Backdoor IRA with current IRA

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Topic Author
littlej2455
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Joined: Tue Sep 10, 2019 6:30 pm

Backdoor IRA with current IRA

Post by littlej2455 » Tue Sep 10, 2019 6:47 pm

Hey! I currently have a traditional IRA that was rolled over from a previous employer's 403b plan. I did not know much about investing at the time, and wish I would have left it be. In two years I will be passing the limit to contribute to my Roth IRA, and wanted to take advantage of the backdoor IRA. What is your thoughts on converting my traditional IRA to a Roth IRA so in the future I can utilize the Backdoor IRA? I currently have roughly $10,000 in the traditional IRA and making probably the lowest income I will make this year.

Thank you!

ThankYouJack
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Joined: Wed Oct 08, 2014 7:27 pm

Re: Backdoor IRA with current IRA

Post by ThankYouJack » Tue Sep 10, 2019 6:53 pm

Can you roll the IRA into an employer sponsored retirement plan?

If not, what's your current tax bracket and what do you think it'll be at the time of retirement?

Topic Author
littlej2455
Posts: 7
Joined: Tue Sep 10, 2019 6:30 pm

Re: Backdoor IRA with current IRA

Post by littlej2455 » Tue Sep 10, 2019 6:55 pm

Currently in 22% bracket. Should jump up in 2 years, and at retirement I would estimate close to the 35% range.

Currently we do have the option of a 403b, however the ER is close to .4%. What is too high?

Thank you!

ThankYouJack
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Joined: Wed Oct 08, 2014 7:27 pm

Re: Backdoor IRA with current IRA

Post by ThankYouJack » Tue Sep 10, 2019 7:03 pm

littlej2455 wrote:
Tue Sep 10, 2019 6:55 pm
Currently in 22% bracket. Should jump up in 2 years, and at retirement I would estimate close to the 35% range.

Currently we do have the option of a 403b, however the ER is close to .4%. What is too high?

Thank you!
Considering your tax brackets I would convert it over to a Roth.

Also, I don't think a .4% ER is too high to contribute. You may want to consider Roth contributions (if that's possible for your 403b) for the next 2 years or until your tax bracket jumps to ~35%
Last edited by ThankYouJack on Tue Sep 10, 2019 8:27 pm, edited 1 time in total.

Topic Author
littlej2455
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Joined: Tue Sep 10, 2019 6:30 pm

Re: Backdoor IRA with current IRA

Post by littlej2455 » Tue Sep 10, 2019 7:05 pm

Thank you so much for your opinion! That is what I think I am leading towards right now.

lakpr
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Re: Backdoor IRA with current IRA

Post by lakpr » Tue Sep 10, 2019 8:16 pm

Where there is a 403b, there is a pension in the mix. It is likely that such pension + SS if any, would be enough to fill in the lower tax bracket (either 12% or 15%, as the case may be when you retire). Any traditional contributions you now make are going to escape a 22% tax rate now, but likely to attract a 22% or a 25% tax rate at retirement.

Hence, while you are in the 22% tax bracket, you should be preferring to make Roth contributions to 403b. If the conversion of this $10k also does not push you beyond 22% bracket, and perhaps even if it does on a small fraction of the amount, it is worth it to do a Roth conversion.

By saying you may need to resort to Backdoor Roth in about 2 years, you are also implicitly saying you will be in a 24% or higher tax bracket soon. This is a classic case for preferring Roth over traditional (lower tax rates now vs higher tax rates later)

TL;DR: yes you should convert to Roth. You should also make Roth 403b contributions.

Topic Author
littlej2455
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Joined: Tue Sep 10, 2019 6:30 pm

Re: Backdoor IRA with current IRA

Post by littlej2455 » Wed Sep 11, 2019 7:23 am

That is a great perspective as well, that I have not really thought of before.

I did forget to mention, that I am also an independent contractor for a moonlighting gig. So I could set up a individual 401K for the moonlighting job. Would that change your way of thinking on converting the IRA into my Roth IRA or into an individual 401K?

Thank you again!

ThankYouJack
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Joined: Wed Oct 08, 2014 7:27 pm

Re: Backdoor IRA with current IRA

Post by ThankYouJack » Wed Sep 11, 2019 7:53 am

I would probably still convert the IRA into a Roth IRA while in the lower tax bracket and try to take advantage of all the tax-advantage accounts you have available.

How much income will be from moonlighting? Does your employer offer a 457?

I'm wondering if it would be best to max out your i401k and backdoor Roth IRA, or to max out your 403b and contribute to a SEP IRA.
Or you may be able to do all three i401k, 403b, and backdoor Roth, but the limits for the combined i401k and 403b are a bit confusing. I believe you could contribute $19k to your 403b and 20% of moonlighting profits (up to $56k) to your i401k and $6k to your backdoor Roth but am not certain. I'm sure others on here can provide more info.

