ROTH IRA Question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
HG01
Posts: 7
Joined: Thu Aug 11, 2016 2:23 pm

ROTH IRA Question

Post by HG01 »

I am 43 year old (married with two kids). Me and my wife max out on 401Ks and our combined AGI for past few years has been around $250K.

Question - Can we still contribute to Roth IRA?

Thanks
User avatar
BolderBoy
Posts: 6755
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: ROTH IRA Question

Post by BolderBoy »

HG01 wrote:I am 43 year old (married with two kids). Me and my wife max out on 401Ks and our combined AGI for past few years has been around $250K.

Question - Can we still contribute to Roth IRA?
Maybe. Look in the forum wiki for "backdoor Roth" and you'll find out how.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
User avatar
LAlearning
Posts: 1365
Joined: Wed May 09, 2012 12:26 pm
Location: Los Angeles

Re: ROTH IRA Question

Post by LAlearning »

No you can't "contribute". But you can "convert". Maybe.
I know nothing!
Topic Author
HG01
Posts: 7
Joined: Thu Aug 11, 2016 2:23 pm

Re: ROTH IRA Question

Post by HG01 »

Thus, can I open a traditional IRA and convert to ROTH IRA? Obviously, traditional IRA monies will be using post tax income. Am I correct here?
BolderBoy wrote:
HG01 wrote:I am 43 year old (married with two kids). Me and my wife max out on 401Ks and our combined AGI for past few years has been around $250K.

Question - Can we still contribute to Roth IRA?
Maybe. Look in the forum wiki for "backdoor Roth" and you'll find out how.
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: ROTH IRA Question

Post by Rob Bertram »

Yes, you can do a non-deductible IRA contribution and then do a Roth conversion. One thing to consider is if you have an existing traditional (deductible) IRA balance.
Topic Author
HG01
Posts: 7
Joined: Thu Aug 11, 2016 2:23 pm

Re: ROTH IRA Question

Post by HG01 »

Actually I do, can I start a new IRA (non deductible) and only roll off to Roth IRA?
Rob Bertram wrote:Yes, you can do a non-deductible IRA contribution and then do a Roth conversion. One thing to consider is if you have an existing traditional (deductible) IRA balance.
User avatar
CAsage
Posts: 3540
Joined: Sun Mar 27, 2016 6:25 pm

Re: ROTH IRA Question

Post by CAsage »

Research "backdoor Roth" and the rules on pro-rating your IRA. Embrace form 8606 and read the instructions. In answer to your last question, no, you cannot open a new IRA and convert only that to a Roth and ignore your other IRA(s). The IRS will tax the conversion assuming the Roth dollars are a fraction of the total IRAs. Which is why people with old pre-tax IRA don't generally do conversions, unless you are in a low tax bracket situation, in which case convert it all!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: ROTH IRA Question

Post by Rob Bertram »

Sadly, it is not that simple.

You can create as many IRA accounts as you want. The IRS only looks at the total across all of your IRA accounts. If you have an existing deductible amount in any IRA, then your conversion is prorated based on your total IRA balance. Here is an example:

You have an existing deductible $45,000 IRA balance. You make a $5,000 non-deductible IRA contribution, so your total IRA balance is $50,000 -- 90% is deductible and 10% is deductible. You want to convert $5000 from traditional to Roth. The IRS will consider this conversion 90% deductible, so $4500 of that conversion will be taxable.

More information can be found in the wiki: https://www.bogleheads.org/wiki/Roth_IRA_conversion

One way to avoid the proration is to roll your existing traditional IRA balance into a workplace 401k/403b/457/TSP retirement plan.
Topic Author
HG01
Posts: 7
Joined: Thu Aug 11, 2016 2:23 pm

Re: ROTH IRA Question

Post by HG01 »

Thanks. This is very helpful.

Two question though -
Are rollover IRAs and SEP-IRAs (i have both) treated same as traditional IRAs for pro-rated calculations?
Also, does spouse's IRA gets counted in the calculation too?

Rob Bertram wrote:Sadly, it is not that simple.

You can create as many IRA accounts as you want. The IRS only looks at the total across all of your IRA accounts. If you have an existing deductible amount in any IRA, then your conversion is prorated based on your total IRA balance. Here is an example:

You have an existing deductible $45,000 IRA balance. You make a $5,000 non-deductible IRA contribution, so your total IRA balance is $50,000 -- 90% is deductible and 10% is deductible. You want to convert $5000 from traditional to Roth. The IRS will consider this conversion 90% deductible, so $4500 of that conversion will be taxable.

