Traditional IRA/Roth IRA

Investing
#1

Hi Everyone,

Prior to knowing about the backdoor ROTH IRA, My husband I contributed the full amount to a traditional IRA due to income limits in 2018 (part of my salary is commission so 2018 was a good yr). In 2019, we could’ve contributed to a Roth since we were below the income limit but not thinking about it we contributed the max to the traditional IRA again. This yr, we contributed the max to a Roth and will hopefully continue to do so knowing about the backdoor Roth. Currently our Traditional IRA’s have roughly $13,000 each. Any recommendation on whether we should leave the traditional IRA’s as is or convert it to a Roth somehow? Not entirely clear how the pro-rata situation works.

Thanks
Daniel

#2

Hey Daniel!

If that traditional money is pre-tax (i.e. you took the tax deduction on it the year you contributed it) then you will run into the pro-rata rule. A Backdoor Roth IRA works like this:

  1. Contribute $6K to a Traditional IRA (don’t claim any tax break)
  2. Immediately convert your Traditional IRA to a Roth IRA

The net result is “after tax” money has snuck into a Roth IRA through the back door.

The problem arises in step 2 if your Traditional IRA didn’t start empty. In that case the government says “hey! You can’t convert just the new $6,000, you have to convert the $6,000 in proportion to what’s already there!” i.e. you have to convert some of the pre-tax money which means you have to pay tax on it this year… and it’s probably more paperwork to keep track of.

But basically, in your situation I’d probably be talking to a CPA. If you’re in the “too much income to contribute to a Roth IRA” territory, you’re probably in “A CPA is going to be worth it” territory. Taxes are their thing. Ask their advice on if you’re eligible, the impact it would have on your taxes, etc.