Backdoor Roth

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Topic Author
elementarydesigns
Posts: 4
Joined: Sun Mar 12, 2017 11:27 am

Backdoor Roth

Post by elementarydesigns »

Between me and my wife, I have a situation where I have a few Traditional IRAs but would love to take advantage of the back door Roth.

He:
Traditional IRA(pre-tax $): 2002-2003 Currently worth 15K

She:
Traditional IRA(pre-tax $): 2002-2003 Currently worth 17K
Traditional IRA(post-tax $): 2009-2010 Currently worth 14K

What would be the best strategy to take advantage of the back door Roth if I would like to start ?
My 401K doesnt allow a roll-in while hers does. I have a time horizon of another 10 years of contributions (meaning, should I even bother and keep at the Traditional post-tax $ contributions ? How can I model this for a reliable answer?)

Thanks in advance
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Backdoor Roth

Post by PFInterest »

roll her tIRA over to the 401k. thats easy. you can convert the nondeductible one as the basis wont count, only the earnings.
you need an i401k or just take the tax hit to convert your tIRA.
Topic Author
elementarydesigns
Posts: 4
Joined: Sun Mar 12, 2017 11:27 am

Re: Backdoor Roth

Post by elementarydesigns »

PFInterest wrote:roll her tIRA over to the 401k. thats easy. you can convert the nondeductible one as the basis wont count, only the earnings.
.
Thanks, PFInterest. Re hers, can the conversion and rollin be done in the same year or is there a waiting period between the 2 events? These 2 accounts are at 2 different brokerages.
Alan S.
Posts: 10521
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Backdoor Roth

Post by Alan S. »

You need to know the actual IRA basis and have filed Form 8606 to report any past non deductible contributions.

Her IRA basis, whatever that amount is cannot be rolled into her 401k. Therefore, in order to make her Roth conversion non taxable she should directly transfer her entire TIRA pre tax amount into her 401k. Her second IRA likely contains almost as much in earnings as the non deductible contributions she made.

There are various ways to handle her transactions.
1) If she is sure her plan will accept IRA rollovers including from non rollover IRA accounts, she could convert her non deductible contribution amount to her Roth IRA first, then roll the balance of both IRAs into the 401k.
2) If she is not totally sure her plan will accept the IRA rollover, then she should first do a direct transfer that consolidates her pre tax amount into one of her IRAs, then roll that one IRA into the 401k plan. There is less chance of error if only one IRA account is rolled into the plan instead of one entire IRA and part of a second IRA.

There is no sense in doing an IRA rollover into the 401k if she leaves enough pre tax assets behind in the other IRA which will cause her back door conversion to be mostly taxable. Her entire pre tax balance of both IRAs should go to her 401k.
lazylarry
Posts: 504
Joined: Sat Apr 04, 2015 10:35 pm
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Re: Backdoor Roth

Post by lazylarry »

Alan S. wrote:You need to know the actual IRA basis and have filed Form 8606 to report any past non deductible contributions.

Her IRA basis, whatever that amount is cannot be rolled into her 401k. Therefore, in order to make her Roth conversion non taxable she should directly transfer her entire TIRA pre tax amount into her 401k. Her second IRA likely contains almost as much in earnings as the non deductible contributions she made.

There are various ways to handle her transactions.
1) If she is sure her plan will accept IRA rollovers including from non rollover IRA accounts, she could convert her non deductible contribution amount to her Roth IRA first, then roll the balance of both IRAs into the 401k.
2) If she is not totally sure her plan will accept the IRA rollover, then she should first do a direct transfer that consolidates her pre tax amount into one of her IRAs, then roll that one IRA into the 401k plan. There is less chance of error if only one IRA account is rolled into the plan instead of one entire IRA and part of a second IRA.

There is no sense in doing an IRA rollover into the 401k if she leaves enough pre tax assets behind in the other IRA which will cause her back door conversion to be mostly taxable. Her entire pre tax balance of both IRAs should go to her 401k.
Alan, I'm a bit confused. Why does she need to convert non-deductible portion to Roth IRA first? Given that husband and wife's IRAs have pro rata rule applied separately, what if:
-1) Wife rolls over 17k from pre-tax IRA into her 401k
-2) Wife contribute to post-tax IRA as desired, and converts any amount to Roth IRA desired, while paying taxes on gains?
-Husband won't convert tIRA due to pro-rata rule.
-And OP, it can all be done in same tax year, it just matters where the money is at the end of the year.
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