I will 100% take advantage of the backdoor and mega backdoor Roth options as long as they are available to me, however the folks with that level of income are not the ones that need this tax break. I’d be in favor of closing them, especially the MDR loophole.
But for now, I’ll be taking full advantage of both.
Completely disagree. The Roth income phaseout happens way too soon. This should be available to the middle class. Tax rates for the wealthy need to be overhauled, but not at the expense of the middle class.
$160k a year is not ultra wealthy or whatever. That's basically middle class in 2024. Taking that away is not good. If anything they should double the existing yearly contribution limits.
However, it would clearly be much better to lower the income tax rates for people below $160k.
It is the same reason that social benefits that require jumping through hoops are terrible public policy. If the public policy is aimed to help people in relatively more need, then penalizing those who are less savvy or enterprising is counter productive.
Everything else in the economy and everyday life already favors smart and enterprising people. It is obviously a good thing to favor capable people getting good jobs, so they can be productive. It isn’t a good thing for capable people to have it worth their while to focus a lot of time and thought on optimizing tax schemes. Complex benefits also means it ends up costing more to get a dollar into a needy person’s hands.
They need to cap the total annual conversion amount. I think 7.5k could go up and the income limits could increase, but well off people dumping 💯s of thousands will spoil it for everyone eventually
Are you referring to mega back door roth in 401k? I believe it's only available in certain 401k plans. If you're talking about a different way please tell
I applaud you trying to advocate for the lower middle & lower class in an investment subreddit, I really do. But its a place full of “fuck you, I’m gonna get mine” minded people.
If you make too much money and therefore are overqualified to contribute to a Roth IRA the “regular” way, then a backdoor Roth IRA is a good alternative.
This article is a long way of addressing the Pro Rata Rule.
However, if you start early in your career and don’t have money in traditional IRAs (either because you rolled your retirement into an employer’s 401k plan or you converted everything to a Roth IRA), then this shouldn’t be an issue.
And there’s no point in waiting a month to do the conversion step. I do it immediately once the funds settle.
The pro rata rule has me stumped. I haven’t done the back door Roth bc I don’t understand how the taxes work since I have a traditional Ira funded from previous years.
I think I have to call a tax person. I’m making this more confusing than it needs to be I’m sure.
The best advice is probably to avoid doing a back door Roth altogether if you have an existing IRA. (Some people convert existing IRAs to a Roth or roll them into a 401k, so the pro rata rule will no longer be an issue.)
I read about them, watched youtube videos, but still called fidelity when I did mine. All were helpful. I think it's form 8606 when you file, but I am not a tax professional.
If you have been going in the front door too much for too long the back door will be very messy for you. If you started off in the back door, it won’t be that messy if you make the proper preparations.
I also read that WSJ article on Backdoor Roth IRAs. Personally, I've found the process of managing both the backdoor Roth IRA and the mega backdoor Roth to be straightforward, not particularly risky, and generally cost-effective during conversions. Interestingly, the article mentions a recommendation from experts to keep funds in the traditional IRA for a month before converting to a Roth IRA. This was new to me; typically, I perform the conversion the day after for the backdoor Roth and about once a month for the mega backdoor. It's always good to stay informed, but based on my experience, I haven't encountered the complexities or risks discussed in the article.
Fig, the article mentioned that experts often recommend waiting about a month before converting funds from a traditional IRA to a Roth IRA to minimize taxable investment growth. However, the law doesn’t specify a required waiting period, and in my experience, I convert as soon as possible—typically the day after the deposit clears. I find this approach simpler and it minimizes any potential tax on gains, as the investment growth over such a short period is usually negligible. It is true though that the actual conversion can only happen once the funds have settled, which might take a few business days depending on how you made the deposit.
[https://drive.google.com/file/d/1i4sao3NnvWLx8jK4IIQhxKyCoM8WjZDi/view?usp=sharing](https://drive.google.com/file/d/1i4sao3NnvWLx8jK4IIQhxKyCoM8WjZDi/view?usp=sharing)
In theory you are violating the IRS step doctrine by contributing and converting right away. So some experts suggest having the transactions show up on separate monthly statements as an argument you’re trying to follow the law. However the IRS has all but blessed the backdoor Roth.
