Back Door Roth

[ACJC]

We do not qualify for a regular Roth. How do I calculate how much we will owe in taxes after we complete the conversion of 5,500.00 to a back door Roth?

Thank you

[lowlight21]

Only the gains on the $5,500 while it sat in your TIRA

[marklar13]

I'll take a crack at this -- although you are probably going to need to give more details.

It depends on your situation. If you have no other (non-roth) IRAs then you can pretty much do it without owing anything in taxes. You would contribute money this year to a traditional IRA. This contribution is with "post tax" dollars, and is not taxable. You then convert that money to a Roth IRA. The only portion of the conversion that is taxable is the earnings... which are likely $0 or close to zero if they are just sitting for a short time in cash in your traditional IRA.

If you have other IRA accounts when you perform the conversion (e.g. a rollover IRA) then you may be subject to pro-rata rule. Basically this means that you can't just target the latest contribution for conversion -- you have to look at all of the IRAs in your name as a whole. So if you have any non-Roth IRAs that have earnings, and/or pre-tax dollars (e.g. a rollover IRA), then you are going to owe tax. Note that 401k / 403b are not included, so a common strategy if you have rollover IRAs is to "hide" them by consolidating them into your current employers 401k plan (if it allows).

Here's an often cited article that does a better job at explaining it than I can:
https://thefinancebuff.com/the-backdoor ... ow-to.html

[ACJC]

Thank you . So I did put money into my 401k at work. I have a rollover account and a old Roth. I was planning on putting new money in the old Roth. Is this part of the pro-Rata rule?

[marklar13]

Yes, your rollover account -- assuming this is pre tax dollars -- is going to mean you are subject to pro rata rule. If you want to contribute to your existing Roth via backdoor conversion then your options are going to be:

1. See if your 401k plan allows you to move the rollover account in. If they do, then there is some paperwork, but the move is tax free (as long as you follow the instructions they give you). Once complete, you just have Roth and 401k so you are free to do a backdoor contribution as described in the article above.

You'll have to look into timing of this. It takes some time to move the funds into your 401k. You can still contribute to the tIRA as a 2017 contribution up until April 2018 I believe. I've never done it this way, so I'm not sure if it complicates anything.

2. Pay tax based on pro rata rule. This probably doesn't make sense for you financially, but writing it out for you to see. Basically you determine the percentage of pre-tax money between your contribution and your rollover account, and that is the percentage of your contribution that is taxable. Here is the step by step formula:
https://retirementctr.com/edslott.php?theentry=860

So if you contribute $5500 to a tIRA and then convert that $5500 to Roth... then the amount of that converaion that you pay tax on (I think at your ordinay income rate) is:

5500 * (rollover_balance/(5500 + rollover_balance))

[ACJC]

Thank you! Very helpful! I will call on Monday to see if my 401k can help me with this. If my husband does not have a roth can we open a Vanguard account and deposit “new” money to a brokerage account and then convert to a roth?

[JW-Retired]

If my husband does not have a roth can we open a Vanguard account and deposit “new” money to a brokerage account and then convert to a roth?

You might be confused about how this works or maybe you just misspoke about "not have a roth". It's a traditional IRA of any sort with tax deferred money in it that he can't have. It would make the backdoor roth process expensive.
JW