Author Topic: Backdoor Roth IRA Tips, Pro rata rule Avoidance  (Read 864 times)

WorkingToUnwind

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Backdoor Roth IRA Tips, Pro rata rule Avoidance
« on: December 24, 2021, 11:43:15 AM »
Hi investors, I appreciate the help answering my questions around Roths. Our AGI has been too high to qualify for them and I never bothered with learning about the backdoor method, thinking since our tax bracket in retirement will be lower than our current tax bracket, they're not an important investment vehicle for us. But then I realized if our extra money is going into a post-tax brokerage account and will be taxed when we take it out, we might as well get some money into a Roth now if we can.

We have three old IRAs totaling about 300k kicking around. Two are from 401k rollovers and the third is an old SEP IRA that I don't contribute to anymore since opening an individual (solo) 401k. I think the IRAs will mess with our tax situation if we try to do a backdoor Roth. My cousin's husband was trying to explain the pro rata rule to me. It sounds like we'd have to rollover those IRAs into one of our 401ks to avoid extra taxes. Is that correct? Am I missing anything else?

Once the three rollovers are all set, I just call Vanguard, have them help me open a new IRA, fund it with 6k from my bank account, then immediately have them roll than into a Roth? I won't have to pay taxes on that, since that 6k is coming from income that's already been taxed?

I don't think I'll be able to do this for 2021. It looks like it can take 2-4 weeks to rollover accounts, so we'd still have a balance in the old IRAs for 2021. But it's a goal for early 2022. Correct me if I'm wrong there. Thank you!

MDM

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Re: Backdoor Roth IRA Tips, Pro rata rule Avoidance
« Reply #1 on: December 24, 2021, 12:53:49 PM »
You have the general idea, and nothing you wrote appears incorrect.  Reading something like the Backdoor Roth - Bogleheads wiki article might help with your comfort level.

Filling a draft Form 8606 by hand can also be helpful.

Whether the backdoor Roth process will remain viable in 2022 depends on what Congress does with the tax law.

WorkingToUnwind

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Re: Backdoor Roth IRA Tips, Pro rata rule Avoidance
« Reply #2 on: December 24, 2021, 02:48:18 PM »
You have the general idea, and nothing you wrote appears incorrect.  Reading something like the Backdoor Roth - Bogleheads wiki article might help with your comfort level.

Filling a draft Form 8606 by hand can also be helpful.

Whether the backdoor Roth process will remain viable in 2022 depends on what Congress does with the tax law.

Thank you! Just writing out the steps gave me a little more confidence in what to do next.

I'm going on maternity leave in 2022, and depending on how much I cut back my hours when I come back, we very well could qualify for a Roth contribution without the backdoor method.

I saw that Congress attempted to do away with the backdoor method this year, but it didn't go through. Hopefully it remains an option for a little longer. I just wish I had read up more on Roth IRAs earlier. We could've finagled money into them for the past seven years. Oh well.