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Should I convert already deductible IRA amount

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  • Should I convert already deductible IRA amount

    Hello,

    My wife has a IRA from 2003 to which she contributed $3000 in 2003 and today it is $6700. A gain of $3700. Never took any distribution.

    The $3000 was a “deductible” contribution for the year 2003.

    Now planning to do Backdoor Roth for her from this year 2019.

    Should I convert this $6700 into Roth along with $6000 non deductible contribution (for 2019) or just leave the $6700 alone. Since it was “deductible” her basis should be 0. Will it affect her 2019 (and subsequent) backdoor conversion of $6000 at all.

    I would like to get some expert opinions here.

    thank you,
    ANPrinceton

  • #2
    Your $6700 will be taxed at ordinary income rates for married filing jointly. But you’ll need to do this (unless you can roll it into an i401k) to have non taxable backdoor Roth conversions in the future. If you don’t you’ll pay pro rata tax on the % of the backdoor Roth that is deemed to have no basis. It’s certainly not a tax win to convert at what is likely a higher tax rate now, but you’ll be doing the backdoor Roth anyway so just get it over with.

    Comment


    • #3
      To avoid the prorata rule, she can:
      • r/o to a solo-k
      • r/o to employer account (401k or 403b), if allowed
      • convert to a Roth
      For this amount I would probably convert to a Roth and get the tax-free growth started.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4
        Originally posted by jfoxcpacfp View Post
        To avoid the prorata rule, she can:
        • r/o to a solo-k
        • r/o to employer account (401k or 403b), if allowed
        • convert to a Roth
        For this amount I would probably convert to a Roth and get the tax-free growth started.
        Sorry to be overly didactic, but I believe only your first two choices avoid the pro rata rule. However, I concur that for this amount the third choice is the way to go. Fewer hoops to jump through and tax consequences fairly minimal.

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        • #5
          1. What is your marginal tax rate federal plus state?

          2. Does your spouse have access to any other retirement account such as a workplace 401k?

          Comment


          • #6
            Originally posted by Bmac View Post

            Sorry to be overly didactic, but I believe only your first two choices avoid the pro rata rule. However, I concur that for this amount the third choice is the way to go. Fewer hoops to jump through and tax consequences fairly minimal.
            I think you mean pedantic, which I am now being.



            Merry Christmas

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            • #7
              Originally posted by FIREshrink View Post

              I think you mean pedantic, which I am now being.



              Merry Christmas
              I would aver that either work in the way intended, but I like your style.

              Merry Christmas

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              • #8
                Originally posted by Bmac View Post

                Sorry to be overly didactic, but I believe only your first two choices avoid the pro rata rule. However, I concur that for this amount the third choice is the way to go. Fewer hoops to jump through and tax consequences fairly minimal.
                Sorry to be so dense
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #9
                  if we’re being didactic or pedantic or whatever I believe all three of Johanna’s options “avoid the pro rata rule”

                  Comment


                  • #10
                    @jac is correct as usual.
                    Bmac, do you see why?

                    Comment


                    • #11
                      Originally posted by jacoavlu View Post
                      if we’re being didactic or pedantic or whatever I believe all three of Johanna’s options “avoid the pro rata rule”
                      I guess I don’t completely understand the pro rata rule then. It would seem to me that the option of converting a TIRA with untaxed gains and deductible contributions, particularly if adding annual nondeductible contributions would be invoking the pro rata rule.

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                      • #12
                        How? What is left to pro rate.......?

                        Comment


                        • #13
                          Ok. Agreed if just converting the $6700 of deductible + gains before adding nondeductible 2019 contributions avoids the pro rata rule. But it does not avoid the taxes due which is what I think @jfoxcpacfp’s first two options do. Why do we have to make retirement account investing so needlessly complicated in this country?

                          Comment


                          • #14
                            Now you got it.

                            Comment


                            • #15
                              Originally posted by jacoavlu View Post
                              1. What is your marginal tax rate federal plus state?

                              2. Does your spouse have access to any other retirement account such as a workplace 401k?
                              1. Federal tax rate : 35%
                              State tax rate : Between 6% and 7%

                              2. yes, she has access to 401K at work but it has been Roth 401(K) so far. From this year she has been offered pretax 401(k) and she plans to max it out. Don’t know whether they will take rollover to it. I doubt it as her employer has their own funds for retirement savings.

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