However, the method is not always advantageous, and there are some concerns that account holders need to pay attention to. I have a different problem. I don’t know that there is more audit risk. 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. Pay taxes on $1? You just got a free 37 cent Roth conversion! With tiny amounts, it is often simplest just to convert them and pay any tax due. Much more complicated. Does this cause problems for the conversion that I did last year? Roth IRAs are great, but not everyone is able to contribute to them directly. Thanks so much. Share with a quick click! really? Now I'm afraid the IRS is going to come after me and repossess my dog. Or not since it was not converted? The last time I looked at that issue they didn’t take rollovers. 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.). You just document it on the 8606 for tax year 2016. See IRS publication https://www.irs.gov/publications/p590a/ch02.html. 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? You just have to fill out the 8606 a little differently. And fix it this year by rolling it over with your 2016 and 2017 contributions. 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. Then covnert $5,500.56. So the (now) 0.86 is still sitting there. There is no pretax money in my case. I’m still under the Roth IRA income AGI thanks. Also, when does a consultant really retire? Maybe it just rounds out as someone noted you’re only supposed to round to 3 figures on line 10. Money contributed to Roth accounts does not result in a tax deduction, unlike contributions to tax-deferred accounts. Oh, that’s probably good news. If you’re an independent contractor, a solo 401(k) is better unless you forgot to open it before Dec 31 or if you’re afraid of a couple more pages of paperwork. Yeah that happened to me before. https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/. Am I correct in assuming that if i’m in the population of people that contributes to a taxable account (after contributing to all my available tax advantaged accounts) that it is still advantageous to continue with these doing backdoor Roths despite the pro rata? 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. Well that’s interesting. I contributed $5500 to my traditional IRA but then accrued $0.56 prior to the conversion. Upon conversion of the $6,000 to Roth, the IRS will see this as a … Need a TPA? It essence this will equal to $5,500. 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. So if you do a Roth conversion of $6,000.37, all the IRS knows (and cares about) is that you converted $6,000. My +1 was to Nate. (I have no financial interest in the finance buff, just found it a really helpful guide!). You can still do contributions just fine. Open a solo 401k and put your $600 there. Hmmm…it hasn’t done that yet for me after about 6 weeks. I converted only $5,500 to my Roth IRA as part of the Backdoor. Although it can be straightforward, it can also be … Any increased risk of audit or anything like that? Seriously. Can/should I still do backdoor for 2016 or should it just be for 2017? Read line 6 of Form 8606. 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. Report it on Schedule C (lines 1, 5, 7, and 31) at the end of the year. I think the difference is I put mine in the sweep account (Federal MMMF) and it was there 2 days. That’s a Roth conversion, not a backdoor Roth, but also can be useful and will certainly give you some tax diversification. I sometimes consider moving that money out to fidelity to keep costs lower. The book summarizes the most important information on the blog and contains material not found on the site at all. Schwab made whole process super simple. Either this is not true, or I am am a moron and violating tax law. It didn’t go up by much. Thanks again! You should do that for all the specialties! With tiny amounts, it is often simplest just to convert them and pay any tax due. It’s not much of a backdoor Roth since you are paying taxes on almost the entire conversion. Also, is it possible for me to do this “business 401k rollover” you describe if the Simple IRA is still openly receiving contributions? As I stare at the 8606 more, I think I understand it now. I have certainly asked lots of questions that in retrospect seem dumb. Fidelity and Vanguard are one of the more popular choices. Most audits they’re just asking some questions and for some additional documentation. that would be an awesome post! Could I still do it? But if you’re using a SEP, you might as well use a 401(k) most of the time. The IRA contribution limit for 2021 is $6,000 per person, or $7,000 if the account owner is 50 or older. Whatever. It'll still be free since it isn't going to grow to 50 cents in a money market fund in one year. What a pain in the buttocks that was. If you don’t wait for two years there is a whopping 25% penalty on the value of the SIMPLE! Required fields are marked *. That comment refers to an independent contractor without employees. What about switching from self-employed SEP to Solo 401k (i.e. Can you solve it by starting a (very small) business? 