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Backdoor Roth IRA and SIMPLE IRA Question

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  • Backdoor Roth IRA and SIMPLE IRA Question

    Hi all,

    I'm finishing up training this year and will be an attending at a private practice starting in July 2021. With my spouses income, we're over the limit and had to do a backdoor Roth IRA for 2020. The practice I will be working at uses a SIMPLE IRA (not ideal) retirement plan with a 3% match. I understand I will not be able to do Roth conversions, however if I have the cash currently would I be able to fund a traditional IRA and then convert it before I start working at the new practice and have other IRAs subject to pro rate? I don't want to make this too complicated, but my understanding is that the pro rata rule is considered at the time of conversion. Moving forward, we'll fund the SIMPLE IRA until we can roll it all over into a 401K (future employer says they are already considering to switch). Additionally we'll just fund a tIRA and convert it all once we roll the SIMPLE IRA over.

    Thanks for any and all insight!

  • #2
    Your understanding is incorrect. All pre-tax balances in all traditional SEP and SIMPLE IRA accounts on 12/31 of the year you do any Roth conversions are included in pro rata taxation.

    You probably should continue to make non-deductible traditional IRA contributions until you can start rolling over the SIMPLE IRA. This can not happen until two (2) years have elapse since the first contribution.

    Hopefully, by then you can generate some self-employment income and adopt a one-participant 401k to rollover your SIMPLE IRA by 12/31 each year. Then you will be able to do Roth conversions with little to no tax liability.
    Last edited by spiritrider; 01-24-2021, 12:06 PM.

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    • #3
      Perfection

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      • #4
        Thanks for the response!

        Follow up question: For 2020, I had to recharacterize my contribution back to a traditional IRA as we didn't realize we would be over the limit since we got married recently. If I did my conversion this year (2021) for my 2020 contributions, would that also make my future SIMPLE IRA account included in pro rata taxation?

        Yes - the plan is to continue making non-deductible traditional IRA contributions until I can open a solo 401K, or my employer decides to change over. Then, I'd roll over after 2 years of the first contribution.

        This was very helpful - thank you.

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        • #5
          The pro rata taxation of non-deductible basis occurs in the tax year of the Roth conversion. The tax year of contribution is irrelevant. If you did/do a Roth conversion this (2021) tax year, your Simple IRA 12/31/21 balance will cause pro rata taxation.

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          • #6
            Thank you for your response!

            Although this practice is a dream job situation work-wise, the unfortunate SIMPLE IRA option has been a head scratcher for me.

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            • #7
              Having a SIMPLE IRA instead of a 401(k) hurts the practice owner(s) as well as the worker bees.

              Do some research and politely pitch ownership on the advantages of a 401(k), with or without profit sharing beyond the required matching contributions.
              Last edited by Hank; 01-28-2021, 05:01 AM.

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              • #8
                https://www.nerdwallet.com/blog/inve...he-right-plan/

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                • #9
                  Incorrect.

                  That is only a valid point for choosing to make Roth contributions vs. traditional contributions or doing Roth conversions.

                  A Backdoor Roth or Mega Backdoor Roth is about additional Roth contribution space, not instead of traditional contribution space. The choice is between taxable investment space and tax-free investment space.

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                  • #10
                    No, but a Backdoor Roth is just a slang term for two different actions.

                    It is not to late to open a traditional IRA, make and report a 2020 non-deductible contribution on your 2020 Form 8606. However, a Roth conversion now will be reported and to-the-extent taxable on your 2021 Form 8606.

                    ​​​​

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                    • #11
                      Originally posted by spiritrider View Post
                      No, but a Backdoor Roth is just a slang term

                      ​​​​
                      Were from the streets, yo....

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