<p>I’m trying to figure out if this type of investment would be a smart thing to do, and I wonder if I’m missing something on this. I just read about the “backdoor Roth IRA” and question why I didn’t do this a couple of years ago. The problem is, we don’t qualify to contribute to a Roth IRA, but apparently it is legal to contribute to a traditional non-deductible IRA, and then instantly convert it to a Roth. Here is a link to the backdoor Roth, if anyone is interested: [The</a> Backdoor Roth IRA for High Income Earners: A Step-by-Step How To Guide](<a href=“http://www.nerdwallet.com/blog/investing/2013/backdoor-roth-ira-high-income-how-to-guide/]The”>http://www.nerdwallet.com/blog/investing/2013/backdoor-roth-ira-high-income-how-to-guide/)</p>
<p>We have a friend who manages a Roth that we recently converted, and his rate of return is amazing. It has averaged 17.3% since inception (about 17 years or so). And that is just as the end of December, so I’m sure his rate of return is even higher now. I’m kind of disgusted that we haven’t given him more money to invest, and am desperately trying to figure out how to give him more…non-taxable, if possible.</p>
<p>I think that we would be better off investing in the backdoor Roth, than even putting money in our 401K. We’ve maxed that out for almost 20 years, so it is difficult to think of not doing that, but I don’t think we can do both. My rate of return kind of stinks, it’s about 5.7% over the last five years, so it would be much better giving it to our friend than investing it ourselves, as obviously we don’t really know what we’re doing.</p>
<p>17.3% over 17 years? That’s higher than Bill Miller’s record, and he beat the market for something like 11 years in a row! I would be very skeptical of anyone who claimed such a record (think Bernie Madoff). I would sincerely run the numbers in this scenario past another financial expert before making such a commitment.</p>
<p>Well, the thing is, psychodad, it’s not that he’s claiming this to get our business. I don’t even know if he’s willing to deal with additional hassle to do the backdoor Roth for us. He manages many millions of dollars. On his latest statement to us, that is the rate of return that he claimed. It seems plausible, as I think we gave him about $14.9K approximately 16-17 years ago (worth about 250K now), and we’ve paid his commission out of the account (stupid), so it seems reasonable. We might have given him a bit more, but not much…and it was so long ago that I don’t know if I have the original data to run the numbers. He’s pretty honest and is always self-critiquing, so I don’t question that.</p>
<p>We’re in the process of trying to get voluntary contributions (post tax) that we made to H’s employer rolled over into a ROTH IRA. There is printed documentation supporting doing this. We’re still awaiting them to confirm his lifetime wages because he can only contribute up to a fixed max % of those lifetime earnings.</p>
<p>Wow, then you are really fortunate, since hardly anybody gets a return like this! But wouldn’t you have to pay taxes on the gains that you made in your IRA portfolio if you converted to a Roth ($236000 gain from your scenario)?</p>
<p>There’s no hassle to the investment advisor to do a Roth conversion - if you’re worried there is, do the conversion at some low-cost / no-cost place, then roll it over.</p>
<p>Bear in mind that if you have any other IRA accounts (including SIMPLE or SEP accounts) at all at the time of the conversion, it doesn’t work, because your basis gets used up ratably.</p>
<p>Seems like that is an absolute that you’d want to get that done, HImom. No taxes when you roll it over? Then no taxes when you start withdrawing it? I hope they don’t take forever getting that confirmation out to you.</p>
<p>“But wouldn’t you have to pay taxes on the gains that you made in your IRA portfolio if you converted to a Roth ($236000 gain from your scenario)?”</p>
<p>We converted it from a traditional IRA a couple of years ago, and I think it was approximately 200K then. We have made additional tax payments of 25K two years in a row for this, and it has just about killed us. This year we had to borrow from our HELOC to pay taxes. But we know that even though it was really painful, our friend has done so well that this is absolutely the account that should be not taxed. No matter how difficult it was. And in the conversion, we had to pay taxes on the entire amount, not just the gain.</p>
<p>That’s interesting, ally, I didn’t know about the basis. But we only have 401k’s and Roths now, so I guess that doesn’t apply?</p>
<p>And ucb, I know that our friend’s rate of return is far better than ours, so no dispute there. We don’t know what we’re doing. We suck, and like most amateurs, are ruled by fear and greed.</p>
