?typo on step 3. I have a SEP IRA, my husband doesn’t. You can make this contribution anytime between January 1 of the current year and April 15 of the next year. Talk to your Congressman. No. Then you can do an in-service distribution. Does it beat the Fidelity AmEx (2% on everything) plus PenFed (5% on gas)? Congratulations on saving for retirement! What would be the best course of action at this I fear I have really screwed up my attempt at the backdoor Roth conversion. When I asked my CPA about this he seemed to think after-tax contributions to the 401k were not a good idea because I would run into the pro-rata rule (similar to backdoor roth) when I converted the after-tax yearly contribution to a roth IRA, thus incurring taxes. In general, I like High deductible plans that allow you to use an HSA (stealth IRA. There used to be concern that the IRS would have a problem with the backdoor Roth due to an IRS rule called The Step Transaction Doctrine. I max out my 403b employee contributions, receive a 100% match up to 6% of compensation, and can contribute after tax to the plan. My tax accountant felt it was OK to go ahead and do it – she does not understand the pro rata rule (which I have read extensively about this week!) 1) You have your ‘cost basis’ backwards, but point taken. Right now if you converted you’d owe about $5K. Keeping old tax-deferred IRA at Brokerage One; open new non-deductible IRA and just convert it at Brokerage Two. 4) And, going forward, I will put 34.5k into after-tax 401k every year (my plan allows this) and withdraw it (my plan also allows this) into my TIRA, then convert that 34.5k + 5.5k = 40k to Roth IRA each year. 2) That’s fine if it’s coming up shortly. It’s pretty tough to pass up on that tax break, even with the credit risk. I am a new attending an have been recommending your website to all our residents and fellows. EM doc. This rule basically says that if the sum of a bunch of legal steps is illegal, then you can’t do it. Great post. # 1 are you doing Roth 401(k) or tax-deferred 401(k) contributions. And no, you need to get rid of all traditional, SEP, and SIMPLE IRAs in order to avoid the pro-rata issue. I have no outstanding Traditional IRAs (I previously rolled them over into my 401k) so I can convert to Roth at any time. The Roth IRAs are often taken for granted. In that case will 100% of the premium be tax deductible? AS you have stated, Vanguard does not allow SEP –> 401k rollover. I usually recommend that a self-employed physician use an Individual 401K instead of a SEP-IRA. Maybe. The key to not closing the account is to leave a little of money behind ($1) on that account before doing a back door conversion. ), Hi – I am an academic MD and have a W2 income. Great article. But consider $5500 per year contributed to a Roth IRA for 30 years vs $5500 per year invested in a taxable account. 2. No no, you’re thinking about all the right things. – The plan allows in-service withdrawals to an IRA or Roth IRA, and i can specify i just want to move out the after- tax portion. Ok, so when you contribute 5500 on Jan 2nd of a given year, then convert the next day is it for that given year or for the previous? Similar to what I did with my after-tax TSP money when I got out of the service. ), The plan should allow for “lump sum” contributions (not mandatory, but useful.). Am I correct? As Jim mentioned before, once you have maximized your 401k and other similar accounts, this provides a great tax diversification. or wait till the next year? It is very straightforward. Yes. That was helpful. If I had taken this screenshot at the right time, it would say “funds available to trade $6,000” and the “total credits and debits” would be $0. 2) These funds will be untouchable for 5 years as they’re conversions as opposed to contributions, which isn’t such a big deal for $11,000 per year, but is potentially more of an issue for $81,000. Since no conversion step was done during the calendar year 2020, you only have to fill out lines 1-3 and 14. I wish I had something like this post 5 years ago. No. As you can see, I forgot to take this screenshot before I actually did it, so I don't actually have any funds available to trade and I have a -$6,000 credit. I want to move my after tax out and roll over to a Roth IRA. As you can see, I am waiting for an opportune time to convert and I was wondering your thoughts on the matter. But I don’t think this is specified by the IRS, but rather by the plan document. Sorry for the confusion. Well, that was easy. You can add money to it the same year, you just have to convert the whole thing or roll it into a Roth IRA. How did the US budget deficit perform based on the president? ), I do number 1 on the difference between 52K and [17.5k + match]. https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/, Regarding health insurance, I’m no expert in what your best option would be for your family’s needs and local area. Max out the employee contribution ($17,500) in either a Roth or traditional tax-deferred manner. Is having the account closed such a bad thing, such as will it reflect on your credit score? But a reasonable hierarchy for a typical attending would be: 2. + 5500 Back door entry roth after tax at Vanguard. I've recently accepted a new position where I am earning quite a bit more per year. On Line 2, your basis is zero because you had no money in a traditional IRA on December 31 of last year (if you've been carrying a non-deductible IRA for years this may not be zero). It’s the end of the year, and some lucky folks are getting year end bonuses! I reopened my wife’s and put auto investments into each one, hopeful they won’t close an account early if it has an auto investment heading into it. Line 7 – This doesn't include conversions. Last point. Could I then contribute 43k of after-tax earnings into the vanguard individual 401k — and then follow by rolling this money into a roth ira? If it's your first time, they can be confusing. $5500 spends one day in the account, then it is all gone. Note that Turbotax may fill this out a little differently (may leave lines 6-12 blank) but you end up with the same thing. Prior to getting into the variations, I need to point out that most physicians and most Americans probably don't want, don't need, or can't have a Mega Backdoor Roth IRA. You can get an email that tells you that you didn't have them withheld if you want. If you're over the income limits for a Roth IRA, pursue a backdoor Roth IRA so you can do step 4. Please help me understand the timing of this. In dollars, let’s take a look at this example. If you were allowed to make after-tax contributions whose earnings were tax-deferred, and converted that, then that would be a Mega Backdoor Roth. A few years ago, I made the mistake of rolling over a 401k from a former employer into my nondeductible, traditional IRA. It is taxable. If not, no big deal. That means you pay $14,250 in tax. They have figured this out in the last year or so because three years ago I had to re-create a new traditional Ira account after I converted. I can’t see why a high-earner would want to do that. I’m pretty sure case #3 won’t fly because the after-tax (non-Roth) contributions have to go through 401(m) non-discrimination testing. Third, the prorata calculation only has to do with dollars in IRAs, not the number of accounts. That’s exactly what you want to isolate the basis. Thanks for the info. Puny. Each year, I make my Traditional IRA contribution on January 2, then convert to a Roth IRA the next day. Great thoughts — this was a fun discussion we had at the company a few months ago, here’s some things I think you’re missing: I think you’re adding a few extra steps with the in-plan withdrawals to a Traditional IRA for individual 401(k)s. With the new (post ATRA) in-plan conversion options for 401(k)s, you can save a step: http://www.irs.gov/pub/irs-tege/forum13_roth_conv_opps.pdf, “This means that all salary deferrals, any other employee contributions and all vested employer contributions made to your account, plus the earnings, may now be converted to a designated Roth account within that same plan.” – Slide 4, “And with the new within plan Roth conversion rules, after the employer contribution of $34,000 is made to the plan, you can convert it to a designated Roth account. You can use the same traditional IRA accounts every year—they just spend most of the time with $0 in it. So, I’ve been on the phone with Vanguard and Fidelity to look into a couple of things and I wanted to see if you could clarify because Vanguard has me confused. Yes, I learnt the hard way! employer, who sent out paperwork as a 1099 on it – so I had to pay taxes on it already. Thanks for pointing that out. Backdoor Roths are individually. Convert your entire SEP-IRA to a Roth IRA. This can be done in a minute or two online at Vanguard and is essentially the same process as opening the traditional IRA. ( 33% tax) So, if I convert my SEP with around 130k in it, what will be the tax hit? For some reason they didn’t close mine, and it was 0 for the same amount of time. As Employer he can contribute 20% of 40,000K – right? Gotcha. Tax free gains going forward? The reason i ask this is that a lot of websites say , “this conversion might not be right for you if you are going to be in a lower tax bracket at retirement”, but i think that since I am funding this trad ira with POST tax dollars, why to leave that money in trad ira (only to be taxed again on withdrawal) . I know that you’ve mentioned have a backdoor roth IRA and solo 401k at the same time, but what about SEP IRA? I know I’m not paying commissions for Vanguard funds in my HSA at TD Ameritrade as well. The opposite, of course, could easily occur. Then you can convert the rollover IRA to a Roth IRA tax free. Once your individual 401K plan his $250K, you do have to file an additional form (5500) each year. It took me way to long to figure this