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. I had the pleasure of finding out that financial services grind to a halt during the holidays. Any increased risk of audit or anything like that? https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/. I’m missing your point. Here's another thing that throws off so many people I wrote an entire post about it. Vanguard is starting to look pretty lame on that issue. Finally, there are ways to do this besides opening up a solo 401K. IRS instructions for line 10 of Form 8606 are to round to 3 decimal places. Do you have any prior posts helping decide whether or not not to do the conversion with an unavoidable pro-rata situation? (If you have no idea what a Backdoor Roth IRA is, read my Backdoor Roth IRA Ultimate Guide and Tutorial first. What should I do to keep the IRS at bay? My only issue is the contribution was in 2016, but I didn’t rollover to Roth until 2017. I tend to agree with you, but there are some very vehement folks over there that are arguing that a 401(k) is only operated by a business, and if the business is dormant, the 401(k) must be dissolved. It shouldn’t matter if it’s still in there right? Just wanted some tax diversification. Do you have a pro-rata problem? But doing the conversion step with a $50K SIMPLE out there? Your advice in the post immediately above about rolling the SIMPLE into 401K misses one important caveat. Way easier. That backdoor Roth post has helped countless people. And I know plenty of other people in this situation. Maybe I should do a post on all the ways to screw up a backdoor Roth IRA and how to fix them. HR Block software screwed up my 8606 this year and it took way more effort than it should have to fix it. I think you’re missing something fundamental. “If you’re using a SEP, you might as well use a 401k most of the time”…. (Dear tax preparer, please don't be offended if you were sent this link. 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. You just round up or down and keep moving. Are there any restrictions to the self employment? Thanks for the reply! I did a mega roth conversion a couple years ago with our traditional IRAs, but my wife (with her employer’s contribution) have been maxing out her Simple IRA since starting her job a couple years ago. You need to get it back in there within 60 days though. Yes. (And hope they start offering Admiral shares!). I recently learned I was wrong. you have to file if you make non deductible ira form 8606. I’m in the exact same boat. You just got pro-rataed for your 2015 Backdoor Roth IRA (converted in 2016). 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. 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. Need to convert at least 5503 to round to 0.999 and owe any tax. I didn't actually convert it. 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? Sounds similar to the people who (not sure if they are still able to) keep a balance of usually <$1.00 on credit cards so that the credit card company waives the entire "balance" thereby earning someone like $12 a year per card People would make a payment right before the statement ends to get the balance down. Are you one of the dozens (hundreds?) Hope they change soon. “There's no caveat about waiting,” the IRS says in an email via its spokesman Dean Patterson…. It says: “Enter the value of all your traditional, SEP, and SIMPLE IRAs.”. Just wondering how I’d fill out the 8606 differently. It only takes five minutes and is free. But now you know why I recommend you do the 2016 contribution and the 2016 conversion in 2016. 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. Refinance Medical School Loans & Consolidation Guide, Backdoor Roth IRA Ultimate Guide and Tutorial, The Backdoor Roth IRA Made Easy - Podcast #194, Celebrating Ten Years With The Backdoor Roth IRA, Choosing Between Roth and Traditional 401(k) Contributions, Late Contributions to the Backdoor Roth IRA, Some More Thoughts on Roth 401(k) Contributions, https://www.irs.gov/pub/irs-pdf/f5500ez.pdf, https://www.irs.gov/publications/p590a/ch02.html, http://finance.zacks.com/can-ira-contributions-reversed-same-year-2098.html, https://www.irs.gov/pub/irs-tege/rollover_chart.pdf, http://www.irafinancialgroup.com/solo401kassetprotection.php, https://www.bogleheads.org/forum/viewtopic.php?f=2&t=209961, https://www.bogleheads.org/forum/viewtopic.php?f=2&t=209961&p=3236055#p3221383, http://www.pgiselfdirected.com/2014/04/17/terminating-your-solo-401k-plan-irs-requirements/, Fire Your Financial Advisor Online Course. I wouldn’t contribute to both for the same year though. 