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Back Door Access to a Roth IRA


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Like most of us, I'm intimately familiar with back door access to South Austin's mom but I have some questions about back door access to a Roth IRA.  I've never had an IRA or Roth IRA.  My income is too high to qualify for a regular Roth IRA.

From what I understand, I can fund a traditional IRA with $6,000. I can then backdoor convert that IRA to a Roth IRA.  Since I would use after tax dollars to fund the traditional IRA and would convert it immediately, I should not owe any taxes due to conversion. 

Questions:

1. Am I free to treat it as a traditional investment account and pick which stocks, mutual funds, etc., that I want or are there limited investment options like a 401k?

2. If I can trade stocks at will, my understanding is that any gains are tax free. Is that correct?

3. Can I contribute an additional $6,000 after tax dollars to the Roth IRA each year or do I need to open a new traditional IRA and backdoor it to a new Roth IRA?

4. If I have to open a new IRA each year, can I merge multiple Roth IRAs into a single account so it's easier to manage?

5. I purchase company stock at a large discount through my ESPP at work.  If I use those stocks to fund the IRA, would I have to pay taxes on the difference between my purchase price and current price at conversion to the Roth IRA?

 

 

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14 minutes ago, CooterBrown said:

Like most of us, I'm intimately familiar with back door access to South Austin's mom but I have some questions about back door access to a Roth IRA.  I've never had an IRA or Roth IRA.  My income is too high to qualify for a regular Roth IRA.

From what I understand, I can fund a traditional IRA with $6,000. I can then backdoor convert that IRA to a Roth IRA.  Since I would use after tax dollars to fund the traditional IRA and would convert it immediately, I should not owe any taxes due to conversion. 

Questions:

1. Am I free to treat it as a traditional investment account and pick which stocks, mutual funds, etc., that I want or are there limited investment options like a 401k?

2. If I can trade stocks at will, my understanding is that any gains are tax free. Is that correct?

3. Can I contribute an additional $6,000 after tax dollars to the Roth IRA each year or do I need to open a new traditional IRA and backdoor it to a new Roth IRA?

4. If I have to open a new IRA each year, can I merge multiple Roth IRAs into a single account so it's easier to manage?

5. I purchase company stock at a large discount through my ESPP at work.  If I use those stocks to fund the IRA, would I have to pay taxes on the difference between my purchase price and current price at conversion to the Roth IRA?

 

 

I can answer some of these.

1.  That is entirely dependent on who is the custodian of your iRA.  Most IRA's, Roth or otherwise, are just brokerage accounts where you can buy/trade any security you want.  A 401k can be that, too, but your employer chose a custodian or plan with limited investment options.  I don't know why anyone would do that, but they do.

2.  As a general rule, transactions in a qualified account (IRA, Roth, 401k) are tax free.

3.  You may contribute to the same IRA account every year.

4.  If, for some reason, usually 401k rollovers, you have multiple IRAs, yes you can consolidate the accounts, like with like (meaning you can't consolidate a regular IRA with a Roth).

5.  Not sure about this one.

A final caveat.  When you make non-deductible contributions to an IRA, that is, those that you are not eligible to deduct in the case of traditional IRAs, there are some downsides.  Contributions to Roth accounts in excess of the annual contribution limit, as reduced by income and other factors, are treated the same way. One that comes to mind immediately is that those contributions are not sheltered from creditors.  An IRA is exempt from creditor claims under Texas law, but not to the extent it is "overstuffed" with non-deductible or over-the-limit contributions.  There are some other downsides, as well.  I'll leave that to the accountants and investment pros.  @Brew @Reagan1k

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1 hour ago, CooterBrown said:

Like most of us, I'm intimately familiar with back door access to South Austin's mom but I have some questions about back door access to a Roth IRA.  I've never had an IRA or Roth IRA.  My income is too high to qualify for a regular Roth IRA.

From what I understand, I can fund a traditional IRA with $6,000. I can then backdoor convert that IRA to a Roth IRA.  Since I would use after tax dollars to fund the traditional IRA and would convert it immediately, I should not owe any taxes due to conversion. 

Questions:

1. Am I free to treat it as a traditional investment account and pick which stocks, mutual funds, etc., that I want or are there limited investment options like a 401k?

2. If I can trade stocks at will, my understanding is that any gains are tax free. Is that correct?

3. Can I contribute an additional $6,000 after tax dollars to the Roth IRA each year or do I need to open a new traditional IRA and backdoor it to a new Roth IRA?

4. If I have to open a new IRA each year, can I merge multiple Roth IRAs into a single account so it's easier to manage?

5. I purchase company stock at a large discount through my ESPP at work.  If I use those stocks to fund the IRA, would I have to pay taxes on the difference between my purchase price and current price at conversion to the Roth IRA?