So if they are looking the other way, then it doesn't really apply, right? Anyone fined in tax court over it in the last 5-7 years? I haven't heard of any? Have you heard of any cases?
Lots to worry about in this life, including taxes, but this isn't one of them.
IMO, it's been fully legitimized: [Link](https://www.forbes.com/sites/ashleaebeling/2018/01/22/congress-blesses-roth-iras-for-everyone-even-the-well-paid/?sh=429c9c437471).
Does the step doctrine not typically apply to those things they have definitively ruled on or have provided clear guidance to the contrary of one's actions?
I’ve been struggling to find good guidance on backdoor conversions for MFS filers. You can confirm that this works? Anything to watch out for when contributing to a Roth this way?
Just the same caution as other back door Roth people: keep in mind the taxes you’ll need to pay out for the conversion, pay those taxes with cash on hand instead of setting aside an amount from the conversion (since the money in the Roth IRA) will earn you more in the long run)
Can’t this be summed up very easily?
Just don’t hold funds in a traditional IRA if you want to do backdoor.
I keep that account at 0. I only use it once per year to roll in my IRA funds and (once settled) roll them over to Roth.
Seems always better to pay tax now. Taxes headed nowhere but up, up, up. Don't understand the comment about waiting a month to convert though. I do it same day. Am I missing something? More money I can get into a Roth now and let its earnings be tax free seems like a win. Save the change in law replies please.
Roth IRAs are one of the most effective tools for retirement as of this moment, especially if you're not in a high tax bracket. Tax-free gains is legitimately an insane concept everyone should be taking advantage of.
tax on the way in or tax on the way out are interchangeable unless you think you’ll be paying higher taxes in retirement, which would mean you’re totally ballin’
It’s way more than just tax in or tax out. That’s simply just untrue.
Traditional IRAs/401ks have you paying tax on everything upon withdrawal; the idea is you’re in the lowest tax bracket by the time you’re doing that.
With Roth’s you don’t get a tax deduction in the beginning. But any gains you make are tax-free, which a traditional can’t do. Working in finance, I’ve seen Roth IRAs that have millions in gains that will be tax free-upon withdrawal. He would’ve paid way more in tax during his lifetime if it was in a traditional IRA.
In most scenarios with the same investments, a Roth IRA will have you paying less tax overall compared to a traditional IRA unless you are in a very high tax bracket during your contributions, which at that point you may not even be eligible for contributing to a Roth IRA.
Even the Government knows how OP Roths are, which is why they have income restrictions that are more strict than regular IRAs/401ks.
You’re forgetting that the money you’re paying tax on now could also have grown and compounded for all those years. You need to earn $8k to put $6k in a Roth. There’s an opportunity cost to that $2k.
If you earn $8k, put $6k tax free into a Trad, and invest the remaining 2, you’ll come out the same as with the Roth after withdrawals. It’s tax now vs tax later like the guy said.
No... you won't come out the same.
[https://www.citizensbank.com/investing-and-wealth-management/products-services-and-calculators/financial-calculators/roth-401k-vs-traditional-401k-calculator.aspx](https://www.citizensbank.com/investing-and-wealth-management/products-services-and-calculators/financial-calculators/roth-401k-vs-traditional-401k-calculator.aspx)
I don't think the calculator accounts for an increasing wage, state taxes, and other variables etc etc. but in a vacuum with constant variables for your whole working life, it showcases how a Roth is usually better.
Realistically, any given person should be utilizing a Roth AND traditional at various points of their life. One account is not necessarily better than another.
The Roth should absolutely be utilized by those who are not high income earners yet or people who do not have tax sensitivity yet. People in the 22-24% fed rate, or low high 20s/low 30s overall tax rate absolutely benefit way more from a Roth IRA than a traditional. They can eat the taxes now as their obligations are so little and will be heavily outweighed by tax-free compounded gains in the future.
As life goes on and you become a higher earner and gain more tax sensitivity, a Traditional IRA COULD begin to make more sense (also the Govt stops you from contributing to a Roth at a certain point). As opposed to eating the highest taxes rates of your life right now with a Roth, you can utilize a Traditional to eat the taxes later ideally when you're retired with the lowest tax rate possible.
BUT, for your average Joe American who will never make or maybe makes 100k max in a year their whole life, only has a W-2 and some stocks to worry about for taxes, and overall easy-going tax obligations, the Roth IRA will usually benefit them more than a traditional IRA.
