ROTH IRA Question
ROTH IRA Question
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
Question - Can we still contribute to Roth IRA?
Thanks
Re: ROTH IRA Question
Maybe. Look in the forum wiki for "backdoor Roth" and you'll find out how.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?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
- LAlearning
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Re: ROTH IRA Question
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:Maybe. Look in the forum wiki for "backdoor Roth" and you'll find out how.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?
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Re: ROTH IRA Question
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.
Re: ROTH IRA Question
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.
Re: ROTH IRA Question
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.
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Re: ROTH IRA Question
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.
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.
Re: ROTH IRA Question
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?
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.
- Thrifty Femme
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Re: ROTH IRA Question
I have a slightly different question. Let me tweak your example a bit: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.
- 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?
Re: ROTH IRA Question
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.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?
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Re: ROTH IRA Question
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.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?
Re: ROTH IRA Question
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.
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.
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- Earl Lemongrab
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Re: ROTH IRA Question
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.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?
Earl