How exactly do you make back door Roth contributions?

[Anonymous]

If I plan to set up IRAs for my kids when they get their first jobs, should I set up a Roth to keep this option open for them in the future?

[Anonymous]

Anonymous wrote:If I plan to set up IRAs for my kids when they get their first jobs, should I set up a Roth to keep this option open for them in the future?

For first job, unless they are earning 160k+ right out of school (which is possible), they can invest directly in a Roth IRA, no need for a Traditional IRA in between.

[Anonymous]

OP, do you have access to a 401k through your current employer? If so, depending on the source of your IRA ($600k) funds, you may be able to roll over some or all of it into your current employer's 401k. Which would then allow you to do the back door Roth without any pro rata taxable amount or at least minimize it.

[Anonymous]

Anonymous wrote:OP. I'm high income ($1M) and I love Roths. I max out my Roth 401(k) every year and I don't care how valuable the deduction is for the traditional; I want as much of that magic Roth money as I can accumulate. So why am I not doing back door Roth? Sounds too good to be true. Why is there even an income limit to Roth IRA contributions if you can so easily get around it?

Isn't there some pro rate rule too - like if I have other big traditional IRAs, I have some tax consequence to conversion?

Don't you expect to be lower income at retirement, making a Roth a less good option tax-wise (you'll be in a lower bracket later)?

[Anonymous]

Anonymous wrote:OP again. Ok I think I figured it out; thanks google. This isn't going to work for me because I have $600k in a traditional IRA.

Found this article:
https://www.fidelity.com/learning-center/personal-finance/backdoor-roth-ira#:~:text=Cons%3A,tax%20bracket%20for%20the%20year.

It says:
How do you calculate your taxable percentage with the pro-rata rule?
- (non-deductible amount) / (total of all non-Roth IRA balances) = non-taxable percentage.
- (amount to be converted to Roth IRA) x (non-taxable percentage) = amount of after-tax funds converted to Roth IRA

In other words, "you don't get to cherry pick and only choose to convert your nondeductible contributions...because the IRS uses the IRA aggresgation rule when calculating taxes owed on a conversion, which means it views all your traditional IRAs as a single tax entity."

So let's say I make a $7,000 nondeductible IRA contribution this year and I immediately convert it to a Roth. My pre-tax traditional IRA is worth $600k, so with the nondeductible contribution it's worth $607k. The $7k is 1.1% of the total balance, meaning that 98.9% of my conversion is going to be taxable. Or $6,923. So I'm not causing myself to have to pay income tax on an extra $6,923 just so I can do a back door Roth. Makes no sense.

I knew it had to be too good to be true. So all these posters crowing about back door Roths and always making it seem like you're dumb if you don't do it either a) have no other traditional IRAs, b) don't know the rules or c) paying a whole lot of unnecessary taxes.

I am in the same situation !

[Anonymous]

Anonymous wrote:

Anonymous wrote:OP again. Ok I think I figured it out; thanks google. This isn't going to work for me because I have $600k in a traditional IRA.

Found this article:
https://www.fidelity.com/learning-center/personal-finance/backdoor-roth-ira#:~:text=Cons%3A,tax%20bracket%20for%20the%20year.

It says:
How do you calculate your taxable percentage with the pro-rata rule?
- (non-deductible amount) / (total of all non-Roth IRA balances) = non-taxable percentage.
- (amount to be converted to Roth IRA) x (non-taxable percentage) = amount of after-tax funds converted to Roth IRA

In other words, "you don't get to cherry pick and only choose to convert your nondeductible contributions...because the IRS uses the IRA aggresgation rule when calculating taxes owed on a conversion, which means it views all your traditional IRAs as a single tax entity."

So let's say I make a $7,000 nondeductible IRA contribution this year and I immediately convert it to a Roth. My pre-tax traditional IRA is worth $600k, so with the nondeductible contribution it's worth $607k. The $7k is 1.1% of the total balance, meaning that 98.9% of my conversion is going to be taxable. Or $6,923. So I'm not causing myself to have to pay income tax on an extra $6,923 just so I can do a back door Roth. Makes no sense.

I knew it had to be too good to be true. So all these posters crowing about back door Roths and always making it seem like you're dumb if you don't do it either a) have no other traditional IRAs, b) don't know the rules or c) paying a whole lot of unnecessary taxes.

I did a backdoor Roth by converting my entire IRA into a Roth IRA. It wasn't as large as yours, but I did have to pay taxes on the $200,000 that I converted. That cleared the way for yearly backdoor Roths. I used capital gains from sale of stock to fund the taxes.