out on my own. This year total self employment income will most likely come to 40,000 max. The earnings include: An amount for each completed pick-up, an amount for each completed drop-off, a per-minute-waited rate for the time you spend at the pick-up location, a per-mile rate for the distance between the pick-up and drop-off locations, any blitz bonuses that are shown … For married couples filing jointly, the income phase-out range is $189,000 to $199,000. SO my questions are : 1. Given my high tax bracket, I will maximize my other pre-tax space first. https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans. Vangurad put my Rollover money into a TIRA and I was clueless what the difference was and Vanguard did not tell me either when accepting my $$. If you have extra cash to invest after maxing out a 401(k) or other retirement plan at work, it’s wise to consider your options. is it true that you cannot convert your SEP IRA till after you have the funds in the account for 2 years ? Wouldn’t I need to convert the entire 401k though (both pre-tax and after tax) to avoid creating a problem with the pro rata rule? Fianancial newbie here so forgive me if I don’t understand totally. If not, it doesn’t sound like the mega backdoor Roth is an option for you. Thanks for the quick reply. Suppose you’ve contributed the allowable maximum to your Roth IRA for the year but still have money left over to stash away for retirement. You can do 100% employer contributions into a second 401(k) up to $53K. You can’t put $19,500 into an IRA, that’s a 401(k). Financial Educator of the Year Award - Call for Submissions, The Backdoor Roth IRA Made Easy - Podcast #194, Backdoor Roth IRAs and Why You Should Be Funding Them, Calculating the Value of Your Backdoor Roth Contributions, How To Get Your Tax-Exempt TSP Money In To A Roth IRA, How a Taxable Brokerage Account Can Be as Good or Better Than a Roth IRA, Fire Your Financial Advisor Online Course. Let's go through this line by line. 2) I cant do backdoor roth due to sizable rollover IRA and roth IRA accounts from my/wife’s prior jobs and investing in roth when income was lower, so running into pro-rata rule there too (unless is there any way around this?). All that matters is the SEP IRA balance on December 31. It just seems a little confusing. What do you think? They closed my wife’s before 12 months went by!!! 12) 0 My plan allows inservice withdrawals of after tax money only. We should all get a 2013 1099-R this month. Our company did not max out pension/profit sharing in 2014. Good reason to spend that money first in retirement, of course. So you can put in your $17,500 that is either tax-deferred or Roth, then contribute another $34,500 to the plan in after-tax dollars, similar to a non-deductible traditional IRA. Option 1 – Max Your 401k Past the Match. I meant a regular Roth IRA that was not done backdoor style. Two of them work well for selected people, but after discussing the third with several retirement plan experts, it probably isn't a viable option. The Backdoor Roth IRA IS a no-brainer because you’re comparing a tax-free Roth IRA to a taxable account or a non-deductible traditional IRA and the Roth IRA always wins that comparison. Come on Vanguard, you can do better than this. Do I have to get rid of inherited IRAs (ie convert to 401k’s) to avoid the pro-Rata rule to fund a Backdoor IRA? On Sunday January 3rd I put in an order for an IRA contribution. do you have to choose your own banks like fidelity or scwabb open those3 accounts for him- first after obtaining the separate EIN or do folks like Nora take care of everything from guiding you step wise- opening accounts to everything? The process will be slightly different at Fidelity, Schwab, and other IRA custodians, but the basic steps will remain the same. – RMDs DO exist for Roth 401(k)s If you have a $130K SEP, and you convert it, and your marginal tax rate is 33%, then your tax due on that conversion will be $130K*33%=$42,900. We are also doing the HSA and dependent saving accounts based on your posts. Finally, convert the entire traditional IRA to a Roth IRA. Roth IRA. I wouldn’t wait for a lower bracket, since the increase in value is a far bigger factor. Posted on December 23, 2020 by Jeremy Schneider. Will it be 33% of 130-52 =78K? I have never heard of $400 as some minimum income needed. The market drops considerably so my ‘cost basis’ would (hopefully) be close to zero when I convert (rather than about 15K as it is now) such that my tax liability would also be near zero. I have always done my own taxes on TurboTax, but about 3 years ago I decided maybe I should hire a professional because I might be costing myself more in lost tax savings than if I just hired someone. Yes and no. Going forward, based on my understanding it would be easier to open individual 401k and max it out for 2019, open a traditional IRA max it out for 2019 and do backdoor roth conversion. Going forward, based on my understanding it would be easier to open individual 401k and max it out for 2019, open a traditional IRA max it out for 2019 and do backdoor roth conversion. I”m not sure what you mean by an IRA through a former employer. 