Back Door Access to a Roth IRA

[jeevsie 3733]

[936horn 910]

So what do I do if I have a trad IRA I rolled over from a previous job 401k? Reading upthread it seems like I can't open a new IRA and backdoor since it'll be counted along with my trad IRA I already have. Am I just fucked out of backdooring unless I want to take the tax hit on the 6figures already in the rolled over IRA?

[Not a cat 5652]

1 hour ago, 936horn said:

So what do I do if I have a trad IRA I rolled over from a previous job 401k? Reading upthread it seems like I can't open a new IRA and backdoor since it'll be counted along with my trad IRA I already have. Am I just fucked out of backdooring unless I want to take the tax hit on the 6figures already in the rolled over IRA?

See if you can roll trad ira over to your existing 401k. 401ks do not count for pro rata rule. As long as you do that before end of year you'll be fine as total ira amounts for pro rata rule are calculated as of year end

[Reagan1k 3024]

6 hours ago, Not a cat said:

See if you can roll trad ira over to your existing 401k. 401ks do not count for pro rata rule. As long as you do that before end of year you'll be fine as total ira amounts for pro rata rule are calculated as of year end

Correct-  if your current 401(k) has decent fees and investment options, and will allow a roll-in that’s the play.

 

[Izhmash 562]

Any leverage to be considered here for the SEP-IRA's?

[UTexasFight 9427]

It was a good run…

just annoyed 2021 was the first (and looks like only) year my employer offered this

https://www.wsj.com/articles/retirement-savers-love-the-backdoor-roth-ira-strategy-it-might-not-last-11632475801?st=hp4t4dow6sng3hj&reflink=article_copyURL_share

Edited September 25, 2021 by UTexasFight

[Wiler77 1566]

That article seemed a bit all over the place, but I didn't see anything about the more traditional backdoor Roth IRA as opposed to the "mega" verson.

I use the $6k backdoor Roth IRA every year.  Hope that doesn't go away.

[UTexasFight 9427]

12 hours ago, Wiler77 said:

That article seemed a bit all over the place, but I didn't see anything about the more traditional backdoor Roth IRA as opposed to the "mega" verson.

I use the $6k backdoor Roth IRA every year.  Hope that doesn't go away.

Yeah I think that’s still ok

they are just cutting  off the after tax piece now

the “normal” kind you're talking about would get shut off in 2032 if you’re a surly 1%’er (make more than $400k single/ $450k married in a year)

[Horn Dog 9815]

What about if I have a preexisting traditional IRA which has been funded for many years with exclusively post tax contributions, but has grown from investment returns over the years?   Can I do a 100% Roth conversion of that without immediate tax implications (since no pre-tax contributions were ever used)  or do I need to somehow account for the returns in that account prior to conversion?

[CooterBrown 18002]

What about if I have a preexisting traditional IRA which has been funded for many years with exclusively post tax contributions, but has grown from investment returns over the years?   Can I do a 100% Roth conversion of that without immediate tax implications (since no pre-tax contributions were ever used)  or do I need to somehow account for the returns in that account prior to conversion?

Pretty sure you owe the taxes on capital gains and the initial pretax investment during the current income tax cycle.

I just did this for the first time last year and just put $6K in an IRA and converted to a Roth immediately before investing that money. That way there’s no taxes owed on any gains. I plan to do that every year.

[Reagan1k 3024]

8 hours ago, Horn Dog said:

What about if I have a preexisting traditional IRA which has been funded for many years with exclusively post tax contributions, but has grown from investment returns over the years?   Can I do a 100% Roth conversion of that without immediate tax implications (since no pre-tax contributions were ever used)  or do I need to somehow account for the returns in that account prior to conversion?

If 100% of the contributions were non-deductible (after tax) then the tax liability would be on the gains only.  If you roll it over during a series of years to keep the tax hit down, each year the rollover is considered part contribution (not taxed) and pre-tax earnings (taxed). 

But.......Your tax preparer would have to look at all of your IRA's, how they were funded, and apply the proper formula to figure it out.  The IRS has formulas for all scenarios of contributions....100% pre-tax, 100% post tax, or a combination of both.  You can't pick and choose which dollars to convert......the IRS looks at the aggregate holdings and treats a rollover as an equally proportional transaction.

[Bogeywon 2519]

I live in Michigan. The wife and I have a traditional IRA. We used it early on for tax breaks (we max’d it out and used the tax money to basically fill it as much as we could). I haven’t funded it in a few years because I office (have a small business) started finally doing 401ks with a match. We don’t make a ton but enough that my guy told me we can both open a Roth IRA and both contribute $6,000 each a year on top of having a IRA. Is that smart? I’m not great at this so I guess it wouldn’t be bad to have more retirement money. Also should I convert my traditional to a Roth since I’m not using it for tax benefits?

