Please explain a Back Door Roth?

[Anonymous]

Would you give me the lowdown on how to do this if our income is too high for a straight contribution? Please write in a "BD Roth for Dummies" style! I already have a Roth account, but have stopped contributing to it. THANK YOU!

[Anonymous]

If you search this forum you will find this answer many times.

[Anonymous]

Open a traditional IRA and fund it with post-tax dollars. Then, convert it to Roth.

[Anonymous]

Anonymous wrote:Open a traditional IRA and fund it with post-tax dollars. Then, convert it to Roth.

be careful of tax consequences if you have a SEP or an IRA (rolled over from a 401K) or anything where you put in pre-tax dollars that is considered to be similar to a traditional IRA. You will be taxed at your current income rate.

http://www.bankrate.com/finance/retirement/drawback-one-type-roth-conversion.aspx

[Anonymous]

Also, if you do choose this route and have done the pros/cons, you should try to convert asap after you fund your traditional ira, as you do not want to accrue any gains.

[Anonymous]

http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

The White Coat Investor blog also has a similar step-by-step, google White Coat Investor backdoor Roth.

[Anonymous]

Not OP, but I don't quite understand the rationale for going through the effort. Why bother?

With a traditional IRA, the max contribution is just $5500/year. So, while we would be benefiting from the earnings growing tax free in the Roth, we can't put very much money in to it. Since the back door Roth only applies for those making over about $200k, you can only stuff a tiny portion of your assets in it.

The tax benefit just seems kind of trivial compared to just holding on an asset and passing it on with a stepped up basis.

[Anonymous]

Anonymous wrote:Not OP, but I don't quite understand the rationale for going through the effort. Why bother?

With a traditional IRA, the max contribution is just $5500/year. So, while we would be benefiting from the earnings growing tax free in the Roth, we can't put very much money in to it. Since the back door Roth only applies for those making over about $200k, you can only stuff a tiny portion of your assets in it.

The tax benefit just seems kind of trivial compared to just holding on an asset and passing it on with a stepped up basis.

See the second table in this link. It assumes an initial contribution of $10,000. When withdrawn at the end of 30 years, if you had put the money in Roth it would be 72K. If in a non-deductible traditional IRA (non-deductible being the only option for high earners) then 54K. And that is assuming you only contributed 10K at the beginning.

https://www.bogleheads.org/wiki/Non-deductible_traditional_IRA

So, maybe it's "trivial" if you think tens of thousands of dollars are trivial...and if you think a little paperwork is "effort".