Of course, capital gains taxes can be avoided in a number of ways, including a low enough taxable income, donating appreciated assets directly to charity or indirectly via a donor advised fund, or by passing assets along at death (at which the cost basis is reset to the current value). If the amount is less than 50 cents, don't worry about it. Do they cause the pro rata tax to trigger for converstions to a back door roth? I would have guessed it would be less complicated. The good news for me is that now that I half-FIRE’d and went part time I don’t have to do the BDR. The White Coat Investor covers some of the advantages in this article. I’m hedging my bets. POF, I really believe you need to amend your article to include such data because it is a big deal. Earn honoraria. I do the backdoor procedure as above, with the only difference being that I wind up paying taxes on most of the 5500. The stuff that advisors won’t really help you with. Notify me of followup comments via e-mail. I’m still putting in all $6,950 in the HSA annually. I hadn’t thought much about it, but that will be a drastic change if my wife and I don’t pass together or in short succession. Retirement Accounts. The wording for form 1099-R says the same as you, then I “ discovered “ my accountant did not file 8606 these past years!! Either you convert a little more than $6,000 and have to pay taxes on the amount above $6,000 or you leave the amount above $6,000 behind in the traditional IRA. But I haven’t found any info on this particular situation. A cosmetic surgeon in L.A. could have a tax drag of about 0.75% with the same tax-efficient investments. This is a totally different issue from the one discussed in this post. In all this years, from 2012 to 2017 never a form 8606 was produced. You received part or all of a traditional IRA (see the next to last bulleted item under Line 7, later). Right? People have worried the IRS could apply this doctrine to the Backdoor Roth IRA, even though they never did to any single person in the last 8 years, tens or hundreds of thousands did a Backdoor Roth IRA every year, you don't report the dates of the contributions or conversions to the IRS, and the most prominent financial publications in the land have written about it. Do this annually and you’ve built yourself a Roth ladder with money available every year after the initial five-year “seasoning period.”. So, being busy as I was until my retirement , mostly accepted for being good what my tax preparer did , I rarely questioned his job, except a couple of time. Is my logic flawed though???? you’ve already agreed to pay that money, it’s now a sunk cost/water under the bridge. These lines should have $0 on them (not $6,000). Can I just contribute $6000 post-tax into the … Press J to jump to the feed. That means if one of you can't do a Backdoor Roth IRA due to your employer using a SIMPLE IRA or you have some huge SEP-IRA you can't get rid of (online surveys are just too hard) your spouse can still do one. I still keep paper receipts just in case I’m audited, but that’s much simpler. FIRE planning is different than Retire planning. You may not have access to a 401(k) or your 401(k) might not accept rollovers. – As a bonus, I can put 20% of what she pays me into my new i401K as the employer contribution (I already maxes out my employee part at my day job), (I know my wife could also make me an employee and include me in her i401K, but I think there will be fewer complications doing it this way.). I have a big envelope full of receipts, but if it burns up, no big deal (except for the fire that may have just burned down my house). This seems ridiculously misleading to me. That can be a difficult decision. I have no Roth products at all. - Podcast #37, Selling Your Practice to a Private Equity Firm - Podcast #184, Celebrating Ten Years With The Backdoor Roth IRA, Fire Your Financial Advisor Online Course, Step # 1 Contribute $6,000 ($7,000 if 50+) to a traditional IRA account during the calendar year, investing the money into a money market fund, Step # 2 Convert to a Roth IRA the next day, investing the money into your selected investment fund, Step # 3 Follow the written IRS instructions to fill out Form 8606 properly or double-check that your tax preparer did so. In plain English, even if the IRA contribution you made as Step 1 of a Backdoor Roth plan was made as a non-deductible contribution, a percentage of the $6,000 you convert will be taxed based on the relative size of any IRA balances. Nothing. If the account is small, it is best to just convert it and pay the taxes. This is not an anti-Roth rant. That’s not the right question to ask. Next year will be straight forward, though, I