1) A solo 401k at Vanguard can be set up to be Roth, so you can fund $52k with Roth assets from the start. 5) Backdoor Roth IRAs If you understand the rules of both of these steps, putting them together is no problem. INDIVIDUAL Retirement Arrangements. I definitely see how it can be beneficial, but you are omitting the fact that it costs money to setup you’re own 401k as a corporation, followed by the ongoing accounting costs of filing returns for the 401k. See a local broker. Just makes your 8606 a little more complicated. How much more did you want to put toward retirement each year and why not just put it in taxable? Good luck with your decision. As always, extremely informative and helpful. Per the table below the maximum employee (elective deferral) annual contribution limit across all 401k and 403b plans will remain at $19,500 in 2021.The maximum annual contribution rises to $58,000 which includes elective deferrals, employer matching and discretionary contributions, but excludes catch-up contributions for those over 50. Accountants charge $500 a return. There is $25,000 in the account, with a basis of $5000. That situation would be a mess. Contribution limits for Roth IRAs. If so, your CPA is probably right. Only snag thus far: I have a pension contribution (13k per yr) and apparently that counts against the 52k max. I chose to keep the SEP till the end of the year to maximize contributions for that year, and then rolled it over late Dec. 1. Does his employer allow him to make after-tax contributions and allow in-service wihdrawals of those after tax contributions? https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/. Jim – How long do you keep the money in the converted Roth in Prime money market funds? If you convert the entire account, you pay taxes on $20,000 and you get $5000 tax-free. After you do mega backdoor Roth conversion and get Aftertax-401K funds transferred into Roth IRA, do you have to complete any particular tax form at end year (similiar to Form 8606 for the normal backdoor Roth)? Who knew the minimum to open a solo 401k was so small?! While she might not be able to do a backdoor Roth, you still might be able to. Only you can decide how much money is significant to you. Wouldn’t this mess with the prorata in the future? I have brokerage, IRA and roth IRA accounts with schwab. Exactly. I have zero money in a traditional IRA, no SEP, Simble, or rollover or anything. Yourself. So, I should convert the SEP IRA to Solo 401k to get it out of the way for all the back door and mega back door Roth conversions. Just the after-tax 401(k) without the backdoor Roth is likely a good idea from an asset protection standpoint, but a bad idea from an expense/tax standpoint. You don’t have to use an old traditional IRA when you can open a new one at Vanguard in 5 minutes. That seems to be a good idea. Comment below! Here you get the deduction already. If you rollover the whole SEP, you will eventually pay taxes twice on part of the money. I managed to do that with my TSP money a few years ago. Even after the checklist is completed, clients may want to save for a down payment on a house or fund an IRA before deciding to max out 401(k) contributions, Weber says. If your 401(k) or 403(b) plan allows after-tax contributions (this is different than making Roth contributions), consider doing the "mega backdoor Roth". I’m back to doing my own taxes. It doesn’t give you an extra contribution $57K limit. On your taxes, you'll deduct your SEP-IRA contributions, then pay tax on the conversion, but the net effect will be like contributing $52K to a Roth IRA. That’s useful if you’re in college and probably paying no taxes anyway. What is a traditional Roth IRA? There are no required minimum distributions (RMDs) for as long as you live. But is there any advantage to rolling your traditional IRA money back into your company 401k every year? I don’t plan on being late in 2018 . It will then make you consent to electronic delivery of the fund prospectus. Since you didn't take any money out of your traditional IRA this year except the conversion, this is $0. my husband is a physician and I am a pharmacist- our net income this year is 650,000, I contribute 18k with 5 % match at my employer with NO self employment income. WCI, you said above: “Once your individual 401K plan his $250K, you do have to file an additional form (5500) each year. Ironically, upon acquiring sufficient information to assess the skill of an investment service provider, individuals end up empowered to take control of their portfolios and make their own decisions, © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. So read that and ask whoever knows the most about your particular plan. If you have enough income that you need