Ha — that was exactly my argument here (https://www.bogleheads.org/forum/viewtopic.php?f=2&t=209961&p=3236055#p3221383). You need to get it back in there within 60 days though. I just left the few cents in the traditional IRA until the following year. I haven’t done any SE work in several years — but I might tomorrow, given an attractive opportunity. Now I have $0.56 sitting in my traditional IRA account. Am I correct in assuming that if i’m in the population of people that contributes to a taxable account (after contributing to all my available tax advantaged accounts) that it is still advantageous to continue with these doing backdoor Roths despite the pro rata? But, if the Roth 401(k) is not an option, or you just want to put away even more money to grow tax-free, and you are making too much money for the Roth IRA, enter the “backdoor Roth IRA.” This is not an actual type of account, but rather an IRS-sanctioned strategy for high-earners. If you did the conversion last year, you’ve got a hassle on your hands. I don’t know that there is more audit risk. You can also subscribe without commenting. (Describing the tax code as perverse is nothing new, of course. However there is an exception for a non working spouse. Jim, first off, thanks so much for this site. Wow! you have to file if you make non deductible ira form 8606. Just leaving for future reference, since I had the same question: line 14 is a basis, and cannot be negative. I did a mega roth conversion a couple years ago with our traditional IRAs, but my wife (with her employer’s contribution) have been maxing out her Simple IRA since starting her job a couple years ago. You must wait two years AFTER making your final contributions into the SIMPLE to move the money out (whether this be to a 401K to reduce your IRA basis to zero to do backdoor Roths in future years, or to do a mega Roth conversion from the SIMPLE plus any contributions to nondeductible IRAs). Do an online survey. I did that. It'll still be free since it isn't going to grow to 50 cents in a money market fund in one year. I contributed 5.5k to vanguard IRA and converted to Roth the next day….. turns out, my tIRA wasn’t cleared out until Jan 13th. It’s all for the purpose of the backdoor. You do NOT want that check in your hand 60 days from the time it was cut. At any rate, you’ll probably owe tax on $1 in 2016 once you work through the 8606. Babysit someone's kid. So in 2016 I still had money in the tIRA. Thanks again! I didn’t know what to do with it, so I did another Backdoor Roth already this year, but only converted $5,500 again this year. I tend to agree with you, but there are some very vehement folks over there that are arguing that a 401(k) is only operated by a business, and if the business is dormant, the 401(k) must be dissolved. No. IMO in many instances a SEP makes more sense than a 401K. I was under the assumption it wasn’t (pretty sure my accountant said it wasn’t when I asked him a couple years ago), but after reading this blog it’s sounding like it actually is. What do you think? Oh, you’re very clear in your posts, Jim…… Its my fault because I’m stupid. Step 3: Open an individual 401(k) at Fidelity or eTrade (the Vanguard individual 401(k) doesn't take rollovers). This trick doesn't work so well if you have a business where each year you are making SIMPLE IRA or SEP IRA contributions. You just round up or down and keep moving. Do you suggest turbotax users pay for the audit representation insurance? Thank you for the great post Jim! IRS instructions for line 10 of Form 8606 are to round to 3 decimal places. First off thanks for the heads up on the back door Roth combined with self employment. Is it expensive to get representation after the fact? As I stare at the 8606 more, I think I understand it now. Sometimes a SEP makes sense, sometimes a 401(k) makes sense, sometimes a SIMPLE makes sense and sometimes nothing makes sense. Also, when does a consultant really retire? For Don, the backdoor Roth contribution works as intended: He gets a new $7,005 Roth IRA but has to pay tax on only $5 of income. But for a Backdoor Roth IRA, it is done instead of being able to open a Roth IRA directly. But my wife’s has nothing. Why don’t you? And how can I best address this issue so that I can make the contributions for 2016 and 2017? Of course, not every group 401K will accept rollovers from outside plans, and you’d have to weigh whether the expense fees of the investments are (if they are high or have limited selection) vs the value of higher asset protection. You will owe taxes on it. IRS instructions for line 10 of Form 8606 are to round to 3 decimal places. Any increased risk of audit or anything like that? The Backdoor Roth can be thought of as a backup plan for how to contribute to a Roth IRA. And I realize these conversions will all go on my 2017 tax form. https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/, I rolled over my tIRA to 401k in January 2017 to avoid pro rata rule. Great. Then go mow some lawns in the summer. If your previous employer allows rollovers from other plans, such as self employment plans, you can take advantage of this to reduce your IRA basis to zero every December 31. “If you’re using a SEP, you might as well use a 401k most of the time”…. Easy to open and they also take rollovers. The IRS didn't really weigh in at all about the Backdoor Roth IRA for years, leaving taxpayers and advisors wondering if the step transaction doctrine could ever be applied to it. Can/should I still do backdoor for 2016 or should it just be for 2017? HR Block software screwed up my 8606 this year and it took way more effort than it should have to fix it. I have certainly asked lots of questions that in retrospect seem dumb. But that 37 cents is actually still in the traditional IRA! Congratulations! People often freak out about having a few extra cents. How does that affect the 8606? Are there any restrictions to the self employment? because