 

 

First, to do this, you cannot have a current investments in an IRA account I believe.  Or maybe you can but you it complicates it.  If you currently do not have any IRA accounts, I think this should be pretty simple for you.  I opened a traditional and roth account.  Put the money in the traditional.  Then transfer it to the Roth account (convert it... or whatever you call it).  Make sure you don't take a tax deduction from the traditional now as you will want to take the tax break on the gains from your Roth down the line.  You will need to fill out the 8606 form for the IRS when you submit your filing each year (THIS IS IMPORTANT, your accountants should help you with this.  If you do it yourself you will need to make sure you put the correct information in the correct boxes).  You will need to do this process every year.  You do not need to open a  new account every year.  As long as you have a deposit every year, your traditional should stay "active".  

The link below should help you.

https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

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Posted (edited)
21 minutes ago, victory88 said:

First, to do this, you cannot have a current investments in an IRA account I believe.  Or maybe you can but you it complicates it. 

You can do it with an existing traditional IRA but the complication is all of your contributions are lumped together and there are tax implications. 
 

Let’s say you want to contribute $6000 after tax to an IRA that has $60000 in pretax contributions. When you convert the $6000 to a Roth you will be on the hook for taxes on 90% of the conversion since the government only recognizes you as having 10% after tax funds in the IRA. 
 

From my understanding even if you have separate IRAs at different brokerages they are all looked at as one by the IRS so you can’t open a new IRA for just after tax money. 

Edited by Archer
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4 minutes ago, Archer said:

You can do it with an existing traditional IRA but the complication is all of your contributions are lumped together and there are tax implications. 
 

Let’s say you want to contribute $6000 after tax to an IRA that has $60000 in pretax contributions. When you convert the $6000 to a Roth you will be on the hook for taxes on 90% of the conversion since the government only recognizes you as having 10% after tax funds in the IRA. 
 

From my understanding even if you have separate IRAs at different brokerages they are all looked at as one by the IRS so you can’t open a new IRA for just after tax money. 

Correct.  It's been years since I was doing back door but this is what I remembered.  I was lucky in that I was fresh out of school and didn't have retirement at the time so I just started doing a back door Roth right off the bat.

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its a 3 mouse click process

 

open trad ira

deposit 6k

wait 1 day (just to be safe), click button to convert to roth ira

 

most brokers have this process all streamlined

yes you can buy whatever the broker allows you too...which is most things

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I don't see anything I would argue with here, and as said above, the biggest pitfall in doing this is the Pro-Rata Rule.

If you have no traditional IRA holdings (contributory or rollover that were pre-tax dollars) you can stop reading as this doesn't apply.

If you do have pre-tax IRA money, the feds look at any conversion on a pro-rata basis and assume for you that you are converting equal percentages of pre-tax and post tax contributions based on the aggregate amount divided by the different classes.  You can't identify and convert specific contributions.

If you have any pre-tax IRA dollars, they consider you to have converted a percentage of those dollars and tax you as such.

That doesn't mean you should never do this, but it muddies the calculation, as you are betting that your retirement tax bracket will be higher than your current bracket and are willing to take a cash flow hit now vs. in the future.  It basically becomes a partial Roth conversion exercise instead of a pure backdoor Roth. 

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Posted (edited)
3 hours ago, CooterBrown said:

Thanks, everyone.

Just set up the traditional IRA with Fidelity and will convert to a Roth IRA later this week. 

 

 

You have, at minimum, 10 more days to contribute towards 2020.  Since tax season was extended, you may have until May 27th.  I was informed by my broker the extension, even though federal, may not apply to all States (there may have been some miscommunication).  Also, you can go ahead and contribute towards 2021.

Edited by Hmmm
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You have until 5/17 to make retirement contributions. 

Nondeductible to Roth seems fairly well covered at this point. Simple process with no other IRA holdings.

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4 minutes ago, dingleberryswitzer said:

Noob¬†question: ¬†what is the reason to ‚Äúback door‚ÄĚ into a Roth vs just starting a Roth from scratch. ¬†
I’d be putting a starter amount in it from my savings then adding a couple hundy a month.  

roth IRAs have an earnings amount which if you come in higher than you're not allowed to contribute to a Roth.  

 

OP, i'd open a traditional IRA account which does nothing, and holds no other funds, other than to backdoor into your Roth every year.  makes the accounting easier.  

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On 4/6/2021 at 2:38 PM, CooterBrown said:

Just set up the traditional IRA with Fidelity and will convert to a Roth IRA later this week. 

