Am I understanding the back door Roth correctly?

[caseyzee]

Hi.

I currently have about 225k in a Rollover IRA.  Last year, I was able to contribute $1770 to a Roth, before it was maxed.  Of course, I would like to do the back door Roth option.  Am I understanding the rules correctly?  If I opened a new non-deductible IRA at Vanguard and put $3730 into it ($5500-1770), and then rolled that $3730 into the Roth, virtually all of it would be taxable because of my rollover IRA?  Am I missing anything?

Thanks.
-Casey

[Catbert]

Unfortunately you do understand how it works.  If you have a substantial existing traditional IRA a backdoor Roth doesn't work well.  The IRS looks at the rollover as prorated of your OVERALL total traditional IRAs.  In your case, you'd be paying tax on essentially all of it.

Do you have a 401k at your current job?  Does it have great options?   Does it accept transfers in?  You could roll your existing IRA into your 401k and then do the backdoor Roth.  Not worth it unless you have great 401k options.

[caseyzee]

Well, that's a bummer.  Thanks for confirming Mary.  I had never thought of rolling money into my current 401k.  As luck would have it, we have Vanguard, with the basic index fund and some target funds.  I just use the index currently.

Something to think about.  Thanks!

-Casey