What are the benefits of a backdoor Roth IRA if I have to pay taxes on conversion?

  • This topic is empty.
Viewing 9 posts - 1 through 9 (of 9 total)
  • Author
  • #96595 Reply

      My husband and I are over the limit for a Roth IRA. We are 49/52 yrs old. We max out 401k and IRA every year. I keep hearing about a back door Roth IRA. But wouldn’t I have to sell from IRA, pay taxes and then move to the Roth? So where’s the benefit? What am I missing?

      #96596 Reply

        Yes, you would pay taxes on the distribution in order to convert to Roth. The benefit is you pay taxes now on the distribution versus later. Which will save you money if your income will be higher, higher tax brackets, etc in the future compared to now.

        #96597 Reply

          Yes… We leaned this the hard way. We left it in the trad IRA, because it would have been such a hit. So we can’t do the back door…

          #96598 Reply

            Can you roll the (assuming it’s traditional) Ira balance into the 401k?

            What you’re describing is not the same as the back door contribution you see discussed here.

            #96599 Reply

              You take the initial tax deference for the traditional and then you’d pay the taxes on the conversion. So it essentially breaks you even on taxes for that year but then it will grow tax free.

              And then you also have the benefit of access to the contributions to the Roth rather than waiting until 59.5 and no RMDs if you don’t need it in retirement.

              Proposed: Which index funds are best for a Roth IRA? FNILX and FXAIX are down; should I switch?

              #96600 Reply

                It’s a conversion…you can roll it directly from your 401K into a Roth IRA. You will be on the hook to pay the taxes on it, preferably using $ from non-retirement funds.

                You’ll want to make sure before converting anything that it makes sense for your situation – it doesn’t for everyone. I’m doing back door conversions because otherwise, my RMDs will be so high they’ll push me 2 tax brackets higher sometime in my late 70s. Converting some of that now will still allow me to grow the money in the ROTH IRA (tax-free now) and also decrease my RMD’s to the extent that they don’t impact my bracket or trigger IRMAA surcharges.

                #96601 Reply

                  The backdoor Roth IRA conversion is a specific maneuver that requires all traditional, rollover, SEP and Simple IRAs be empty by 12/31 of the conversion year. If that condition is met, a non-deductible traditional IRA contribution can be immediately converted to Roth with $0 tax owed. That’s the “backdoor” maneuver.

                  If you have a balance in any of those tax-deferred IRAs, you can’t do a backdoor conversion but can do a regular Roth IRA conversion (through the front door). This involves paying tax on the converted amount proportionate to the value of pre-tax dollars in all the tax-deferred IRAs. This is the IRS’ pro rata (“prorated”) rule. For example, if you have a traditional IRA with a mix of $50K pre-tax dollars and $25K post-tax dollars, 67% of any amount converted would be taxable as regular income. 33% would be tax-free.

                  #96602 Reply

                    If you have ANY money sitting in a Traditional IRA already, then doing the Backdoor Roth becomes more complicated as the pro rata rule comes into play.

                    If you have no money in any Traditional IRA, it’s quite simple. You make a non-deductible contribution to a Trad IRA one day, then convert it to Roth the next day (sometimes two days) as soon as it “settles.” The reason for doing it so quickly is so that the Trad IRA contribution has no time to generate earnings, thus making it a simple conversion of the same amount as the contribution.

                    Suggested: Should I open a traditional IRA or invest in a brokerage account after maxing out my 401k and being ineligible for Roth IRA due to income limits?

                    #96603 Reply

                      Quick question: are you even elegible for the tax deduction on the traditional IRA?

                      If you are covered by a workplace retirement plan and are saying you make too much for a direct Roth contribution, I’d be worried that you are elegible for a traditional IRA contribution that’s tax deductible (which sorta negates its value).

                      Just want to make sure you are aware of this

                    Viewing 9 posts - 1 through 9 (of 9 total)
                    Reply To: What are the benefits of a backdoor Roth IRA if I have to pay taxes on conversion?
                    Your information:

                    Spread the love