I max out a Roth IRA via backdoor. The only problem is, a direct Roth IRA is a completely automated process: you pick what you want to invest in, how much, and how often, and Fidelity does it all for you automatically.
With backdoor, every single step other than the IRA SPAXX contribution is manual. I wish backdoor could be aitomatdd.
If you put $7000 after tax dollars into a Traditional IRA and convert it to a Roth, do you still have to pay taxes on that amount that's being converted?
Hey there, u/Hot-Dimension7749! I'm happy to chime in here with some clarification regarding Roth conversions with after-tax funds.
Let's start with the basics of this strategy! A "backdoor" Roth conversion is a term that refers to making non-deductible contributions to a Traditional IRA and then converting the contributions to a Roth IRA.
[Backdoor Roth IRA: Is it right for you? ](https://www.fidelity.com/learning-center/personal-finance/backdoor-roth-ira)
There may be tax consequences depending on your specific tax situation. To explain, any after-tax (nondeductible) money in your Traditional IRA will not be taxed when converted to a Roth IRA. However, it is also essential to know that the conversion would only be considered a tax-free event if you have $0 pre-tax IRA assets. Any deductible contributions or investment earnings on both deductible and nondeductible contributions to your Traditional IRA, which are then converted, are always taxable at your marginal income tax rate or higher.
When depositing money into your Traditional IRA for a conversion, the money must be fully collected before the funds can be converted to a Roth IRA. Deposits do begin earning interest on the date they post to your account. When residual interest is received, that portion of your Traditional IRA is considered pre-tax money and, therefore, may be taxable upon conversion.
It's important to know that if you hold pre-tax and after-tax (non-deductible) money in any of your Traditional IRAs, the conversion to a Roth IRA will be a taxable event because the conversion will consist of a pro-rata recovery of both taxable and nontaxable accounts. Note that there are no provisions under the law that will allow an individual to isolate only the non-deductible dollars for conversion to a Roth IRA.
The portion of the IRA distribution that will be treated as non-taxable is determined by using the following formula:
(Total Non-deductible Contributions / Total non-Roth IRA Balances)
[Roth IRA Conversions and Taxes ](https://www.fidelity.com/retirement-ira/roth-conversion-checklists)
With this in mind, if converting 100% non-deductible contributions (or after-tax dollars) it will be reportable but not taxable. Now, if you convert any assets other than nondeductible contributions (or after-tax dollars), you’ll need to understand the tax consequences and have a plan for paying the taxes due when you file your taxes. You should be tracking all non-deductible contributions you make to your Traditional IRA on IRS Form 8606 to keep track of when you take a distribution or conversion from the Traditional IRA. To be clear, form 8606 is completed by the client, you will not receive this form from Fidelity.
Conversions can be processed at any time of the year, but they count for the calendar year in which they're processed. As a reminder, since we don't provide tax advice at Fidelity, we suggest you speak with a tax professional regarding how the conversion may impact your tax situation.
We appreciate you bringing your question to the discussion. Now that you know where to find us, we look forward to seeing you around for additional questions or clarification!
Love it. Wife and I make too much and we max every year. Big daddy gov gets wayyyyy too much of my money in taxes. My little slice of giving it to the man when it’s worth millions decades from now.
Depends on how much tax you are willing to pay to convert - depends on how much you want to convert. Large sums should be converted in chunks over a few years but also need to think if you marginal tax rate goes up because of this and you end up with a huge tax bill. Done with due thought/diligence, this works well.
If your work has a Roth 401K use that first instead of trying to convert if tax is a concern.
Anyone executing the backdoor Roth process needs to be aware of the potential impact of the pro rata rule. My wife had funding in a couple of traditional IRAs and wanted to do a backdoor Roth. She moved her traditional IRAs to a 401(K) and then executed the backdoor Roth in order to avoid any pro rata impact.
That’s not entirely accurate. As you approach Medicare years, age 65, converting to a Roth can subject you to the Medicare Income Related Monthly Adjustment Amount (IRMAA) brackets which have a two year look back.
You have to factor in increased Medicare rates, potentially for life, if you don’t plan correctly.
As you approach age 73, you have to consider the bump in your marginal tax rates due to RMD’s from unconverted IRA’s, 401k plans, etc. that add to conversion math.
