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Backdoor Roth IRA question. I have previous TIRA in CDs. Confused.

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  • Backdoor Roth IRA question. I have previous TIRA in CDs. Confused.

    I have 4 Traditional IRAs for tax deduction started but placed them in CDs per family advice (regret this now as they won't mature until 2017-2020, each one was for 5 years and I started the first one in 2012). Subsequently, opened 1 Roth IRA for 2015.
    However, recently changed jobs and no longer eligible for Roth IRA and Traditional IRA deduction (high income earner/tax bracket). Can only do nondeductible IRA.

    Question 1: Can I still open a nondeductible Traditional IRA and then convert to a Roth IRA for 2016 given my previous Traditional IRAs in CDs? Does the pro rata rule work against me?

    Question 2: Should I open nondeductible Traditional IRA for this year (2016) in Vanguard, wait for the old CDs to mature and transfer them to Vanguard, and then start backdoor Roth IRA in 2020 (if it still exists)? Is this the mega back door IRA?

    I am interested in the backdoor Roth IRA but I'm not sure if my previous deductible Traditional IRAs (in CDs) make it financially worth it to try or to wait for my CDs to mature and then start the backdoor Roth IRA process?

    OR should I just open regular taxable accounts from Vanguard? and forget about nondeductible IRAs altogether?

    Thanks

  • #2
    (Hope I understood your situation correctly)

    Answer to your Question 1 is that yes the Pro Rata rule will apply in your case.  It applies to all pre-tax retirement accounts, such as Traditional IRA's, SEP-IRA's, Rollover IRA's, and SIMPLE IRA's.  You can see here a sample on how a conversion will be taxed.

    As long as pre-tax IRA balances exist, the Pro Rata will apply.

     

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    • #3
      If reading correctly at 4 pre-tax TIRA you're probably looking at a $20k+ balance.

      Unfortunately as long as those exist you'll be subject to pro-rota so at looking at at least a quarter of any conversion amount getting taxed .

      The only "clean" way to do the back-door is if your new employer 401k plan will allow any pre-tax to be rolled in some plans do, some plans do not. Some are really strict with a lot of paper work to verify it is pre-tax some just take the check. You need to ask your employer 401k administrator.

      Say you can do that then you would want to roll in ALL the excess that is above your cost-basis into your 401k. If done correctly the only balance you have are those that were the post-tax you already paid tax on (your cost basis).

      Then after that you can do "clean" backdoor Roth conversions ever year.

      But let's say your employer plan doesn't allow it. There are some benefits still for having a non-decutible IRA va regular tax brokerage. In the non-deductible you're deferring paying tax on gains till at the end so you get some compounding benefit but if you're just doing but and hold on plain stock then the long-term tax would be better.

      Also having the non-deductible gives you the option to convert later if say you get a new employer plan which is more flexible.

      Good luck!

      Comment


      • #4
         

        Question 1: Can I still open a nondeductible Traditional IRA and then convert to a Roth IRA for 2016 given my previous Traditional IRAs in CDs? Does the pro rata rule work against me? Question 2: Should I open nondeductible Traditional IRA for this year (2016) in Vanguard, wait for the old CDs to mature and transfer them to Vanguard, and then start backdoor Roth IRA in 2020 (if it still exists)? Is this the mega back door IRA?
        Click to expand...



        1. You can do it, but you'll pay taxes, which is unnecessary. The prorata rule comes into play.

        2. You should go ahead and contribute to the nondeductible TIRA every year in which you have extra $ that you have not contributed pre-tax, assuming other goals are funded (no high-int debt, life and OO disability ins in place, etc.)

        3. Why are you waiting for the CDs to mature? Cash them out, pay the penalties and let them begin working for you. After the cash-out & penalty might be a good time to convert them to a Roth (lowest value) and then continue with your back-door strategy.


        No, this is not a mega back-door Roth. That results from working for an employer who allows you to make after tax contributions to your 401k. When you convert this after-tax balance (either annually, if allowed, at retirement, or upon separation from service) to a Roth, the balance may be quite large and you will owe taxes only on the growth and income since contributing.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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