My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

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jomama341
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My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

As the title states, my mom is going to retire later this year. She currently has a 403b as well as a traditional IRA and SEP IRA with significant balances.

While her income is likely to go down significantly in retirement, she may do some part time work in retirement and she owns shares in a family business that generates six figures of income on her tax return every year. Currently, she hovers right below the AGI limit for married-filing-jointly, but it's possible that the family business will push her over the limit in the future.

My question: would it make sense for her to roll her IRA's over to her 403b to give herself the possibility to do Roth conversions from traditional IRA to Roth in the future? She spoke with her plan administrator (Prudential) today and they confirmed that such rollovers were allowed by the plan.
Silk McCue
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by Silk McCue »

I would only do it if the 403b has low fees and access to the funds that she wants to hold all of her tax deferred in. Otherwise being able to contribute to Roth would not be a hard requirement.

Cheers
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jomama341
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

Silk McCue wrote: Mon Jan 23, 2023 1:15 pm I would only do it if the 403b has low fees and access to the funds that she wants to hold all of her tax deferred in. Otherwise being able to contribute to Roth would not be a hard requirement.

Cheers
Thanks. The plan's options are pretty solid. Among other funds, it has Vanguard Total Bond Market, Vanguard Institutional Index, Vanguard Extended Market and Vanguard FTSE All World ex US.
Silk McCue
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by Silk McCue »

I have no clue about this but is there any chance that the family business could setup some sort of retirement contribution plans where a Mega Backdoor Roth could be supported?

Cheers
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jomama341
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

Silk McCue wrote: Mon Jan 23, 2023 1:28 pm I have no clue about this but is there any chance that the family business could setup some sort of retirement contribution plans where a Mega Backdoor Roth could be supported?

Cheers
I doubt it since the income is not earned income. It's an S-Corp and the income is essentially a dividend that gets taxed at normal income tax rates.
an_asker
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by an_asker »

jomama341 wrote: Mon Jan 23, 2023 1:41 pm
Silk McCue wrote: Mon Jan 23, 2023 1:28 pm I have no clue about this but is there any chance that the family business could setup some sort of retirement contribution plans where a Mega Backdoor Roth could be supported?

Cheers
I doubt it since the income is not earned income. It's an S-Corp and the income is essentially a dividend that gets taxed at normal income tax rates.
I am confused how she could do a backdoor Roth if she does not have earned income. Maybe I am really not getting the concept of MAGI in the case of where most of the income is from investments.
tashnewbie
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by tashnewbie »

jomama341 wrote: Mon Jan 23, 2023 1:09 pm My question: would it make sense for her to roll her IRA's over to her 403b to give herself the possibility to do Roth conversions from traditional IRA to Roth in the future? She spoke with her plan administrator (Prudential) today and they confirmed that such rollovers were allowed by the plan.
Is she going to be doing Roth conversions of her current pretax TIRA balances (SEP and Rollover) or does she want the ability to do the backdoor Roth without the pro rata rule?

The backdoor includes a Roth conversion as the second step, but it is not the same as just a Roth conversion.

Sounds like she should have been above the direct Roth IRA contribution limit while she's working full-time and less likely to be above that limit when she reduces to part-time. I think the benefit of the backdoor will be nominal for her (roughly about $1k/year, depending on tax rates) because it doesn't sound like she'll be doing it for an extended period.
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jomama341
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

an_asker wrote: Mon Jan 23, 2023 1:54 pm
jomama341 wrote: Mon Jan 23, 2023 1:41 pm
Silk McCue wrote: Mon Jan 23, 2023 1:28 pm I have no clue about this but is there any chance that the family business could setup some sort of retirement contribution plans where a Mega Backdoor Roth could be supported?

Cheers
I doubt it since the income is not earned income. It's an S-Corp and the income is essentially a dividend that gets taxed at normal income tax rates.
I am confused how she could do a backdoor Roth if she does not have earned income. Maybe I am really not getting the concept of MAGI in the case of where most of the income is from investments.
She will likely do some part time work in retirement, which would allow her to contribute to the Roth.