line 14 becomes negative?? I’m impressed. The IRS responded with a letter explaining [that] no further action or taxes [were] required based on the information provided. Also available on Audible! Step 2: Make some money. Apply for an EIN and viola, you’re self employed. (I have no financial interest in the finance buff, just found it a really helpful guide!). E.g. When did you do the conversion step? You’re not in the crappy situation Will is. Is it even necessary to report our non-deductible Traditional IRA contributions? you have to file if you make non deductible ira form 8606. I respectfully disagree; the advantage of using a group 401K plan (either a current one or one from a previous employer that still is open) rather than your solo 401K is because for asset protection purposes a group 401K is more ironclad; there has been case law that solo 401Ks are not ERISA plans because they only benefit one individual (or married couple), so therefore sometimes you have to declare bankruptcy to get the asset protection, depending on the state you live in: No. Also I was at my specialties national conference in SD, and the locumtenems group was talking about how they had you come talk at the EM and Ortho event they did. Do you have a pro-rata problem? I contributed 5.5k to vanguard IRA and converted to Roth the next day….. turns out, my tIRA wasn’t cleared out until Jan 13th. Here's another little trick a lot of people may not know about. You could fix that in 2017 just by filling out the 8606 right. Some people don't want to do a Backdoor Roth IRA due to the pro-rata issue. You don't need an LLC or an S Corp or even a name separate from your own. I am a solo practice ophthalmologist (single employee excluded from SEP matching until 2018 because she started to work the year after I did) and max out my SEP. What’s the point of a non-deductible IRA when you could have a Roth IRA? Right now we have around 50k in the Simple IRA and are contributing 11k as a backdoor Roth between the both of us this year. That’s the whole point of the 8606. I suppose the problem would arise if/when you wish to contribute to a Roth IRA via the backdoor. Do you worry about the step transaction doctrine? I’m planning to contribute $5,499.44 in 2017 and then convert it to Roth IRA. Sorry, didn’t mean IRA- just different plan…. 3. There is also no income restriction on this strategy. You can convert it. You read 1000 comments? You can make your SEP contributions throughout the year, move it into your 401K by say December 1, and then do the backdoor roth through a traditional IRA before December 31. I’m sure this depends heavily on the person’s circumstances, but let’s say it’s a hospital employed physician with IRA, HSA, and backdoor Roth contributions, also a homeowner/itemizer… aka me! But if you’re using a SEP, you might as well use a 401(k) most of the time. What’s the point? But I found out recently that the IRS has at least said something about it, although what they said really didn't surprise me. Do you worry about the step transaction doctrine? Then convert it with your next $6,000. E.g. Open a solo 401k and put your $600 there. But, if the Roth 401(k) is not an option, or you just want to put away even more money to grow tax-free, and you are making too much money for the Roth IRA, enter the “backdoor Roth IRA.” This is not an actual type of account, but rather an IRS-sanctioned strategy for high-earners. “If you’re using a SEP, you might as well use a 401k most of the time”…. What a pain in the buttocks that was. Thanks so much. Shovel a driveway. Read line 6 of Form 8606. I moved to them, did the rollover and then moved back to Vanguard. So you and the IRS know your basis in a non-deductible IRA going forward. Then, in early April 2016, I opened a new traditional IRA account and contributed $5500 for the tax year 2015 and my spouse opened a new traditional account and also contributed $5500 for 2015. Does this cause problems for the conversion that I did last year? I don’t write the rules. But, if the Roth 401(k) is not an option, or you just want to put away even more money to grow tax-free, and you are making too much money for the Roth IRA, enter the “backdoor Roth IRA.” This is not an actual type of account, but rather an IRS-sanctioned strategy for high-earners. Do I need to roll that $60 back into my work 401(k) before converting my 2016/2017 contributions from my traditional IRA to the Roth IRA? That way on December 31 your basis in IRAs is zero, which is the amount reported on form 8606, making the backdoor roth not taxable. IMO in many instances a SEP makes more sense than a 401K. You can start a business. Does this affect my spouse’s accounts or just mine? You're now self-employed! Several folks there seem to think it’s pretty close to the line, if not entirely across it, and there’s also some debate as to whether it’s legitimate to continue a Solo 401(k) if you don’t have ongoing economic activity. I know the vast majority of your clients don't do Backdoor Roth IRAs.). You can still do 2016. does it not mess up line 14 then? See Kay bailey Hutchinson spousal Ira limit: That’s a Roth conversion, not a backdoor Roth, but also can be useful and will certainly give you some tax diversification. Actually, if you don’t contribute until 2018, it doesn’t matter what your balance is on 12/31/2017. Only on deduction. Part is pre-tax and part is post tax. Of course, we were both pleased with the outcome.”. Definitely worth it to double check the software – generated forms. Step 4: Roll that pesky IRA over to the individual 401(k) before December 31st. So my basis for 2017 will be $1, contributed $5,500 and converted $5,500 with $1 left over again. It shouldn’t matter if it’s still in there right? I'll bet the law gets changed before this ever gets tested in tax court because after 8 cycles now, nobody in Congress nor the IRS seems to really care. 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