The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Beriberi on October 05, 2016, 11:04:33 PM
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DH and I have maxed out our tax-deferred savings options. Our income is too high for a Roth IRA.
We've avoided putting extra money into an IRA because there was no tax advantage. However, I am now understanding that we can open IRAs, put 5.5 k each in them and immediately convert them to Roth's. We will have already paid income tax on the money we use to open the IRA - will we be taxed again? At what rate?
Can we do this yearly?
Also, if it matter, he has a IRA (smallish, I think), and I have an old Roth IRA with about 5k in it.
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See Backdoor Roth IRA - Bogleheads (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA) and links therein for very detailed descriptions of the Backdoor Roth and its nuances.
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The common refrain on the backdoor IRA is that the IRS probably doesn't care.
I'm more conservative with the IRS, and tended to wait a statement or two. Although it's been years and the IRS hasn't acted, in theory they could say people can't use "2 steps" to defeat the Roth IRA restrictions - the "step doctrine" of the IRS. But most likely, the IRS continues to not care about the backdoor Roth.
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Or manipulate your income to a level below the phaseout threshold. Easy to do unless you rely on a job for all your income.
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We've avoided putting extra money into an IRA because there was no tax advantage.
You get tax deferred growth of dividends. Since dividends are 2% and most people's tax rates on dividends are 15%, it doesn't add up very fast. But it is a benefit, and you can use that benefit to argue against the IRS and their step doctrine (you can't Roth convert in 2 steps if converting in 1 step isn't allowed).
Note as you convert your non-deductible Traditional IRA to a Roth IRA, the IRS wants you to convert all IRAs proportionally. So if you have $100k pre-tax IRA and $5.5k after-tax IRA, you'll have to take proportionally from both. It might not be what you intended, so you might try simulating it in tax software to see for yourself.