Procedural Question - Roth

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Topic Author
Malinois000
Posts: 176
Joined: Sun Feb 26, 2017 6:08 pm

Procedural Question - Roth

Post by Malinois000 »

I have invested in Backdoor Roth for the past 5 years, one for me and the other my wife. I retired in June of 2020 (so I have six months of earnings in 2020) and recently rollover my wife's 401k into an Individual IRA. I do not have an Individual IRA only a 401k, and a Backdoor Roth.

Question:
I was planning to again contribute $7,000 in 2021 for the 2020 year for my wife's Backdoor Roth, and another $7,000 for my Backdoor Roth. Am I precluded from doing so for my wife's Backdoor Roth now that we rolled over her 401k to an IRA in 2020?

Any assistance would be appreciated.
magicrat
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Joined: Sat Nov 29, 2014 7:04 pm

Re: Procedural Question - Roth

Post by magicrat »

Malinois000 wrote: Tue Nov 10, 2020 12:28 pm I have invested in Backdoor Roth for the past 5 years, one for me and the other my wife. I retired in June of 2020 (so I have six months of earnings in 2020) and recently rollover my wife's 401k into an Individual IRA. I do not have an Individual IRA only a 401k, and a Backdoor Roth.

Question:
I was planning to again contribute $7,000 in 2021 for the 2020 year for my wife's Backdoor Roth, and another $7,000 for my Backdoor Roth. Am I precluded from doing so for my wife's Backdoor Roth now that we rolled over her 401k to an IRA in 2020?

Any assistance would be appreciated.
Your wife is not precluded from doing so, but she will be subject to the pro-rata rule.
lakpr
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Re: Procedural Question - Roth

Post by lakpr »

Malinois000 wrote: Tue Nov 10, 2020 12:28 pm I have invested in Backdoor Roth for the past 5 years, one for me and the other my wife. I retired in June of 2020 (so I have six months of earnings in 2020) and recently rollover my wife's 401k into an Individual IRA. I do not have an Individual IRA only a 401k, and a Backdoor Roth.

Question:
I was planning to again contribute $7,000 in 2021 for the 2020 year for my wife's Backdoor Roth, and another $7,000 for my Backdoor Roth. Am I precluded from doing so for my wife's Backdoor Roth now that we rolled over her 401k to an IRA in 2020?

Any assistance would be appreciated.
Your action of rolling over the 401k into an Individual IRA has made her contribution subject to the pro-rata rule already for 2020. Assuming the rollover amount is sizable, she is precluded from doing any more Roth conversion (the crucial second step of the Backdoor Roth), UNLESS your combined income is below $196k for the year 2020.

You, on the other hand, can continue with the Backdoor Roth, assuming that between you and your spouse there is at least $7k of earned income for 2020 and every year beyond (*IRS-adjustments for inflation, of course).
rkhusky
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Re: Procedural Question - Roth

Post by rkhusky »

lakpr wrote: Tue Nov 10, 2020 12:39 pm Your action of rolling over the 401k into an Individual IRA has made her contribution subject to the pro-rata rule already for 2020. Assuming the rollover amount is sizable, she is precluded from doing any more Roth conversion (the crucial second step of the Backdoor Roth), UNLESS your combined income is below $196k for the year 2020.
I didn't think a Roth conversion had an income limitation.

OP's wife would need to pay tax on most of the 2nd step of the Backdoor Roth, but that doesn't preclude doing so. It might not be prudent, but is still permissible. If the OP is in a low tax bracket, it might be prudent.

Edit: Aha. If your income is below $196K, you can do a direct Roth contribution.
lakpr
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Re: Procedural Question - Roth

Post by lakpr »

rkhusky wrote: Tue Nov 10, 2020 12:45 pm
lakpr wrote: Tue Nov 10, 2020 12:39 pm Your action of rolling over the 401k into an Individual IRA has made her contribution subject to the pro-rata rule already for 2020. Assuming the rollover amount is sizable, she is precluded from doing any more Roth conversion (the crucial second step of the Backdoor Roth), UNLESS your combined income is below $196k for the year 2020.
I didn't think a Roth conversion had an income limitation.

OP's wife would need to pay tax on most of the 2nd step of the Backdoor Roth, but that doesn't preclude doing so. It might not be prudent, but is still permissible. If the OP is in a low tax bracket, it might be prudent.

Edit: Aha. If your income is below $196K, you can do a direct Roth contribution.
Right, yes .. when I say "preclude" I meant to say that most of the conversion will come up on the Form 8606 as taxable income, which might substantially increase the tax bill. And yes, with an income below $196k MFJ, rather than a Trad. IRA + Roth conversion, the couple can do direct Roth contributions.
Topic Author
Malinois000
Posts: 176
Joined: Sun Feb 26, 2017 6:08 pm

Re: Procedural Question - Roth

Post by Malinois000 »

lakpr wrote: Tue Nov 10, 2020 12:39 pm
Malinois000 wrote: Tue Nov 10, 2020 12:28 pm I have invested in Backdoor Roth for the past 5 years, one for me and the other my wife. I retired in June of 2020 (so I have six months of earnings in 2020) and recently rollover my wife's 401k into an Individual IRA. I do not have an Individual IRA only a 401k, and a Backdoor Roth.

