2023 Backdoor Roth IRA Home Base

[GasFIRE]

Sorry about about that. I have an old Rollover IRA account which is at zero dollars. Can I use this Old Rollover IRA account to do my non-deductible contribution?
Or is it better to open a Traditional IRA account to do the non-deductible contribution?

Thank you again

A rollover IRA is a traditional IRA so yes you can use it for your BDR non-deductible contribution, especially since it’s empty. The main advantage of keeping a separate rollover IRA is if you plan to eventually roll it back into an employer’s retirement plan some plans won’t allow you to if you’ve mixed old retirement plan $ with your own IRA contributions.

[T.W.]

A rollover IRA is a traditional IRA so yes you can use it for your BDR non-deductible contribution, especially since it’s empty. The main advantage of keeping a separate rollover IRA is if you plan to eventually roll it back into an employer’s retirement plan some plans won’t allow you to if you’ve mixed old retirement plan $ with your own IRA contributions.

Perfect. thank you, GasFire, for confirming. Everybody, have great holiday!

[tylerjw12]

I had a brief job this year in which I contributed a little under $1,000 into a 401k. I left the company and had no other place to put it, so I rolled it over into a trad IRA. Do I need to convert this to the roth IRA first before I do the backdoor (for 2021 tax year)? Does the order I do this matter?

Also, I understand these funds DO NOT count towards my $6k allotment for this year. Please correct me if I misunderstood.

Thanks

[GasFIRE]

I had a brief job this year in which I contributed a little under $1,000 into a 401k. I left the company and had no other place to put it, so I rolled it over into a trad IRA. Do I need to convert this to the roth IRA first before I do the backdoor (for 2021 tax year)? Does the order I do this matter?

Also, I understand these funds DO NOT count towards my $6k allotment for this year. Please correct me if I misunderstood.

Thanks

You are correct, the $1K rollover to your tIRA does not count towards your individual $6K contribution limit for your IRA. No need to convert the rollover $1K first before the BDR. You can convert $7K ($1K + $6K) all at the same time. Just make sure you do it before 12/31/21 so your tIRA balance is $0 to avoid the pro-rate rule.

[Larry Ragman]

Big thank you to POF for turning this original post by PEDS into a formatted FAQ over on Physician on Fire with the permission of both Peds and WCI.

[Tim]

Big thank you to POF for turning this original post by PEDS into a formatted FAQ over on Physician on Fire with the permission of both Peds and WCI.

The sticky is under "Retirement Accounts" on WCI. Wonderful reference tool.

[blbaker28]

Hello everyone, my first ever post here. I had a lawyer friend of mine recommend this site as one of the best to get financial questions answered (irony?). Anyway, I've read and searched but didn't see anything addressing my backdoor question, my apologies if this has already been answered. The question first, is a backdoor conversion still worth it given my situation.

My situation is that I have close to 500k in a traditional IRA accumulated the usual way, previous 401s rolled over, over time. I opened a Roth last year when my wife was laid off from Covid. We were under the income limits then. Now she's gone back to work and we are over the Roth contribution limits (Good problem to have I know). I looked into doing a Roth backdoor conversion but then discovered the pro rata rules that say, essentially, the entire 6k contribution would be taxed. We top out at the 24% bracket.

Would a backdoor Roth still be worth it given the way it increases my tax base (i.e. basically taxing close to 99% of that 6k). I guess the TL: DR question is, is it better to pay the taxes early (and in this case twice on the same dollars (seems wrong)) and then let it grow tax free, or leave those dollars parked somewhere else since the money in my traditional IRAs and the IRA aggregation rules make the backdoor Roth a poor strategy?

Any help is very much appreciated.

thanks so much!

b

[GasFIRE]

Would a backdoor Roth still be worth it given the way it increases my tax base (i.e. basically taxing close to 99% of that 6k). I guess the TL: DR question is, is it better to pay the taxes early (and in this case twice on the same dollars (seems wrong)) and then let it grow tax free, or leave those dollars parked somewhere else since the money in my traditional IRAs and the IRA aggregation rules make the backdoor Roth a poor strategy?

