Author Topic: Backdoor Roth Questions  (Read 421 times)

Trudie

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Backdoor Roth Questions
« on: January 04, 2018, 03:46:07 PM »
We're a few years out from drawing on our retirement accounts and I'm considering a backdoor Roth strategy to get more of our traditional IRA funds into our Roths.  I'm considering this because I used the Vanguard RMD calculator, and at some point our RMDs will likely throw us into a higher-than-desired tax bracket.  In addition, I expect our income to dip in these pre-retirement years, giving us some space in a relatively low bracket (and before the tax bracket changes sunset) to do conversions.

I just want to clarify that my thinking on the two five year rules are correct:

5 year rule on contributions - My husband and I both have had Roth IRAs for well over 5 years now.  Because all contributions will be aggregated and we've already met this test, any new contributions and earnings on those contributions will be income tax free, regardless of the holding period because we've already met the test.

5 year rule on conversions - Any funds we convert will need to be held for 5 years to be withdrawn penalty free, unless we're over 59 1/2, in which case penalties would not apply anyway.

Please weigh in ya'll.

MDM

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Re: Backdoor Roth Questions
« Reply #1 on: January 04, 2018, 07:44:07 PM »
5 year rule on contributions - My husband and I both have had Roth IRAs for well over 5 years now.  Because all contributions will be aggregated and we've already met this test, any new contributions and earnings on those contributions will be income tax free, regardless of the holding period because we've already met the test.
If the earnings stay within the Roth there is no tax on them, ever.  If you withdraw earnings before age 59.5, regardless of how long they have been in the account, they are taxed.

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5 year rule on conversions - Any funds we convert will need to be held for 5 years to be withdrawn penalty free, unless we're over 59 1/2, in which case penalties would not apply anyway.
In Backdoor Roth vs. Recharacterization - Bogleheads.org there is a perspective that the non-taxable amount of backdoor Roth conversions are not subject to this 5 year rule.  See that thread for more.

Zamboni

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Re: Backdoor Roth Questions
« Reply #2 on: January 04, 2018, 08:27:11 PM »
^Interesting . . . thank you for this link.

terran

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Re: Backdoor Roth Questions
« Reply #3 on: January 04, 2018, 09:32:43 PM »
Sounds like your talking about roth conversions, not backdoor roth. That is, you want to convert previously tax deferred IRA contributions and pay the tax now. A backdoor roth is converting after tax IRA contributions (on which you have already paid tax) and not paying tax on the conversion (except for any gains you've had since contributing to the after tax IRA).

Anyway, here's a good post of the 5 year rules: https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/