However, her AGI will be high because of the income that shows up on her return from the family business, which is an S-Corp whereby shareholders pay taxes on behalf of the business pro rata to their % ownership.
Last edited by jomama341 on Mon Jan 23, 2023 2:19 pm, edited 1 time in total.
Topic Author
jomama341
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

tashnewbie wrote: Mon Jan 23, 2023 2:00 pm
jomama341 wrote: Mon Jan 23, 2023 1:09 pm My question: would it make sense for her to roll her IRA's over to her 403b to give herself the possibility to do Roth conversions from traditional IRA to Roth in the future? She spoke with her plan administrator (Prudential) today and they confirmed that such rollovers were allowed by the plan.
Is she going to be doing Roth conversions of her current pretax TIRA balances (SEP and Rollover) or does she want the ability to do the backdoor Roth without the pro rata rule?

The backdoor includes a Roth conversion as the second step, but it is not the same as just a Roth conversion.

Sounds like she should have been above the direct Roth IRA contribution limit while she's working full-time and less likely to be above that limit when she reduces to part-time. I think the benefit of the backdoor will be nominal for her (roughly about $1k/year, depending on tax rates) because it doesn't sound like she'll be doing it for an extended period.
The idea behind rolling the TIRA balances into her 403b is to avoid the pro rata rule should she need to/want to do backdoor Roth contributions in retirement. This will depend on her AGI, but she won't have another opportunity to rollover her TIRA balances into the 403b plan once she retires, hence my question at this juncture.
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by livesoft »

With the 403(b) fund line-up I do not see why she would not roll her IRAs into the 403(b) if it is allowed. That's a way to simplify her accounts, too.
Once retired, she can always rollover the 403(b) into an IRA if she wants to. If she is going to have to withdraw from the 403(b) to pay expenses, then make sure that will be no hassle as well.
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Topic Author
jomama341
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

livesoft wrote: Mon Jan 23, 2023 2:26 pm With the 403(b) fund line-up I do not see why she would not roll her IRAs into the 403(b) if it is allowed. That's a way to simplify her accounts, too.
Once retired, she can always rollover the 403(b) into an IRA if she wants to. If she is going to have to withdraw from the 403(b) to pay expenses, then make sure that will be no hassle as well.
This is pretty similar to what I told her. At the very least, I think there’s something to be said for consolidation.
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by tashnewbie »

jomama341 wrote: Mon Jan 23, 2023 2:46 pm
livesoft wrote: Mon Jan 23, 2023 2:26 pm With the 403(b) fund line-up I do not see why she would not roll her IRAs into the 403(b) if it is allowed. That's a way to simplify her accounts, too.
Once retired, she can always rollover the 403(b) into an IRA if she wants to. If she is going to have to withdraw from the 403(b) to pay expenses, then make sure that will be no hassle as well.
This is pretty similar to what I told her. At the very least, I think there’s something to be said for consolidation.
I agree that there doesn't appear to be a downside to consolidation. She probably could've (should've?) done this years ago so that she could've been doing backdoor all along (or for as long as her MAGI was too high to make direct Roth IRA contributions).
Topic Author
jomama341
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

tashnewbie wrote: Mon Jan 23, 2023 2:49 pm
jomama341 wrote: Mon Jan 23, 2023 2:46 pm
livesoft wrote: Mon Jan 23, 2023 2:26 pm With the 403(b) fund line-up I do not see why she would not roll her IRAs into the 403(b) if it is allowed. That's a way to simplify her accounts, too.
Once retired, she can always rollover the 403(b) into an IRA if she wants to. If she is going to have to withdraw from the 403(b) to pay expenses, then make sure that will be no hassle as well.
This is pretty similar to what I told her. At the very least, I think there’s something to be said for consolidation.
I agree that there doesn't appear to be a downside to consolidation. She probably could've (should've?) done this years ago so that she could've been doing backdoor all along (or for as long as her MAGI was too high to make direct Roth IRA contributions).
Agreed. The reason I didn’t suggest it earlier is because I only recently learned that it was possible to roll TIRA’s into qualifying plans. Oh well… better late than never? The way I see it, if her finances allow, at least she can now squirrel away another $35k tax advantaged if she does this for the next 5 years. She’s currently 66.
tashnewbie
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by tashnewbie »

