If you stagger the conversion, will each individual stagger segment be subjected to the 5 year rule? Withdrawals from a Roth IRA you’ve had less than five years.”. Would the “Pro-Rata Rule” bite me if I moved the money from the 401k into a tIRA, and then perform the conversions (i.e. Does the amount of that conversion transfer increase my income on my taxes? Even if they do, you might have an issue with the breakout between the tax-deductible and non-tax-deductible contributions. Shortly after, we converted to Roth IRA (Vanguard has a simple icon/pathway online to accomplish the conversion). Hi Don – No, the amount of the rollover doesn’t go toward your annual contribution, so you should be able to do the maximum IRA contribution. Can you convert a traditional IRA to a Roth IRA by April 15, 2016 and have the conversion included in your 2015 tax return (i.e., back date the conversion), or will it have to be reported in your 2016 tax return? Hi Jeff, as a married couple and my spouse having earned income of $6500 , could my spouse make a tax deductible contribution (we are within the income limits guidelines ) to an existing contributory IRA and also make a $6500 conversion to a Roth IRA from that same contributory account in the same year 2016? I have a 403(b) that I am wanting to convert to a Roth, but I am still employed. And I’m not sure how much sense it will make to convert the investment earnings from tax-free to taxable in retirement. This type of investment strategy intends to help you save money on taxes later at the cost of higher taxes now, in the year you make the conversion. Is this true? $1,000,000 divided equally among 401a, 403b and 457 accounts (or it could be just one 401k account) converting to an IRA upon retirement with subsequent partial conversions each year to Roth IRA’s. Love it. If you do a direct trustee-to-trustee transfer there are generally no withholding. If you’re using tax software, there should be a tax projection feature that will enable you to recalculate your taxes based on the conversion. I just started using the “backdoor” roth contribution strategy this year. I received a 1099-R for $11000, distribution code 2, taxable amount $11,000. For the first time, I converted an IRA to a Roth in mid 2016. My old 401k has 120k and about 16k of that in Roth 401k. Is there any mechanism for me to correct my folly (I can afford to pay the taxes outright)? I think the only wrinkle is that I can’t withdraw any of the converted funds until five years after the first conversion. I have an conventional IRA and will be taking a minimum distribution for the first time this year. But if you’re worried about land mines discuss it with a CPA. I’m the only one working. Great article. You have to be very precise about moving money between retirement accounts. As a result of my checking off the incorrect box, my post-tax contribution-funded Roth IRA turned into a Rollover (Traditional) IRA ! A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution. If your income is too high to contribute to a Roth IRA outright, the Backdoor Roth IRA offers a potential workaround. Hi Nathan – Your correction is right on the money! Thanks! In other words, I want to pay Federal & State taxes for converting a per-tax IRA to a Roth using after-tax IRA balances. I have a simple question on what I now realize is a somewhat complex topic. (Unless some of the traditional IRA was deductible for 2016.). Here’s how that is calculated: Step 1: Calculate non-taxable portion of total Non-Roth IRA’s: Total after-tax contributions / Total Non-Roth IRA Balance = Non-Taxable %: Step 2: Calculate the non-taxable amount by converting the result to Step 1 into dollars:14.29% x $140,000 = $20,000, Step 3: Calculate the amount that will be added to your taxable income:$140,000 – $20,000 = $120,000. If you are married and filing separately, single, or filing as a head of household, you can contribute to a Roth IRA in tax year 2021 up to the limit for your age if your modified adjusted gross income (MAGI) is less than $125,000. trigger the IRA rollover containing my 2017 contributions to my Roth account. Too many variables? Thanks for your response. Would I pay income tax on that SIMPLE IRA to ROTH IRA conversion, Same Trustee Transfer transfer if it was done properly? Hi Donna – Yes, conversions do need to be completed in the calendar year. If you are rolling the employer plan over into an IRA, there will be no taxes due and no penalty either. Thank you. This all seems like a time-consuming petty loophole that the IRS has in place. C: Can I return it to the traditional IRA before the year is out? Hi Tara – You can roll the current