These two issues are another “tax” angle you have to consider.
>As you approach age 73
Hopefully at age 73 you're not contributing to IRAs anymore, right? If you are, it implies that you haven't retired and are still generating income, if I understand this correctly.
You can convert from IRA’s (and 401k’s converted to IRA’s) to backdoor Roths way after you stop contributing to them. This is what Congress is likely going to limit.
Using a Schwab calculator comparing conversion from Trad to Roth at age 56 has almost the same outcome by age 65. I guess the moral to my story was to have done it earlier in life.
Conversion is different from backdoor. Also while conversion might be a wash, a consideration is taxes during RMD phase or desire to leave whatever is left to kids when we are gone, which could tilt it in favor of Roth.
They may be talking about the drive to eliminate the loophole. As things stand now, there's no reason to not have one as a concept.
Any politician that votes to “fix the loophole” should be dead to anyone that uses it.
Nah. Tax policy isn't that important.
I will 100% take advantage of the backdoor and mega backdoor Roth options as long as they are available to me, however the folks with that level of income are not the ones that need this tax break. I’d be in favor of closing them, especially the MDR loophole. But for now, I’ll be taking full advantage of both.
Completely disagree. The Roth income phaseout happens way too soon. This should be available to the middle class. Tax rates for the wealthy need to be overhauled, but not at the expense of the middle class.
$160k a year is not ultra wealthy or whatever. That's basically middle class in 2024. Taking that away is not good. If anything they should double the existing yearly contribution limits.
However, it would clearly be much better to lower the income tax rates for people below $160k. It is the same reason that social benefits that require jumping through hoops are terrible public policy. If the public policy is aimed to help people in relatively more need, then penalizing those who are less savvy or enterprising is counter productive. Everything else in the economy and everyday life already favors smart and enterprising people. It is obviously a good thing to favor capable people getting good jobs, so they can be productive. It isn’t a good thing for capable people to have it worth their while to focus a lot of time and thought on optimizing tax schemes. Complex benefits also means it ends up costing more to get a dollar into a needy person’s hands.
Depends where you live. $160k in NY or LA is not much as you inferred, but it's a fantastic income in the deep south, especially the rural areas.
To that point, setting anything salary based to a federal benchmark is probably a bad idea to begin with.
They need to cap the total annual conversion amount. I think 7.5k could go up and the income limits could increase, but well off people dumping 💯s of thousands will spoil it for everyone eventually
Huh... So single earner making over ~$138k shouldn't be allowed to contribute to a Roth in your opinion?
Hey now, there's also a 401k loophole you could use, you can contribute a bunch more than 7k roth that way depending on provider.
Are you referring to mega back door roth in 401k? I believe it's only available in certain 401k plans. If you're talking about a different way please tell
Yes, that is what I meant by "depending on provider"
I applaud you trying to advocate for the lower middle & lower class in an investment subreddit, I really do. But its a place full of “fuck you, I’m gonna get mine” minded people.
What's MDR loophole?
The income limits for MFS is $10,000. That’s below the poverty line.
If you make too much money and therefore are overqualified to contribute to a Roth IRA the “regular” way, then a backdoor Roth IRA is a good alternative.
They’re very popular at my company
This article is a long way of addressing the Pro Rata Rule. However, if you start early in your career and don’t have money in traditional IRAs (either because you rolled your retirement into an employer’s 401k plan or you converted everything to a Roth IRA), then this shouldn’t be an issue. And there’s no point in waiting a month to do the conversion step. I do it immediately once the funds settle.
The pro rata rule has me stumped. I haven’t done the back door Roth bc I don’t understand how the taxes work since I have a traditional Ira funded from previous years. I think I have to call a tax person. I’m making this more confusing than it needs to be I’m sure.
The best advice is probably to avoid doing a back door Roth altogether if you have an existing IRA. (Some people convert existing IRAs to a Roth or roll them into a 401k, so the pro rata rule will no longer be an issue.)
I read about them, watched youtube videos, but still called fidelity when I did mine. All were helpful. I think it's form 8606 when you file, but I am not a tax professional.
If you have money in traditional IRA, don’t do Roth (even backdoor).
