Roth IRAs and the Backdoor Roth Conversion: Today’s Slott Report Mailbag

Thursday, December 05, 2019

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Hello. I am an avid reader. Thank you for the information you provide. About opening/establishing a Roth IRA:

I opened my 1st and only Roth IRA on April 12 of 2018 at the age of 59 ½, funding it with an initial deposit and designating that deposit as a 2017 deposit/contribution. In August of 2018 I made a 2nd deposit as my 2018 Roth IRA contribution. Does the 5-year rule (to withdraw earnings tax free) begin in 2017 or 2018? Does the 5-year rule start on April 12, the actual date of the Roth IRA establishment, or does the date default to January 1st regardless of the actual establishment date?

Thanks again,

Jeff

Answer:

Jeff,

The start date for your Roth IRA is officially January 1, 2017. Even though you initially funded the Roth in early 2018, because it was a prior-year contribution, you captured January 1 of the previous year as your start date and were able to, essentially, fast-forward your 5-year clock for tax-free earnings. Since this is your first Roth IRA, even though you are over age 59 ½, you will have to wait until January 1 of 2022 before your earnings will be tax free.

Question:

Hello and good morning. I love the articles and have followed Ed’s forum for years now. My question revolves around backdoor Roth conversions. I have a client who only has SEP IRAs and a 401(k), but no traditional IRA’s. He makes too much to make a direct contribution to a Roth IRA and was interested in looking into the Backdoor Roth strategy. My question is: does the SEP IRA count for aggregation if he was to do a Backdoor Roth conversion or would that only apply to Traditional IRA accounts? Your help is greatly appreciated, and I look forward to your information.

Sincerely,

Prescot

Answer:

Prescot,

Thank you for being a loyal reader! When a person does a Backdoor Roth conversion (or any IRA-to-Roth conversion for that matter), the pro-rata rule dictates that all Traditional IRAs, SEPs and SIMPLE plans must be included when calculating the taxable amount of the conversion. Based on the description of your client’s portfolio, all of his SEPs would need to be included. However, his 401(k) would not be factored into pro-rata when doing the Roth conversion.

 

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