Backdoor Roth -- what to do with Traditional IRA?

[DataFientist]

I currently contribute to a traditional IRA as my AGI is below 62K.

Let's say my income is to go up over the years to where I will need to contribute to the Roth IRA since the income limits are higher. So I start contributing to the Roth.

Eventually, my income will be too high for a direct Roth IRA contribution. This is where the backdoor Roth comes in.

However, I've read that it's difficult to do the backdoor Roth if you already have money in a traditional IRA account.

My question(s):
(1) What do I do with the money in the traditional IRA if I want to take advantage of the backdoor Roth without steep penalties?

(2) Do I need to open up a new Roth IRA account to deposit the backdoor contributions to keep them separate from the Roth contributions I made when my income didn't hit the limit?

(3) I currently only have about 1.5K in the Traditional. Should I start making Roth contributions from here on out instead?

My thinking is that I'll put my traditional IRA funds into a 401(k), then start the backdoor Roth from there. Is that correct?

[secondcor521]

It isn't difficult to do a backdoor Roth if you have an existing traditional IRA.  It just creates tax implications that you need to be aware of and decide whether or not you want to put up with the taxes and record keeping.

1.  One option, if it is available to you, is to roll your traditional IRA into your traditional 401(k).  Your traditional 401(k) must accept incoming rollovers.  Mine did.  You'll have to check with your plan administrator and/or the plan documents to see if yours does.  Another option is if your $1.5K has been contributed for 2017 or 2018, you could recharacterize it to a Roth IRA; this would give you a clean slate to do a backdoor Roth.

2.  No.  But you should keep track of them separately, because they are considered conversions, not contributions, and the tax treatment is different.

3.  Depends on your goals and plans.  Much ink has been spilled on this topic.  There is some "investment order" page around somewhere that someone can link to that would have some advice.  My generic advice would be if you're in a tax bracket under about 20-25%, then go with the Roth.  If you're in a tax bracket above about 20-25%, then go with a traditional.  But there are a lot of other things that could sway the analysis.

A backdoor Roth IRA, as I understand it, is contributing to a non-deductible traditional IRA and then immediately converting that to a Roth IRA.  A mega-backdoor Roth IRA somehow involves contributing to an after-tax 401(k) and then rolling that to a Roth IRA.  It's not clear which you intend to do based on your last sentence.

[swampwiz]

There is special type of rollover IRA that is considered by the IRS to be transferable to a 401K.  Funds rolled over from a 401K are allowed to go into this special IRA.  However, transfers can only go out to regular IRAs, not from them.  About the only advantage I can see for rolling into another 401K is the ability to start taking out any funds without penalty (if separated from that employer after age 55) at age 55 instead of 59-1/2 without doing it via 5-year Roth conversion basis or a 72(t) plan.

[secondcor521]

However, transfers can only go out to regular IRAs, not from them.  About the only advantage I can see for rolling into another 401K is the ability to start taking out any funds without penalty (if separated from that employer after age 55) at age 55 instead of 59-1/2 without doing it via 5-year Roth conversion basis or a 72(t) plan.

Interesting.  I was able to roll my IRA into my 401(k) about 8 years ago.  I researched things pretty carefully and nobody barked at me, but maybe I made a mistake.

Another advantage is the ability to avoid taxability of a backdoor Roth, which is why I did my rollover.  This is a minor advantage, and the only reason I did it was because I had good choices inside my 401(k) and had excess income that I wanted to put into an IRA and was above the contribution limits at the time.