I use Fidelity for my brokerage account (not an IRA) but I use Vanguard for my backdoor Roth IRA due to their low fee index funds. My Vanguard account contains a traditional IRA and a Roth IRA. 

The traditional IRA is merely a vehicle for getting money into the Roth IRA. I make contributions to the traditional IRA about 4 times a year to hit the $6,000 max. The money never gets invested while in the traditional IRA, where it sits for about 2 days max before doing the backdoor conversion into the Roth IRA.

Once in the Roth IRA, it gets invested into a mix of 3 different funds:

1. Vanguard Total Stock Market Index Fund (VTSAX)

2. Vanguard Total International Stock Index Fund (VTIAX)

3. Vanguard Total Bond Market Index Fund (VBTLX)

These are all index funds which have extremely low fees compared to the mutual funds, individual stocks, or ETFs you would buy through Fidelity. More specifically, these are the Vanguard "Admiral Shares" which are even lower fees than Vanguard's regular index funds, but the Admiral Shares require a specific minimum dollar amount (I think it's $10k?) to qualify, which you wouldn't have starting out, so you would start with the corresponding basic index funds (Investor Shares), which would be VTSMSX, VGTSX, and VBMFX. They will automatically convert to Admiral Shares later on once you have enough money in the Roth IRA.

I know this is all kind of unsolicited advice, but I was at the same point you are a few years ago and I got a lot of different opinions, read several books, and spent time on the Bogleheads forum. It seems like this is the most foolproof approach to retirement planning you can do. You won't get rich by picking a hot stock like Netflix, but you will do very well for yourself over a long period of time. Besides, you can use your Fidelity account for a brokerage account where you play around with GME and other stock gambles.

Also, if anyone else reads this and thinks there is a better way to do it, I'm all ears. This has just been my autopilot approach since making the initial decision to go with it.

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26 minutes ago, wild_turkey said:

I know this is all kind of unsolicited advice, but I was at the same point you are a few years ago and I got a lot of different opinions, read several books, and spent time on the Bogleheads forum. It seems like this is the most foolproof approach to retirement planning you can do. You won't get rich by picking a hot stock like Netflix, but you will do very well for yourself over a long period of time. Besides, you can use your Fidelity account for a brokerage account where you play around with GME and other stock gambles.

Also, if anyone else reads this and thinks there is a better way to do it, I'm all ears. This has just been my autopilot approach since making the initial decision to go with it.

This is pretty sound advice.  I opened a Roth recently and I'm trying to decide how conservative I want to play it.  At this point in time, I'm not looking at is as a retirement account (maybe in a few years).  I'm looking at is as an account where I can be more active with my trades without having the tax consequences.  Somewhat of a play account.  More freedom to reallocate whenever I want.  The downside is that if I lose money, I can't realize the loss.  Other than that and the contribution limit each year, I'm not sure why you wouldn't use Roth for play money.  Then again, I'm still learning.

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35 minutes ago, wild_turkey said:

I use Fidelity for my brokerage account (not an IRA) but I use Vanguard for my backdoor Roth IRA due to their low fee index funds. My Vanguard account contains a traditional IRA and a Roth IRA. 

The traditional IRA is merely a vehicle for getting money into the Roth IRA. I make contributions to the traditional IRA about 4 times a year to hit the $6,000 max. The money never gets invested while in the traditional IRA, where it sits for about 2 days max before doing the backdoor conversion into the Roth IRA.

Once in the Roth IRA, it gets invested into a mix of 3 different funds:

1. Vanguard Total Stock Market Index Fund (VTSAX)

2. Vanguard Total International Stock Index Fund (VTIAX)

3. Vanguard Total Bond Market Index Fund (VBTLX)

These are all index funds which have extremely low fees compared to the mutual funds, individual stocks, or ETFs you would buy through Fidelity. More specifically, these are the Vanguard "Admiral Shares" which are even lower fees than Vanguard's regular index funds, but the Admiral Shares require a specific minimum dollar amount (I think it's $10k?) to qualify, which you wouldn't have starting out, so you would start with the corresponding basic index funds (Investor Shares), which would be VTSMSX, VGTSX, and VBMFX. They will automatically convert to Admiral Shares later on once you have enough money in the Roth IRA.

I know this is all kind of unsolicited advice, but I was at the same point you are a few years ago and I got a lot of different opinions, read several books, and spent time on the Bogleheads forum. It seems like this is the most foolproof approach to retirement planning you can do. You won't get rich by picking a hot stock like Netflix, but you will do very well for yourself over a long period of time. Besides, you can use your Fidelity account for a brokerage account where you play around with GME and other stock gambles.

Also, if anyone else reads this and thinks there is a better way to do it, I'm all ears. This has just been my autopilot approach since making the initial decision to go with it.