Roth accounts over to other accounts. Without being able to foretell the future of my investment decisions for 2016, how can I predict the amount of quarterly payments to make. I am 70 but not quite 70 and a half as yet. Hi Heather – I’ve not seen anything that has that restriction. One stock is down a lot. As far as the timing, you’re looking for a strategy to limit taxes. Can I ask a detailed question? ), @Brian Nope. A $30k tax liability warrants a consultation fee of a couple hundred dollars. Thanks! From there, a Roth IRA conversion takes place, letting those high-income investors take advantage of tax-free growth and future distributions without having to pay income taxes later on. Since I will not have much income for 2017, I plan to pay the tax from the conversion in tax year 2017. If one contributes (or converts) to a Roth while they are in the 39.6% tax bracket and then retires into the 15% tax bracket, they made a poor decision. Thank you in advance for time. Hi, Jeff. Thanks! Many people believe it doesn’t make sense to convert a traditional IRA to a Roth IRA late in life. But tax software packages also provide the ability to report the conversion. Talk to a CPA if you are unsure. In the case of a conversion, five years must pass since the conversion. Hi June – It’s complicated! I have a question about the pro-rata rule for married couples. Because my traditional IRA account will have been opened for 2 years, will I have to pay a 10% penalty, or only the taxes due? For me, it was a no brainer. She can make the IRA contribution (on all $6,500 if she’s 50 or older), then do the conversion later the same year. I am hoping to just undo my $5,500 deposit, deal with the minimal investment earnings, and not have to be subject to the annual 6% penalty. Hi Franz – There’s no age limit on either the conversion or a contribution to a Roth IRA. If yes, perhaps I can rollover the old Roth 401k dollars to the Roth component on my new Solo 401k? Will 401K account accept rollovers from traditional IRA even if non deductible contributions have been made to the Traditional IRA account? There is a foreign earned income exclusion (FEIE) that would offset most/all of the double taxation that would occur, but nonetheless, a US citizen reports all income (including Roth conversions). As pointed out, the future is uncertain and changing tax rates would not be a surprise. Can I roll over a partial amount from my 401K into my Roth? Or not, given they did not exist at the same time? I have a traditional IRA with 100% after-tax contributions in 2017 ($5500 + $20 growth). I am thinking of doing a Roth conversion so I should pay state taxes for IL rather than CA. You’ve got a lot going on right how, so proceed with caution! Is the conversion to Roth a one time action? It’s easy to see why the Roth IRA is so incredibly popular. I have a question about establishing the tax basis for your Roth conversion. Is that right? I have the dividends put into a money market fund so that i don’t lose the gain. Thank you. Roth conversions don’t have a limit. Since the contribution to the traditional IRA was not tax-deductible, there will be no tax liability on the conversion, except on any earnings accumulated on that contribution before it was converted. An advantage of the rule allowing for delaying payment of taxes and distributing them over two years is that the unpaid taxes earns interest that is invested in the Roth conversion… We are in our 30s. Hi Michael – There are no specific rules if you’re still employed, but you have to make sure your employer will permit you to do the conversion to what I presume is an Roth IRA, not an employer 403(b) Roth. My question is solely about how much I can convert in any year. However you do not have to pay the 10% early withdrawal penalty on the amount of the conversion. You say “Trustee-to-Trustee Transfer. Hi Tee – If disability (I’m assuming Social Security Disability Insurance, or SSDI) is all the income you have, then you probably won’t have any tax liability at all. I am thinking of converting the entirety of my traditional IRA to a Roth over the next five years, before social security and company retirement programs kick in. THANKS! In many case, rolling into a ROTH when the withdrawal amount bumps you into the next bracket, is a very small difference. This threw me off as I thought the conversion would be under Roth 2018, but the conversion did take place in 2019 so it ended up under Roth 2019. The following statement in this article is incorrect. I know the full conversion amount is taxable to my Federal return. If you fund your 2016 IRA in 2016, you can also do the Roth conversion