jomama341 wrote: Mon Jan 23, 2023 2:58 pm
tashnewbie wrote: Mon Jan 23, 2023 2:49 pm
jomama341 wrote: Mon Jan 23, 2023 2:46 pm
livesoft wrote: Mon Jan 23, 2023 2:26 pm With the 403(b) fund line-up I do not see why she would not roll her IRAs into the 403(b) if it is allowed. That's a way to simplify her accounts, too.
Once retired, she can always rollover the 403(b) into an IRA if she wants to. If she is going to have to withdraw from the 403(b) to pay expenses, then make sure that will be no hassle as well.
This is pretty similar to what I told her. At the very least, I think there’s something to be said for consolidation.
I agree that there doesn't appear to be a downside to consolidation. She probably could've (should've?) done this years ago so that she could've been doing backdoor all along (or for as long as her MAGI was too high to make direct Roth IRA contributions).
Agreed. The reason I didn’t suggest it earlier is because I only recently learned that it was possible to roll TIRA’s into qualifying plans. Oh well… better late than never? The way I see it, if her finances allow, at least she can now squirrel away another $35k tax advantaged if she does this for the next 5 years. She’s currently 66.
I agree. I don't think it's useful to play the shoulda/coulda/woulda game, and I probably *shouldn't have brought it up! Moving the TIRAs into her 403b will allow her to get more money easily into Roth accounts over the next few years, which is a plus.
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celia
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by celia »

Has she already been making non-deductible contributions to an IRA? And has she been reporting it each year on Form 8606?

If so, that money is NOT eligible to be rolled over to a 403(b).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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jomama341
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

celia wrote: Mon Jan 23, 2023 4:38 pm Has she already been making non-deductible contributions to an IRA? And has she been reporting it each year on Form 8606?

If so, that money is NOT eligible to be rolled over to a 403(b).
I think you may have misunderstood. The funds in the TIRA’s were all deductible. My question here was whether she should roll them into her 403b so as to clear her TIRA balance to allow her to make non-deductible contributions moving forward to then roll into her Roth.
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by celia »

jomama341 wrote: Mon Jan 23, 2023 4:40 pm I think you may have misunderstood. The funds in the TIRA’s were all deductible. My question here was whether she should roll them into her 403b so as to clear her TIRA balance to allow her to make non-deductible contributions moving forward to then roll into her Roth.
I was just looking for clarification since it seems odd that someone wouldn’t do the Backdoor Roth while working, but does it after she “retires”.

She can also leave some of the tax-deferred in the IRA and get a head start on converting it besides her non-deductible contributions. She can let the pro rata rule tell her how much of her conversions will be taxable. (Each dollar will be taxed only once, as a non-deductable contribution for the year the contribution is made -OR- in the year it is converted, for deductible contribution (and growth).) But I wouldn’t stretch these conversions out more than 3 years.

Since the pro rata rule will apply each year until all her tax-deferred IRAs are empty, she should have at least one year for them to be empty at year-end before rolling anything back to any IRA.
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jomama341
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by jomama341 »

celia wrote: Mon Jan 23, 2023 10:57 pm
jomama341 wrote: Mon Jan 23, 2023 4:40 pm I think you may have misunderstood. The funds in the TIRA’s were all deductible. My question here was whether she should roll them into her 403b so as to clear her TIRA balance to allow her to make non-deductible contributions moving forward to then roll into her Roth.
She can also leave some of the tax-deferred in the IRA and get a head start on converting it besides her non-deductible contributions. She can let the pro rata rule tell her how much of her conversions will be taxable. (Each dollar will be taxed only once, as a non-deductable contribution for the year the contribution is made -OR- in the year it is converted, for deductible contribution (and growth).) But I wouldn’t stretch these conversions out more than 3 years.
Seeing as she has the 403b where she can roll over all of her entire TIRA balances in one fell swoop (all of her contributions thus far have been deductible), would there be any advantage to her converting any of this to Roth? Seems like an unnecessary tax hit in her case.
celia wrote: Mon Jan 23, 2023 10:57 pm Since the pro rata rule will apply each year until all her tax-deferred IRAs are empty, she should have at least one year for them to be empty at year-end before rolling anything back to any IRA.
This is a good point that I hadn't considered. Sounds like the soonest she could do a Roth conversion would be 2024.
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Re: My mother is about to retire. Should she roll her trad IRA into her 403b to allow herself backdoor Roth?

