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Hi,

I've always maxed out my Roth IRA contributions in the past and I would like to continue.

However this summer I plan on getting married, and between the two of us, my husband and I expect to exceed the Roth contribution limits. I know, what a bummer, right?

My fiance exceeded the limits last year for the first time and because he hadn't known about the limits he had done his Roth contribution but then had to pull it out. So he had no Roth last year.

I still plan on maxing my 401K and would like to max my Roth also. I have read a little bit about doing a backdoor Roth, which would entail me opening a traditional IRA account, funding it, and then immediately converting it to a Roth.

I do not currently have any traditional IRAs, so as I understand it, the conversion is simple.

Any things I should be concerned about as far as doing this? Do I need to worry at all about timing? I'm assuming if I fund the traditional account I don't actually have to buy stocks or mutual funds before I convert it, right? I'd be using eTrade probably, since that is where my Roth account is. It looks like I can open a traditional IRA, and I also see info on converting to Roth, so I'm thinking it shouldn't be a problem.

Does it make anything extra complicated with taxes or anything?

Thanks,

Jennlee
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The main thing to know is that you cannot just open a traditional IRA, convert it to Roth and expect to ignore any other IRAS out there. If you have none, then this is simple, and yes, you can do what you propose. It sounds like this is your case, so easy-peasy.

Taxes - you have to pay taxes on the amount of gain (if any) on entire portfolio of traditional IRAs (or in this case one single Traditional IRA) prorated based on % converted. In your case that's just 100% of gain on the one account, so easy. If you convert quickly there shouldn't be much gain.

And you cannot touch the amount converted for at least 5 years, so you may not want to mix this in with your other Roth account, as that would mean you couldn't tocuh anything there for 5 years (as I understand it, I'm not an accountant though...)

If you have ANY other Traditional IRAs or you convert less than 100% of them it gets kind of complicated. I've been doing it the past few years, and you have to look at the total basis in IRAs and the total gain over the entire portfolio.
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If you guys don't qualify for a Roth anymore, it means you're starting to make some serious money. At least as far as the government sees it.

Here is something to think about. Why not just open a traditional IRA and fund it. Don't worry about converting. Why? Its not putting all your eggs in one basket. If everything you have is in a Roth, it will all be treated the same tax wise. Thirty years from now, I'm sure the tax laws will be different. Not just income taxes, but say a federal sales tax is added or some value added tax or who knows what. So when you go to withdraw that money from the Roth, you've either got the best tax break possible or something really bad. Bottom line, you have no control, its your only option.

If you have a traditional plus your Roth, you have a choice of where to pull your money out of. One or the other or a little from each. Thus increasing your chances of minimizing the tax hit. You won't have the best outcome but you won't have the worst either.

JLC
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Thanks for the food for thought, JLC!

I will consider it.

I do have about $350K in my 401K, and my fiance has probably about $90K in a 403B. Would those be treated similarly to a traditional IRA in terms of taxes?

Since I have so much in my 401K I was thinking I should keep trying to bulk up my Roth.
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Thanks for the food for thought, JLC!

I will consider it.




I suggest asking at tax board --
I think there are tax consequences
not mentioned (possible double taxation)
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Here is something to think about. Why not just open a traditional IRA and fund it. Don't worry about converting.

As you said, they're making serious money if they don't qualify for direct Roth contributions. That likely also means they don't qualify for deductible traditional IRA contributions. If they have to put money into a non-deductible traditional IRA, why would they want to keep the money in there instead of converting if there are no other IRAs to worry about? Do you like to pay taxes unnecessarily?

PSU
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Why not just open a traditional IRA and fund it. Don't worry about converting.

There is nothing magical about anything with "retirement" in the name. If you are considering this, open a regular taxable brokerage account instead. There are tax benefits and more flexibility.
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Does it make anything extra complicated with taxes or anything?

As for taxes, I think you understand what is required.

As for as the mechanics of the process, you'll need to check with your broker to see if there are any fees to open a traditional IRA or fees for converting to a Roth. Also you will either be closing the traditional IRA after conversion or leaving it empty until you repeat the process the next tax year. You may want to inquire if there are any fees for closing the account or zero funds in the account.

PSU
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There is nothing magical about anything with "retirement" in the name. If you are considering this, open a regular taxable brokerage account instead. There are tax benefits and more flexibility.

Agree with one exception. In some states, IRAs are protected against creditors. One should check their state laws.
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You've got the right idea. With no other IRA accounts, or SEP-IRAs, or 401k rollover IRAs, or any other kind of IRA account, the backdoor Roth is pretty straightforward.

Someone commented on keeping some traditional IRA money as well as the Roth. An excellent idea. But they forgot that you are also maxing out a 401k. And that works pretty much the same as an IRA for that purpose. So I'd stick with your plan of adding to the Roth.

On that front, the only other thing I'd add in is some after-tax savings. That give you three buckets to choose from in retirement: pre-tax IRA/401k money, non-taxable Roth, and ordinary savings/investments. And that should give you quite a bit of flexibility in retirement to control your taxes.


--Peter
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Someone commented on keeping some traditional IRA money as well as the Roth. An excellent idea.

If the contributions are into a non-deductible traditional IRA, why would you not convert all of the contributions?