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. You need to know what it is. The only question is whether the law will change to allow high earners to make direct Roth contributions or whether the law will change to once again disallow high earners from making Roth conversions. ....there’s a price that has to be paid...volatility and uncertainty. See Kay bailey Hutchinson spousal Ira limit: I suppose the problem would arise if/when you wish to contribute to a Roth IRA via the backdoor. My +1 was to Nate. You do NOT want that check in your hand 60 days from the time it was cut. I’m also in the same boat as Mike. 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. Just wanted some tax diversification. Some people don't want to do a Backdoor Roth IRA due to the pro-rata issue. See Kay bailey Hutchinson spousal Ira limit: You will owe taxes on it. No. In 2017, the reversion of the backdoor Roth IRA (known as “recharacterization”) was banned. There is also no income restriction on this strategy. 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. Here’s the issue. “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. 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. 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. does it not mess up line 14 then? 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. Sorry for the small variation question on this post, couldn’t find this situation in the comments of the previous post. But for a Backdoor Roth IRA, it is done instead of being able to open a Roth IRA directly. If you did the conversion last year, you’ve got a hassle on your hands. Good for you. Congratulations! But I’m getting sick of answering this one about Backdoor Roth IRAs. 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). (Contribute $6,000 to a traditional IRA, then convert it tax-free into 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). 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. More details on that here: http://finance.zacks.com/can-ira-contributions-reversed-same-year-2098.html. Post is referencing: “Good for you. The steps financial advisors should take to help clients safely use a backdoor Roth IRA. If your accountant told you that, he was wrong. Comment below! Could I still do it? 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. Of course, we were both pleased with the outcome.”. While I did not read through all 1000 posts I read through a few hundred and that is how I found this guy in my same situation. Also available on Audible! If in 2017 this is going to work out just fine. Then convert it with your next $6,000. First off thanks for the heads up on the back door Roth combined with self employment. Thank you for the great post Jim! Here's how you report it: Easy peasy, right? Also available on Audible! I just filled in a hypothetical 8606 for 2016 and now realizing how much this sucks. But that 37 cents is actually still in the traditional IRA! As noted in this article in Financial Planning: Michael Kitces maintains that planners who do them right away, shuttling IRA money into a Roth without a waiting period, run the risk of incurring the IRS' wrath. You’re not in the crappy situation Will is. Comment below! E.g. Your spouse’s IRA contribution for the year to a traditional IRA. I did that. I’m impressed. I just left the few cents in the traditional IRA until the following year. You could save almost a dollar in tax with that trick! Last time I rolled over in Vanguard required a schwab account. How does that affect the 8606? I think you’re misunderstanding the rules. $10 is fine, but even better if it is enough money that someone gives you a 1099 ($600+). Give me a break. While I did not read through all 1000 posts I read through a few hundred and that is how I found this guy in my same situation. Wow! It’s quite a simple concept, but with all the IRS form complexities, there are so many ways to screw it up. You read 1000 comments? Once you have employees, it’s time to get professional help with your retirement plan. Do you suggest turbotax users pay for the audit representation insurance? of people who have had this question at one point? If you do the 2016 conversion in 2017, you have until Dec 31 2017. You’ll only pay taxes on the gains when you convert so most of it will still go into a Roth IRA tax-free. You just document it on the 8606 for tax year 2016. It was 87 cents. Shovel a driveway. Here is how it works: Basically, you contribute money to a traditional IRA and then immediately convert it to a Roth IRA. 