Post by celia »

jomama341 wrote: Tue Jan 24, 2023 3:59 am
celia wrote: Mon Jan 23, 2023 10:57 pm She can also leave some of the tax-deferred in the IRA and get a head start on converting it besides her non-deductible contributions. She can let the pro rata rule tell her how much of her conversions will be taxable. (Each dollar will be taxed only once, as a non-deductable contribution for the year the contribution is made -OR- in the year it is converted, for deductible contribution (and growth).) But I wouldn’t stretch these conversions out more than 3 years.
Seeing as she has the 403b where she can roll over all of her entire TIRA balances in one fell swoop (all of her contributions thus far have been deductible), would there be any advantage to her converting any of this to Roth? Seems like an unnecessary tax hit in her case.
The taxes aren’t “unneccessary”. They are just tax-DEFERRED and are required to be paid eventually (when RMDs start and the balance and tax brackets may be higher) or when she dies and the heirs have to pay them (on top of their own tax rates).

However, there is also an option for making direct Qualified Charitable Distributions (QCDs) to charities after she turns 70.5. [The QCDs are paid out of the tax-deferred IRA directly to the charity and therefore are not taxed to either the charity or taxpayer.]

celia wrote: Mon Jan 23, 2023 10:57 pm Since the pro rata rule will apply each year until all her tax-deferred IRAs are empty, she should have at least one year for them to be empty at year-end before rolling anything back to any IRA.
This is a good point that I hadn't considered. Sounds like the soonest she could do a Roth conversion would be 2024.
No, she can convert this year after she moves [most of] the tax-deferred to the 403(b).

Here’s an example:
Assume she is over 50 and can thus make a $7,500 non-deductible contribution each year she works and she thinks she can earn at least that much for this year and next. Also assume she is willing to convert $20K each year so she never has to pay taxes on that money again (while it is in the Roth).

Let’s have her do two years of Roth conversions of $20k each year. So she would move all her tax-deferred money to a 403(b) while still at her current job except for $40,000. Then she retires and soon after contributes $7,500 to the IRA as a non-deductible contribution (because she already earned more than that this year). Soon after, she converts the $7,500 and another $20,000. Most people think of this as the $7,500 will be converted tax-free while the $20,000 is taxed. But the pro rata rule sees it a little differently, as discussed in the Backdoor Roth wiki page (which has several examples).

Using the description there, the calculation of the percentage of the conversion that is Tax-Free is:
TF = 100 * ((carryover basis + current basis) / (year-end IRA balance + withdrawn, not converted + withdrawn and converted))

So we have For 2023:
TF = 100 * (0+7,500 / 20,000+0+27,500)
TF = 100 * (7,500/47,500)
TF = 15.79% of the 27,500 converted amount is tax-free ($4,342) and $23,158 to be taxed.

Note that $3,158 of basis remains behind in the IRA and is carried over to the next year.


Next year, she makes another $7,500 non-deductible contribution and converts everything in the IRA.

For 2024:
TF = 100 * (3,158+7,500 / 0+0+27,500)
TF = 100 * (10,658 / 27,500)
TF = 38.75% of the 27,500 converted amount is tax free ($10,658) and $16,842 will be taxed.

Note that total taxes over the two years will be applied to the $23,158 + $16,842 = $40,000 and there is now $55,000 in the Roth.

Also note that these calculations are based on NO GROWTH in the IRA. If there is also growth, that will be taxed similarly.

Now the IRA is empty on Dec. 31, 2024 and the pro rata rule no longer applies until there is a new mix of non-deductible contributions and deductible (or growth) in the IRA again.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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