Backdoor Roth IRA time requirement
Is there any holding period required if you make non-deductible contributions to a Traditional IRA before you can convert those funds to a Roth IRA? For example, could you fund a Traditional IRA today with an after-tax contribution (assuming you make too much to qualify for a Roth) and immediately convert a couple of days later to a Roth once those funds were credited to the Traditional IRA?
This assumes the individual does not have any Traditional IRAs with pre-tax money where the pro rata rule would apply.
Permalink Submitted by Alan - IRA critic on Thu, 2015-02-26 01:27
There is no holding period in the tax code. Some tax attorneys have recommended waiting for a period of time to reduce the risk that the IRS could nullify the conversion based on illegal step transaction doctrine, but in the outside chance this was a real risk, how long would you wait? I would not wait at all until the IRS actually does this to a taxpayer. The chances of that taxpayer being you are a probably one in a million.
Permalink Submitted by Jose Morales on Thu, 2015-02-26 16:30
As Alan stated, there is no holding period. I’ve had people counseled by their accountants to wait a week, then when they converted they had not only the contribution amount to convert but a small amount of earnings.
Permalink Submitted by Ben Meyer on Fri, 2015-02-27 15:47
As far as I can tell, the IRS has no way of knowing how long the account was held as a TIRA. The only reportable record is the forms 1099-R and 5498, which only show the tax year, not the specific date of the transactions. So, in the absence of an IRS audit, how would the specific transaction timing become disclosed?
Permalink Submitted by Donald Dempsey on Mon, 2015-03-30 16:34
If someone has a 401k but no other IRA’s I know they can do the back door ROTH. What I’m curious about is what if later in the year they decide to roll teh 401k into an IRA. Is the governement going to say:1. When you did the original ROTH Conversion you did not have that deductible IRA so you are fine, no pro-rated calculation needed, or2. Sorry we are going to pro-rate since you did have money in a deductible IRA on 12/31/2015. ie. Does waiting to convert a 401k until after you did the back door IRA protect you?
Permalink Submitted by Alan - IRA critic on Mon, 2015-03-30 17:14
The answer is 2. The 401k would be pro rated with the conversion because Form 8606 requests the IRA value as of the end of the year of the conversion.
Permalink Submitted by Donald Dempsey on Tue, 2015-03-31 19:26
Thank you for the response.