Tax Help & ROTHs

Re: Tax Help & ROTHs

• hoffse member

  

  April 2017 edited April 2017

  What you described should work.  You can't make a direct contribution to a Roth IRA if you file separately and make over $5K per year, but you ought to be able to back-door it.  You do need to ask if you can make a contribution for 2016 and convert it in 2017 - conversions don't work on the same timeframe as contributions, and they "count" in the calendar year in which they are made.  I think it can be done in different years, but you need to ask somebody at your bank to be certain.  I have never tried to do this myself, because conversions are tricky enough to report on turbotax without dealing with different years too.  We have always done the contribution and conversion in the same calendar (not just tax) year.
  
  The other thing you need to check on the conversion is whether you will have to prorate anything.  If you do not have any assets in a traditional IRA then this won't be an issue.  If you do have assets in a traditional IRA already then you need to read about the pro rata rules before you make a decision.
  
  Finally, I suggest making life easier on yourself and converting as quickly as possible and waiting to invest at the very end.  When H and I do it we literally do our contributions on day 1, convert on day 2, and then invest on day 3.  That's probably overkill, but I want the money to clear the account at each step.  Just be sure you don't invest the contribution in the traditional account.... you have to pay taxes on any gains between the contribution and conversion.  While this might not be much money, it's a pain in the butt to report.  Losing 1-2 days of potential gains is worth it IMO.
  
  
  

  

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• AprilZ81 member

  

  April 2017

  We both have traditional IRAs...  I'm so confused I'm about ready to just let the federal government keep our extra money to avoid the headache of it all, but that isn't exactly MM...  LOL

  Formerly AprilH81

  

  
  

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• jtmh2012 mod

  

  April 2017

  AprilZ81 said:

  We both have traditional IRAs...  I'm so confused I'm about ready to just let the federal government keep our extra money to avoid the headache of it all, but that isn't exactly MM...  LOL

  It might not be MM, but I'd file jointly to keep the roth contribution too....lol
  

  
  

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• hoffse member

  

  April 2017 edited April 2017

  Yes, it's a huge pain.  I do Roth conversions in November or December to make sure we aren't going to trip ourselves up with the pro rata rules because the calculations for that year are run on December 31.  Here's an article that sort of explains it, with an example.  Substitute your own numbers to see if it's worth messing with it:  https://www.kitces.com/blog/the-impact-of-the-ira-aggregation-rule-on-after-tax-distributions-roth-conversions-60-day-rollovers-rmds-and-72t-payments/

  

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• hoffse member

  

  April 2017

  To clarify, the pro rata rules work such that if you do the conversion early in the year and then later on take a new job and ultimately send your 401(k) from your old job to your traditional account and it has a balance on December 31, then that counts for the purposes of the pro rata rules, even if your traditional account had a $0 balance after your conversion at the beginning of the year.  So we just do everything in Nov/Dec to make sure we have accounted for all of the money going into the traditional account for that year.  I had started to move our IRA contribution date up to build in a little extra time for gains, but after realizing this quirk I just don't think it's a good idea when you are doing annual conversions.  It becomes a lot to keep up with.  

  

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• AprilZ81 member

  

  April 2017

  So we are going to have to take the tax hit.  My IRA is funded with pre-tax money (401k rollover) and we can't mix pre and post tax money now.  Marriage penalties SUCK.

  Formerly AprilH81

  

  
  

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