Question:
I was planning to again contribute $7,000 in 2021 for the 2020 year for my wife's Backdoor Roth, and another $7,000 for my Backdoor Roth. Am I precluded from doing so for my wife's Backdoor Roth now that we rolled over her 401k to an IRA in 2020?

Any assistance would be appreciated.
Your action of rolling over the 401k into an Individual IRA has made her contribution subject to the pro-rata rule already for 2020. Assuming the rollover amount is sizable, she is precluded from doing any more Roth conversion (the crucial second step of the Backdoor Roth), UNLESS your combined income is below $196k for the year 2020.

You, on the other hand, can continue with the Backdoor Roth, assuming that between you and your spouse there is at least $7k of earned income for 2020 and every year beyond (*IRS-adjustments for inflation, of course).
Our 2020 income exceeds the $196k you referenced...about three times that amount. Her rollover was $450k. 2020 will likely be the last of our earned income as I'm now retired. If I understand your response, and others, it appears 2020 will be subject to the pro rata rule. Thanks for the responses.
McDougal
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Re: Procedural Question - Roth

Post by McDougal »

Malinois000 wrote: Tue Nov 10, 2020 12:28 pm I have invested in Backdoor Roth for the past 5 years, one for me and the other my wife. I retired in June of 2020 (so I have six months of earnings in 2020) and recently rollover my wife's 401k into an Individual IRA. I do not have an Individual IRA only a 401k, and a Backdoor Roth.
Can you do a backdoor Roth conversion without an IRA?
nolesrule
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Joined: Thu Feb 26, 2015 10:59 am

Re: Procedural Question - Roth

Post by nolesrule »

Malinois000 wrote: Tue Nov 10, 2020 4:10 pm

Our 2020 income exceeds the $196k you referenced...about three times that amount. Her rollover was $450k. 2020 will likely be the last of our earned income as I'm now retired. If I understand your response, and others, it appears 2020 will be subject to the pro rata rule. Thanks for the responses.
Additionally, all future withdrawals and conversions from her IRAs would be subject to the pro-rata rule.
retiredjg
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Re: Procedural Question - Roth

Post by retiredjg »

Malinois000 wrote: Tue Nov 10, 2020 12:28 pm I was planning to again contribute $7,000 in 2021 for the 2020 year for my wife's Backdoor Roth, and another $7,000 for my Backdoor Roth. Am I precluded from doing so for my wife's Backdoor Roth now that we rolled over her 401k to an IRA in 2020?
No you are not precluded from doing this. But that does not mean you should do it.

In fact, you should not do it because it will set her IRA up for prorating for the rest of her life and that would just be an annoyance. Easy to avoid. Just don't do the backdoor for her.
McDougal
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Joined: Tue Feb 27, 2018 3:42 pm

Re: Procedural Question - Roth

Post by McDougal »

retiredjg wrote: Tue Nov 10, 2020 5:01 pm
Malinois000 wrote: Tue Nov 10, 2020 12:28 pm I was planning to again contribute $7,000 in 2021 for the 2020 year for my wife's Backdoor Roth, and another $7,000 for my Backdoor Roth. Am I precluded from doing so for my wife's Backdoor Roth now that we rolled over her 401k to an IRA in 2020?
No you are not precluded from doing this. But that does not mean you should do it.

In fact, you should not do it because it will set her IRA up for prorating for the rest of her life and that would just be an annoyance. Easy to avoid. Just don't do the backdoor for her.
I know, a lot of "ifs", but if the spouse is still working, and if the 401K has very good low cost options, and if the 401K accepts rollovers from IRAs, why not roll the spouse's IRA back into the 401K, and no more pro rata issue with Roth backdoor?
Topic Author
Malinois000
Posts: 176
Joined: Sun Feb 26, 2017 6:08 pm

Re: Procedural Question - Roth

Post by Malinois000 »

McDougal wrote: Tue Nov 10, 2020 5:23 pm
retiredjg wrote: Tue Nov 10, 2020 5:01 pm
Malinois000 wrote: Tue Nov 10, 2020 12:28 pm I was planning to again contribute $7,000 in 2021 for the 2020 year for my wife's Backdoor Roth, and another $7,000 for my Backdoor Roth. Am I precluded from doing so for my wife's Backdoor Roth now that we rolled over her 401k to an IRA in 2020?
No you are not precluded from doing this. But that does not mean you should do it.

In fact, you should not do it because it will set her IRA up for prorating for the rest of her life and that would just be an annoyance. Easy to avoid. Just don't do the backdoor for her.
I know, a lot of "ifs", but if the spouse is still working, and if the 401K has very good low cost options, and if the 401K accepts rollovers from IRAs, why not roll the spouse's IRA back into the 401K, and no more pro rata issue with Roth backdoor?
She is no longer employed...we are both now retirees and have no plans of withdrawals until RMDs (I am 60 and she is 58). We may leave the back door Roths to our kids.
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