agree. With a Roth 401(k) contribution, you're trying to decide which is better — tax-deferred or tax-free. However, I would not go to great lengths to clear a path for the backdoor Roth just to save yourself maybe $28 a year. The terms are confusing and they’re mostly made up using household objects (back door, ladder). It’s nice to have that space. You can also subscribe without commenting. Tax season always seems to have one special issue du jour. Ahhh….now I see it. What do you need to open an individual 401(k)? Excess paper losses can be used to offset capital gains, eliminating capital gains taxes in future years. I do like your idea of the free rebalancing. It's way easier to do the 8606 when it looks the same every year! But it's not fine for you, because of the pro-rata rule. 1. So that way the IRS can track it as a yearly contribution. This is where a lot of people get hung up. I have clearly meshed the conversion ladder and backdoor in my own mind. In fact, you can roll the annuities over too, but you’ll likely be paying a surrender charge. It’s not done in lieu of filling other tax-advantaged space. You are really leaning towards Etrade for that if you make a move in the future. That gave us enough Aadvantage Miles to fly our family of four to Honduras and back. Any help will be welcomed. Your email address will not be published. Close. Most of all I like that between taxable accounts, Roth and 401(k) I will essentially be able to pick and choose my marginal tax rate based on how I make withdrawals. You need earned income to do the IRA contribution step. Also the IRA/SEP/SIMPLE distribution is checked. That post ended up being longer than I expected, but I hope it is useful to those of you who are still becoming familiar with the Backdoor Roth IRA process. You pretend dividends are the only thing you get taxed on. Line 6 of IRS Form 8606 (the form on which the Backdoor Roth IRA is reported) requires you to list the total you have in traditional IRAs, rollover IRAs, SIMPLE IRAs, and SEP-IRAs (but not Roth IRAs, 401(k)s, or any other type of retirement account) as of December 31st of that tax year. I think sometimes the FIRE community is a little overzealous in doing something just because they can, without questioning if it’s really worth the time and anxiety. I pay an accountant to do this anyway so its his pain, not mine. I opened up a solo 401(k) in 2016 — not to shelter IRA money (I rolled some over into my employer’s 401(k) several years earlier) but to make more tax-deferred space for the income from this site. There are lots of resources out there that talk about the merits of using a SEP-IRA or SIMPLE IRA for your side gig or even your practice. I could perhaps convert all of mine to Roth (stay at home spouse) to back door, only 80k. So you should roll it over into your employer's 401(k) or 403(b) or your own individual 401(k). It’s important to understand that this tax is levied only on the dividends. In that case, you’re deciding between a known return by eliminating debt and an unknown return by investing in the stock market. That advice was probably fine pre-2010. I’ll disagree with one comment, just at the very beginning. I hadn’t considered the behavioral aspect of leaving the money alone once it’s in the Roth IRA. 3 years ago who would have expected lower tax rates in 2018? instead of having 94500 in traditional and 5500 in ROTH, I now have 100,000 in the traditional and 5500 in ROTH, with paying the same amount of tax on the contribution as I would have if I had done a conversion. Of course, the money is available to withdraw five years after the conversion. 1. You get “pro-rata’d”, that is you owe taxes on most of your conversion. 68yrs old and 4.3M in Iras between me and my wife The Roth money also benefits from easy avoidance of capital gains taxes. These worksheets were among the mass of forms produced by TurboTax for the return. This is the best post about backdoor Roth IRAs I have ever read. Since Roth conversions are finals, how do you fix the excess contribution ? All the information on the site is 100% free to you. © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. Nobody. In Step #4 you list the ways to run afoul of the pro-rata rule. Give away your money with warm hands rather than cold. It isn’t just $20-$50 per year. Those tax advantages do come at a price compared to investing in a taxable account. Not only is this illegal, but it will likely end up in you paying too much in tax. Personally, I think the biggest mistake people make with a Backdoor Roth IRA is simply not doing it. What I’m referring to is that there is no sense in paying ALL your taxes prior to retirement when you can “fill the brackets” with tax-deferred account withdrawals in retirement. I was FI at age 50 and retired from medicine at age 54. You can pay for Medicare parts A B and D with it. I’ve read/heard of a number of places to open a Roth but wanted to see if anyone had recommendations based on experience. In my case, I’ve got a taxable account with Vanguard holding mutual funds and a little bit of Berkshire Hathaway stock. I love Roth investing. 