Backdoor Roth
Hi:
Do you see any need to wait a period of time once a client makes a non-deductible contribution to a TIRA before converting to a Roth? He does not have any IRAs at all. Only a 401k and 457 plan via the state of TN. I seem to recall a concern over step transactions, but am I correct in assuming its a non issue at this point? Or would you suggest waiting for some reason? He will make one non deductible for 2021 and 2022 later this month. Thank you.
Permalink Submitted by Alan - IRA critic on Mon, 2022-01-03 19:59
Step transactions are a non issue. There is no reason to wait to convert, particularly with the potential end of the back door Roth conversion. If legislation eliminates the conversion of IRA basis, it is highly doubtful that it would apply retroactively to conversions already done, so I would be aggressive and make the contributions and convert them ASAP.
Permalink Submitted by MIKE KRUCHTEN on Tue, 2022-01-04 15:41
Do the new RMD tables impact existing Bene IRA RMD calculations prior to 2020? By example, clients who establised a divisor (ie: 2015) then has decreased by 1annually. Does this stay staus quo or can client look at new tables and adjust divisor. I feel I have read that existing Bene IRA’s also have to use new table but unsure if such is true??
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-04 16:24
Yes, existing non spouse beneficiary IRAs must “reset” their divisors by using the new tables to determine what the divisor would have been for the year of the first beneficiary RMD. That divisor is then reduced by 1.0 for each year after that through 2022. Sole spousal beneficiaries only have to go the new tables for 2022, since they are allowed to recalculate their divisors (no 1.0 reduction).
Permalink Submitted by Robert Ervolina on Tue, 2022-01-04 16:53
thank you very much
Permalink Submitted by fairira on Wed, 2022-01-05 03:08
To Alan-iracritic, you commented above that “If legislation eliminates the conversion of IRA basis, it is highly doubtful that it would apply retroactively to conversions already done, so I would be aggressive and make the contributions and convert them ASAP.” My question: Though highly doubtful that legislation would apply retroactively to conversions already done, if it did apply retroactively would there at least be a way to reverse the nondeductible IRA contribution and return the contribution to one’s nonretirement funds? Thank you for your response and for the thousands of helpful answers you have unselfishly provided on this forum.
Permalink Submitted by Alan - IRA critic on Thu, 2022-01-06 02:04
Yes, there is a way out should a conversion of IRA basis be eliminated retroactively. The amount of IRA basis converted would be treated as an excess regular Roth IRA contribution and have to be removed with allocated earnings in the usual manner. In the meantime, within 60 days of the conversion distribution the after tax portion of the conversion could be rolled back into the TIRA, restoring the IRA basis. However, in most cases the 60 days would have expired, but there is still a potential solution with Rev Proc 2020-46. This procedure allows the IRA owner to self certify that one of the approved reasons on the certification form resulted in the deadline expiring. One of those reasons is that the IRA thought the rollover was being made to an eligible retirement account, and the Roth IRA was certainly an eligible account at the time of the actual conversion. Therefore, the TIRA custodian should cooperate and accept the self certification form and the rollover of basis back to the TIRA. Any earnings distributed from the Roth with the return of contribution could not be rolled over, and would be taxable and subject to penalty if the Roth owner did not qualify for an exception to the penalty. All this would not be too costly, but would complicate tax filing considerably.