I take it you have no traditional IRAs?

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On 4/6/2021 at 3:30 PM, Reagan1k said:

I don't see anything I would argue with here, and as said above, the biggest pitfall in doing this is the Pro-Rata Rule.

If you have no traditional IRA holdings (contributory or rollover that were pre-tax dollars) you can stop reading as this doesn't apply.

If you do have pre-tax IRA money, the feds look at any conversion on a pro-rata basis and assume for you that you are converting equal percentages of pre-tax and post tax contributions based on the aggregate amount divided by the different classes.  You can't identify and convert specific contributions.

If you have any pre-tax IRA dollars, they consider you to have converted a percentage of those dollars and tax you as such.

That doesn't mean you should never do this, but it muddies the calculation, as you are betting that your retirement tax bracket will be higher than your current bracket and are willing to take a cash flow hit now vs. in the future.  It basically becomes a partial Roth conversion exercise instead of a pure backdoor Roth. 

And the flipside of this is that when you withdraw Roth funds, you are tax-free only on the same percentage, correct?

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I take it you have no traditional IRAs?

Correct. Unless you count the Vanguard traditional IRA that holds no money in it beyond the few days a year it’s serving as the vehicle to get money into the Roth IRA.
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10 minutes ago, TwiceHorn said:

And the flipside of this is that when you withdraw Roth funds, you are tax-free only on the same percentage, correct?

Something about distributions, too.  Which I have yet to figure out.

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Just now, Hmmm said:

Something about distributions, too.  Which I have yet to figure out.

I believe the rule is that all IRA distributions then are partially taxed and partially untaxed in the ratio at the time of the Roth conversion.

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So if I have a rollover from a 401k not a great candidate to backdoor unless I want to take the tax hit.  I'd have to set up a traditional to make post-tax contributions for back door action?  AM I understanding correctly?

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I believe the rule is that all IRA distributions then are partially taxed and partially untaxed in the ratio at the time of the Roth conversion.

Can you explain that again for slow thinkers.

I thought all gains in a Roth IRA can be withdrawn tax free after age 59 1/2.
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53 minutes ago, Anastasis said:

So if I have a rollover from a 401k not a great candidate to backdoor unless I want to take the tax hit.  I'd have to set up a traditional to make post-tax contributions for back door action?  AM I understanding correctly?

Yes, if you roll the 401k into a traditional IRA and then do a backdoor Roth IRA conversion, you will have to pay the taxes on that. You might be able to split it up across multiple years so you don't take the tax hit all in one year. Or it might not be worth it at all, depending on your age and the amount in your 401k.

Assuming you don't have an existing traditional IRA, you could also just start fresh with a traditional IRA that is used entirely for backdoor Roth conversion.

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1 hour ago, wild_turkey said:


Correct. Unless you count the Vanguard traditional IRA that holds no money in it beyond the few days a year it’s serving as the vehicle to get money into the Roth IRA.

Yea Vanguard is literally 1 click to do this each year and you dont have to recreate your traditional IRA. Just keep it at 0 and refill and convert yearly.

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Posted (edited)
42 minutes ago, CooterBrown said:


Can you explain that again for slow thinkers.

I thought all gains in a Roth IRA can be withdrawn tax free after age 59 1/2.

If you have 36K in traditional IRA and convert 6K (or backdoor 6K), then you will pay taxes on 5/6 of the converted amount.  

Additionally, when you distribute from your IRA, you will be taxed on 5/6 of it.

Your IRA is a "moeity," an undivided mass of money.  Some (the traditional) parts are pre-tax money, some, the Roth parts, are post-tax money.  Every distribution will be partially taxed in proportion to the ratio of pre- to post-tax money when the conversions occurred.

If you only have Roth IRAs, or convert 100% of your traditional to Roth, then you will pay no tax when taking distributions.

 

Edited by TwiceHorn
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3 hours ago, TwiceHorn said:

And the flipside of this is that when you withdraw Roth funds, you are tax-free only on the same percentage, correct?

I could be wrong but I don’t think that’s correct.  Roth money comes out tax free because it is considered after-tax.  You’d have paid taxes on the back door portion of the conversion as well as the pro rated portion the IRS assumes comes from your traditional.  Something could have changed but that amounts to double taxation and would render any conversion or back door strategy useless.  Point being, the back door is really the same as a straight Roth conversion, just using the new deductible contribution as the funds.  

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Posted (edited)
2 hours ago, Anastasis said:

So if I have a rollover from a 401k not a great candidate to backdoor unless I want to take the tax hit.  I'd have to set up a traditional to make post-tax contributions for back door action?  AM I understanding correctly?