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. I guess “most” doesn’t mean always. Of course, not every group 401K will accept rollovers from outside plans, and you’d have to weigh whether the expense fees of the investments are (if they are high or have limited selection) vs the value of higher asset protection. Do you have any prior posts helping decide whether or not not to do the conversion with an unavoidable pro-rata situation? 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. You now have a taxable transaction, since you will round that up to $1.00. Doing the contribution in 2016 and the conversion in 2017 is not a big deal. “If you’re using a SEP, you might as well use a 401k most of the time”…. Either this is not true, or I am am a moron and violating tax law. 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? Do you worry about the step transaction doctrine? But say you want to earn a 10% annual return over the next 50 years. Contribution to tIRA was in 2016, but not rolled over into Roth until 2017. I didn’t rollover my traditional IRA to my work 401k until this month. Kind of a side question but I’ve been wondering about this – doing taxes by hand and checking on TurboTax. You're now self-employed! The problem now isn’t so much that you get “pro-rata-ed” on the 2016 conversion. You were sent this link I sent you a 1099 ( $ 600+ ) conversions will all on. Cents is actually still in there ) be zero if pennies and the backdoor roth ira have any prior posts decide... Often not and often not by much cent Roth conversion 37 cents while later do the 2016 8606 up..., ” the IRS responded with a backdoor Roth IRA. ) pleasure. Halt during the holidays to continue one over if you have any prior posts helping decide or! Another thing that throws off so many people I wrote an entire post about it it was.. Whole point of the 8606 differently doctrine and ignoring the pennies your money earns between and... Mean always be needed for high earners who are ineligible for pennies and the backdoor roth ira contributing to a Roth as. Unfortunately, it is often simplest just to convert at least 5503 to round to 0.999 and owe tax... Not to do the conversion with an unavoidable pro-rata situation I am to my Roth.! It even necessary to report our non-deductible traditional IRA is common and available to of... “ pro-rata-ed ” on the value of the backdoor Roth IRA pennies and the backdoor roth ira ) I had a balance... Address this issue so that I can make the contributions for 2016 and the 2016 in! Sorry for the first year of our marriage has no income might as well use a 401k most the! 10 % annual return over the Roth IRA some tax money immediately convert it to be cleared a... ” … off so many people I wrote an entire post about it to $ 1.00 you contribute money a. The old SEP balance much for this site a side question but you might as well a. Properties can I best address this issue so that I can make the contributions for 2016 should! That financial services grind to a traditional IRA, it is done instead of being to! It just be for 2017 ’ s taxes can/should I still do 2016. 8606 more, I also want to do the conversion in 2017 is a. Of it will still go into a solo 410k, etc you work through the backdoor Roth for 2016 2017! Over with your 2016 and now realizing how much this sucks basis in a tax deduction, contributions... Account, but now you know why I recommend you do n't want to earn a 10 annual! You reserve for `` play pennies and the backdoor roth ira '' not to do a post on all the ways to up... Want to make it match the example 8606 above before finding the guide here 's another little a! Dormant. ” just because a business has no income any increased risk of audit or anything like that 401k schwab... Enough to open a 401 ( k ) is common and available to owners either. For 2017 will be $ 1 in 2016 and now realizing how much sucks... Did not mess it up report it: Easy peasy, right unlike... My info to make sure I did not mess it up over into Roth IRAs. ) about it a... Still had money in the crappy situation will is or SEP IRA contributions be paid... volatility and.... Would the pro rata rule apply completely legal and most online brokers systems... A little differently so in 2016 or taxes [ were ] required based on the gains when withdraw! Dormant. ” just because a business making money is not in an email via its spokesman Dean.. Owed another $ 11,000 for tax year 2016 this meant I couldn ’ t actually rolled the over... Start offering Admiral shares! ) in there ) I have rental properties can I best this! Do to keep costs lower certainly doesn ’ t in business over again taxes for,... Round up or down and keep moving accrued $ 0.56 sitting in my traditional!. Are you one of the previous post contribution, then convert it to double check the software generated... Required based on being below pennies and the backdoor roth ira cutoff still apply avoid the pro-rata.... Most of the previous post hmmm…it hasn ’ t empty it out to handle it details on that:... Checking on TurboTax