Backdoor ROTH IRA conversion?

[ken-do-nim]

Have any of you ever done it?

I'll be opening up an IRA account soon and putting post-tax dollars into it, so that I can then move the funds into my ROTH IRA.  Seems super weird that you can just override the income limits by moving the money first into another account.  How long did you let the funds sit in the regular IRA before moving them to the ROTH?

[fenders53]

(02-17-2021, 07:41 AM)ken-do-nim Wrote: Have any of you ever done it?

I'll be opening up an IRA account soon and putting post-tax dollars into it, so that I can then move the funds into my ROTH IRA.  Seems super weird that you can just override the income limits by moving the money first into another account.  How long did you let the funds sit in the regular IRA before moving them to the ROTH?

What are you over-riding?  The regular IRA contribution limit, or the Roth.  If the Roth, you've already paid the taxes so not sure why they would care?  I haven;t invested new money in my IRAs for years. There is a separate limit for ROTH and Traditional?

Chad is our forum tax expert.  Shoot him a PM if he misses this.

[ken-do-nim]

From https://www.irs.gov/newsroom/new-income-...ty-in-2021

Here are the traditional IRA phase-out ranges for 2021:
$66,000 to $76,000 – Single taxpayers covered by a workplace retirement plan.

Here are the income phase-out ranges for taxpayers making contributions to a Roth IRA:
$125,000 to $140,000 – Single taxpayers and heads of household.

[ChadR]

I have a few clients that do this. One thing, make sure that you don't intermingle this with other Traditional IRA accounts before you convert. If you don't have any other trad IRAs it's the easiest and cleanest way to do it. You can make the conversion the same day, but how long it has to be in the IRA before converting to a ROTH is mainly determined by who your IRAs are with. Some companies make you wait a day or up to a week. Have the money sitting in cash while in the IRA. Don't try to make a quick buck if they make you wait for a week. And as always the CYA, "Talk to your tax advisor for more details and to see if this will work for you."

[ken-do-nim]

(02-17-2021, 04:10 PM)ChadR Wrote: I have a few clients that do this.  One thing, make sure that you don't intermingle this with other Traditional IRA accounts before you convert.  If you don't have any other trad IRAs it's the easiest and cleanest way to do it.  You can make the conversion the same day, but how long it has to be in the IRA before converting to a ROTH is mainly determined by who your IRAs are with.  Some companies make you wait a day or up to a week.  Have the money sitting in cash while in the IRA.  Don't try to make a quick buck if they make you wait for a week.  And as always the CYA, "Talk to your tax advisor for more details and to see if this will work for you."

Thanks Chad!  Yeah I don't have a traditional IRA account so this should be clean and easy.  I'm really looking forward to doing this.

[ken-do-nim]

Okay, I have the IRA set up, and the money is in transit.

I've been reading up on this.

Michael Kitces recommends waiting a year between funding the IRA and converting it to the ROTH to avoid the step transaction doctrine.

Jeffrey Levine says wait one statement period and really dives into the issue.

[ChadR]

https://www.wallstreetphysician.com/back...ira-legal/

Those articles are 6 years old. You don't need to wait. Though the typical CYA. Please talk to your tax advisor before making any transactions.

[ken-do-nim]

(04-06-2021, 08:11 PM)ChadR Wrote: https://www.wallstreetphysician.com/back...ira-legal/

Those articles are 6 years old.  You don't need to wait.  Though the typical CYA.  Please talk to your tax advisor before making any transactions.

Woohoo!  Thanks a bunch.

[ken-do-nim]

Just in case someone else reads this thread, this article has the final word on the subject: https://www.forbes.com/sites/jimdahle/20...55b9775ce7

No Waiting Period Required

A lot of people, including some financial professionals, were concerned for many years that the IRS might apply the "Step Doctrine" to this indirect Roth IRA contribution process. The Step Doctrine is a concept occasionally employed by the IRS that if the sum of a number of steps is illegal, the process is illegal even if each of the steps is legal. It's easy to see why one might worry this could apply to the Backdoor Roth IRA process. Due to this fear, many advisors actually advocating waiting some period of time (weeks, months, sometimes a year or more) between the contribution and conversion step, or worse, recommended against doing it at all. However, despite thousands of investors doing this every year (and reporting it to the IRS on Form 8606) the Step Doctrine was never applied. Finally, in 2018, the IRS issued clarification that no waiting period was required, essentially giving the Backdoor Roth IRA their blessing. Unfortunately for those who never funded their Roth IRAs or complicated their tax paperwork and ran up the tax bill on the Roth conversion step by leaving the money in the traditional IRA for lengthy periods of time, there was no going back.

[ken-do-nim]

Conversion complete! I have $12,000 to invest with tomorrow in my ROTH!!! (I managed to get a $6000 contribution for 2020 and a $6000 contribution for 2021.)

They should really just remove the income limits on the Roth IRA.