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Roth IRA timing and the pro-rata rule

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  • jfoxcpacfp
    replied
    I'm going to add one more suggestion to @spiritrider 's list:

    5.  Wait until the next market correction and convert all to a Roth IRA. In the meantime, continue to get those nondeductible TIRA contributions in so you won't lose out on any years' availability. Go ahead and invest in the n.d. TIRA; when we have a decent correction (the market averages intra-year corrections of around 14%), you'll be paying very little, if anything, on the growth. Or, leave the balance in a MMA and don't invest the n.d. TIRA until the next correction and buy at a bargain, then convert all. The point is to not waste any opportunities to make your annual IRA contributions.

    In the long-term scheme of your plan, even converting the full amount of $30k today and paying taxes on $15k could yield better results than moving 1/2 of the money to continue growing tax-deferred to be taxed at your top marginal bracket in 40 years. That's a choice my crystal ball can't predict but my personal inclination is to stash as much as possible into the Roth.

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  • spiritrider
    replied




    I figured my options were to

    1) Convert the whole 30K and pay taxes on the 15K growth (since I paid the taxes on the non deductible contribution)

    2) Convert 15K of the growth but don’t know what the tax implication is because as I understand it I can’t convert just the growth

    3) Roll the entire 30K into my current 401K but then I will pay taxes on the original 15K that I alreadly paid taxed on at some point after 59.5.

    I know I am going to pay taxes just don’t know which approach is the least costly
    Click to expand...


    1) This is certainly an option, but there is no need to pay any taxes right now, especially if you are in a high marginal tax bracket.

    2) Any Roth conversion is done pro-rata. This means since 50% of your balance is pre-tax, 50% of the $15K conversion $7,500 will be taxable in the conversion.

    3) IRS regulations do not allow the rollover of after-tax money into a 401k. This will be a mess as evidenced by another recent thread.

     

    4. The best option. Rollover the non-deductible contributions tax-free to a Roth IRA. Then rollover the remaining pre-tax (traditional, SEP and SIMPLE(>= 2 years)) IRA balance(s) tax-free to your current 401k. Just be sure to accomplish the latter by 12/31/17.

     

     

     

    Leave a comment:


  • smilebraces
    replied
    Thanks for the blog post but I still can't find information on non deductible IRA contributions that have grown since the original contribution.  I contributed 15k (5K  from 2010, 2011, 2012) which has grown to 30 K.  I would like to start contributing and converting the 5500 via a back door roth but can't figure out the best thing to do with the 30k.

    I figured my options were to

    1) Convert the whole 30K and pay taxes on the 15K growth (since I paid the taxes on the non deductible contribution)

    2) Convert 15K of the growth but don't know what the tax implication is because as I understand it I can't convert just the growth

    3) Roll the entire 30K into my current 401K but then I will pay taxes on the original 15K that I alreadly paid taxed on at some point after 59.5.

    I know I am going to pay taxes just don't know which approach is the least costly

     

    Leave a comment:


  • jfoxcpacfp
    started a topic Roth IRA timing and the pro-rata rule

    Roth IRA timing and the pro-rata rule

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