What you could do is roll your rollover IRA into your current employers 401k if their plan allows it, leaving you without any pretax IRA dollars.  May or may not be be wise depending on the plan’s fee structure and investment options. 

Edited by Reagan1k
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4 hours ago, wild_turkey said:

I use Fidelity for my brokerage account (not an IRA) but I use Vanguard for my backdoor Roth IRA due to their low fee index funds. My Vanguard account contains a traditional IRA and a Roth IRA. 

The traditional IRA is merely a vehicle for getting money into the Roth IRA. I make contributions to the traditional IRA about 4 times a year to hit the $6,000 max. The money never gets invested while in the traditional IRA, where it sits for about 2 days max before doing the backdoor conversion into the Roth IRA.

Once in the Roth IRA, it gets invested into a mix of 3 different funds:

1. Vanguard Total Stock Market Index Fund (VTSAX)

2. Vanguard Total International Stock Index Fund (VTIAX)

3. Vanguard Total Bond Market Index Fund (VBTLX)

These are all index funds which have extremely low fees compared to the mutual funds, individual stocks, or ETFs you would buy through Fidelity. More specifically, these are the Vanguard "Admiral Shares" which are even lower fees than Vanguard's regular index funds, but the Admiral Shares require a specific minimum dollar amount (I think it's $10k?) to qualify, which you wouldn't have starting out, so you would start with the corresponding basic index funds (Investor Shares), which would be VTSMSX, VGTSX, and VBMFX. They will automatically convert to Admiral Shares later on once you have enough money in the Roth IRA.

I know this is all kind of unsolicited advice, but I was at the same point you are a few years ago and I got a lot of different opinions, read several books, and spent time on the Bogleheads forum. It seems like this is the most foolproof approach to retirement planning you can do. You won't get rich by picking a hot stock like Netflix, but you will do very well for yourself over a long period of time. Besides, you can use your Fidelity account for a brokerage account where you play around with GME and other stock gambles.

Also, if anyone else reads this and thinks there is a better way to do it, I'm all ears. This has just been my autopilot approach since making the initial decision to go with it.

I see you, 3 fund Boglehead. One day I'll get there. 

Fidelity asked me to fill out a survey. I told them to step up their fucking game and try to compete with vanguard ETFs. Fuck the 2 hour after-close mutual funds, fuck the actively managed ETFs.

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4 hours ago, wild_turkey said:

Also, if anyone else reads this and thinks there is a better way to do it, I'm all ears. This has just been my autopilot approach since making the initial decision to go with it.

Making regular investments as you are doing, and keeping fees / transaction costs low gives you the keys to the kingdom.  Not sexy but virtually foolproof. No argument here.

Get in the market, stay in the market, and add to the market!!!!

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Posted (edited)
35 minutes ago, Reagan1k said:

I could be wrong but I don’t think that’s correct.  Roth money comes out tax free because it is considered after-tax.  You’d have paid taxes on the back door portion of the conversion as well as the pro rated portion the IRS assumes comes from your traditional.  Something could have changed but that amounts to double taxation and would render any conversion or back door strategy useless.  Point being, the back door is really the same as a straight Roth conversion, just using the new deductible contribution as the funds.  

I converted a chunk of IRA to Roth some years back when Roth was new and there was a period when you could spread the tax liability over four years, I believe.

That was my understanding at the time.  I could be wrong.  This article seems to indicate that I am correct.  https://www.irahelp.com/slottreport/detailing-pro-rata-rule

It's not double taxation, as the proportion of after-tax contributions is not taxed again.  It's a product of the notion that you have one IRA, whether it's in one or multiple accounts or designated Roth or traditional.

Only if you never had a tradtional IRA, or converted all of it to Roth, would all of it be non-taxable at distribution.

Edited by TwiceHorn
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If you are already investing after tax dollars in an after tax account for retirement, check out a mega backdoor roth (google it) and see if you can get it.  Basically, if your 401k plan offers after tax contributions and in service distributions you can make after tax contributions and immediately convert it to a roth 401k so you'll have no additional tax on earnings.  

So, assuming you're surly 1%er, max 19500 401k pretax to bring your tax rate down, get company match, do a normal backdoor roth for 6k, then do a mega backdoor with remaining amounts whatever your plan will allow.  My plan allows it and fidelity puts it on autopilot- the second the after tax amount hits it is converted to Roth.  Easy money.