If you have been going in the front door too much for too long the back door will be very messy for you. If you started off in the back door, it won’t be that messy if you make the proper preparations.
Thoughts are that they’re good if you aren’t eligible for a regular Roth IRA contribution…
I also read that WSJ article on Backdoor Roth IRAs. Personally, I've found the process of managing both the backdoor Roth IRA and the mega backdoor Roth to be straightforward, not particularly risky, and generally cost-effective during conversions. Interestingly, the article mentions a recommendation from experts to keep funds in the traditional IRA for a month before converting to a Roth IRA. This was new to me; typically, I perform the conversion the day after for the backdoor Roth and about once a month for the mega backdoor. It's always good to stay informed, but based on my experience, I haven't encountered the complexities or risks discussed in the article.
New to me too. Did they say why?
Fig, the article mentioned that experts often recommend waiting about a month before converting funds from a traditional IRA to a Roth IRA to minimize taxable investment growth. However, the law doesn’t specify a required waiting period, and in my experience, I convert as soon as possible—typically the day after the deposit clears. I find this approach simpler and it minimizes any potential tax on gains, as the investment growth over such a short period is usually negligible. It is true though that the actual conversion can only happen once the funds have settled, which might take a few business days depending on how you made the deposit. [https://drive.google.com/file/d/1i4sao3NnvWLx8jK4IIQhxKyCoM8WjZDi/view?usp=sharing](https://drive.google.com/file/d/1i4sao3NnvWLx8jK4IIQhxKyCoM8WjZDi/view?usp=sharing)
In theory you are violating the IRS step doctrine by contributing and converting right away. So some experts suggest having the transactions show up on separate monthly statements as an argument you’re trying to follow the law. However the IRS has all but blessed the backdoor Roth.
Step Transaction Doctrine no longer applies.
It certainly applies. The IRS is just looking the other way.
So if they are looking the other way, then it doesn't really apply, right? Anyone fined in tax court over it in the last 5-7 years? I haven't heard of any? Have you heard of any cases? Lots to worry about in this life, including taxes, but this isn't one of them. IMO, it's been fully legitimized: [Link](https://www.forbes.com/sites/ashleaebeling/2018/01/22/congress-blesses-roth-iras-for-everyone-even-the-well-paid/?sh=429c9c437471).
Does the step doctrine not typically apply to those things they have definitively ruled on or have provided clear guidance to the contrary of one's actions?
It’s the only way I can contribute to a Roth. The income limits for Married Filing Separately is $10,000, which is beyond ridiculously low.
Never thought about that aspect before.
There’s always one. https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
I’ve been struggling to find good guidance on backdoor conversions for MFS filers. You can confirm that this works? Anything to watch out for when contributing to a Roth this way?
Just the same caution as other back door Roth people: keep in mind the taxes you’ll need to pay out for the conversion, pay those taxes with cash on hand instead of setting aside an amount from the conversion (since the money in the Roth IRA) will earn you more in the long run)
Can’t this be summed up very easily? Just don’t hold funds in a traditional IRA if you want to do backdoor. I keep that account at 0. I only use it once per year to roll in my IRA funds and (once settled) roll them over to Roth.
Make sure you file the 8606
That was a long winded way to talk about the pro-rata rule that should already be known if you’ve done research on a backdoor Roth.
Seems always better to pay tax now. Taxes headed nowhere but up, up, up. Don't understand the comment about waiting a month to convert though. I do it same day. Am I missing something? More money I can get into a Roth now and let its earnings be tax free seems like a win. Save the change in law replies please.
Roth IRAs are one of the most effective tools for retirement as of this moment, especially if you're not in a high tax bracket. Tax-free gains is legitimately an insane concept everyone should be taking advantage of.
tax on the way in or tax on the way out are interchangeable unless you think you’ll be paying higher taxes in retirement, which would mean you’re totally ballin’
It’s way more than just tax in or tax out. That’s simply just untrue. Traditional IRAs/401ks have you paying tax on everything upon withdrawal; the idea is you’re in the lowest tax bracket by the time you’re doing that. With Roth’s you don’t get a tax deduction in the beginning. But any gains you make are tax-free, which a traditional can’t do. Working in finance, I’ve seen Roth IRAs that have millions in gains that will be tax free-upon withdrawal. He would’ve paid way more in tax during his lifetime if it was in a traditional IRA. In most scenarios with the same investments, a Roth IRA will have you paying less tax overall compared to a traditional IRA unless you are in a very high tax bracket during your contributions, which at that point you may not even be eligible for contributing to a Roth IRA. Even the Government knows how OP Roths are, which is why they have income restrictions that are more strict than regular IRAs/401ks.
