Income likely to exceed Roth IRA threshold limit. Can I go for Backdoor Roth IRA strategy right away.

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Topic Author
investmax
Posts: 53
Joined: Thu Mar 11, 2021 8:00 pm

Income likely to exceed Roth IRA threshold limit. Can I go for Backdoor Roth IRA strategy right away.

Post by investmax »

Hello BogleHeads,

Please critique my approach

I am married filing jointly. So far I am trying to maximize my 401K ($19.5K) and I have invested $6K in my wife’s Traditional IRA for 2021. I also have a Roth IRA which I have not contributed to this year. Due to some of my RSUs vesting later in June this year, it is highly likely (depending on the share price then) that I will either be in the phase out band of my Roth IRA (between $198K and $208K) or may be exceeding $208K which means I exceed the income limit for my Roth IRA.

I have my Roth IRA account which I have started in the year 2020 and my wife’s traditional IRA which we have been maximizing for the last few years.

1. For my wife’s traditional IRA account we have already invested 6K for 2021. Even in her case we will either be in the phase out band or would exceed the limit for traditional IRA deduction. In her case I intend to leave the money in the IRA account and not deduct it in our taxes. She will have to fill the 8606 form with our 2021 return. I am not considering a Roth conversion here because of the complications of pro-rata in her account.

2. I have not invested in my Roth IRA this year as I became aware of the possibility of the income limit. Instead of waiting till the end of the year I was looking at the option of Backdoor Roth IRA. My Roth IRA account is with Vanguard. I can open a new Traditional IRA for myself with them and make a $6K non deductible contribution. Then I can ask them to convert this to my Roth IRA. Note that this will be a new traditional account IRA for me so there is no pro-rata issue. This way I can fully contribute to my Roth IRA without worrying where I will fall in the income limits for this year.

3. My Employer 401K (the 401K provider is Vanguard again) provides an after tax non-deductible option as well which I can contribute to. I have never availed this facility so far. What I am thinking is after I do the Backdoor Roth IRA contribution of $6K in the previous step, I contribute additional after tax non-deductible to the 401K and then immediately do a mega backdoor to my Roth IRA. This way I can add some extra amount to my Roth IRA this year making use of the RSU’s vesting.

With regards to point 1, is there any other alternatives you can suggest. We do not plan to do create a Roth IRA for my wife and do a Roth conversion as this will really bump up our tax for this year.

With regards to point 2 and 3, is there any issues with the feasibility of the plan. Is there something I am missing which would cause us a big hassle at tax time next year.
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Income likely to exceed Roth IRA threshold limit. Can I go for Backdoor Roth IRA strategy right away.

Post by FiveK »

1. Might be best to avoid the Non-deductible traditional IRA and just do taxable investing for her. See that wiki in case she is one of the few for whom the n-d tIRA is actually best.

2. Good plan. No practical downside to doing the backdoor Roth, even if your income would have allowed a direct Roth contribution. The major hassle people run into is not understanding how to fill form 8606 correctly. If you can do a draft 8606 before starting the process, you will likely have no problems.

3. Another fine idea. See Investment Order and Prioritizing investments for discussion along these lines.
Topic Author
investmax
Posts: 53
Joined: Thu Mar 11, 2021 8:00 pm

Re: Income likely to exceed Roth IRA threshold limit. Can I go for Backdoor Roth IRA strategy right away.

Post by investmax »

FiveK wrote: Mon May 03, 2021 12:07 am 1. Might be best to avoid the Non-deductible traditional IRA and just do taxable investing for her. See that wiki in case she is one of the few for whom the n-d tIRA is actually best. --> Yes that would be the strategy going forward. This year since a portion of the $6K investment to this account will be non-deductible, I will not try to remove it. Instead she will file the 8606 to mark the non-deductible and deductible portions

2. Good plan. No practical downside to doing the backdoor Roth, even if your income would have allowed a direct Roth contribution. The major hassle people run into is not understanding how to fill form 8606 correctly. If you can do a draft 8606 before starting the process, you will likely have no problems. --> Thanks that is good advise

3. Another fine idea. See Investment Order and Prioritizing investments for discussion along these lines. -->
One question I have regarding the 3rd point is, is there a suggested order of doing this investments, in other words, do "Backdoor Roth" first, and then do the Mega Backdoor Roth.
Also with the after tax non-deductible account of Vanguard, even if I retain the funds in lowest yielding money market account I may still accrue some non-taxed gains. I was reading some strategies of moving the taxed portion to the roth IRA and the non-taxed portion to be moved to traditional IRA. But this will put non-taxed dollars to my traditional IRA and complicate my Backdoor Roth process for 2022.

Can I leave my non taxed gains of the after tax non-deductible portion in the after tax account itself and not move it. Or can I move entire portion taxed + non taxed to my Roth IRA and pay tax on the non-taxed potion along with my tax returns
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FiveK
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Re: Income likely to exceed Roth IRA threshold limit. Can I go for Backdoor Roth IRA strategy right away.

Post by FiveK »

investmax wrote: Mon May 03, 2021 10:15 am One question I have regarding the 3rd point is, is there a suggested order of doing this investments, in other words, do "Backdoor Roth" first, and then do the Mega Backdoor Roth.
That is probably correct, although it won't matter much if you reverse those.
Also with the after tax non-deductible account of Vanguard, even if I retain the funds in lowest yielding money market account I may still accrue some non-taxed gains. I was reading some strategies of moving the taxed portion to the roth IRA and the non-taxed portion to be moved to traditional IRA. But this will put non-taxed dollars to my traditional IRA and complicate my Backdoor Roth process for 2022.
Likely just a few dollars, maybe even <$0.50 that would round to $0. If the 401k plan allows, you could roll the tIRA money back into the pre-tax 401k.
Or can I move entire portion taxed + non taxed to my Roth IRA and pay tax on the non-taxed potion along with my tax returns
This.
Paying the tax on the minimal dollar amount is probably the best way to deal with it.
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