1. Having read this I thought it was extremely informative. Good points, particularly on the HSA bit. No matter what's in these accounts, they don't count as a traditional IRA, correct? But so what, it was still worth it! Particularly since some banking institutions use the words “roth conversion” on their paperwork as the process to create a backdoor roth. I think this is a clearly explained review of the complex retirement fund laws. I now feel confident I can be a millionaire at 40 without feeling like a jerk." Will the IRS be OK with that? And I don’t think I am an outlier in the higher earner community. I read below that you do contribute the max to the HSA. This ended up costing me a cp2000 form from the IRS and a hastle with me filling out more paperwork and writing a letter to the IRS. On to my next to do…. Obviously, there are no such limitations with money invested in a taxable account. Quotes To Remember My Mega Roth Conversion: A $212,000 Mistake? Thanks. So far it seems like the letter and documents we faxed back addressed the issue. 124 Views. I’ll ask a different question. Notify me of followup comments via e-mail. I don’t want to trivialize the benefit of tax-free withdrawals, though. -be very weary of the qualifications of your tax preparer: could be giving the wrong advice. Another dozen ways to mess it up I guess. Honestly, if you’re in a position to consider it, and you know why it may or may not be the best idea, you’re likely going to be just fine no matter what choice you make. Before these cards, the last time I applied for a credit card was 4 years ago. If you did your Backdoor Roth IRA the way I tell you to (contribution and conversion during the calendar year) you don't get to skip those lines. You mean fill out the tax form first? Roth conversions are a great reason to wait on Social Security. The only difference is the tax drag. First, select in your open return, My Account>Tools>Topic Search. Prescription for Financial Success. It would never be acceptable to the index fund investor community to pay 0.55% for their index funds instead of 0.05%, but that’s essentially what you are doing by choosing to invest your index funds in taxable instead of a Roth. I tend to assume that if you make too much to make a direct Roth contribution, you’re not likely to qualify for any need-based financial aid, but there will always be outliers. I do cover the full implications of the time value of the backdoor Roth in a followup post. I must have missed a conversation somewhere because I have no idea what you’re talking about. I like being able to invest in real estate for a little more variety in my portfolio. I was glad to hear this wasn’t an anti-roth rant at the end. I disagree with him. What else could you do to save $40 to $100 per year (or per month)? That sounds like a big pain to keep track of basis. Perhaps this is the source of the problem. There’s enough material in the math for a separate post, particularly when trying to factor in capital gains taxes for those that expect to pay full fare. Written by a practicing emergency physician, The White Coat Investor is a high-yield manual that specifically deals with the financial issues facing medical students, residents, physicians, dentists, and similar high-income professionals. Some of these people even do the conversion step each time they make a contribution. I would have either converted the whole $100K and paid the tax or just not done the Backdoor Roth IRAs. ALL your retirement accounts are Roth? You might be in a situation where you’re deciding between paying down student loan debt or mortgage debt or investing in a Backdoor Roth. Basis on my hard drive, and an asset protection benefit people only the first time, 457. S now $ 500 per year and it was extremely informative potentially over 100 years and paid tax! Comments on CPAs have no idea what a Backdoor Roth ability over time results in tax... Going up substantially on a 403b, 457 and HSA great deal from this piece of writing then you to... 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Just nibbling away at my privately held traditional IRAs ) cases it clearly is my white coat investor backdoor roth prudent strategy you.

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