for tax purposes for 2016. If I move $75k will i be paying 10% up to $18,650 and 15% between $18,651 and $75k – that’s it? I am considering converting an amount each year that would keep me under the 25% federal income tax bracket. I also have a roth IRA account from previous years. I will have to repeat the process again here in a few months for the 2017 year as well. You don’t sleep much do you!!! In my comment I meant withdrawal before age 59½, not 70½. They do have special rules for marketplace insurance, and the rule is that there is no adjustment for Modified Adjusted Gross Income which does reflect even a ROTH conversion. My suggestion however is to find a way to pay the tax without using money from either account, that way you’ll be able to transfer the full $72,000. Any help would be greatly appreciated. Can I now move the past 3 years and this year’s contribution to a ROTH account? The non-deductible IRA contributions will not be taxable. And, as we already mentioned, you’ll have to pay income taxes on converted amounts regardless of which rule you choose to follow above. Is this allowed? My assumption is I can combine the account, and I only owe taxes on the GAINS made since the contributions were non-deductible. Thanks. I have been reducing my Traditional IRA by withdrawing about $10,000 each year and moving it to a taxable account without having to pay any taxes. The benefits aren’t present in all cases, so careful … Continue reading "Post-Retirement Roth Conversion" Question: If I convert the post tax 401k contributions to the Roth within my 401k umbrella this year, is that my one and only allowable conversion for the year? If she converts the after tax assets to Roth, does the IRS look at the balance of the IRA in the prior years and apply the pro-rata rule and calculate taxes or once the roll-over is done then the conversion is tax free? I know I will have to pay the taxes but will there be the other 10% penalty because I didn’t put that money in an retirement account in my name before 60 days or does her roth ira count to not get penalized. through the back door). Wouldn’t he just annually roll over however much he wants to convert to a TIRA and then immediately convert to an RIRA, and then pay taxes on the entire conversion? I also have an external Roth account that I backed into by doing the non deductible IRA conversion thing once income limitations went away. A miscalculation or unexpected event could cost you thousands in extra tax. 2) You must covert by Dec 31. Hi Dave – According to the IRS you can contribute to both a Roth IRA and a SIMPLE IRA, as well as a 401k, at the same time. Hi Brad, that’s a VERY specific question, and you need to discuss it with a CPA. It looks like you’re in a good position. Thanks so much for your help! For a decade I have held on to a stock which has a 6-figure loss. Accessed March 17, 2020. Can she convert to a Roth without tax or do they take into account my traditional IRA as well since we are married and charge tax accordingly on the total IRA balances between us? Also, because I made these 2016 contributions and the conversions between Jan 1 2017 and April 18 2017, I don’t think Vanguard will be sending any tax forms to me. I currently have a traditional IRA with a balance of $X, which includes deductible contributions from years previous to 2016. Required fields are marked *. Hi Scott – When it comes to retirement accounts, you and your wife are completely separate people. Hi Mike – Since you have both pre-tax and after tax contributions your tax liability will be less than would be the case if it was all pre-tax amounts. I’m wanting to isolate those nondeductible contributions and move them to a ROTH to tidy things up. Hi Joe – There’s some dispute about multiple Roth conversions. I plan to withdraw from my traditional IRA, all pre-taxed, to live on. Just what I was looking for! Hi John – This point is confusing to a lot of people. However, in each of the last two years I converted funds from the traditional IRA to the ROTH, paying taxes on the full conversion amount (that is, I didn’t subtract the “basis” or the 15k in non-deductible contributions that I made over the years from the amount I paid taxes on because I forgot about my past non-deductible contributions). A simple answer with some explanation and maybe an IRS reference would be greatly appreciated. Or are they all owed in the year you do the conversion? @Nick In 2010 when they lifted the $100k AGI limits on Roth IRA conversions, you could spread the tax payment over 2 years. You can only do one conversion per year, so you have to get this right. After the conversion, am I correct