Clarification re: Backdoor Roth and Spouse's existing Traditional IRA

[gkeep84]

I am 3 months into my first faculty job and starting to progress in our financial planning. My wife and I started a Roth IRA for each of us while I was a med student and have been contributing the max faithfully the last 4 years. In addition to maxing out my tax beneficial plans (403b/SRA and government 457) this year, I am planning on opening a tradition IRA for myself for a backdoor roth contribution.  I would like to continue to use the roth contribution for both myself and my wife; however, she  currently has a traditional IRA (about $12,000) originally from a 401k rollover from a previous job. Even though I will have a half years salary, I will likely be above the income threshold for direct Roth contribution. In order to avoid the pro rata rule, I would like to have both of our tradition IRAs have a balance of $0.00 in order to use the backdoor roth contribution for 2017.  What should I do with the balance of $12K in my wife's traditional IRA?

[childay]

You could roll it into the roth and pay taxes on it.  Otherwise does she have any income currently or a solo 401k to roll it into?

[jfoxcpacfp]

gkeep84 wrote:

I am 3 months into my first faculty job and starting to progress in our financial planning. My wife and I started a Roth IRA for each of us while I was a med student and have been contributing the max faithfully the last 4 years. In addition to maxing out my tax beneficial plans (403b/SRA and government 457) this year, I am planning on opening a tradition IRA for myself for a backdoor roth contribution.  I would like to continue to use the roth contribution for both myself and my wife; however, she  currently has a traditional IRA (about $12,000) originally from a 401k rollover from a previous job. Even though I will have a half years salary, I will likely be above the income threshold for direct Roth contribution. In order to avoid the pro rata rule, I would like to have both of our tradition IRAs have a balance of $0.00 in order to use the backdoor roth contribution for 2017.  What should I do with the balance of $12K in my wife’s traditional IRA?

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This is the best time to convert to a Roth since next year you will, presumably, be in a higher tax bracket with a full year's faculty pay.  As  childay said, if she has SOLO-k availability, she can roll into that. Or, if she has a 401k or 403b at her current job, she should check to see if it accepts rollovers and r/o to her work plan (assuming it's not too crappy - but it's only $12k).

[gkeep84]

Thanks for your thoughts childay and Johanna. I agree this is the best time to convert the funds to the Roth and pay the tax. Is there anything I should watch out for in order to do this conversion correctly and pay the ordinary income taxes?

[jfoxcpacfp]

gkeep84 wrote:

Thanks for your thoughts childay and Johanna. I agree this is the best time to convert the funds to the Roth and pay the tax. Is there anything I should watch out for in order to do this conversion correctly and pay the ordinary income taxes?

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Not especially. You have until 10/15/17 to recharacterize, but i doubt you will want to do that, given the back-door Roth situation. You can liquidate and convert or convert "in kind", which means you simply change the character of your account from TIRA to Roth, without touching your investments.