Author Topic: Back Door Roth Question  (Read 2929 times)

saijoe

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Back Door Roth Question
« on: May 19, 2015, 04:09:48 PM »
I'm 50 (as of today as a matter of fact) and I know I could contribute as much as $6,500 to a Roth IRA.  But I make too much to contribute.  I was considering a Back Door Roth, but in my initial reading I think I'm seeing that there are tax implications if you already have Traditional IRAs.  I have ~$460K in rollover IRA's.  It seems to me that it's after-tax money that I'm contributing, so what's the deal?

MDM

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Re: Back Door Roth Question
« Reply #1 on: May 19, 2015, 04:17:28 PM »
It's the way the law is written.

You may have already seen http://www.bogleheads.org/wiki/Backdoor_Roth_IRA:
Quote
Caution

If you have any other (non-Roth) IRAs, the taxable portion of any conversion you make is prorated over all your IRAs; you cannot convert just the non-deductible amount.[3] In order to benefit from the backdoor, you must either convert your other IRAs as well (which may not be a good idea, as you are usually in a high tax bracket if you need to use the backdoor), or else transfer your deductible IRA contributions to an employer plan such as a 401(k) (which may cost you if the 401(k) has poor investment options).

forummm

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Re: Back Door Roth Question
« Reply #2 on: May 19, 2015, 04:25:19 PM »
Happy birthday!

VanityFIRED

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Re: Back Door Roth Question
« Reply #3 on: May 19, 2015, 09:19:35 PM »
To help clarify- and to make sure I understand this correctly myself (please correct if I'm wrong here) - the above response from MDM applies to a conversion from a non-roth Ira into a Roth IRA.  This is not really what is typically considered a back door Roth IRA.

There are 3 designations of IRAs: Roth IRA, traditional IRA, and finally a non-deductible IRA.  A Roth ira and a non-deductible Ira are both funded with after tax dollars.  Traditional Ira is funded with pre-tax (or tax deductible) money.

If you have all three of these IRAs and you decide that you want to convert money from your non-deductible Ira into a Roth ira, you CAN do this however you will be required to also convert a portion of your traditional IRA, which may not be advantageous from a tax perspective.

Now, a back door Roth contribution is different.  Typically it is funded by rolling over after tax money in a 401k plan directly into a Roth ira.  Mad Fientist has very good explanation of this.  However in summary, you make a special after tax contibution to your 401k plan up to $53k/yr.  then you take an in service rollover from your 401k plan and roll it direct into your existing Roth ira.  Potentially allowing you to fund up to $53k/yr in Roth.

Hope that is clear and correct.  If I turn out to be wrong on this, I'll just delete the post, but I think this is accurate.


MDM

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Re: Back Door Roth Question
« Reply #4 on: May 19, 2015, 09:43:23 PM »
To help clarify- and to make sure I understand this correctly myself (please correct if I'm wrong here) - the above response from MDM applies to a conversion from a non-roth Ira into a Roth IRA.  This is not really what is typically considered a back door Roth IRA.

There are 3 designations of IRAs: Roth IRA, traditional IRA, and finally a non-deductible IRA.  A Roth ira and a non-deductible Ira are both funded with after tax dollars.  Traditional Ira is funded with pre-tax (or tax deductible) money.

If you have all three of these IRAs and you decide that you want to convert money from your non-deductible Ira into a Roth ira, you CAN do this however you will be required to also convert a portion of your traditional IRA, which may not be advantageous from a tax perspective.

Now, a back door Roth contribution is different.  Typically it is funded by rolling over after tax money in a 401k plan directly into a Roth ira.  Mad Fientist has very good explanation of this.  However in summary, you make a special after tax contibution to your 401k plan up to $53k/yr.  then you take an in service rollover from your 401k plan and roll it direct into your existing Roth ira.  Potentially allowing you to fund up to $53k/yr in Roth.

Hope that is clear and correct.  If I turn out to be wrong on this, I'll just delete the post, but I think this is accurate.
My own interpretation may well be in error - but I'm pretty sure the quoted Bogleheads wiki entry defines "backdoor IRA" correctly. ;)

The MadFIentist article discusses a "Mega Backdoor IRA."  A very good thing to be able to do, and similar to but also different from the backdoor IRA described (I think) by the OP.

forummm

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Re: Back Door Roth Question
« Reply #5 on: May 20, 2015, 07:45:17 AM »
To help clarify- and to make sure I understand this correctly myself (please correct if I'm wrong here) - the above response from MDM applies to a conversion from a non-roth Ira into a Roth IRA.  This is not really what is typically considered a back door Roth IRA.

There are 3 designations of IRAs: Roth IRA, traditional IRA, and finally a non-deductible IRA.  A Roth ira and a non-deductible Ira are both funded with after tax dollars.  Traditional Ira is funded with pre-tax (or tax deductible) money.

If you have all three of these IRAs and you decide that you want to convert money from your non-deductible Ira into a Roth ira, you CAN do this however you will be required to also convert a portion of your traditional IRA, which may not be advantageous from a tax perspective.

Now, a back door Roth contribution is different.  Typically it is funded by rolling over after tax money in a 401k plan directly into a Roth ira.  Mad Fientist has very good explanation of this.  However in summary, you make a special after tax contibution to your 401k plan up to $53k/yr.  then you take an in service rollover from your 401k plan and roll it direct into your existing Roth ira.  Potentially allowing you to fund up to $53k/yr in Roth.

Hope that is clear and correct.  If I turn out to be wrong on this, I'll just delete the post, but I think this is accurate.



One thing is that there are only 2 kinds of IRAs discussed here: Roth and Traditional. Traditional can have both deductible and non-deductible contributions inside it. So it gets confusing because you have to tell the IRS as you contribute each year whether it's deductible or not (through your 1040), and you have to keep track of that, and then when you make withdrawals, you have to account for the part you aren't paying tax on. I'm not solid on the withdrawals part, so I forget if you can choose whether to take out only deductible or only nondeductible funds, or if you have to take them out proportionally. Your post suggests that you have to take them out proportionally, which does sound familiar.

http://www.bogleheads.org/wiki/Non-deductible_traditional_IRA