Author Topic: Backdoor Roth - Help me figure out best way  (Read 1291 times)

oldmannickels

  • Stubble
  • **
  • Posts: 249
Backdoor Roth - Help me figure out best way
« on: April 25, 2019, 08:13:10 AM »
I'm trying to figure out the best way to do a backdoor Roth IRA.

Me and my wife already max out 401ks and HSAs. We're 33 and marginal tax rate is 24%.

I have $50k in an IRA from an old 401k and she has no IRA accounts. We both have 5 year old Roth IRA's from before we were over the limit.

Can my spouse do a backdoor Roth without making any other adjustments?

Should I re-characterize my IRA to a Roth and pay the taxes now?

MDM

  • Senior Mustachian
  • ********
  • Posts: 11488
Re: Backdoor Roth - Help me figure out best way
« Reply #1 on: April 25, 2019, 11:50:25 PM »
I'm trying to figure out the best way to do a backdoor Roth IRA.

Me and my wife already max out 401ks and HSAs. We're 33 and marginal tax rate is 24%.

I have $50k in an IRA from an old 401k and she has no IRA accounts. We both have 5 year old Roth IRA's from before we were over the limit.

Can my spouse do a backdoor Roth without making any other adjustments?
Yes.

Quote
Should I re-characterize my IRA to a Roth and pay the taxes now?
Don't mean to be picky, but the verb would be "convert" instead of "re-characterize" if you want to pay tax now.  A recharacterization is something else.

Perhaps better would be a "rollover" of your IRA to your 401k.  This would clear the way for you to use the backdoor Roth process without incurring tax now.

Laura33

  • Magnum Stache
  • ******
  • Posts: 3506
  • Location: Mid-Atlantic
Re: Backdoor Roth - Help me figure out best way
« Reply #2 on: April 26, 2019, 08:47:03 AM »
What MDM said.  I too had IRAs, but I checked, and my plan allowed me to roll them into my 401(k).  That left me with no IRAs, so I could do the backdoor Roth without the tax issues that would otherwise apply.

If you cannot do that, I would suggest doing some more math on whether/how you should convert the IRAs.  The reality is, you are likely in a much higher tax bracket now than you will be later on when you FIRE, so I would likely not convert the whole thing now.  However, you may be able to convert a little at a time over a couple of years in the context of doing the Roth, but timing the conversions in a way that avoids adding a huge amount to your tax burden in any one year.  Note that you will still pay taxes on the amount converted at your (currently high) marginal tax rate, however, so you should do the math to try to compare the long-term impacts of (i) starting the Roth investments/conversion now and just taking the tax hit, so that you can have tax-free withdrawals later, vs. (ii) keeping the tIRA, putting the money you'd have put into a Roth into a tax-efficient fund every year, and then after you FIRE, slowly converting the IRAs to a Roth over a couple of years at a rate that will keep you in a lower tax bracket.

Your wife is fine, though.  IRAs are individual, not joint, so the only thing that matters is what's in your individual names.

 

Wow, a phone plan for fifteen bucks!