Backdoor Roth in January, Rollover to new IRA later in year

Submitted by Andy Wagner on Wed, 2014-10-01 21:34

I will be retiring in March or April 2015 and I will be rolling over a Lump Sum distribution from the company pension plan into a traditional IRA.

I do not have a traditional IRA balance today, as I converted the balance to a Roth about five or six years ago. Since then, each January I have been making a non-deductible contribution to a TIRA and immediately converting that contribution to a Roth IRA. Since I have no pretax IRA balances, I pay no tax upon those conversions. (My income level disqualifies me from making a direct Roth contribution).

In January 2014 I made the normal TIRA contribution and Roth conversion, and I inherited an IRA from my mother in June. However, I am aware that the inherited IRA does not count as “mine” for the pro-rata rule and thus I don’t expect to pay tax upon that conversion either.

In 2015 I am concerned that I might get surprised. If I make a non-deductible TIRA contribution in January and convert to a Roth immediately, will I be forced to take a later rollover of the Lump Sum payout into account for the pro-rata calculation? In other words, does my January conversion to a Roth look at the balance of pretax IRA amounts as of the conversion date? Or does it look at year-end balances, thus taking the April 2015 retirement related rollover into account?

Thanks.



Submitted by David Mertz on Wed, 2014-10-01 22:14

  • The Form 8606 calculation uses the end-of-year balance in all of your traditional IRAs plus the amount of any Roth conversions or distributions from your traditional IRAs (but not the IRA inherited from your mother, as you mentioned) to determine the amount of after-tax basis to apply to the Roth conversion.  So yes, a rollover of the pension plan anytime in the same year as you do the backdoor Roth transactions would make your Roth conversion in that year (and in future years) mostly taxable.
  • If you are retiring in March or April 2015, perhaps your modified AGI will be low enough for you to be able to contribute directly to the Roth IRA for 2015 rather than doing a backdoor Roth.

Submitted by Andy Wagner on Thu, 2014-10-02 13:20

DMx – thanks for the clarification on how form 8606 works.  That is exactly what I wanted to verify, even though the answer wasn’t the one I was hoping for  🙂 I also appreciate the suggestion for a Roth contribution in 2015.  When I retire, I will vest in some RSU shares that will propel me into a very high tax bracket in 2015.  However, in 2016 I will have a fairly low MAGI and I will have a small amount of earned income in the form of a partial year bonus for 2015 that will be paid in February 2016.  I will consider making a direct Roth contribution in 2016.Thanks again.

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