Topic Author
littlej2455
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Joined: Tue Sep 10, 2019 6:30 pm

Re: Backdoor IRA with current IRA

Post by littlej2455 » Wed Sep 11, 2019 8:13 am

The income from the moonlighting is very little, just a hobby. I would say I make about $8,000 annually from this.

Maybe a dumb question, but would a SEP IRA interfere with the backdoor plan?

I have not received a 457 from them. The only tax paperwork I receive is a 1099-E.
ThankYouJack wrote:
Wed Sep 11, 2019 7:53 am
I would probably still convert the IRA into a Roth IRA while in the lower tax bracket and try to take advantage of all the tax-advantage accounts you have available.

How much income will be from moonlighting? Does your employer offer a 457?

I'm wondering if it would be best to max out your i401k and backdoor Roth IRA, or to max out your 403b and contribute to a SEP IRA.
Or you may be able to do all three i401k, 403b, and backdoor Roth, but the limits for the combined i401k and 403b are a bit confusing. I believe you could contribute $19k to your 403b and 20% of moonlighting profits (up to $56k) to your i401k and $6k to your backdoor Roth but am not certain. I'm sure others on here can provide more info.

ThankYouJack
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Joined: Wed Oct 08, 2014 7:27 pm

Re: Backdoor IRA with current IRA

Post by ThankYouJack » Wed Sep 11, 2019 8:28 am

littlej2455 wrote:
Wed Sep 11, 2019 8:13 am

Maybe a dumb question, but would a SEP IRA interfere with the backdoor plan?
Yes, you would run into the pro-rata rule so you wouldn't want to contribute to a SEP IRA and do a backdoor Roth.

So I think $19k to your 403b, $6k to a back door Roth, and 20% of profits to your i401k would be maxing everything out. And while in the lower tax bracket, I would probably go Roth for any possible account (https://www.bogleheads.org/wiki/Traditional_versus_Roth). Some tax gurus on here may have better advice though :)

Topic Author
littlej2455
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Joined: Tue Sep 10, 2019 6:30 pm

Re: Backdoor IRA with current IRA

Post by littlej2455 » Wed Sep 11, 2019 12:32 pm

ThankYouJack wrote:
Wed Sep 11, 2019 7:53 am
I would probably still convert the IRA into a Roth IRA while in the lower tax bracket and try to take advantage of all the tax-advantage accounts you have available.
I think you are right, on just converting the traditional to a roth. This would at least allow me to contribute to a backdoor roth in the future. Just hate to have to take the tax hit.

Spirit Rider
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Re: Backdoor IRA with current IRA

Post by Spirit Rider » Wed Sep 11, 2019 12:45 pm

ThankYouJack wrote:
Wed Sep 11, 2019 7:53 am
Or you may be able to do all three i401k, 403b, and backdoor Roth, but the limits for the combined i401k and 403b are a bit confusing. I believe you could contribute $19k to your 403b and 20% of moonlighting profits (up to $56k) to your i401k and $6k to your backdoor Roth but am not certain. I'm sure others on here can provide more info.
403b plans are considered controlled by the participants. They must be aggregated with all businesses in which you have more than 50% control to determine the total annual additions. Maximum one-participant (employee + employer contributions) are = the annual addition limit (2019 = $56K) - (403b employee + employer contributions).

lerler
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Joined: Thu Apr 25, 2019 12:29 pm

Re: Backdoor IRA with current IRA

Post by lerler » Fri Sep 13, 2019 9:19 am

Question on the backdoor Roth IRA and Roth IRA
Whats the purpose of the Roth IRA phase out when someone could just do a backdoor roth? How does that make sense?

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Backdoor IRA with current IRA

Post by Spirit Rider » Fri Sep 13, 2019 9:49 am

When it comes to the tax code, to paraphrase Tennyson: “yours is not to reason why, yours is but to do and pay."

Also, the Backdoor Roth really only became possible in 2010. Prior to then a phase-out allowed individuals in the phase-out the ability to make partial direct Roth contributions.

Unlike the IRMAA or ACA cliffs. Ask people who have missed the ACA cliff by a few dollars if they would have preferred a phase-out.

Topic Author
littlej2455
Posts: 7
Joined: Tue Sep 10, 2019 6:30 pm

Re: Backdoor IRA with current IRA

Post by littlej2455 » Wed Sep 18, 2019 5:58 pm

I didn’t realize that it’s only been possible to use the backdoor since 2010. That’s very interesting. Thank you so much for your help!

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Backdoor IRA with current IRA

Post by Spirit Rider » Thu Sep 19, 2019 4:46 am

I should clarify.

The Backdoor Roth is a fancy name for a non-deductible traditional IRA contribution followed by a Roth conversion with little to no tax liability, because there is little to no pre-tax balances in all your traditional, SEP and SIMPLE IRA accounts.

Prior to 2010, you could only do a Roth conversion if your Roth MAGI was < $100K. That was unnecessary in 2010 if your Roth MAGI was < the Roth direct contribution income limit, which was > $100K.

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