Backdoor Roth with traditional IRA

Investing
#1

Hi, first love the idea of this site. I browsed around several topics and just great overall information. So my question is in regards to Roth IRA.
I’m married and both me and my wife work. We’re over the limit for Roth. We also both have 401ks and Traditional IRAs and we have Roth IRAs from when we weren’t married and making less money. We’re both 30.

My question is to contribute to Roth IRA, we’ll need to do backdoor Roth’s? I’ve read that Well both need to roll our traditional ira into 401k. Is that recommended? What if one of us leaves our job in a few years. What then happens to the Roth and traditional? I feel like I should talk to a cfp, but I just want them to advise me on that then I want to just put my money with vanguard and watch it grow.

How to do a backdoor Roth IRA?
#2

So, to keep things in perspective, you guys make SO MUCH MONEY you’re not legally allowed to contribute to a Roth IRA. Plus, you both have 401ks which offer $19,500 of tax deferred contributions each. That’s $39,000/year plowing into tax advantaged retirement accounts. So the whole Backdoor Roth IRA is just a possible optimization to maybe get $6K/year each more into a tax advantaged state. Even if you never did that, you would likely be in very good shape. (You can always invest an unlimited amount inside of a regular brokerage account… 95% of my money is there).

That said, it is a great tax break and probably well worth your time to figure it out. It’s basically a simple idea. You can’t directly contribute to a Roth IRA if you’re over the income limit. But you are allowed to take this two step process:

  1. Contribute to a Traditional IRA with no tax deduction
  2. Convert your Traditional IRA to a Roth IRA

If you do those two things, the net result is essentially identical to just contributing to a Roth IRA. But there is one stumbling block: On step two above, the IRS says, if you convert ANY money from your Traditional IRA, you have to do it “pro-rata” with all money in all your pre-tax IRAs. So what that means is if you do step one for $6,000 and then you have $54,000 of money already in Traditional/Rollover IRAs, you can’t just sneak that new $6,000 into a roth… you’d have to do it “pro-rata”… so like $600 from your new contribution and $5,400 from your existing contributions. The conversion on that $5,400 would be a taxable event, and taxes would be owed the year you do the conversion.

That’s where the “roll into your new 401k” advice comes from. If you can clear out that $54,000 by moving it to a 401k (which isn’t counted by the pro-rata rule) then you have smooth sailing for your backdoor Roth IRAs.

So yeah, if you have those existing accounts it can get a little messy. At your income level, I think it’s worth the investment to talk to an advisor with experience here or a CPA. Most successful people I know have a good CPA and skip the financial advisor. The other option would be to save on the professional advice, and just not worry about doing a backdoor Roth IRA. I’ve had very few years lately where I’m eligible for any kind of tax advantaged account, and I’m still doing OK. You can always just dump it all in a brokerage account and keep it in low-fee, tax efficient index funds. :slight_smile:

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#3

Thanks for the advice! Reassuring that you have most of your money in a taxable brokerage. I think I’ll just continue as I have. Thanks.

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