closing Traditional IRA

[ukn1207]

My spouse has $7400 in a 2010 traditional IRA and has been unable to contribute to a backdoor roth. I've done backdoor roth in the past and am trying to understand the process to be able to help him. it seems that the best route is to roll it over to a 401K. isn't that double tax since i have already paid taxes on the traditional IRA contributions? or is that the price to pay to be able to do backdoor roth?

in case his employer 401K doesn't allow for roll-ins, can he roll the traditional ira $7400 into a $5500 roth for him and rest (1900) into a spousal ira for me (no earnings this year for me) which i would later backdoor into a roth for me?

i'm just trying to figure out how best to come out of this and lose the least amount in taxes or penalties.

[DMFA]

Well your spouse *can* do backdoor Roth, would just have to pay taxes on it, like you said...

Yours and your spouse's IRAs cannot mix.  They're *individual* retirement accounts.

Your options are:

• just convert your spouse's Traditional IRA to Roth and pay the tax on it


• roll your spouse's Traditional IRA into a pretax employer account (401k or 403b), including an individual 401(k) for self-employment income, which can be as low as a few hundred dollars

Probably easiest just to convert to Roth, but then there's the tax hit.  Of course, if your spouse already has an employer account that accepts incoming rollovers, then that's also easy.  People will fairly regularly obtain some self-employment income from doing surveys in order to be "self-employed" to open the 401(k).

[nachos31]

If the OP (or spouse) made a non-deductible Trad IRA contrib (i.e. with post-tax dollars) and they roll it into a 401k, is it accounted for separately such that when withdrawn they only owe taxes on the growth and not the originally amount rolled over (since taxes were already paid)?

[spiritrider]

IRS regulations prohibit rolling over anything other than pre-tax IRA assets into a qualified plan.

This is in fact what allows you to isolate non-deductible basis. You rollover just the pre-tax IRA assets to the qualified plan leaving just the non-deductible basis. You can then do a Roth conversion with little to no tax liability.

[jfoxcpacfp]

If your spouse's retirement plan will not accept rollovers, I would recommend simply converting and sucking up the tax hit. Best to just get it finished, imho, and start the tax-free growth. You will not use up your $5,500 annual "contribution" amount by doing this, however. A conversion is different from a "contribution" - you are not limited to the amount you can convert in a single year, but you are limited to the amount you can contribute. As mentioned by @DMFA, you cannot mingle your IRAs with another person's IRAs, spouse or anyone else.

Another consideration on whether to move into the employer plan is the quality of the plan. Once you move assets into your employer plan, you lose control over asset choices, fees, etc. If the plan is a good one, go ahead and roll in.

[nachos31]

ukn1207 wrote:

isn’t that double tax since i have already paid taxes on the traditional IRA contributions?

Click to expand...

ukn, I wasn't thinking clearly when I posted my last question that spiritrider kindly answered. Whatever portion of your partner's traditional IRA made with non-deductible (i.e. already paid taxes on) contributions, as you suggest in the quoted material above, can simply be converted into a Roth IRA without any tax implications...as long as your partner does not have any pre-tax contributions to that IRA or any other IRA (traditional, SIMPLE, SEP).

If any portion was a pre-tax contribution then you may be able to roll it into your employer plan OR convert to Roth IRA but pay taxes with the latter since none have been paid thus far (as Johanna stated above).

[ukn1207]

thank you to all that have responded. my husband's 401K sucks so it appears best option is to just convert the 7400 traditional to roth.  this traditional IRA was opened using non-deductible contributions (already paid taxes). so when i roll over this amount, will i just pay taxes (% based on tax bracket) on the interest earned? can i roll over the entire amount since there is technically no limit on how much you roll over (vs. 5500 limit on roth ira contribution)? i'm just wondering why everybody doesn't do backdoor roth annually to allow for a higher $ amount compared to the roth IRA limit??

[jfoxcpacfp]

ukn1207 wrote:

thank you to all that have responded. my husband’s 401K sucks so it appears best option is to just convert the 7400 traditional to roth.  this traditional IRA was opened using non-deductible contributions (already paid taxes). so when i roll over this amount, will i just pay taxes (% based on tax bracket) on the interest earned? can i roll over the entire amount since there is technically no limit on how much you roll over (vs. 5500 limit on roth ira contribution)?

Click to expand...

Well, that changes things! Yes, you'll be taxed only on the growth in the TIRA and yes, you can r/o 100% of the balance. I almost hate to say this, but since the TIRA was opened with after-tax dollars, he could have been doing a backdoor Roth since 2010.

Did you file the 8606 for the contribution(s)? If not, you will need to file one for 2010 to establish "basis". The penalty for filing Form 8606 late is $50, but the IRS will waive it if you can show reasonable cause for late filing (not too difficult in this situation).

ukn1207 wrote:

i’m just wondering why everybody doesn’t do backdoor roth annually to allow for a higher $ amount compared to the roth IRA limit??

Click to expand...

I'm afraid there may be some confusion over the use of the backdoor Roth. It is still a conversion of an IRA for which you have a $5,500/yr. contribution limit. The reason you are converting $7,400 rather than $5,500 is because of 1) growth in the account and/or 2) multiple-year contributions.

You may be thinking about general Roth conversions. You can convert as much $$ as you want in a year, limited only by the amount you have in a pre-tax IRA, non-deductible IRA, or qualified retirement account and your ability to pay the taxes on the taxable portion of the conversion.