Backdoor Roth IRA

U

uptickk

Was wondering if anyone has tried the following approach to funding a Roth IRA for 2011 that makes more than the IRS income limits. I have talked to one CPA and he doesn’t see anything wrong with it but also doesn’t do taxes on individuals either and recommended I talk to someone more qualified which I will but thought I would throw this out there anyway.

Since the 2011 income limits a Roth IRA is $179,000 for married (120,000 for singles), you open a regular IRA and make a non-deductible IRA contribution for 2011. You then covert the IRA to a roth IRA, in 2011 there isn’t an income limit on the conversion. Since you haven’t traded in the account you do not pay taxes on the conversion and have thus successfully funded a Roth IRA while making more than the IRS limits.

Just thinking out loud here….
 
It's a great thought and strategy! I think it works beautifully if you don't already have a regular deductible IRA. If you do, then (I think) you have to pay taxes on what you're converting on the amount proportional for the deductible IRA to non Deductibe IRA and then file paperwork to keep track of the whole thing. For example, say you're holding a deductible IRA that's worth $100,000 and you convert your new nondeductible IRA of $6,000, most of the $6,000 (100/106) will be taxed right away. (Though no penalty in 2011)

I'll love for somebody to point out how i'm wrong though! because I'll like to contribute to a roth tax free this year.
 
Quote from joeactuary:

It's a great thought and strategy! I think it works beautifully if you don't already have a regular deductible IRA. If you do, then (I think) you have to pay taxes on what you're converting on the amount proportional for the deductible IRA to non Deductibe IRA and then file paperwork to keep track of the whole thing. For example, say you're holding a deductible IRA that's worth $100,000 and you convert your new nondeductible IRA of $6,000, most of the $6,000 (100/106) will be taxed right away. (Though no penalty in 2011)

I'll love for somebody to point out how i'm wrong though! because I'll like to contribute to a roth tax free this year.
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I currently don't have a regular IRA so it doesn't apply to me but I believe you are correct about paying taxes on the proportional amount being converted.

It is possible to open an new IRA and just convert that IRA? I would assume it isn't but thought I would throw the idea out there.
 
Don't know how old you are but you might want to consider just a regular IRA, especially if you are in your 20's or 30's. I think a lot of people are assuming that a Roth (the future withdrawls) will not be taxed in the future. I think it will. I would rather take the known for the unknown, especially when it comes to politicians and my money, and invest with tax deffered $$ now and pay tax in the future. I have heard a few financial advisers also making this point.
 
Quote from Arnie:

Don't know how old you are but you might want to consider just a regular IRA, especially if you are in your 20's or 30's. I think a lot of people are assuming that a Roth (the future withdrawls) will not be taxed in the future. I think it will. I would rather take the known for the unknown, especially when it comes to politicians and my money, and invest with tax deffered $$ now and pay tax in the future. I have heard a few financial advisers also making this point.
More...

Arnie - I understand your point of view with the uncertainty of the future. I am in my upper twenties so it would be a good hedge the future by splitting funds between an IRA and Roth IRA. The issue I see is that since I am not able to get the tax deduction on a regular IRA (due to income limits) the ROTH IRA looks better since I could contribute after tax money to the IRA then convert it to a Roth IRA and be "technically" done with taxes as oppose to just making non-deductible contributions to an IRA and paying tax now and when I take distributions.

Again I understand the government could decide they need more tax revenues and start taxing distributions to ROTH IRAs in the future.
 
Quote from joeactuary:

It's a great thought and strategy! I think it works beautifully if you don't already have a regular deductible IRA. If you do, then (I think) you have to pay taxes on what you're converting on the amount proportional for the deductible IRA to non Deductibe IRA and then file paperwork to keep track of the whole thing. For example, say you're holding a deductible IRA that's worth $100,000 and you convert your new nondeductible IRA of $6,000, most of the $6,000 (100/106) will be taxed right away. (Though no penalty in 2011)

I'll love for somebody to point out how i'm wrong though! because I'll like to contribute to a roth tax free this year.
More...

Another idea for your situation...

http://www.forbes.com/sites/ashleaebeling/2012/01/23/the-backdoor-roth-ira-advanced-version/
 
Quote from uptickk:

Arnie - I understand your point of view with the uncertainty of the future. I am in my upper twenties so it would be a good hedge the future by splitting funds between an IRA and Roth IRA. The issue I see is that since I am not able to get the tax deduction on a regular IRA (due to income limits) the ROTH IRA looks better since I could contribute after tax money to the IRA then convert it to a Roth IRA and be "technically" done with taxes as oppose to just making non-deductible contributions to an IRA and paying tax now and when I take distributions.

Again I understand the government could decide they need more tax revenues and start taxing distributions to ROTH IRAs in the future.
More...

The only advantage I see to that is that you will most likely pay a lower tax now on the roth conversion. I think thats a pretty good idea, given your age, and assuming your income, and taxes, will go up in the future. Also like that you are splitting between the two IRA's. I have nieces and nephews your age and I really worry about what they face. Good luck.
 
If it were come to pass with what you are suggesting it would not be retroactive...

Quote from Arnie:

Don't know how old you are but you might want to consider just a regular IRA, especially if you are in your 20's or 30's. I think a lot of people are assuming that a Roth (the future withdrawls) will not be taxed in the future. I think it will. I would rather take the known for the unknown, especially when it comes to politicians and my money, and invest with tax deffered $$ now and pay tax in the future. I have heard a few financial advisers also making this point.
More...
 
Quote from Arnie:

The only advantage I see to that is that you will most likely pay a lower tax now on the roth conversion. I think thats a pretty good idea, given your age, and assuming your income, and taxes, will go up in the future. Also like that you are splitting between the two IRA's. I have nieces and nephews your age and I really worry about what they face. Good luck.
More...

I have multiple tax deductible IRAs and I currently earn too much to open a NEW Roth IRA. I am converting them to Roths this year. There is an allowance to spread the tax hit over 2 years if you did it before 2012...I have been told that they may extend that rule to 2012-2013 as well but not sure about that. Anyway for those under 40 it is most likely in your best interest to convert everything possible to Roth now. Taxes are currently at the lowest level in over 57 years!!! If you think that with all the debt that any politician (Rep. OR Dem.) is going to be able to keep taxes where they are or lower them then you are sadly mistaken IMHO. All politicians will eventually agree that taxes will go higher. If you think your taxes will be lower when you retire I think you are also mistaken. In order to retire you generally need 75% of your salary when yku retire to live the same way. Do you guys really think you will not be in a higher tax bracket than you are right now and the income you get from investments in retirement will lower you tax bracket then you are also probably mistaken...unless you have no drive/desire for a better life in your future. I doubt anyone reading this lacks desire because you would not be here inquiring about this if you lacked desire.

Bottom line there is nothing wrong with converting traditional IRA to Roth and pay taxes. In fact its probably better. If you own your own business like I do you could also make your company's 401k offer a ROTH 401K. Its the same as traditional IRA and the matching contribution makes it even better deal. Max contribution is $16500 like traditional 401k but because its after taxes it is equal to about $22000 before taxes assuming 35% bracket. Add that to the company 3-4% match and you are nearly 50% of the way to Max allowable contribution of ~$49500.

Hope this helps

N54_Fan
 
Quote from ElectricSavant:

If it were come to pass with what you are suggesting it would not be retroactive...
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Agreed. Besides that would be double taxation. A Roth is AFTER TAX dollars.
 
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