PSU
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If the contributions are into a non-deductible traditional IRA, why would you not convert all of the contributions?

I'm talking about the long-term plan of what to have available in retirement. Not the shorter term planning of what to do this year.

--Peter
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I'm talking about the long-term plan of what to have available in retirement. Not the shorter term planning of what to do this year.

Sure but the OP asked about the conversion rules for a traditional IRA contribution made this coming year and the poster, JLC, said open a traditional IRA and don't convert. Your response said "Someone commented on keeping some traditional IRA money as well as the Roth. An excellent idea.". Since the OP was making a shorter term planning decision, I was making sure that she didn't decide not to convert based on JLC's advice. Your followup seemed to support JLC.

For a short term plan of making a non-deductible traditional IRA in 2013, I don't see a reason not to convert 100% of the contribution.

PSU
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Someone commented on keeping some traditional IRA money as well as the Roth. An excellent idea. But they forgot that you are also maxing out a 401k. And that works pretty much the same as an IRA for that purpose. So I'd stick with your plan of adding to the Roth.

On that front, the only other thing I'd add in is some after-tax savings. That give you three buckets to choose from in retirement: pre-tax IRA/401k money, non-taxable Roth, and ordinary savings/investments. And that should give you quite a bit of flexibility in retirement to control your taxes.


This is timely. I did a backdoor Roth last year and will likely do it again this year after I get over the paranoia that I might have missed something with last year's conversion. But, you bring up something I've been thinking about lately, which is if someone wants to retire before 59 1/2, when the Roth becomes fully distributable, one would have to bridge the gap between the age of retirement and age 59 1/2. So, a regular brokerage account will likely be one of the best vehicles to bridge the gap.
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But, you bring up something I've been thinking about lately, which is if someone wants to retire before 59 1/2, when the Roth becomes fully distributable, one would have to bridge the gap between the age of retirement and age 59 1/2. So, a regular brokerage account will likely be one of the best vehicles to bridge the gap.

If you have some traditional IRA accounts, that gap could be a good time to convert some to a Roth.

And if you have a 401k plan, you can access that money without any penalties if you retire from that company after you reach 55. So that could be another source of funds for someone retiring between 55 and 59.5 years of age.

To do that, you have to be making the withdrawals from the 401k plan itself. So you can't roll the money out and into an IRA.

--Peter
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if someone wants to retire before 59 1/2, when the Roth becomes fully distributable, one would have to bridge the gap between the age of retirement and age 59 1/2. So, a regular brokerage account will likely be one of the best vehicles to bridge the gap.

Maybe it's just that I tend to be conservative around my financial planning, but I have never considered the amount you can put into an IRA (Traditional or Roth) or 401k to be sufficient to fund retirement, and so have always also saved in a taxable brokerage account as well.

This has done a couple of things. It has given me the flexibility to do whatever I want with the money such as funding the kids' college, although I was also saving for that, or have money available to buy our retirement home, which we are looking for now, or even just pay for a child's wedding at some point which is probably sooner than I would like, but they are getting to be that age. It has let me save quite a bit more than what is allowed in the "retirement" accounts so that I can have more income in my retirement, which I calculate that I need anyhow if I want to maintain our current standard of living. And it has allowed me to be able to retire at the point I want which may or may not be when I can start taking money out of a retirement account, so age has been removed from my planning.

I'm sure there are other advantages, but these are the ones that were driving me with the flexibility being the top reason and the ability to save as much as I want coming in a close second.

I think people get hung up on thinking retirement money has to be in an account that is labelled as such, but that really just has to do with some tax advantages, and those can be outweighed by other factors or just secondary to other factors, depending on each person's particular situation.
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which is if someone wants to retire before 59 1/2, when the Roth becomes fully distributable, one would have to bridge the gap between the age of retirement and age 59 1/2. So, a regular brokerage account will likely be one of the best vehicles to bridge the gap.

You could withdraw principle early from a Roth without the 10% penalty and without income taxes.

You could also look at a 72T if you retire prior to 59 1/2.
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Maybe it's just that I tend to be conservative around my financial planning, but I have never considered the amount you can put into an IRA (Traditional or Roth) or 401k to be sufficient to fund retirement, and so have always also saved in a taxable brokerage account as well.

I would agree with you that there are advantages and flexibility in investing in after-tax accounts and retirement accounts may not have the best investment options. I would disagree that IRA and 401k accounts are not sufficient to fund retirement for some people. A two-income couple with 401ks available at their employer could possibly save $46k in 2013 (2x$17.5k + 2x$5.5k) not including any matching. If both of them are over age 50, they could potentially save $58k in 2013.

PSU
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I've always maxed out my Roth IRA contributions in the past and I would like to continue.

Maybe it was somewhere in the thread but what tax year is "in the past." It sounds like the 2012 tax year is fine. When you are considering 2013, you'll be considered married for the whole year. If your expected joint income is too high to contribute, do you know what your marginal tax rate will be ? If so, make sure that paying taxes at that rate is really worth it.

Also, carefully compare that to what you would pay for taxable investments(short term gain, long term gain and dividends). For some reason the word "taxable" scares people.

I'd also wait to do anything other than an individual taxable account until after your are married.
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