What are backdoor Roth IRA contributions?

[Coronita]

Ok… So I have a question for folks…

People with certain incomes are not allowed to contribute to a Roth IRA directly.

But some folks have suggested first contributing to a Traditional non-deductible IRA, and then immediately rolling it over to a Roth IRA.. Since the intial contribution to the non-deductible IRA doesn’t have any sort of capital gains in a few days it’s in there, rolling it out into a Roth IRA there would be little/no capital gains on it…

This process, some have described it as being a “backdoor Roth IRA”…

I was under the impression that this sort of thing would be illegal by the IRS. But some folks apparently indicated otherwise.

Anyone know what the IRS stance is on this?

Seems kinda sketchy to me…

[Coronita]

Nevermind.. found the answer i think..

http://www.forbes.com/sites/josephsteinberg/2012/12/12/warning-about-roth-ira-conversions-often-misunderstood-irs-rule-can-cost-you-money-and-aggravation/

I thought so…

[jeff303]

Bogleheads has some good info as well: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

[Coronita]

[quote=jeff303]Bogleheads has some good info as well: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA%5B/quote%5D

Thanks…It’s pretty retarded rule I think…

If I have roll all my IRA into a 401k, and then contribute $5000 to a non-deductible IRA, then I can roll it over into a Roth without tax consequences.

But… If I have any rollover IRA’s, then I need to pay taxes on all my IRA even if I rollover $5000?

That sucks… I don’t like my 401k plan so I don’t want to roll everything over..

Oh well. at least my employer has a roth 401k….

[SK in CV]

Seems like you found the right answer. The “backdoor” Roth is a great vehicle for SOME people. Others, not so much. For those with no IRA accounts of any kind, it’s perfect. If you have any assets in a pre-tax IRA (of any sort, including SEP and SIMPLE IRA’s) it just doesn’t work.

[Coronita]

[quote=SK in CV]Seems like you found the right answer. The “backdoor” Roth is a great vehicle for SOME people. Others, not so much. For those with no IRA accounts of any kind, it’s perfect. If you have any assets in a pre-tax IRA (of any sort, including SEP and SIMPLE IRA’s) it just doesn’t work.[/quote]

So I guess the answer is “backdoor” Roth isn’t illegal in itself. It’s just it’s conditional if you have other IRA accounts or not…

I don’t understand why the IRS would classify IRA differently from a 401k. It just seems a little weird.

I mean, I checked with my employer, and if I wanted to i could rollover all of my IRA’s into my 401k..And then I think I would be fine if I really wanted to do that..

But the reason why I don’t want to is I don’t like my employer’s 401k fund selection….

Makes no sense to me whatsoever….

[UCGal]

I’m wondering of the “MyRA” mentioned last night by the POTUS at the SOTU is another way of doing a backdoor roth.

From what I’m reading – you can contribute up to $15k (total) in post-tax money to this MYRA. When it hits $15k, you can/must roll it to a Roth IRA.

Presumably you can rinse and repeat this.

While it’s in the MyRA it’s in the equivalent of the TSP G-fund… which is a great option for fixed income stuff not normally available to non public workers.

I’m hoping I’m reading the tea leaves right on this.

[Coronita]

[quote=UCGal]I’m wondering of the “MyRA” mentioned last night by the POTUS at the SOTU is another way of doing a backdoor roth.

From what I’m reading – you can contribute up to $15k (total) in post-tax money to this MYRA. When it hits $15k, you can/must roll it to a Roth IRA.

Presumably you can rinse and repeat this.

While it’s in the MyRA it’s in the equivalent of the TSP G-fund… which is a great option for fixed income stuff not normally available to non public workers.

I’m hoping I’m reading the tea leaves right on this.[/quote]

I’m actually pretty happy that Obama is doing this. I think anything that encourages savings in this country is a good thing.

MyRA contributions unfortunately aren’t available to everyone though, because I think there are certain income thresholds to from what I read..

ACK!!! acronym overload.. I’m not use to POTUS and SOTU

[UCGal]

Since I’m not quite a 1%er I don’t have to worry about the $191k household income cap. 🙂

I’m very curious about the details on the myRA – and will be watching closely. Especially as to whether my “rinse and repeat” scenario will be true.

I can see upper middle income folks like me (under the $191k cap) diverting a lot of money into backdoor roths this way. Maybe not the intention of the program, but it may not be precluded.