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12 hours ago, wild_turkey said:

Once in the Roth IRA, it gets invested into a mix of 3 different funds:

1. Vanguard Total Stock Market Index Fund (VTSAX)

2. Vanguard Total International Stock Index Fund (VTIAX)

3. Vanguard Total Bond Market Index Fund (VBTLX)

Also, if anyone else reads this and thinks there is a better way to do it, I'm all ears. This has just been my autopilot approach since making the initial decision to go with it.

backtest a holding of leveraged US stock market + bonds, represented by UPRO + TMF , over any period of time you want against the vanguard tri fund.  even though there is ETF fee and some drag from leverage, i think it does better over all time periods

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Does anyone have a recommendation for someone to provide advice on these Ira’s and Roth accounts? I have a weird problem with most of my retirement funds in after tax accounts, so I’m not getting the benefit of tax deferral on the after tax funds.

I’m trying to figure out how to get as much money as possible into a Roth, or some other strategy. I’m not working right now and may not for another few years so I will have little current income other than investment returns. 

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1 hour ago, Dbeasy said:

Does anyone have a recommendation for someone to provide advice on these Ira’s and Roth accounts? I have a weird problem with most of my retirement funds in after tax accounts, so I’m not getting the benefit of tax deferral on the after tax funds.

I’m trying to figure out how to get as much money as possible into a Roth, or some other strategy. I’m not working right now and may not for another few years so I will have little current income other than investment returns. 

def PM anyone but derka

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10 hours ago, TwiceHorn said:

I converted a chunk of IRA to Roth some years back when Roth was new and there was a period when you could spread the tax liability over four years, I believe.

That was my understanding at the time.  I could be wrong.  This article seems to indicate that I am correct.  https://www.irahelp.com/slottreport/detailing-pro-rata-rule

It's not double taxation, as the proportion of after-tax contributions is not taxed again.  It's a product of the notion that you have one IRA, whether it's in one or multiple accounts or designated Roth or traditional.

Only if you never had a tradtional IRA, or converted all of it to Roth, would all of it be non-taxable at distribution.

Here is where I think the confusion lies on both of our ends.  The verbiage and explanations are a bit convoluted.

From your article - For IRA distribution purposes, all IRAs (except Roth IRAs) are considered one big giant IRA. It doesn’t matter if you have one IRA that was rolled over from a former employer, and one SEP IRA with your current employer, and one contributory IRA where you put annual contributions, and one after-tax IRA where you put contributions for which you do not take a deduction. All four IRAs will be considered one IRA any time you take a distribution.    (***Note he does not include Roth accounts in this last two sentences in that paragraph setting the stage for the rest of the article***)

What this says to me and what my understanding has always been - When you take any distribution - conversion or otherwise - the Pro-Rata rule applies to all IRAs except the Roths as they are a different animal.  (Whether you have both pre and post tax IRA, or 100% in either - Pro-Rata is applied)  If you take income for spending or a distribution to do a conversion - the Pro-Rata rules apply so if you have pre-tax and post tax dollars in various IRA's then you must take distributions in the same proportion, regardless of which account the funds reside.  If you only have type of funds then the Pro-Rata application is 100% either way.

The Roth stands separate and alone from that discussion.

In thinking through practical applications - In your case you did a Roth Conversion under the special provision for a 4-year tax spread.  If I think through that - many people who only had pre-tax IRA's took advantage of that.....meaning 100% of the distributions turned into a Roth conversion would be taxable now (or over 4 years under that special provision). 

No one would have done that if the outcome would be that they converted 100% pre-tax funds to a Roth (with Pro-Rata rules requiring taxes on 100%) - when the outcome would be that down the road then those same Roth dollars are taxed at the 100% Pro-Rata level as well.  It would defeat the purpose of any pre-tax Roth conversions and cause double taxation.

I think there are a lot of poorly worded illustrations on the Pro-Rata rules - and they do not properly address that Roth accounts stand unique and separate from the Pro-Rata rule.  Pro-Rata is for tax computations, and as designed, the Roth allows for tax free withdrawals after 59 1/2 / 5 years so that calculation doesn't even come into the discussion.

I'm always interested in being corrected if one of our CPA's will chime in.

 

 

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15 hours ago, wild_turkey said:

I use Fidelity for my brokerage account (not an IRA) but I use Vanguard for my backdoor Roth IRA due to their low fee index funds. My Vanguard account contains a traditional IRA and a Roth IRA. 

The traditional IRA is merely a vehicle for getting money into the Roth IRA. I make contributions to the traditional IRA about 4 times a year to hit the $6,000 max. The money never gets invested while in the traditional IRA, where it sits for about 2 days max before doing the backdoor conversion into the Roth IRA.