I have more than a million in my rollover IRA. It would be too much tax. I wish there was a way to keep the money in 401k when I left the jobs.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP again. Ok I think I figured it out; thanks google. This isn't going to work for me because I have $600k in a traditional IRA.

Found this article:
https://www.fidelity.com/learning-center/personal-finance/backdoor-roth-ira#:~:text=Cons%3A,tax%20bracket%20for%20the%20year.

It says:
How do you calculate your taxable percentage with the pro-rata rule?
- (non-deductible amount) / (total of all non-Roth IRA balances) = non-taxable percentage.
- (amount to be converted to Roth IRA) x (non-taxable percentage) = amount of after-tax funds converted to Roth IRA

In other words, "you don't get to cherry pick and only choose to convert your nondeductible contributions...because the IRS uses the IRA aggresgation rule when calculating taxes owed on a conversion, which means it views all your traditional IRAs as a single tax entity."

So let's say I make a $7,000 nondeductible IRA contribution this year and I immediately convert it to a Roth. My pre-tax traditional IRA is worth $600k, so with the nondeductible contribution it's worth $607k. The $7k is 1.1% of the total balance, meaning that 98.9% of my conversion is going to be taxable. Or $6,923. So I'm not causing myself to have to pay income tax on an extra $6,923 just so I can do a back door Roth. Makes no sense.

I knew it had to be too good to be true. So all these posters crowing about back door Roths and always making it seem like you're dumb if you don't do it either a) have no other traditional IRAs, b) don't know the rules or c) paying a whole lot of unnecessary taxes.

I did a backdoor Roth by converting my entire IRA into a Roth IRA. It wasn't as large as yours, but I did have to pay taxes on the $200,000 that I converted. That cleared the way for yearly backdoor Roths. I used capital gains from sale of stock to fund the taxes.

I have more than a million in my rollover IRA. It would be too much tax. I wish there was a way to keep the money in 401k when I left the jobs.

I am confused. If you converted $200k in one year from traditional to Roth, isn't that termed simply a Roth conversion, and not a back door Roth?? And why would you do a $200k conversion in one year vs spaced out over a few years to reduce taxes?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP again. Ok I think I figured it out; thanks google. This isn't going to work for me because I have $600k in a traditional IRA.

Found this article:
https://www.fidelity.com/learning-center/personal-finance/backdoor-roth-ira#:~:text=Cons%3A,tax%20bracket%20for%20the%20year.

It says:
How do you calculate your taxable percentage with the pro-rata rule?
- (non-deductible amount) / (total of all non-Roth IRA balances) = non-taxable percentage.
- (amount to be converted to Roth IRA) x (non-taxable percentage) = amount of after-tax funds converted to Roth IRA

In other words, "you don't get to cherry pick and only choose to convert your nondeductible contributions...because the IRS uses the IRA aggresgation rule when calculating taxes owed on a conversion, which means it views all your traditional IRAs as a single tax entity."

So let's say I make a $7,000 nondeductible IRA contribution this year and I immediately convert it to a Roth. My pre-tax traditional IRA is worth $600k, so with the nondeductible contribution it's worth $607k. The $7k is 1.1% of the total balance, meaning that 98.9% of my conversion is going to be taxable. Or $6,923. So I'm not causing myself to have to pay income tax on an extra $6,923 just so I can do a back door Roth. Makes no sense.

I knew it had to be too good to be true. So all these posters crowing about back door Roths and always making it seem like you're dumb if you don't do it either a) have no other traditional IRAs, b) don't know the rules or c) paying a whole lot of unnecessary taxes.

I did a backdoor Roth by converting my entire IRA into a Roth IRA. It wasn't as large as yours, but I did have to pay taxes on the $200,000 that I converted. That cleared the way for yearly backdoor Roths. I used capital gains from sale of stock to fund the taxes.

I have more than a million in my rollover IRA. It would be too much tax. I wish there was a way to keep the money in 401k when I left the jobs.

I am confused. If you converted $200k in one year from traditional to Roth, isn't that termed simply a Roth conversion, and not a back door Roth?? And why would you do a $200k conversion in one year vs spaced out over a few years to reduce taxes?

PP who did the $200,000 conversion. Yes, that was a Roth conversion, but it left my IRA at zero so I subsequently did a backdoor Roth for the same tax year and have done backdoors every tax year since.

[Anonymous]

I moved my rollover IRA (which was the 401ks from past jobs) into my current employer’s traditional 401k. That gave me no IRAs, which allowed me to start a new traditional IRA and backdoor a Roth.

[Anonymous]

Is there a limit to how much you can transfer in each year through a backdoor Roth? i.e. can you put in more than the $6500/year limit on the regular Roths?