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To backdoor or not Backdoor. That's the question

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  • To backdoor or not Backdoor. That's the question

    I am asking for my sister. She just started travel nursing (still a W-2 employee) and she would be earning more than the Roth IRA contribution limit. She also has a traditional 403b + money purchase plan from work that she is unsure what to do. She can’t open a 403b account till she is 4 months into her job. However, she could be working for another travel nursing company by then.
    The challenge is to figure out what to do with the asset in her 403b account while having the option to do a backdoor Roth.
    1. If she keeps the asset with the 403b custodian, she would be paying about 1.65% per year which is crazy.
    2. She can wait till she is eligible for a 403b account with her new company, roll over the assets, then do a backdoor Roth.
    3. She can roll it to a traditional IRA now, when roll it onto the new 403b account when she is eligible. Then she could do the backdoor Roth. However, I don’t know if Traditional IRA accounts needs to be completely empty throughout the year or she would have to pay taxes due to the pro-rata rule.
    4. So she can just roll the asset to a traditional IRA and call it a day and forget about the backdoor Roth. She doesn’t know for sure how long she will be a travel nurse. Based on her old income she and her husband won’t be over the contribution limit. If they are over the contribution limit again, then we think about rolling over the asset to a 403b account.
    Thoughts and ideas?

  • #2
    What's the basis of her current 403b?
    Does the the new plan have better fees?


    • #3
      She has until 12/31/21 to empty the TIRA, sounds like a bd Roth is a possibility. She needs to check that her new 403b will accept rollovers. Of course, if the 403b is rather insignificant, she might just consider rolling directly into her Roth.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


      • #4
        jfoxcpacfp can you clarify your comment on 12/31/2021 to empty the TIRA? Are you talking about the IRA contribution that would go into backdoor roth? Or are you talking about the 403b rollover.

        pierre Are you talking about her current account balance or how much contributions she/her old company made in the account? I can ask her to find out about the 403b plan at the new company. But I don't even know if she would be with this company for 120 days to 1 year..


        • #5
          jfoxcpacfp is referring to the latter.

          A Backdoor Roth is a possible combination of two actions. A non-deductible traditional IRA contribution and a Roth conversion.

          Pro-rata taxation of the non-deductible basis only occurs when there is any pre-tax balance in all traditional SEP and SIMPLE IRA accounts on 12/31 of any year you actually do a Roth conversion.

          There are ways that pro rata taxation can be avoided:
          Do not rollover the 403b until you have another non-IRA employer plan to roll it over to. Yes, 1.65% annual costs are unpleasant, but a year or two is not a big detriment.

          If you rollover the 403b to an IRA, you can still make non-deductible traditional IRA contributions.

          Just do not do any Roth conversions until all the pre-tax balances in all traditional SEP and SIMPLE IRA accounts are $0. A year or two of pre-tax earnings is not a big detergent detriment.

          Especially, when you can rollover those pre-tax earnings along with any other pre-tax IRA balance.
          Last edited by spiritrider; 02-16-2021, 01:50 PM. Reason: I didn't really finish the thought with the highlighted sentence. The auto complete of detergent was confusing.