Once in the Roth IRA, it gets invested into a mix of 3 different funds:

1. Vanguard Total Stock Market Index Fund (VTSAX)

2. Vanguard Total International Stock Index Fund (VTIAX)

3. Vanguard Total Bond Market Index Fund (VBTLX)

These are all index funds which have extremely low fees compared to the mutual funds, individual stocks, or ETFs you would buy through Fidelity. More specifically, these are the Vanguard "Admiral Shares" which are even lower fees than Vanguard's regular index funds, but the Admiral Shares require a specific minimum dollar amount (I think it's $10k?) to qualify, which you wouldn't have starting out, so you would start with the corresponding basic index funds (Investor Shares), which would be VTSMSX, VGTSX, and VBMFX. They will automatically convert to Admiral Shares later on once you have enough money in the Roth IRA.

I know this is all kind of unsolicited advice, but I was at the same point you are a few years ago and I got a lot of different opinions, read several books, and spent time on the Bogleheads forum. It seems like this is the most foolproof approach to retirement planning you can do. You won't get rich by picking a hot stock like Netflix, but you will do very well for yourself over a long period of time. Besides, you can use your Fidelity account for a brokerage account where you play around with GME and other stock gambles.

Also, if anyone else reads this and thinks there is a better way to do it, I'm all ears. This has just been my autopilot approach since making the initial decision to go with it.

This is exactly what I do as well.  Wife and I max out or Roths and then she contributes to her 401k up to company match.  I have mine in a target retirement fund but I'm going to start putting it in VTSAX from here on out.  Vanguard has the best fees.

I also play around with day trading with 15-20k where I just end up losing money to be honest through fidelity.

 

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3 hours ago, Dbeasy said:

Does anyone have a recommendation for someone to provide advice on these Ira’s and Roth accounts? I have a weird problem with most of my retirement funds in after tax accounts, so I’m not getting the benefit of tax deferral on the after tax funds.

I’m trying to figure out how to get as much money as possible into a Roth, or some other strategy. I’m not working right now and may not for another few years so I will have little current income other than investment returns. 

post it here, there are some knowledgeable people with experience.

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45 minutes ago, gsoda3 said:

post it here, there are some knowledgeable people with experience.

Basically most of my retirement finds are in after tax accounts. That means the yearly income I derive is taxable. I’m thinking it financially would make sense to get some more of it into tax advantaged accounts, but I can’t  do Roth because I have no earned income and it’s limited to $7k a person anyway. I guess there’s no way to get more funds into tax advantaged? It seems a standard IRA is the only way and that would turn it into income tax rates on withdrawal. I can’t back door to Roth either because I do have some existing Ira’s. 

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21 minutes ago, Dbeasy said:

Basically most of my retirement finds are in after tax accounts. That means the yearly income I derive is taxable. I’m thinking it financially would make sense to get some more of it into tax advantaged accounts, but I can’t  do Roth because I have no earned income and it’s limited to $7k a person anyway. I guess there’s no way to get more funds into tax advantaged? It seems a standard IRA is the only way and that would turn it into income tax rates on withdrawal. I can’t back door to Roth either because I do have some existing Ira’s. 

You can possibly open an HSA account where you deduct the taxes now when you contribute.  I believe with TD ameritrade you can actually invest it into their funds and then if you use it on medical expenses when you are older, you don't pay taxes when you withdraw, almost like double dipping.  I read this years ago but haven't actually tried it.  I could be wrong and missing details but it was one avenue I was looking at to try to limit my tax exposure.

Maybe someone in finance/investing field can chime in.

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1 hour ago, Dbeasy said:

Basically most of my retirement finds are in after tax accounts. That means the yearly income I derive is taxable. I’m thinking it financially would make sense to get some more of it into tax advantaged accounts, but I can’t  do Roth because I have no earned income and it’s limited to $7k a person anyway. I guess there’s no way to get more funds into tax advantaged? It seems a standard IRA is the only way and that would turn it into income tax rates on withdrawal. I can’t back door to Roth either because I do have some existing Ira’s. 

are you married?  does your spouse have income?  if so you can contribute to an IRA based on her #s.

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2 hours ago, gsoda3 said:

are you married?  does your spouse have income?  if so you can contribute to an IRA based on her #s.

I’m married but wife also has no income. We have two tiny hsa’s as well but it’s my understanding I can’t contribute to those either because I’m not on a high deductible health care plan. 

Edited by Dbeasy
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6 hours ago, Dbeasy said:

Basically most of my retirement finds are in after tax accounts. That means the yearly income I derive is taxable. I’m thinking it financially would make sense to get some more of it into tax advantaged accounts, but I can’t  do Roth because I have no earned income and it’s limited to $7k a person anyway. I guess there’s no way to get more funds into tax advantaged? It seems a standard IRA is the only way and that would turn it into income tax rates on withdrawal. I can’t back door to Roth either because I do have some existing Ira’s. 

You're married, have only investment income and some iras?

Assuming that investment income is all long term cap gains and dividends then convert 25k (your standard deduction) of ira to roth, and realize up to 85k additional in cap gains and dividends.  Total tax is zero. 