<p>Yes, we are fine. We paid taxes already on the funds we were allowed to contribute so we don’t have to pay them to roll over to the ROTH IRA. Have printed govt docs to support this. H will bug them again to get them to finalize the amount so we can proceed. </p>
<p>We’re pleased we won’t have taxes on it.</p>
<p>We will likely try to mostly stick with index funds. We hate trading and also dislike babysitting investments. We can live comfortably on H’s pension and required minimum distributions. Planning not to touch the ROTH.</p>
<p>ucbalumnus is correct in that you have two separate issues here. It is true that you can contribute to a traditional IRA if your income prohibits you from contributing to a Roth and then convert that to a Roth. And remember that for 2013 you can contribute an additional $500. So it would be $5,500 for those under 50 and $6,500 for those over. You can also do this in addition to any 401k contributions. It’s also true that those who already have traditional IRA’s may not want to do this because the basis is taken into consideration when converted so part of your contribution for this year will be taxed when converted.</p>
<p>So I would do it even if you can’t invest with your friend. Remember the other huge benefit to a Roth is that it has not RMD when you reach 70 1/2. Also, that it is left to your heirs tax free.</p>
<p>Ok, so help me understand this…I have a trad IRA opened in the 80’s from a non vested retirement fund when I left a job. Over the years we have contributed to it, mostly tax deductible contribs till the last few years when it’s been post tax $’s. I don’t think it’s done very well investment wise. So could I open another trad IRA with more post tax $’s and then convert it to a Roth? Since the original IRA now has a mix of pre and post tax $’s it sounds complicated to try to convert that. Who would I go to for advice re this? What’s RMD?</p>
<p>If you have other IRA’s and want to avoid the basis, you can roll all of them into a qualified pension plan (i.e. 401k plan). This way when you contribute your non deductible IRA you can immediately convert it to a Roth with no taxable effect. if married both spouses may contribute the maximum and convert immediately each year. Has no effect on contributing maximum to 401k each year.</p>
<p>I don’t think it’s complicated to convert an IRA to a Roth when mixed pre- and post tax contributions are made. Everything except post-tax contributions that are reported to IRS will be taxed as ordonary income including gains and earnings. If you contributed $20K pre-tax and $10K after-tax to the same account and the contributions generated $5K income, you would pay taxes on $25K.</p>
<p>Thanks guys, I think I’m going to have to do some reading on this. I’m pretty stupid when it comes to such things…for a long time I thought there was a maximum amount I could contribute to the IRA - actually, it was a maximum tax deductible amount - yikes all that missed contribution opportunity! So there’s no specific age when one must begin to take distributions from a Roth? That being the case is there any benefit to maintaining a trad IRA unless one predicts income at 70 will be much lower so distributions liable for less tax?</p>
<p>Get out your tin foil hats. I’m starting to think that 401k funds over a certain level - Obama floated 3 million, will start getting either seized (doubtful) or taxed (more likely). </p>
<p>I think the real question is what to do with your money outside retirement to lower your tax burden.</p>
There is a maximum amount. For 2012 it’s $5,000 or earned income ($6000 for those over 50). For 2013 those numbers are $5,500 or $6,500. Whether it’s deductible or not depends on whether you have a retirement plan at work and your AGI</p>
<p>A Roth has the same dollar max but the rules for who can contribute are different.</p>
<p>And determining how much would be taxable is not that tough if your record keeping is good, like Igloo said. However, if you don’t know how much of the contribution was non deductible and how much was deductible, it will be very messy. Also, in Igloo’s example above, if you add into the mix the fact that you contribute $5,000 into a traditional IRA and then want to convert it to a roth, you have $35,000 in your traditional IRA before the new contribution, with a “basis” of $10,000. Adding $5,000 makes it $40,000 with a basis of $15,000. If you then want to convert $5,000 you can’t designate which $5,000 so 5/8ths of it would be taxable. If you simply convert the entire thing, $25,000 of it would be taxable.</p>
<p>Oh! So I was right before I was wrong. Hmm! I’ve been self employed and had no retirement plan other than the IRA. DH has a 401K that rises to dizzying heights and then loses half it’s value during market crashes.<br>
Can one have more than one IRA or just one per person? I can easily work out which contributions were deductible so I should probably look into converting it to a Roth when I figure out the rate I would be taxed at.
Thanks for all the info.</p>