Backdoor Roth conversion question: What do I do with that?

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  • #81047 Reply

      Backdoor Roth conversion question: I contributed 6k to traditional IRA for backdoor. The vanguard lady told me I wait at least 7 days before I can convert to roth. But by the time I converted my 6000$ from traditional to Roth , it increased by 2$.

      When I did my conversion I just transferred 6k to Roth and there is 2 bucks sitting in traditional IRA.

      #81048 Reply

        Technically, you could leave it and convert it in a future year. However (depending on how the percentages work out), you could potentially have to deal with the pro-rata rule and have to track your basis for a future year.

        For example, suppose that you contributed $6,000; it earned $10 of interest while sitting there; and you convert only the $6,000. Depending on how far out you round off the percentage, that would result in a $5,990.02 tax-free conversion and $9.98 taxable conversion. But second and more importantly, you would then have $9.98 of basis to keep track of and remember to not count as taxable in a future year when you either withdraw or convert again.

        #81049 Reply

          For next time, Ideal to keep the money in cash to avoid gains while you wait to be able to convert to Roth.

          #81050 Reply

            Just convert it. You’ll pay taxes on the gain…which is nothing! If you were in the 100% tax bracket, you’re out a whopping $2!

            #81051 Reply

              I convert mine the following day.
              Convert the 2 bucks now or
              Wait till next year – doesn’t make much of a difference.

              #81052 Reply

                It’s been touched on, but I would suggest two things. First, the $2 can be converted at any time. Yes you will pay taxes on the $2. The reason to convert it is to avoid accumulating money in your traditional IRA if you wish to continue doing back door conversions each year. Obviously $2 isn’t going to matter much, but if you begin accumulating thousands over time you will run into the Pro Rata rule and trust me, you don’t want to mess with that.

                Secondly, in the future simply don’t invest the money until after you convert it to your Roth. Just wait the week, it will simplify your life.

                Side note, it doesn’t technically need to take a week. It just takes as long as Vanguard needs to settle the cash in your accounts. Fidelity only needs 2-3 days for example.

                #81053 Reply
                Phil Em

                  If you plan on doing future backdoor roths, you better get that $2 out of your IRA.

                  #81054 Reply

                    Convert it now. The irs uses year end balances to compute the tax due using the pro rata rules. If you leave that $2 there, you are creating a bunch of extra paperwork for yourself for at least the next 2 years. You are going to be taxed on that $2 this year anyway, so you may as well make your life easy

                    #81055 Reply

                      Vanguard lady was wrong, you don’t need to wait any specific period of time any more. Convert the extra (and owe a little in taxes), or have pro rata calculation paperwork on your taxes if you backdoor next year.

                      When rates are high like they are now, it’s difficult to avoid earning something on large sums over even short periods of time.

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