Does the backdoor Roth work for me?

[nykhansahib]

Good morning,

First of all I am huge fan of WCI. Thank you for all the guidance and giving us a platform to learn.

I am currently an associate that does not get a retirement account from my employer. I have been contributing to a traditional IRA, one for my wife and one for me.

I am currently doing some work as an independent contractor. So I started thinking about the backdoor Roth.

We currently have around $18000 in an traditional IRA under my name and another $5500 in an IRA under my wife's name. We have deducted these contribuations on our tax returns in the past.

My understanding is that I can open up a 401 K through the S-corp and can roll my IRA into the 401K and then roll it into a roth afterwards. Do I have to pay taxes on the gains on the traditional IRA funds that I will be transfering.

Let me know if that is possible for us to do? And or if it even make sense, my gross income will be about $250 K through my W2 and another $30-40 K through my IC work.

Thank you for taking the time to help me sort this out.

[DMFA]

No, no taxes. A "rollover" is like-to-like, such as pretax to pretax, like your traditional IRA and 401(k) are. These are both tax-deferred in the sense that contributions are deducted, and all distributions (both contributions and earnings) are taxed as ordinary income. Hence rollovers aren't taxed.

If you were converting to Roth, on the other hand, all pretax money converted (deducted contributions and any earnings) would be taxed.

Be sure you choose a 401(k) custodian which accepts incoming rollovers. Unless they've recently changed their rules, Vanguard doesn't.

[jfoxcpacfp]

Is your S-corp for the IC work? Yes, you can set up a SOLO-k through it and roll your pre-tax IRA into it. You have to do this before 12/31/17 in order to be able to do a tax-free backdoor Roth conversion this year. You will not pay any taxes now, just when you begin taking future distributions.

Since your wife has only $5,500 in her TIRA, might want to consider just converting to a Roth so that she can do backdoor conversions, also. You might also consider hiring her to do some bookkeeping or payroll for your IC business since you already have to prepare payroll for yourself. Then she could participate in the SOLO-k and roll her TIRA into her account.

Back to an S-corp for $40k of income - you'll almost certainly save money if you'll shut down the s-corp and move to either a PLLC or a sole proprietorship. The cost of administration for a small S-corp is just not worth any benefit. And I really don't see any benefit.

[Faithful Steward]

I think you're confusing a couple of strategies or simply using wrong terminology. However, your overall thinking is on track.

nykhansahib wrote:

We currently have around $18000 in an traditional IRA under my name and another $5500 in an IRA under my wife’s name. We have deducted these contribuations on our tax returns in the past.

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Because you have Traditional IRAs containing pre-tax contributions, you will need to either plan on paying the taxes on these accounts and converting them to Roth IRAs or repositioning them so they do not cause problems due to the IRS pro-rata rule.

• If you simply pay the taxes for Roth Conversion, and (as it sounds from your income information) you're in the 28% marginal tax bracket, it will cost you around $6,580 in Federal income tax.
  
  
  
  • This is the simplest way to get your Traditional IRA money into a Roth IRA - no need to transfer it into a Solo 401(k) and convert from there.
  
  
  • Unless your spouse has some self-employed income, this is probably the only way to clear the deck for her to make future Backdoor Roth contributions.
  
  
  
  


• Since you have IC income, another alternative, as you point out, would be to open a Solo 401(k). When you do, make sure the plan document allows for you to transfer in other qualified accounts. Once that's done, you could transfer (not rollover) your Traditional IRA into the Solo 401(k). If you don't want to pay the taxes to convert your Traditional IRA to a Roth IRA, this is the only way to clear the deck for future Backdoor Roth contributions.

nykhansahib wrote:

Do I have to pay taxes on the gains on the traditional IRA funds that I will be transfering.

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Since you made pre-tax contributions to your Traditional IRAs, the entire account balance would be taxable in a Roth Conversion.

Finally, since you have the IC income, I would absolutely recommend opening a Solo 401(k) to allow you to increase the amount you can contribute to your retirement nest egg.