that then I can not go ahead and re initiate my previous 401K rollovers in 2020, as the pro-rata rules are calculated on the “end of year” values of all my (non Roth) IRA accounts. Retiring at 64 say. After reading your article, I realize I can portion of convert my traditional IRA to Roth. Wouldn’t the same apply to a Traditional IRA that holds after-tax contributions? First, make sure you open a Roth IRA with one of the top brokerage firms. The risks of getting it wrong are too great to go with general information. My ex spouse had a traditional IRA that was converted into a ROTH IRA during the marriage using marital funds to pay the conversion taxes. But since you are retired, you will only be able to make your contribution if you had earned income of at least $6500. I will tell you this, if your 1099R says that the distribution is $23k, then that’s what you’ll have to work with, and that’s why you need an accountant. Wow, Jac, I’ve not heard of that kind of rollover. Do i need to include the basis in new IRA #2 when i estimate my taxable income related to converting IRA #1 to Roth? I just landed into a new job and my current employer supports 401K with match and also a pension plan. What if any are the number of times one can convert a traditional ira to a roth ira each year? You can do the conversion into the existing Roth, but each conversion starts its own 5 year rule clock, so you won’t change the outcome, no matter what Roth account you do the conversions into. I’m just a guy on a blog, and don’t know all the nuances of your tax situation . Hi Jeff, thank you for informative article. Thanks. Louise . @ Janet I’m sorry. That might happen, for example, if your income is unusually low during a particular year (for example, you were furloughed or lost your job during the COVID-19 pandemic) or if the government raises tax rates substantially in the future. I have money in an old 401K from a job I left a couple years ago. I’d like to get your feedback… Here is my scenario.. We file married filed jointly. SEP IRA: Consists entirely of pre-tax contributions. The major downside of a Roth conversion is that you will be paying taxes on the amount converted in the current year, and depending on your income tax bracket and the amount you’re converting, the tax bite could be substantial. In fact it’s a great strategy. I only see options for four payments, but the income is not spread through the year. My wife converted $20K in January’2015 and plan to convert again another $25K(same IRA), both type IRAs’ are with the same brokerage firm. What are we permitted to do? They’d pay taxes on the conversion, but they’d get to avoid the 10% penalty. The pro-rata rule is used to determine the after-tax amount of a Roth conversion when the taxpayer has both pre-tax and after-tax balances in their IRA(s). If the answer is at the time of Roth conversion, then i should not include the basis in IRA #2 as it does not exist on January 1. I have $57,000 in stocks and cash in a Traditional IRA that I am thinking about converting to a ROTH IRA. Thanks for the easy to understand piece! The trustee can provide advice on how to handle a rollover, but actual tax reporting is done by you (or your accountant or tax preparer). If I move a substantial amount out of the traditional IRA, I will have a corresponding tax liability. You won’t have to pay them on either Social Security income or IRA distributions. However, there is no place (that I can tell) to list our conversion from Traditional IRA to Roth IRA. I have a Traditional IRA that has only been open/existing for a year. @Joe Yes, you sure can. $46,000 of combined annual social security income starting at age 70 to maximize the benefit. Yes Gregory, you should make a tax estimate shortly after doing the conversion in order to avoid a penalty. Thank you so much! 2) Contribute to a SEP IRA. "About Form 8606: Nondeductible IRAs." Thanks for the article. -In January 2016, I switched to Traditional. The main reason I am looking to make this change (just for this year) is because I am married filing separately this year (due to personal and employment circumstances), meaning I am subject to the $10,000 limit, which I am well over. It would be too easy for the IRS to let anyone contribute and leave their Roth IRA alone without all this maneuvering, right? And not to mention, some forms of retirement income either aren’t or are only partially taxable. I currently have about 90k in a Roth IRA and 90k in a SEP. I’m just wondering if the taxes we would end up paying for the Roth IRA conversion would be better spent investing somewhere else? Also, keep in mind that when you do move money