ROLLING OVER MULTIPLE CHECKS AND BACKDOOR ROTH IRAS: TODAY’S SLOTT REPORT MAILBAG | Ed Slott and Company, LLC

ROLLING OVER MULTIPLE CHECKS AND BACKDOOR ROTH IRAS: TODAY’S SLOTT REPORT MAILBAG

By Ian Berger, JD
IRA Analyst
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Question:

My husband has taken two different qualified distributions from his Roth IRA within the last 60 days.  We would like to "pay those back.” It looks like we can put money back into the Roth IRA as a rollover.

My question is:  Can we put the total amount of the two distributions back into the same IRA, or are we limited to "paying back" just one of those distributions

Thanks,

Laura


Answer:

Hi Laura,

Redepositing the funds back into the Roth IRA is considered a rollover. Unfortunately, only one of your husband’s withdrawals can be rolled back into his Roth IRA. He is not permitted to combine them and then roll the combined amount back.

The rollover must be done within 60 days of receipt of the distribution that is being returned. However, you can’t do this rollover if you have done another IRA rollover within the last 12 months. (Company plan-to-IRA rollovers, IRA-to-company plan rollovers and Roth conversions don’t count for purposes of the once-per-year rule.)


Question:

I would appreciate your guidance regarding a backdoor Roth question.

My client participates in an employer 401(k) plan.  The client also has $50k in a traditional IRA which includes $20k in after-tax contributions that have been reported on Form 8606 over the years.  We are able to roll over his IRA balance to his 401(k) and would like to do so in order to complete backdoor Roth contributions in the future.  It is my understanding that he should transfer only the pre-tax funds to the 401(k) that is $30k.  This would leave $20k in after-tax contributions only in the IRA (which I presume we could convert to the Roth IRA next year).

Please confirm if this understanding is accurate.

Regards,

Jennifer


Answer: 

Hi Jennifer,

Your understanding is correct. The backdoor Roth strategy allows an individual to make an “indirect” Roth IRA contribution if the person’s income is too high to make a direct Roth contribution. This is accomplished by first making a non-deductible contribution to a Traditional IRA and subsequently converting the Traditional IRA to a Roth IRA.

However, you have added another layer to this scenario. Only traditional pre-tax IRAs can be rolled over to company plans that allow IRA-to-plan rollovers. Rolling over pre-tax IRA funds into a company plan will help your client take full advantage of the backdoor Roth strategy. If no pre-tax funds remain in the IRA when the traditional IRA contribution is converted to a Roth IRA, the converted amount (except for any investment gain from date of contribution to date of conversion) is tax-free. If any pre-tax funds do remain, the conversion can still be done – but a portion of the converted amount will be considered taxable under the IRS pro-rata rule.

 

 

 


Posted in: backdoor Roth IRA

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