Author Topic: Why Not Always Do a Backdoor Roth?  (Read 2027 times)

WorkingOnStubble

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Why Not Always Do a Backdoor Roth?
« on: December 01, 2017, 01:35:43 AM »
Hey guys,

I'm teetering on the edge of the Roth limits, and so started looking into non-deductible Traditional IRA contributions. From that, I moved quickly to the Backdoor Roth and started investigating it. Here is how I see it working right now, please correct me if I'm wrong somewhere. I'm also working entirely on the basis that I have no current Traditional IRA contributions.

  • Non-deductible Traditional IRA contributions are done with post-tax dollars.
  • Upon withdrawal, the earnings on any Non-deductible contributions will be taxed
  • If I were to contribute $5500 in non-deductible contributions, and immediately convert it to a Roth IRA (A backdoor Roth), this is exactly equivalent to having a Roth IRA (assuming the $5500 doesn't appreciate in that short time)
  • The ONLY difference I see, is that because this was a conversion from Traditional to Roth, the 5 year limit would apply allowing me to withdraw these funds in 5 years penalty free

As a result of this, it seems to me like a Backdoor Roth is at least as good, often better for FIRE people, than a Roth, as long as you don't have any Traditional IRA contributions.

I'm assuming I have a mistake in my reasoning here somewhere, otherwise this'd be common practice. Could anyone point it out for me?

Thanks

MDM

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Re: Why Not Always Do a Backdoor Roth?
« Reply #1 on: December 01, 2017, 03:07:45 AM »
...I have no current Traditional IRA contributions otherwise the pro-rata rule would be problematic.
...because this was a conversion from Traditional to Roth, the 5 year limit would apply allowing preventing me to from withdrawing these funds in less than 5 years penalty free

...a Backdoor Roth is at least almost as good, often better for FIRE people, than as a Roth, as long as you don't have any Traditional IRA contributions.
See edited version above, and also Backdoor Roth IRA.

If you have no pre-tax funds in tIRAs, and are over the normal Roth contribution MAGI, the backdoor Roth is indeed a great thing to do.

ixtap

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Re: Why Not Always Do a Backdoor Roth?
« Reply #2 on: December 01, 2017, 07:42:25 AM »
Why would it ever be better to do more paperwork for the same benefit?

Aggie1999

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Re: Why Not Always Do a Backdoor Roth?
« Reply #3 on: December 01, 2017, 10:24:58 AM »
Does the 5 year hold apply to a Backdoor roth IRA for the contribution amount you put in the tIRA? I would think it would not since it is already taxed money before going in a tax advantaged account.

seattlecyclone

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Re: Why Not Always Do a Backdoor Roth?
« Reply #4 on: December 01, 2017, 10:33:45 AM »
Does the 5 year hold apply to a Backdoor roth IRA for the contribution amount you put in the tIRA? I would think it would not since it is already taxed money before going in a tax advantaged account.

First off, there's no "hold." There's simply a 10% tax that applies if you do happen to withdraw the applicable funds within five years.

However you're right that this tax only applies to funds that counted as income at the time of conversion. This would therefore not apply to the money you contributed to the traditional IRA. It would however apply to any growth that happened in the traditional IRA before you converted to Roth.

Also be aware that Roth conversions are withdrawn in FIFO order, meaning if you did do a taxable conversion within the past five years but before your backdoor Roth contribution, that money would have to come out first and be taxed accordingly.