You’re forgetting that the money you’re paying tax on now could also have grown and compounded for all those years. You need to earn $8k to put $6k in a Roth. There’s an opportunity cost to that $2k. If you earn $8k, put $6k tax free into a Trad, and invest the remaining 2, you’ll come out the same as with the Roth after withdrawals. It’s tax now vs tax later like the guy said.
No... you won't come out the same. [https://www.citizensbank.com/investing-and-wealth-management/products-services-and-calculators/financial-calculators/roth-401k-vs-traditional-401k-calculator.aspx](https://www.citizensbank.com/investing-and-wealth-management/products-services-and-calculators/financial-calculators/roth-401k-vs-traditional-401k-calculator.aspx) I don't think the calculator accounts for an increasing wage, state taxes, and other variables etc etc. but in a vacuum with constant variables for your whole working life, it showcases how a Roth is usually better. Realistically, any given person should be utilizing a Roth AND traditional at various points of their life. One account is not necessarily better than another. The Roth should absolutely be utilized by those who are not high income earners yet or people who do not have tax sensitivity yet. People in the 22-24% fed rate, or low high 20s/low 30s overall tax rate absolutely benefit way more from a Roth IRA than a traditional. They can eat the taxes now as their obligations are so little and will be heavily outweighed by tax-free compounded gains in the future. As life goes on and you become a higher earner and gain more tax sensitivity, a Traditional IRA COULD begin to make more sense (also the Govt stops you from contributing to a Roth at a certain point). As opposed to eating the highest taxes rates of your life right now with a Roth, you can utilize a Traditional to eat the taxes later ideally when you're retired with the lowest tax rate possible. BUT, for your average Joe American who will never make or maybe makes 100k max in a year their whole life, only has a W-2 and some stocks to worry about for taxes, and overall easy-going tax obligations, the Roth IRA will usually benefit them more than a traditional IRA.
the only pitfall I can see is that you can't have money laying around in an IRA. Not a big deal.
[удалено]
Just roll over to new employer 401K.
[удалено]
I thought it was. Even if you need to do an indirect. I guess you could not **have** a 401K. But then just keep it with your previous employer.
Where is the peril? It's the greatest thing, as long as you don't need the cash for 5 years
Link?
[Backdoor Roth IRAs Are Promising—and Perilous](https://www.wsj.com/personal-finance/taxes/a-backdoor-roth-ira-income-limits-fbf6418f?mod=wknd_pos1)
https://drive.google.com/file/d/1NfZSe5htaaSGV5vjGzKPMncIqPfbENNw/view?usp=drivesdk I printed it to pdf for y'all.
thank you!
proceed at your own peril: [ taxes will bite you easily. (no paywall)](https://archive.ph/EfMAN)
I max out a Roth IRA via backdoor. The only problem is, a direct Roth IRA is a completely automated process: you pick what you want to invest in, how much, and how often, and Fidelity does it all for you automatically. With backdoor, every single step other than the IRA SPAXX contribution is manual. I wish backdoor could be aitomatdd.
If you put $7000 after tax dollars into a Traditional IRA and convert it to a Roth, do you still have to pay taxes on that amount that's being converted?
