IRA questions

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Have two situations and would very much appreciate your help:
1) I had a 401k account from my previous employer. After I changed my job, I rolled over the funds to a Vanguard Rollover IRA account. I want to make contributions to my already existing Roth IRA account. However, our (married filing jointly) income is above the income limit. So, I was thinking of doing the backdoor ROTH IRA. But just now read about the pro rate rule. From what I understand, I will be taxed again on (some %) of my already taxed income.

For ex, if I had 20k in my rollover and made 5k (already taxed money in my bank account) contribution to the rollover IRA account. When I want to rollover the 5k to the Roth IRA, will I have to pay taxes on 20% of 5k (which is already tax deducted money)?

If that is true, should I open a new traditional IRA account and then rollover that 5k funds to the Roth IRA (can I have 2 traditional IRA accnts open)? Or another option is rollover the initial 20k IRA funds to my current employer sponsored 401k account and then rollover the 5k to the Roth IRA?

2) Wife has a Roth IRA account opened last year. This year our income might go above the limits for contribution and hence wanted to do a backdoor Roth. Hence opened a tIRA account and made part of the contribution earlier this year.  Now, when i wanted to make the remaining contribution left for this year, by mistake I made it directly to the ROTH IRA account. How can this be rectified?

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1) Opening a second Traditional IRA doesn't get around the rules.  You still have to consider both IRAs as one for the Roth conversion calculation.

2) You can recharacterize the Roth IRA contribution to a traditional.  Call the IRA custodian & they can walk you through the process.

Remember that your retirement accounts are completely separate from wife's retirement accounts.

FWFfollower said:   For ex, if I had 20k in my rollover and made 5k (already taxed money in my bank account) contribution to the rollover IRA account. When I want to rollover the 5k to the Roth IRA, will I have to pay taxes on 20% of 5k (which is already tax deducted money)?
 I am not sure your math is correct. It is better to think of the entire 25k as one unit (regardless of how many different IRA accounts it is spread across) composed of 20k in pe-tax money and 5k in post-tax money.

You can move any or all of the 25k into a Roth and the taxable amount would be 20/25 = 80% of the amount converted to Roth (i.e., 4k in your example). Think about it as 4k from the 20k pre-tax money that is going into the Roth (gets taxed) plus 1k from the post tax money that is also going into the Roth (untaxed).
FWFfollower said:   If that is true, should I open a new traditional IRA account and then rollover that 5k funds to the Roth IRA (can I have 2 traditional IRA accnts open)? Or another option is rollover the initial 20k IRA funds to my current employer sponsored 401k account and then rollover the 5k to the Roth IRA?
Opening a new IRA account will not change anything for you. All your traditional IRA accounts are considered as one unit to determine your tax basis and hence tax owed on your trad to Roth IRA conversion.

Moving the 20k into a 401k will help. Make sure your employer plans will accept it and that the investment options in the 401k are decent (something you like).
 

The current investment options in my 401k are good. I wouldnt mind rolling over to my current 401k. But is there no other way? What do everyone do if they have to do backdoor roth and have a IRA (rolled over from 401k)

FWFfollower said:   The current investment options in my 401k are good. I wouldnt mind rolling over to my current 401k. But is there no other way? What do everyone do if they have to do backdoor roth and have a IRA (rolled over from 401k)
  No other way; as along as you have a trad. IRA with pre-tax contributions, it will affect your tax owed when you do a Roth conversion. Folks doing backdoor Roth pay tax in your situation (of course, carefully consider if that makes sense in your situation) or keep it in a 401k.

If your current 401K accepts rollovers in, move all the Vanguard IRA money into your 401K.

Then you no longer have a traditional IRA. Make a non-deductible contribution to your IRA. Then convert it to Roth.

Then the 401K money can be rolled back to Vanguard, or you can just leave it in the 401K, if the fees aren't too high and the investment options are good.

Also try the fairmark forum. They are experts at this stuff and may have better ideas than you'll find on FW. http://fairmark.com/forum/list.php?2

Thanks for the replies. To add to the question, the investments in the tIRA (in both of our accnts) have gains. how does that change the situation?

In wife's case, it might be easy as I am guessing if I had made say 5000$ and it is 5200$ now, I can roll over 5200$ and that I will be left with another 300$ for the year to make contributions (rollover to ROth via backdoor)

However, in my case, how do i differentiate btw the original 401k part and the contributions made in this year?

FWFfollower said:   Thanks for the replies. To add to the question, the investments in the tIRA (in both of our accnts) have gains. how does that change the situation?

In wife's case, it might be easy as I am guessing if I had made say 5000$ and it is 5200$ now, I can roll over 5200$ and that I will be left with another 300$ for the year to make contributions (rollover to ROth via backdoor)

However, in my case, how do i differentiate btw the original 401k part and the contributions made in this year?

  Rollover amount does not affect your annual contribution. Wife/You can contribute your full 5.5k regardless of what amount you rollover into a Roth and what it consists of (IRA contribution, rollover from 401k, earnings).  has had.

FWFfollower said:    the investments in the tIRA (in both of our accnts) have gains. how does that change the situation?
  It doesn't.  Your TIRA is a tax-free account in the sense that you only pay taxes on distribution amounts as ordinary income when you take distributions.  Values can go up or down.  There are no tax implications to gains or losses.

You might want to fill out tax form F8606 that documents the non-deductible contribution and the Roth conversion and calculates the taxable amount to help learn how this stuff works.
For example if you made the rollover of your deductible TIRA to 401K, made your non-deductible TIRA contribution and your backdoor Roth conversion and then moved the TIRA money you had moved to 401K back to the TIRA before year end, you will have defeated what you were trying to do and will be taxed as if you hadn't "hidden" your deductible TIRA in the 401K.

It might be useful, as others have suggested, to think of the TIRA as 1 big pool of money mixed together instead of this 5K lump of non-deductible funds and that 20K lump of deductible .
money. If you don't do the 401K hiding move, and you convert 5K..........you think of converting the 5K of non-deductible funds and think you are being double taxed. IRS thinks you
are converting 1K of non-deductible and 4K of deductible and taxes you on the 4K. If you converted everything you would only be taxed on the 20K so you aren't really being double-taxed tho it may seem to be depending on how you think about it.

I also have a Roth 401k at my current employer. Does that help in any way?

Thanks, I finished the recharacterizing process.... I am now proceeding to convert the full account to Roth IRA (Vanguard), so I select the Convert to Roth IRA option? Further, I should select to not have any tax witholding and not have any taxes withheld?

Yes, mark any conversion paperwork NO tax withholding in order to transfer ALL you money to the Roth.
BUT figure your IRS and State taxes before the end of the year. Odds are you will have a shocking tax bill. Odds are you may be liable for estimated withholding unless you qualify for one of the estimated tax exemptions.



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