Should I still use backdoor IRA if subject to pro rata rule?

[drbfp01]

I have been using the backdoor IRA method for several years.  I also have a 401k and profit sharing plan through my private group.  This year, without considering the consequences, i took some money out(100k) of the 401k and rolled it over into a self directed IRA in order to do some alternative investments.  I had already made the "back door" contributions for this year for myself and wife, and now realize i will be basically double taxed on that 5500 under my name.  My question for the forum is this: Considering that I do not want to convert this 100k from regular to ROTH because I don't want to pay the taxes on it, is it still worth doing "back door IRA", paying the additional tax in order to increase the money in the roth account available for investing.

My (probably flawed) thinking is that if i did a straight roth conversion, I would be paying taxes on that money anyway, so instead, by paying the taxes on the 5500 again, I increase the amount in the Roth IRA without decreasing the amount in the traditional IRA.  Is this foolish because I am in a higher tax bracket now and I would be better off investing this money in a regular account rather than being double taxed? or is the tax free growth i could get for the next 30 years worth the double tax now?  I am 40 years old

[Craigy]

With so much in the IRA you're basically left doing taxable conversions, with about a 5% discount.  You're not so much getting double taxed on that $5,500 as you are simply paying tax for the first time on that $100k pretax balance to convert some of it to Roth.

I would try to find a way to roll the pretax money back into the 401k.

[litovskyassetmanagement]

drbfp01 wrote:

I have been using the backdoor IRA method for several years.  I also have a 401k and profit sharing plan through my private group.  This year, without considering the consequences, i took some money out(100k) of the 401k and rolled it over into a self directed IRA in order to do some alternative investments.  I had already made the “back door” contributions for this year for myself and wife, and now realize i will be basically double taxed on that 5500 under my name.  My question for the forum is this: Considering that I do not want to convert this 100k from regular to ROTH because I don’t want to pay the taxes on it, is it still worth doing “back door IRA”, paying the additional tax in order to increase the money in the roth account available for investing.

My (probably flawed) thinking is that if i did a straight roth conversion, I would be paying taxes on that money anyway, so instead, by paying the taxes on the 5500 again, I increase the amount in the Roth IRA without decreasing the amount in the traditional IRA.  Is this foolish because I am in a higher tax bracket now and I would be better off investing this money in a regular account rather than being double taxed? or is the tax free growth i could get for the next 30 years worth the double tax now?  I am 40 years old

Click to expand...

First, does your plan document allow you in-plan rollovers prior to normal retirement age? If that's not the case, you might have violated the terms of your plan document and this might case significant issues for your plan, since the plan is an ERISA plan and has to abide by relevant IRS/DOL laws and regulations.  And you would definitely be breaking the law if you are trying to invest in assets that are potentially disallowed/forbidden by IRS/DOL inside a retirement plan, which is another common compliance breach.  So I would consult with an ERISA attorney to potentially undo this transaction as soon as possible because both you and the plan sponsor could be held responsible for any penalties as a result. Also, if you didn't title your IRA in the name of the plan, it would potentially be subject to creditor claims, which is yet another reason brokerage accounts in retirement plans should be carefully monitored by plan fiduciaries.