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.