Any help is very much appreciated.

thanks so much!

b

Since you have a tIRA you’ll be subject to the pro-rata tax if you do the BDR. You are not taxed twice, pre-tax is only taxed once when you take it out, whether by conversion now or RMD later. Do you have a 401k/403b plan that you can roll your tIRA back into to eliminate the pro-rata tax?

IRAs are individual accounts. The rollover tIRA is yours. As long as she doesn’t also have one, she can do the BDR for herself.

[blbaker28]

Thank you for the quick reply. I appreciate the help. I do have a 403 with TIAA, I'll need to check the fees and the investment vehicles they have available but I'm considering this as an option. When I said taxed twice I was looking at it from the notion of funding the tIRA with after tax, non-deductible dollars and then, because of the pro-rata IRA aggregation rules, when I do the back door roth, that 6k being converted to roth money feeds my annual income and basically, is being taxed twice. Am I looking at that wrong.

Assuming the 403 is not a good strategy, would you recommend still doing the backdoor roth or does it stop being worth it given the tax basis. Just to make sure I'm doing it right, assuming 500k in my tIRA and I want to fully fund a roth with 6k, so I open a separate tIRA but because of the rules, the IRS now sees a grand total of 506k in IRA money. My non-deductible % is 6k/506k = 1.19% of my 6k or $114 can go into the Roth tax free. The remaining $5886 is now taxable or added to my tax base as an IRA distribution (that's why I'm saying taxed twice, I paid tax on those dollars when I received them as income and then they are adding to the tax base because of the pro-rata rules and the backdoor conversion). If I assume a 24% tax rate on that 5886 I'll owe approx $1412.64 in the year I do the conversion. As I understand it all 6k will go into the roth but I'll owe an additional 1412 in taxes the year I do the conversion. This, of course, all assumes I'm understanding and doing this right, no guarantees there.

So, if it seems like I do have a good handle on this, would you still do the conversion?

Thanks again, I appreciate the quick help, haven't been able to find any help anywhere else despite hours and basically a lost day searching.

b

[Larry Ragman]

You should read the FAQ done by Physician on Fire I linked above to get some background, but let’s distinguish between several different scenarios. First, yes, if you want to do backdoor Roth’s then you must first transfer all of your Roth funds outside your IRA. Typically you would do so as a rollover to either a work 401k or a solo 401k. You don’t say what you do, so it is hard to evaluate whether or not you should be able to do this. But if so, then once you complete the rollovers you will be able to do BD Roth’s in the future. Second, if that is not an option, then the question is whether or not you would be in a higher or lower tax bracket in retirement. If higher, then a Roth conversion (or series of them) might be worthwhile. If the same or lower probably not.

[blbaker28]

Thanks Larry, I appreciate the help with this.

I'm actually a professor, that's why my 403 is with TIAA. I moved most of my money away from them because they didn't have the vehicles I wanted and the fees were kind of high compared to the traditional IRA at Fidelity where I rolled everything into. I also have a rental property that generates a fair amount of revenue. Of course most of that revenue goes into property management, mortgage, taxes and insurance but the government doesn't care about that. So, when my wife wasn't working over the last year and a half or so, we were within the income limits for a Roth. However, now that she's working again we exceed the income limits for the Roth.

Also, when my wife was in professional limbo we started an LLC for her to explore some business ideas she had. It's a long story but we do generate some income from that. It's modest though, last year was the first year we earned anything and it was under a thousand dollars. My lawyer friend, who has his own LLC for his law work, told me to set up my own personal 401 through that. Not only will that solve a lot of the problems we're talking about here, but we can contribute up to the employer-employee limits of a retirement account (58k I believe since I'm still under 50). My concern with that is that our LLC is tiny, we want it to grow but its never going to be a full-fledged business and I'm concerned that could draw unwanted attention from the IRS when the bulk of my retirement lands in a 401 for a company generating barely a thousand dollars a year. He told me that all LLCs are the same and I have those rights just like he does but still, seems a little dodgy. Not that I have a problem with that, just don't want any unwanted attention if that makes sense?

[Larry Ragman]

Thanks Larry, I appreciate the help with this.

