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New to backdoor roth - how to reallocate existing IRAs?

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  • New to backdoor roth - how to reallocate existing IRAs?

    I am still trying to figure out how to deal with the pro-rata part of next year's taxes if I do a backdoor roth IRA. My portfolio consists of the following (#s given as examples):

    My total roth, traditional, and rollover IRAs between scottrade and fidelity: $60,000.

    Active:
    401K $70,000
    403b $1,500
    457b $5,000

    wife's: total roth, traditional, rollover IRAs (also with scottrade/fidelity): $12,000
    Active 403b: $5,000

    Do I need to move all our IRAs to within the 401k (or 403b for my wife) and then start the backdoor roth IRA process to minimize the prorata? or how should I do this? Thanks!

  • #2
    You should try to avoid the pro-rata rule whenever you can.

    What is the value of your IRAs for each category: pre-tax, Roth, and nondeductible (contributed but not deducted)? Do the 403b's and 401k accept roll-ins?
    My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
    Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients

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    • #3
      Thanks for helping me out, Johanna!

      Mine: Roth $22,000, pre-tax $38,000
      Wife's: Roth $1,500, pre-tax $10,500

      Wife and I don't have any nondeductible IRAs.

       

      My 401k plan will accept roll-in.. haven't checked for my wife's plan.

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      • #4
        You're welcome. Thank you for spelling my name correctly  

        Your options are:

        • Figure out a way to get some 1099 income. Set up a SOLO-k and hire the other spouse. This is be the best option (roll the pre-tax dollars into 401k's under your own control).

        • Roll into current employers' plans. Note that, if you do, your pre-tax is locked into those plans until you leave that job or reach age 59.5. IF you have excellent employer plans, that might be the best option.

        • Convert current pre-tax IRAs into Roth IRAs. Of course, you would be taxed on around $50k, but you could spread the conversion over 2 or 3 years, noting that your pre-tax account balances would change with the market. If your tax bracket will be going up in the future (you're a new attending?), this might be the 2nd best choice to the SOLO-k.

        • Back-door Roth and pay taxes under the pro-rata rule. Ugh. You both have a high proportion of pre-tax to post-tax so you would pay tax on most of the conversion. You might have to suck it up and do that for a year or two until you get the pre-tax IRAs converted. You're paying tax on 63% of your back-door and your wife is paying tax on 88% of hers. otoh, you're being taxed on only that portion of $5,500 and your future growth is tax-free. But if you're going to pay tax on a Roth conversion, I'd much prefer that you are taxed on an IRA that you've gotten to deduct once.

        My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
        Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients

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        • #5
          Thanks! That was very helpful.

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          • #6
            I will be finishing residency this year and between my wife and I will have close to $190,000 gross income for 2016. Since we will be close to the limit for Roth contribution is it ok to just do the back door conversion to cover if we do go over the limit?

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            • #7
              WCICON24 EarlyBird
              Sure. You'll simply contribute to a TIRA, which will be nondeductible, and then convert to a Roth IRA. That's better than contributing directly to a Roth and being in suspense all year. Be sure to file your form 8606 with your 2016 Form 1040.
              My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
              Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients

              Comment

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