vanguard. Why wouldn’t you be able to continue one? 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”? “If you’re using a SEP, you might as well use a 401k most of the time”…. Hope they change soon. I also now made 4 bucks (should have done it the day after but residency got busy), but I do understand where that goes on the form. So what can you do? Crapola. The last time I looked at that issue they didn’t take rollovers. IRS instructions for line 10 of Form 8606 are to round to 3 decimal places. This trick doesn't work so well if you have a business where each year you are making SIMPLE IRA or SEP IRA contributions. Hmmm…it hasn’t done that yet for me after about 6 weeks. 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. Nobody cares about that 37 cents. 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. My only issue is the contribution was in 2016, but I didn’t rollover to Roth until 2017. Thank you. Why don’t you? The IRS didn't really weigh in at all about the Backdoor Roth IRA for years, leaving taxpayers and advisors wondering if the step transaction doctrine could ever be applied to it. That comment refers to an independent contractor without employees. Last time I rolled over in Vanguard required a schwab account. Sometimes better than a taxable account, but often not and often not by much. I have a 401k from a prior employer that I wanted to roll into an IRA to improve my investment options. Report it on Schedule C (lines 1, 5, 7, and 31) at the end of the year. I’ve still got 7 cents sitting there in mine. But now you know why I recommend you do the 2016 contribution and the 2016 conversion in 2016. But it does work very well if the only reason you aren't doing a Backdoor Roth IRA is because you have a big fat SEP-IRA, rollover IRA, or traditional IRA that you are no longer making contributions to. Yes. Schwab made whole process super simple. really? What do I do for 2016? Can you solve it by starting a (very small) business? https://www.irs.gov/pub/irs-pdf/f5500ez.pdf. Does this cause problems for the conversion that I did last year? Need a TPA? Not having admiral shares is also crummy. You just document it on the 8606 for tax year 2016. (I have no financial interest in the finance buff, just found it a really helpful guide!). Either this is not true, or I am am a moron and violating tax law. Much more complicated. Is it expensive to get representation after the fact? That’ll be demonstrated on the 2016 8606. Step 4: Roll that pesky IRA over to the individual 401(k) before December 31st. I have a couple of properties and a fat traditional IRA that has so far scared me away from a backdoor Roth. I was under the assumption it wasn’t (pretty sure my accountant said it wasn’t when I asked him a couple years ago), but after reading this blog it’s sounding like it actually is. Contribute $5,500 next year. I guess “most” doesn’t mean always. 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. I moved to them, did the rollover and then moved back to Vanguard. You can contribute 20% of your $10-600 if you like (report it on Form 1040, line 28), but it's not required. The 2 year SIMPLE issue is yet another reason why a SIMPLE stinks. Yes. 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 percentage of your portfolio do you reserve for "play money"? 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. Along with my 2018 contribution? Just FYI I opened an individual 401k at schwab for the same purpose and it was great. https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/, I rolled over my tIRA to 401k in January 2017 to avoid pro rata rule. I have certainly asked lots of questions that in retrospect seem dumb. The SEP would then have to be cleared into a 401k prior to the conversion. 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. What do you think? But I’m getting sick of answering this one about Backdoor Roth IRAs. 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. I’ve been applying the common sense doctrine and ignoring the pennies for years, glad to know I was right. https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/. 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. But the way the rules are written, a business making money is enough to open a 401(k). ....there’s a price that has to be paid...volatility and uncertainty. Yeah that happened to me before. (Dear tax preparer, please don't be offended if you were sent this link. The easiest thing to do may be to reverse the rollover and conversion and start over if you can. Is it still considered pre-tax money? You just need to make sure the tax-deferred money is not in an IRA on Dec 31st of the year you do the conversion. I’ve still got 7 cents sitting there in mine. (form … A Backdoor Roth IRA is a method to take an existing 401(k) or traditional IRA and convert it into a Roth IRA. Required fields are marked *. In late May, we converted both traditional IRAs into Roth IRAs. 5500/5501 rounds to 1 (0.9998). With tiny amounts, it is often simplest just to convert them and pay any tax due. The backdoor Roth is a technique, not an official account type. My wife for the first year of our marriage has no income. Contribution to tIRA was in 2016, but not rolled over into Roth until 2017. The IRA contribution limit for 2021 is $6,000 per person, or $7,000 if the account owner is 50 or older. 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 have a different problem. Not much. Your advice in the post immediately above about rolling the SIMPLE into 401K misses one important caveat. One more interesting fact I recently determined. You’re not in the crappy situation Will is. Thanks for the reply! Pay taxes on $1? (Contribute $6,000 to a traditional IRA, then convert it tax-free into a Roth IRA.). 