If iras are big you might want to go all the way to the top of the 12% bracket (85k taxable income or 110k before your deduction) and just pay the 15% on the cap gains and dividends.  That'll let you move more over.

If your investment income is pass through income taxes as ordinary, you'll have higher rates but concept is similar.

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8 hours ago, victory88 said:

You can possibly open an HSA account where you deduct the taxes now when you contribute.  I believe with TD ameritrade you can actually invest it into their funds and then if you use it on medical expenses when you are older, you don't pay taxes when you withdraw, almost like double dipping.  I read this years ago but haven't actually tried it.  I could be wrong and missing details but it was one avenue I was looking at to try to limit my tax exposure.

Maybe someone in finance/investing field can chime in.

Assuming you are healthy HSA's are the best option after getting up to your 401k match ,the only downside is the low amount per year you can contribute.

No tax going in, no tax on earnings and no tax on withdraws(for health expenses)...and the best part...If it goes directly from your employer to your HSA there are no FICA taxes taken out either. 

Once you turn 65 you can withdraw from it like a normal IRA or continue to use it for health expenses without paying taxes.

As they are currently set up there is also no limit on how long you can wait to reimburse yourself for for medical expenses. Lets say you have a $5,000 medical bill and pay it out of pocket without using funds from your HSA. You can save a copy of that receipt and reimburse yourself that $5,000 tax free from your HSA 10/20/30 years from now. In the meantime that $5,000 is still in your HSA growing tax free. 

Its really the ultimate retirement account

https://www.madfientist.com/ultimate-retirement-account/

 

 

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53 minutes ago, Ted Dantzler said:

As they are currently set up there is also no limit on how long you can wait to reimburse yourself for for medical expenses. Lets say you have a $5,000 medical bill and pay it out of pocket without using funds from your HSA. You can save a copy of that receipt and reimburse yourself that $5,000 tax free from your HSA 10/20/30 years from now. In the meantime that $5,000 is still in your HSA growing tax free. 

94289-I-did-not-know-that-gif-Rob-Lo-Avq

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Assuming you are healthy HSA's are the best option after getting up to your 401k match ,the only downside is the low amount per year you can contribute.
No tax going in, no tax on earnings and no tax on withdraws(for health expenses)...and the best part...If it goes directly from your employer to your HSA there are no FICA taxes taken out either. 
Once you turn 65 you can withdraw from it like a normal IRA or continue to use it for health expenses without paying taxes.
As they are currently set up there is also no limit on how long you can wait to reimburse yourself for for medical expenses. Lets say you have a $5,000 medical bill and pay it out of pocket without using funds from your HSA. You can save a copy of that receipt and reimburse yourself that $5,000 tax free from your HSA 10/20/30 years from now. In the meantime that $5,000 is still in your HSA growing tax free. 
Its really the ultimate retirement account
https://www.madfientist.com/ultimate-retirement-account/
 
 

And you mean ‚Äúreimburse‚ÄĚ for a ‚Äúmedical expense‚ÄĚ, right?
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Okay, I guess I'm really dense ...

Before Tuesday, I had no traditional or Roth IRA account set up.  On Tuesday, I opened a traditional IRA account and put $6000 in it selecting the 2020 Tax year.  I plan to put another $6000 in there for the 2021 tax year as well, but the questions is, can  I go ahead and do that, then convert the $12K to a Roth all at once, or do I need to convert the $6k from last year now, then do the $6k from this year at a later time?  Also, any benefit to keeping the traditional IRA account open with no money in it so I can do this next year, or do I close it once it's empty?

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10 minutes ago, BTW said:

Okay, I guess I'm really dense ...

Before Tuesday, I had no traditional or Roth IRA account set up.  On Tuesday, I opened a traditional IRA account and put $6000 in it selecting the 2020 Tax year.  I plan to put another $6000 in there for the 2021 tax year as well, but the questions is, can  I go ahead and do that, then convert the $12K to a Roth all at once, or do I need to convert the $6k from last year now, then do the $6k from this year at a later time?  Also, any benefit to keeping the traditional IRA account open with no money in it so I can do this next year, or do I close it once it's empty?

the provenance of the money wil be all documented -- half from 2020, half from 2021 -- so you should be okay.  but doesnt hurt doing 2 separate transactions either.  custodian will send you the tax documents on the conversions.  and you can leave the trad IRA open.

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  • 3 weeks later...

I filed my taxes a while back already but didn’t fund an IRA for 2020.

If I decide to after all (traditional and then immediately convert to Roth), what do I have to complete for an amended return?

 

trying to decide if I want to mess with it or just start with 2021.

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