Back door Roth

Submitted by mike silvers on Fri, 2016-03-25 15:24

Hi

My income is too high for a Roth so I read I could make a Back door Roth by contributions to a traditional IRA and then change it to a Roth. I am not a member of a pension at work so the Trad IRA is deductible.

My question is do I take a tax deduction in 2015 for the Trad IRA? What happens in 2016? Do I then pick the 5,500 in income? Am I subject to the 10% penalty?

I went to 2 banks and received different answers. Thank you



Submitted by Alan - IRA critic on Fri, 2016-03-25 19:25

  • Let’s assume this contribution would be your only non Roth IRA balance. In that case, you have a choice whether to deduct the TIRA contribution or declare it non deductible on Form 8606. If you deduct it, then you pay tax on the conversion, if you do not deduct it the conversion is non taxable, so those two considerations offset each other. That said, if the conversion was done after the year the contribution was for, taking the deduction would result in shifting taxable income from the first year to the second year. Granted, in most back door Roth transactions, the conversion is done right after the contribution is made to prevent earnings or losses from occurring in the TIRA account. There is never a 10% penalty on a conversion because the conversion is a rollover.
  • So if you are just now making the 2015 contribution, you could deduct it and reduce your taxable income for 2015. You would not file an 8606 on your 2015 return. The conversion done this year would then be taxable so you have shifted income to 2016. If you do not want this to happen, then declare the contribution non deductible on Form 8606 with your 2015 return.
  • Of course, if you do have a balance in other non Roth IRAs, the pro rate rules will apply and your conversion will be mostly taxable.

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