I'm actually a professor, that's why my 403 is with TIAA. I moved most of my money away from them because they didn't have the vehicles I wanted and the fees were kind of high compared to the traditional IRA at Fidelity where I rolled everything into. I also have a rental property that generates a fair amount of revenue. Of course most of that revenue goes into property management, mortgage, taxes and insurance but the government doesn't care about that. So, when my wife wasn't working over the last year and a half or so, we were within the income limits for a Roth. However, now that she's working again we exceed the income limits for the Roth.

Also, when my wife was in professional limbo we started an LLC for her to explore some business ideas she had. It's a long story but we do generate some income from that. It's modest though, last year was the first year we earned anything and it was under a thousand dollars. My lawyer friend, who has his own LLC for his law work, told me to set up my own personal 401 through that. Not only will that solve a lot of the problems we're talking about here, but we can contribute up to the employer-employee limits of a retirement account (58k I believe since I'm still under 50). My concern with that is that our LLC is tiny, we want it to grow but its never going to be a full-fledged business and I'm concerned that could draw unwanted attention from the IRS when the bulk of my retirement lands in a 401 for a company generating barely a thousand dollars a year. He told me that all LLCs are the same and I have those rights just like he does but still, seems a little dodgy. Not that I have a problem with that, just don't want any unwanted attention if that makes sense?

I totally understand on the TIAA 403b. At my work we shifted over to Vanguard for the same reasons. Regarding the solo 401k, don't allow concern over the IRS to prevent you from doing something sensible. The WCI site has a lot of info on setting one up, so I'll stay away from contribution limits and how they interact with revenue streams. (Hint: it is not as simple as you suggest. But use the search function and you can get educated.) But regarding your current funds in the IRA, there should be no concerns at all about rolling those into a valid solo 401k. Such a transaction is completely separate from earning limits or anything like that. The IRS will not care if the money is in a IRA or a solo 401K.

[blbaker28]

Thanks Larry this has been really helpful. I did some digging as you suggested and I guess it is common sense if you think about it for a couple of seconds. It's kind of hard to contribute to 20k to your solo 401 if your company only made 10k. I guess you are allowed to deposit 100% of your salary or wage compensation and then a % of the profit sharing from your company. Makes sense. For the purposes of this conversation its really not an issue given that I won't be taking any money for retirement from the LLC and the bigger question is if I can roll over my existing tIRA into a 401 housed in our LLC. From my reading today it looks like I can since rolling over is very different from contributing. Assuming I'm understanding everything correctly I need to contact a financial institution, I'm guessing I'll use Fidelity since my tIRA is already there, and see if they can essentially reclassify (I guess technically open up a new account) that tIRA as a 401. Thanks Larry and everyone else who has answered my questions so quickly. Huge help. Nice to know there is a place you can go to, to get answers to these more specific questions.

[Larry Ragman]

Thanks Larry this has been really helpful. I did some digging as you suggested and I guess it is common sense if you think about it for a couple of seconds. It's kind of hard to contribute to 20k to your solo 401 if your company only made 10k. I guess you are allowed to deposit 100% of your salary or wage compensation and then a % of the profit sharing from your company. Makes sense. For the purposes of this conversation its really not an issue given that I won't be taking any money for retirement from the LLC and the bigger question is if I can roll over my existing tIRA into a 401 housed in our LLC. From my reading today it looks like I can since rolling over is very different from contributing. Assuming I'm understanding everything correctly I need to contact a financial institution, I'm guessing I'll use Fidelity since my tIRA is already there, and see if they can essentially reclassify (I guess technically open up a new account) that tIRA as a 401. Thanks Larry and everyone else who has answered my questions so quickly. Huge help. Nice to know there is a place you can go to, to get answers to these more specific questions.

You are most welcome. Several of us here have learned a lot and enjoy giving back. If you have questions on setting up the solo 401k just start a new thread and put that in the title. There are several experts here that will help. But say you pick Fidelity. If you call them they will walk you through it. Here is a preliminary link. Best Solo 401k Providers | White Coat Investor

[G]

What is the general opinion on funding the BDR with the age 50 kicker, if you don't turn 50 til late in the year. Are folks waiting to see if they're still alive before they toss in the extra 1k?