to do a backdoor Roth, you should have enough to fund it all in one fell swoop. My husband and I have a six-month emergency fund and are not inclined to prepay our mortgage because the interest rate is 3.25%. A very high-income physician who expects to still be well into the top bracket in retirement (i.e. What are my options? I’m not sure what a dependent savings account is, but perhaps consider a UTMA/UGMA for money you want your kids to have. Get rid of any SEP-IRA, SIMPLE IRA, traditional IRA, or rollover IRA money. Aside from a Roth IRA, there are a number of different retirement plans and tax-deferred savings vehicles for which you may be eligible. You can probably do that if you want. Why or why not? Viola! I was looking at your variation #2 — it seems like I’m converting pre-tax sep to post tax roth — which slightly diff from variation #1. Your traditional IRA has to be zero on December 31. 4) 0 I just graduated so my income is reduced for 2015 to about 170. I’m not sure what he meant by tax free. Once I get to the point I want to save amounts above that I will set up a defined benefit plan. Thanks for clarifying. Remember that IRA stands for INDIVIDUAL Retirement Arrangement. Any thoughts on this… will it make things complicated tax-wise.. any workarounds? If you automatically transfer funds from a bank account to your Roth IRA, if you DON’T specify the year, most financial providers will assume you want it to go to the current calendar year. I am a little confused about the pro rata rule. I now have the option to rollover pre-tax funds to a new employer 401k. What percentage of your portfolio do you reserve for "play money"? Absolutely. Fidelity actually doesn’t have a Roth 401k option, so you’d have to look at a different provider, such as Vanguard, Charles Schwab for that. Instead of only being able to contribute $5.5K per year, all of a sudden you can contribute $34.5K (plus the $5.5K in your personal and $5.5K in your spousal IRA.) $400 will do. Currently, total non-deductible contributions are around 40K and the total value of the account is around 55K. There is no “counting” on the taxes. Do you have any suggestions, or should I just hold off until I have a job that has an appropriate 401k and allows me to contribute? So when you do the conversion, there is nothing to pro-rate since it is all after-tax. In 2018, Roth contributions are phased out for a single filer with MAGI (modified adjusted gross income) over $135,000 and $199,000 for married filing jointly couples. Employees who pay them have to put them on Schedule A with other medical expenses, subject to a huge 7.5% floor (which means they’re probably not deductible for a typical doctor.) And heaven forbid they actually learn how to work in the process, obviously them working is an essential component to being able to contribute to the account. thx for such a great blog. This would in turn require that one roll that traditional IRA money back into the 401(k) before doing a “standard” backdoor Roth, in order to not be hit by that, distinct pro rata rule. Thus,my tax liability for a conversion would only be the difference (55K-40K=15K taxable at my marginal rate). So will I be able to do a backdoor ROth in the same year as I open the Solo 401K, i.e in 2018, or will I have to wait to 2019? Fees are low there too. However, the work around isn’t a big deal. Thanks so much WCI for all the helpful posts!! My father has 200k after tax in his 401k. Be aware Vanguard doesn’t take rollovers though, so you will probably have to go with Fidelity or etrade. However, I wouldn’t add 529s to it because they’re aimed at a completely different goal. Hi! 2. Look at medicine today and how much paperwork is now required to do very simple things. Thanks! Even though you made a 2020 contribution, you did so AFTER December 31st, so this line would still be zero if you filled it out for 2020, which you didn't because you didn't do a conversion in 2020 and got to skip lines 4-13. No wonder I was confused when I moved my assets from Fidelity to Vanguard to consolidate them as every one raves about Vanguard. Many thanks! 2 weeks Maxing out Roth IRA contributions Reddit . Some day they will appreciate never having to pay taxes on the compounded earning. If I have a 403b from my employer and a Roth IRA only, do I need to open a traditional IRA, make a contribution to that traditional IRA and then rollover to Roth IRA? So is that maneuver not worth it if you have sizable 401k pre-tax balance? That page looks like this: In the first step, you simply choose to convert the entire account. Since there is hardly any time left in 2017, and Vanguard/Fidelity have high call volumes, I want to do this in quiet time in 2018 after making sure I have all my information. Been at the job for 6-12 months now allowed ), the more you contribute each year I. Also what exactly do you mean by an IRA, so you ’ re right about taking. 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