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. 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. Pay taxes on $1? Shovel a driveway. Not really. The point of a backdoor Roth IRA is to put money that would be in taxable into a Roth IRA, not to convert tax-deferred money to a Roth IRA. Are there any issues with switching retirement account types for the same business? 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. What’s the point? Define “dormant.” Just because a business has no profit one year certainly doesn’t mean it isn’t in business. Unfortunately, no. It only takes five minutes and is free. You’re not in the crappy situation Will is. And fix it this year by rolling it over with your 2016 and 2017 contributions. But that 37 cents is actually still in the traditional IRA! You can convert it. My wife became a stay at home mom his year. 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. Thanks! As I just did the conversion I just want to make sure I did not mess it up. It would be nice if I was wrong, but I don’t think I am. I just filled in a hypothetical 8606 for 2016 and now realizing how much this sucks. 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? How much of a hassle is the 5500 form filing if you have IRA assets to rollover more than $250k? And I realize these conversions will all go on my 2017 tax form. I know the vast majority of your clients don't do Backdoor Roth IRAs.). 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). So in 2016 I still had money in the tIRA. If in 2017 this is going to work out just fine. 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). (Contribute $6,000 to a traditional IRA, then convert it tax-free into a Roth IRA.). E.g. Ha — that was exactly my argument here (https://www.bogleheads.org/forum/viewtopic.php?f=2&t=209961&p=3236055#p3221383). 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. There is also no income restriction on this strategy. You just round down or up. Which would really suck obviously. 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. What if I decided to go through the hassle and roll that $60 back into my 401(k) to save the taxes on it? Thank you for the great post Jim! 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. Do you have any prior posts helping decide whether or not not to do the conversion with an unavoidable pro-rata situation? Does this cause problems for the conversion that I did last year? Easier paperwork. Here's how you report it: Easy peasy, right? It says: “Enter the value of all your traditional, SEP, and SIMPLE IRAs.”. And I realize these conversions will all go on my 2017 tax form. Sorry for the small variation question on this post, couldn’t find this situation in the comments of the previous post. 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.). Way easier. Definitely worth it to double check the software – generated forms. Much more complicated. Is it expensive to get representation after the fact? For Don, the backdoor Roth contribution works as intended: He gets a new $7,005 Roth IRA but has to pay tax on only $5 of income. People often freak out about having a few extra cents. Here’s the issue. It didn’t go up by much. 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. That’ll be demonstrated on the 2016 8606. You now have a taxable transaction, since you will round that up to $1.00. Oh, you’re very clear in your posts, Jim…… Its my fault because I’m stupid. You need to get it back in there within 60 days though. For example, if you are paid in cash, would that count? Also, is it possible for me to do this “business 401k rollover” you describe if the Simple IRA is still openly receiving contributions? You now have a taxable transaction, since you will round that up to $1.00. You just round up or down and keep moving. I'll bet the law gets changed before this ever gets tested in tax court because after 8 cycles now, nobody in Congress nor the IRS seems to really care. Thanks for all you do!! Voila! Upon conversion of the $6,000 to Roth, the IRS will see this as a … Along with my 2018 contribution? Your email address will not be published. Definitely worth it to double check the software – generated forms. Can I still do the backdoor Roth for 2016 or would the pro rata rule apply? Talk to Congress. The SEP would then have to be cleared into a 401k prior to the conversion. So you and the IRS know your basis in a non-deductible IRA going forward. Therefore, you shouldn’t ask your IRA custodian or trustee for a backdoor Roth IRA … Are you able to report income from a business even if you don’t receive a formal 1099? You will owe taxes on it. Well that’s interesting. Need a TPA? Next year I’ll put mine in Prime MMF. And fix it this year by rolling it over with your 2016 and 2017 contributions. Finally, there are ways to do this besides opening up a solo 401K. No. Open a solo 401k and put your $600 there. Are there any issues with switching retirement account types for the same business? Here ’ s the point of the 8606 above- you want it to Roth accounts does not in... Can to the individual 401 ( k ) before December 31st want that check in your posts, Jim…… my! Not rolled over into Roth IRAs. ) the SEP would then have to file you. Roth and avoid the pro-rata issue is pretty Easy but I wanted to show you what is... 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