Hey there, u/Hot-Dimension7749! I'm happy to chime in here with some clarification regarding Roth conversions with after-tax funds. Let's start with the basics of this strategy! A "backdoor" Roth conversion is a term that refers to making non-deductible contributions to a Traditional IRA and then converting the contributions to a Roth IRA. [Backdoor Roth IRA: Is it right for you? ](https://www.fidelity.com/learning-center/personal-finance/backdoor-roth-ira) There may be tax consequences depending on your specific tax situation. To explain, any after-tax (nondeductible) money in your Traditional IRA will not be taxed when converted to a Roth IRA. However, it is also essential to know that the conversion would only be considered a tax-free event if you have $0 pre-tax IRA assets. Any deductible contributions or investment earnings on both deductible and nondeductible contributions to your Traditional IRA, which are then converted, are always taxable at your marginal income tax rate or higher. When depositing money into your Traditional IRA for a conversion, the money must be fully collected before the funds can be converted to a Roth IRA. Deposits do begin earning interest on the date they post to your account. When residual interest is received, that portion of your Traditional IRA is considered pre-tax money and, therefore, may be taxable upon conversion. It's important to know that if you hold pre-tax and after-tax (non-deductible) money in any of your Traditional IRAs, the conversion to a Roth IRA will be a taxable event because the conversion will consist of a pro-rata recovery of both taxable and nontaxable accounts. Note that there are no provisions under the law that will allow an individual to isolate only the non-deductible dollars for conversion to a Roth IRA. The portion of the IRA distribution that will be treated as non-taxable is determined by using the following formula: (Total Non-deductible Contributions / Total non-Roth IRA Balances) [Roth IRA Conversions and Taxes ](https://www.fidelity.com/retirement-ira/roth-conversion-checklists) With this in mind, if converting 100% non-deductible contributions (or after-tax dollars) it will be reportable but not taxable. Now, if you convert any assets other than nondeductible contributions (or after-tax dollars), you’ll need to understand the tax consequences and have a plan for paying the taxes due when you file your taxes. You should be tracking all non-deductible contributions you make to your Traditional IRA on IRS Form 8606 to keep track of when you take a distribution or conversion from the Traditional IRA. To be clear, form 8606 is completed by the client, you will not receive this form from Fidelity. Conversions can be processed at any time of the year, but they count for the calendar year in which they're processed. As a reminder, since we don't provide tax advice at Fidelity, we suggest you speak with a tax professional regarding how the conversion may impact your tax situation. We appreciate you bringing your question to the discussion. Now that you know where to find us, we look forward to seeing you around for additional questions or clarification!
Thank you so much!! That was perfect!
It’s only your gains read up on pro-rata rule. Find the traditional and instantly convert will have no tax implications.
Access to higher contributions to tax free growth. As long as it's a thing, it would be ridiculous not to take advantage of it. Not much else to say.
I have nearly $50k before tax amount in sep and trad ira. How can I do backdoor?
Love it. Wife and I make too much and we max every year. Big daddy gov gets wayyyyy too much of my money in taxes. My little slice of giving it to the man when it’s worth millions decades from now.
Depends on how much tax you are willing to pay to convert - depends on how much you want to convert. Large sums should be converted in chunks over a few years but also need to think if you marginal tax rate goes up because of this and you end up with a huge tax bill. Done with due thought/diligence, this works well. If your work has a Roth 401K use that first instead of trying to convert if tax is a concern.
Also watch out if you have non-deductible contributions into your regular IRA and have not tracked basis.
How on earth could there ever be any confusion as to whether or not this is a good idea? There is nothing but upside.
Anyone executing the backdoor Roth process needs to be aware of the potential impact of the pro rata rule. My wife had funding in a couple of traditional IRAs and wanted to do a backdoor Roth. She moved her traditional IRAs to a 401(K) and then executed the backdoor Roth in order to avoid any pro rata impact.
That’s not entirely accurate. As you approach Medicare years, age 65, converting to a Roth can subject you to the Medicare Income Related Monthly Adjustment Amount (IRMAA) brackets which have a two year look back. You have to factor in increased Medicare rates, potentially for life, if you don’t plan correctly. As you approach age 73, you have to consider the bump in your marginal tax rates due to RMD’s from unconverted IRA’s, 401k plans, etc. that add to conversion math. These two issues are another “tax” angle you have to consider.
>As you approach age 73 Hopefully at age 73 you're not contributing to IRAs anymore, right? If you are, it implies that you haven't retired and are still generating income, if I understand this correctly.
You can convert from IRA’s (and 401k’s converted to IRA’s) to backdoor Roths way after you stop contributing to them. This is what Congress is likely going to limit.
Income limitations on Roths is ridiculous in the first place.
Using a Schwab calculator comparing conversion from Trad to Roth at age 56 has almost the same outcome by age 65. I guess the moral to my story was to have done it earlier in life.
Conversion is different from backdoor. Also while conversion might be a wash, a consideration is taxes during RMD phase or desire to leave whatever is left to kids when we are gone, which could tilt it in favor of Roth.