[Coronita]

[quote=UCGal]Since I’m not quite a 1%er I don’t have to worry about the $191k household income cap. 🙂

I’m very curious about the details on the myRA – and will be watching closely. Especially as to whether my “rinse and repeat” scenario will be true.

I can see upper middle income folks like me (under the $191k cap) diverting a lot of money into backdoor roths this way. Maybe not the intention of the program, but it may not be precluded.[/quote]

That definitely sounds like a good plan and idea… My understanding is there isn’t a minimum holding requirement period….

[livinincali]

[quote=UCGal]I’m wondering of the “MyRA” mentioned last night by the POTUS at the SOTU is another way of doing a backdoor roth.

From what I’m reading – you can contribute up to $15k (total) in post-tax money to this MYRA. When it hits $15k, you can/must roll it to a Roth IRA.

Presumably you can rinse and repeat this.

While it’s in the MyRA it’s in the equivalent of the TSP G-fund… which is a great option for fixed income stuff not normally available to non public workers.

I’m hoping I’m reading the tea leaves right on this.[/quote]

I not a huge fan of Roth IRAs because I fully expect the government to rescind the tax benefit before most people will receive it. If they can go after government pensions it won’t be hard to go after Roth IRA tax benefits (you’re minority group that has it better than the general population). I prefer the known tax benefit now rather than hopefully getting a tax benefit down the road.

[SK in CV]

[quote=livinincali]
I not a huge fan of Roth IRAs because I fully expect the government to rescind the tax benefit before most people will receive it. If they can go after government pensions it won’t be hard to go after Roth IRA tax benefits (you’re minority group that has it better than the general population). I prefer the known tax benefit now rather than hopefully getting a tax benefit down the road.[/quote]

Any examples of future tax benefits that have been written into the law and then reversed and repealed? I can’t think of any.

[Coronita]

[quote=SK in CV][quote=livinincali]
I not a huge fan of Roth IRAs because I fully expect the government to rescind the tax benefit before most people will receive it. If they can go after government pensions it won’t be hard to go after Roth IRA tax benefits (you’re minority group that has it better than the general population). I prefer the known tax benefit now rather than hopefully getting a tax benefit down the road.[/quote]

Any examples of future tax benefits that have been written into the law and then reversed and repealed? I can’t think of any.[/quote]

Do retroactive taxes count? 🙂

[SK in CV]

Not exactly. That’s happened, but not very often.

[livinincali]

[quote=SK in CV]
Any examples of future tax benefits that have been written into the law and then reversed and repealed? I can’t think of any.[/quote]

What about the tax act of 1986. It did all of the following things that would seem to be removal of various tax advantages.

[quote]
Moreover, interest on consumer loans such as credit card debt was no longer deductible. An existing provision in the tax code, called Income Averaging, which reduced taxes for those only recently making a much higher salary than before, was eliminated (although later partially reinstated, for farmers in 1997 and for fishermen in 2004). The Act, however, increased the personal exemption and standard deduction.

The Individual Retirement Account (IRA) deduction was severely restricted. The IRA had been created as part of the Employee Retirement Income Security Act of 1974, where employees not covered by a pension plan could contribute the lesser of $1500 or 15% of earned income.[6] The Economic Recovery Tax Act of 1981 (ERTA) removed the pension plan clause and raised the contribution limit to $2000 or 100% of earned income. The 1986 Tax Reform Act retained the $2000 contribution limit, but restricted the deductibility for households that have pension plan coverage and have moderate to high incomes. Non-deductible contributions were allowed.

Depreciation deductions were also curtailed. Prior to ERTA81, depreciation was based on “useful life” calculations provided by the Treasury Department. ERTA81 set up the “accelerated cost recovery system,” or ACRS. This set up a series of useful lives based on 3 years for technical equipment, 5 years for non-technical office equipment, 10 years for industrial equipment, and 15 years for real property. TRA86 lengthened these lives, and lengthened them further for taxpayers covered by the alternative minimum tax (AMT). These latter, longer lives approximate “economic depreciation,” a concept economists have used to determine the actual life of an asset relative to its economic value.

Defined contribution pension contributions were curtailed. The law prior to TRA86 was that DC pension limits were the lesser of 25% of compensation or $30,000. This could be accomplished by any combination of elective deferrals and profit sharing contributions. TRA86 introduced an elective deferral limit of $7000, indexed to inflation. Since the profit sharing percentage must be uniform for all employees, this had the intended result of making more equitable contributions to 401(k)’s and other types of DC pension plans.
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