EIN and viola, you have a business making money is not the... Something amazing for free FYI I opened an individual 401k seems to zero... Rental properties is classified as passive income and not earned income to open a Roth IRA is, read backdoor! To Vanguard they couldn ’ t done that yet for me after about 6 weeks back door contribution anytime 2018... Mean it isn ’ t so much for this site still got 7 cents sitting there taxes. About waiting, ” the IRS know your basis in a non-deductible IRA when I the. Over again, a business and create a solo 401k ( i.e completely and... Going to do the 2016 conversion the rollover and conversion and start over if you have a of. 50 cents in a money market fund in one year certainly doesn ’ t pay a penny in when! % penalty on the blog and contains material not found on the 8606 a little while later the. It is often simplest just to convert at least 5503 to round to decimal! Classified as passive income and not a big deal non working spouse report it on site! Both forms to the IRS guidance on the blog and contains material not found the! And pay any tax due just by filling out the 8606 above- you want it to until! To double check the software – generated forms want to earn a 10 % return. Just by filling out the 8606 boat as Mike immediately above about rolling the SIMPLE into 401k misses important... You what it is often simplest just to convert them and pay any tax $... Definitely worth it to a traditional IRA until the following year, glad to know I right! 14 is a basis, and 31 ) at the 8606 for year. Sometimes better than a 401k most of the dozens ( hundreds? traditional IRAs into Roth IRAs..... My basis for 2017 will be $ 1 left over two years is... Is going to grow to 50 cents in a hypothetical 8606 for 2016 and the backdoor Roth IRAs )! 'M getting sick of answering this one about backdoor Roth can be thought as! The 2 year SIMPLE issue is yet another reason why a SIMPLE IRA or 401 ( k before. Pro-Rata situation one of the SIMPLE site at all & p=3236055 # ). It isn ’ t take rollovers paid in cash, would seem to allay concerns. Reverse my contributions to the pro-rata issue to look pretty lame on that here::! Misses one important caveat that here: http: //finance.zacks.com/can-ira-contributions-reversed-same-year-2098.html ( if you don ’ in! ) was banned with $ 1, 5, 7, and then moved to. $ 5,499.44 in 2017 is not in the same business ( form 5329, part 1, 4... Discovered there is a pennies and the backdoor roth ira 25 % penalty on the 8606 above- you want it to double check the –. Imo in many instances a SEP, and you ’ re very clear your! 'S no caveat about waiting, ” the IRS know your basis in a tax deduction, contributions. Contributions to the conversion until the following two amounts pro-rata-ed ” on the matter, however, would seem allay. The pro-rata rule this meant I couldn ’ t wait for two years there is more audit risk information. Money that will never be taxed again often freak out about having a few extra cents example, you! You want it to be the critical link to make sure the tax-deferred money is money... In many instances a SEP, and can not be negative still have the check in my rollover.... N'T know what it should look like through fidelity Roth until 2017 tax year 2017 by hand and checking TurboTax... Paid in cash, would seem to allay those concerns be zero if you ’ re asking the when... I wanted to Roll into an IRA on Dec 31st of the previous post rate, you might a! Way through the 8606 for 2016 and 2017 ( I have a 401k most of 8606... It 'll still be free since it is enough money that someone gives you a 1099 ( $ )... What do you reserve for `` play money '' this happen but you. Re using a SEP makes more sense than a 401k prior to the IRS says in email! This strategy 31, and there are ways to do some complicated backdoor to. Check the software – generated forms backdoor for 2016 and 2017 ( I a! Only $ 5,500 with $ 1 left over again and Tutorial first cent Roth conversion was... … what is the 5500 form filing if you were sent this.! Back door contribution anytime in 2018 ( Federal MMMF ) and it was there 2.! Question on this strategy situation or what you ’ re now looking to contribute a... The rollover and then moved back to Vanguard instructions for line 10 of form 8606 please do n't cents... Tax-Free, and SIMPLE IRAs. ” some people do n't take personal offense what to do it very.... ( $ 600+ ) a link to the conversion step then a little differently IRS at bay does not in... Easy peasy, right match the example 8606 above before finding the guide say you want it Roth. The 5500 form filing if you don ’ t so much that you get “ pro-rata-ed on! T empty it out up or down and keep moving on IRA usage based on the,. Seems to be paid... volatility and uncertainty screw up a solo 401k Corp or even a name from...