[Archer 474]

4 hours ago, Bogeywon said:

I live in Michigan. The wife and I have a traditional IRA. We used it early on for tax breaks (we max’d it out and used the tax money to basically fill it as much as we could). I haven’t funded it in a few years because I office (have a small business) started finally doing 401ks with a match. We don’t make a ton but enough that my guy told me we can both open a Roth IRA and both contribute $6,000 each a year on top of having a IRA. Is that smart? I’m not great at this so I guess it wouldn’t be bad to have more retirement money. Also should I convert my traditional to a Roth since I’m not using it for tax benefits?

Variety in retirement accounts is always good so if you have the cash to do a Roth its never a bad idea. 
 

Converting your traditional to Roth is a much trickier question. You will have to pay taxes on the amount that you convert i.e. if you convert $100k you will owe taxes on it as income depending on your tax bracket could be up to $37k. 
 

The question is do you expect to be in a higher or lower tax bracket in retirement if you expect to be in a lower bracket converting now makes no sense unless you just want diversity to hedge your bets. 

[UTexasFight 9427]

Semi serious, semi smartass question…

aren’t we all going to be in a higher tax bracket in retirement?

[52-80 19142]

2 hours ago, UTexasFight said:

Semi serious, semi smartass question…

aren’t we all going to be in a higher tax bracket in retirement?

Scratch

I wager in the upcoming decades, the income tax rates will lift.  But for most people their retirement annuity/distribution will be lower than their employment earnings, so it evens out.

 

 

 

[TwiceHorn 31435]

1 minute ago, 52-80 said:

Scratch

I wager in the upcoming decades, the income tax rates will lift.  But for most people their retirement annuity/distribution will be lower than their employment earnings, so it evens out.

 

 

 

Yeah, it's not as easy a question as it initially seems to be.  Brackets may indeed be higher, but the tax efficiency of your investments will have a lot to do with whether your income pushes into those higher brackets.

RMDs later in life (they get bigger as you get older) from traditional IRAs can make you withdraw more than you want/need and that's straight income, so that can keep you paying taxes for a while longer than really planned.

[52-80 19142]

The trick is to invest your IRA into money pits so you dont have to worry about a tax hike

[DalTxHornFan 3097]

7 minutes ago, TwiceHorn said:

RMDs later in life (they get bigger as you get older) from traditional IRAs can make you withdraw more than you want/need and that's straight income, so that can keep you paying taxes for a while longer than really planned.

While on the subject of RMDs, I've been preaching to my older family members and friends about the tax efficiency of making direct payments from a traditional IRA to charitable organizations (your church, for example) that they would ordinarily just write a check for.  Such distributions count against your RMD, the donor avoids a taxable RMD distribution, and the charitable organization gets its money.  A sure win-win if there ever was one in the tax code. 

Edited January 24, 2022 by DalTxHornFan

[Archer 474]

Another option to avoid big RMDs is to do Roth conversions early in retirement. Say you need $60k to live, you could pull out $81k to top off to 12% bracket and put the extra $21k in a Roth. If you are looking at big income after RMDs kick in it could be worth converting into the 22% bracket. 

[Reagan1k 3024]

Life expectancy tables have been updated for the first time in something like 20 years so that’ll be a slightly smaller RMD bites, but won’t help a ton.

If they were smart and wanted to increase current tax revenue they’d allow limited withdrawals above the RMD to be made at a special lower tax rate provided they were reinvested for a period of years (create a hybrid, restricted, taxable account in the same vein as the IRA)  People would be incentivized to get money out and the Treasury would get current revenue right away instead of only getting the bare minimum out of big IRAs.

Call it a TROTH- Taxable Roth 

 

Edited January 29, 2022 by Reagan1k

[Dbeasy 15040]

FYI, I’ve been looking at all of this again and wanted to point out one item not discussed.

If an Ira is converted to Roth, and you want to stay within the 12% tax bracket (or 22% or whatever is appropriate for your situation), that will impact any subsidy you would receive in ObamaCare, if you have a plan on the exchange. This is for self employed folks who don’t have a corporate healthcare plan and need ObamaCare. 

[TwiceHorn 31435]

54 minutes ago, Dbeasy said:

FYI, I’ve been looking at all of this again and wanted to point out one item not discussed.

If an Ira is converted to Roth, and you want to stay within the 12% tax bracket (or 22% or whatever is appropriate for your situation), that will impact any subsidy you would receive in ObamaCare, if you have a plan on the exchange. This is for self employed folks who don’t have a corporate healthcare plan and need ObamaCare. 

I have never wanted to qualify for Medicare so badly in my life.

[Dbeasy 15040]

7 minutes ago, TwiceHorn said:

I have never wanted to qualify for Medicare so badly in my life.

I hear you. ObamaCare plans are terrible. People don’t realize that corporate health plans are great because the corporations are either self insured or have negotiating leverage. If we went to a nationalized healthcare plan, decoupled from companies, that lack of negotiating leverage would sting.