More information can be found in the wiki: https://www.bogleheads.org/wiki/Roth_IRA_conversion

One way to avoid the proration is to roll your existing traditional IRA balance into a workplace 401k/403b/457/TSP retirement plan.
User avatar
Thrifty Femme
Posts: 562
Joined: Sun Apr 12, 2015 1:54 pm

Re: ROTH IRA Question

Post by Thrifty Femme »

Rob Bertram wrote:Sadly, it is not that simple.

You can create as many IRA accounts as you want. The IRS only looks at the total across all of your IRA accounts. If you have an existing deductible amount in any IRA, then your conversion is prorated based on your total IRA balance. Here is an example:

You have an existing deductible $45,000 IRA balance. You make a $5,000 non-deductible IRA contribution, so your total IRA balance is $50,000 -- 90% is deductible and 10% is deductible. You want to convert $5000 from traditional to Roth. The IRS will consider this conversion 90% deductible, so $4500 of that conversion will be taxable.

More information can be found in the wiki: https://www.bogleheads.org/wiki/Roth_IRA_conversion

One way to avoid the proration is to roll your existing traditional IRA balance into a workplace 401k/403b/457/TSP retirement plan.
I have a slightly different question. Let me tweak your example a bit:
- existing $50,000 Rollover IRA with
-- $48,000 of rollover money
-- $2,000 of nondeductible contributions

To facilitate a backdoor Roth in this example, I would have to
1. put the $48,000 of rollover money in a separate account at my current custodian
2. rollover that $48,000 to my current 401K
3. convert the $2,000 nondeductible IRA to Roth and pay taxes
4. contribute $5,500 to another nondeductible IRA for the year
5. convert the $5,500 to Roth and pay taxes very little taxes if done relatively quickly

Is my logic correct?
CppCoder
Posts: 921
Joined: Sat Jan 23, 2016 8:16 pm

Re: ROTH IRA Question

Post by CppCoder »

HG01 wrote: Two question though -
Are rollover IRAs and SEP-IRAs (i have both) treated same as traditional IRAs for pro-rated calculations?
Also, does spouse's IRA gets counted in the calculation too?
For pro-rata calculations, a rollover IRA and an SEP-IRA are treated as a traditional IRA. IRAs are per individual. A spouse's IRAs do not count against the other spouse's IRAs for pro-rata calculations.
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: ROTH IRA Question

Post by Rob Bertram »

Thrifty Femme wrote: I have a slightly different question. Let me tweak your example a bit:
- existing $50,000 Rollover IRA with
-- $48,000 of rollover money
-- $2,000 of nondeductible contributions

To facilitate a backdoor Roth in this example, I would have to
1. put the $48,000 of rollover money in a separate account at my current custodian
2. rollover that $48,000 to my current 401K
3. convert the $2,000 nondeductible IRA to Roth and pay taxes <-- Taxes were already paid (nondeductible)
4. contribute $5,500 to another nondeductible IRA for the year <-- It can be the same IRA
5. convert the $5,500 to Roth and pay taxes very little taxes if done relatively quickly

Is my logic correct?
Rolling your IRA into your current 401k can happen before or after you do your Roth conversion. The important thing is that you have $0 left in your deductible IRA at the end of the year. It might be easier to do the Roth conversion of the $7500 first, then roll the remaining IRA balance into your 401k.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: ROTH IRA Question

Post by retiredjg »

My new standard warning about using the back door to contribute to Roth IRA:

This is easy to do, but many people do not do it right and even more people can't figure out the paperwork because the paperwork is not as easy to do as the actual procedure. Every spring, we get dozens of questions about how to fix the mess that people have made. And then a few months later we get a slew of questions from people who have gotten notices from the IRS about underpaid taxes. Another mess that has to be fixed.

For those of you who use tax-preparers, that rarely helps because they have no idea what you are doing and most can't figure it out either.

If you can figure out the paperwork before hand - use a pencil and old forms you can download from the internet - for at least 2 consecutive years, go ahead and give it a try. If you can't make the paperwork come out right, just don't do it because fixing all this once you mess it up is stressful and a pain in the neck that most people just don't want to do.

I'm not saying not to use the back door. I think it is a great opportunity. But don't do it and hope you can figure out the paperwork later because it very often does not work out that way.
User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: ROTH IRA Question

Post by Earl Lemongrab »

Thrifty Femme wrote:To facilitate a backdoor Roth in this example, I would have to
1. put the $48,000 of rollover money in a separate account at my current custodian
2. rollover that $48,000 to my current 401K
3. convert the $2,000 nondeductible IRA to Roth and pay taxes
4. contribute $5,500 to another nondeductible IRA for the year
5. convert the $5,500 to Roth and pay taxes very little taxes if done relatively quickly

Is my logic correct?
The separate account is unnecessary. You would just roll all but $2000 out of the current IRA to the 401(k). Custodians have no problem with that.

Earl
Post Reply