from a tradition IRA to a Roth, the converted amount will be subject to regular income tax. Let the experts handle it, then relax. If I rollover to a separate Roth IRA that I have (with Betterment), would the whole rollover amount be taxed? Have also heard that it is better to pay the tax up front as it draws interest between roll over and filing. Hi Jonathan – You’re getting hung up on a common misunderstanding. I saw the following mention of that in another article and it makes no sense, but not sure I didn’t miss something. I did not take advantage of back door contribution. But again, find out specifically why the direct Roth rollover can’t be done. No, you don’t need to be earning money to do the conversion, since the funds are already in the plan. Note also that a Backdoor Roth IRA is primarily a two-step process, an IRA contribution and a Roth conversion. Can I convert now (January 2017) but apply the income to my 2016 return, similar to making a contribution for 2016 prior to April? We’re going to have to pay it back at some point, and that likely means higher taxes. A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days. An existing account is just fine. The problem is, if you are beyond the income limit, you cannot make any contribution to either a Roth or a traditional Ira (which you’re saying you would need to convert right away). I’m paying premature distribution income + penalty on the $5k distribution. Due to tax situation I need to make a pre-tax contribution to a traditional IRA for tax year 2016 (before 4/15/2017) and would like to convert it right away to my existing Roth IRA. Assume that my longstanding Traditional IRA contains $450,000, of which $45,000 is after-tax money that has remained the same amount for 12 years or so. That means you’ll be in a relatively high tax bracket in retirement. My dilemma is this: -The first two years, I contributed to the Roth employer program. In fact, most don’t. The Roth IRA contribution and the Roth IRA rollover from your traditional IRA are separate transactions. – (Assuming I’ve done this conversion from Traditional IRA to Roth in February 2017), can I also make a Tax Year 2017 contribution of $5,500 to that Roth, in say March 2017, even before knowing whether my 2017 income will exceed the Roth contribution limit? My IRA contains both pre-tax and post-tax contributions. Thanks! Hi Peter – Should be as of the date of the conversion. You should discuss that with a CPA and/or the recipient plan trustee, but my guess is they’ll say no. Check with an accountant though, there are all kinds of unusual provisions buried in the tax code, so I could be wrong. If each year one converts a non-deductable IRA to a Roth and pays taxes based on balances in a Rollover IRA (per the pro rata rule), one is essentially paying income tax on a portion of the rollover account. There are TWO five-year rules. As a result, I would like to take advantage of the Roth backdoor. For example, you can withdraw the converted balances made at age 50 at age 55. Thanks. 1) Yes you would pay tax on the trustee-to-trustee transfer. Hi George – There should be no taxes on the portion of the traditional IRA that’s been rolled over to the Roth that was non-deductible. Hi Peter – Ah, a theory question! Hello Jeff, Thank you for your service, and your article. First, on the $10k Roth conversion, you can do that, but there will be a tax liability on the conversion to reflect pre-tax contributions and investment earnings on the traditional IRA. Thanks for your time. A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution. They also gave me a 2014 5498 IRA Contribution for 11,000. If we start a back door Roth for her (contribute to a non-deductible conventional IRA, then convert it immediately to a Roth), will the gains in my conventional IRA have to be counted pro rata in the conversion of her conventional to Roth account? Jeff, according to the IRS regulation you cite, “Rollovers from traditional to Roth IRAs (“conversions”) are not limited”. We have small amounts in existing 401K’s. I know I can contribute for 2015 up until April 15, but my question is this: Does the income count for the year in which the transaction occurred, or the tax year for which I’m making the Roth contribution? Leaving the country doesn’t exempt you from income taxes. But you can still make a contribution to the plan if your income exceeds the limit. In addition, I have I have made some deductible as well as some non deductible contributions to that Traditional IRA. Least in regard to bond values not satisfied the 5-year rule deals with withdrawals a. 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