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Roth Income Limits and Backdoor
Posted on 1/19/24 at 9:47 am
Posted on 1/19/24 at 9:47 am
For 2024, it looks like I’m going to be falling into the income range where my Roth contributions are limited for the first time.
It’s hard to predict where exactly because my base is below the window, but my bonus and other income will put me up there based on 2023.
Is there any harm in opening and contributing traditional and instantly moving the a full $7K to my Roth?
I’m 27, so I’d prefer to go Roth over Traditional.
It’s hard to predict where exactly because my base is below the window, but my bonus and other income will put me up there based on 2023.
Is there any harm in opening and contributing traditional and instantly moving the a full $7K to my Roth?
I’m 27, so I’d prefer to go Roth over Traditional.
Posted on 1/19/24 at 9:58 am to TomRollTideRitter
quote:
Is there any harm in opening and contributing traditional and instantly moving the a full $7K to my Roth?
No.
I do it every year.
Posted on 1/19/24 at 10:05 am to JohnnyKilroy
quote:
No. I do it every year.
thank you
almost seemed like I had to be missing something for it to be that easy
Posted on 1/19/24 at 10:18 am to TomRollTideRitter
Can someone lay out how to do the backdoor Roth process as if I were a 5 year old child?
This post was edited on 1/19/24 at 10:21 am
Posted on 1/19/24 at 10:22 am to TomRollTideRitter
If you have a retirement plan at work, even if you don't contribute to it, then you can only make after tax contributions to an IRA. If you already have traditional tax deferred IRA funds (not 401k, etc), then when you try to convert your after tax IRA to Roth you will hit the prorata rule which will require you to pay additional taxes on the conversion.
You're young so you may not have any additional tax deferred IRA's, but older people usually have a rollover or two that messes the conversion up.
You're young so you may not have any additional tax deferred IRA's, but older people usually have a rollover or two that messes the conversion up.
Posted on 1/19/24 at 10:55 am to STLhog
quote:At the beginning of the year I put the Roth IRA limit into a traditional IRA (7k currently). On Vanguard it takes a few days for the money to be settled. Once that is done, Vanguard has a button that allows you to directly convert the Traditional IRA to a Roth IRA. It’s that simple. I’m not sure it’s that easy with other brokerages companies but I assume it’s not difficult.
can someone lay out how to do the backdoor Roth process as if I were a 5 year old child?
Posted on 1/19/24 at 11:25 am to saderade
I've never understood why there are income limits on a ROTH IRA when converting like that is so simple and legal
Posted on 1/19/24 at 11:27 am to CharlesUFarley
quote:
If you already have traditional tax deferred IRA funds (not 401k, etc), then when you try to convert your after tax IRA to Roth you will hit the prorata rule which will require you to pay additional taxes on the conversion.
Thanks for the tip. It’ll all be after tax contributions. My understanding is that I couldn’t get a deferral on traditional IRA contributions because the tax deferral income limits for traditional are lower than the Roth contribution limits.
Posted on 1/19/24 at 11:43 am to STLhog
quote:
Can someone lay out how to do the backdoor Roth process as if I were a 5 year old child?
What brokerage service do you use?
There’s some simple step by step guides out there. I use Fidelity so I was able to find one that walked through the process.
Posted on 1/19/24 at 11:47 am to CharlesUFarley
quote:
If you have a retirement plan at work, even if you don't contribute to it, then you can only make after tax contributions to an IRA. If you already have traditional tax deferred IRA funds (not 401k, etc), then when you try to convert your after tax IRA to Roth you will hit the prorata rule which will require you to pay additional taxes on the conversion.
You're young so you may not have any additional tax deferred IRA's, but older people usually have a rollover or two that messes the conversion up.
I'd say more than half of the Backdoor Roths I see are jacked up by the pro-rata rule.
That's a.... difficult convo I get to have with clients at tax time.
Point of Information: Using a seperate account doesn't get you around the pro-rata rule.
Posted on 1/19/24 at 11:49 am to TigerTatorTots
quote:
I've never understood why there are income limits on a ROTH IRA when converting like that is so simple and legal
1) Pro-rata rule can make this not so simple for some people
2) Because have you met the people who write laws in DC? Some might call the lack of limits on a conversion a "loophole".
Posted on 1/19/24 at 11:50 am to TomRollTideRitter
quote:
My understanding is that I couldn’t get a deferral on traditional IRA contributions because the tax deferral income limits for traditional are lower than the Roth contribution limits.
Correct if you are offered a retirement plan at work such as a 401(k).
Posted on 1/19/24 at 12:04 pm to LSUFanHouston
The pro rata rule only applies to your traditional taxable IRA to determine how much tax you owe on the amount you converted to Roth.
Example 1: You have $100,000 in a traditional IRA and it is 100% taxable. You have a Roth IRA with any amount. You can convert any or all of your Traditional IRA into your Roth. The amount you convert to Roth is taxable income.
Example 2: You have $100,000 in a traditional IRA and it is 80% taxable and 20% after tax. You have a Roth IRA with any amount. You can convert any or all of your Traditional IRA into your Roth. The amount you convert to Roth is taxable income for 80% of the amount you converted.
In summary, you can convert as much of your Traditional IRA to Roth IRA as you want to in any tax year. You just pay normal unearned income taxes for the taxable amounts you converted.
Example 1: You have $100,000 in a traditional IRA and it is 100% taxable. You have a Roth IRA with any amount. You can convert any or all of your Traditional IRA into your Roth. The amount you convert to Roth is taxable income.
Example 2: You have $100,000 in a traditional IRA and it is 80% taxable and 20% after tax. You have a Roth IRA with any amount. You can convert any or all of your Traditional IRA into your Roth. The amount you convert to Roth is taxable income for 80% of the amount you converted.
In summary, you can convert as much of your Traditional IRA to Roth IRA as you want to in any tax year. You just pay normal unearned income taxes for the taxable amounts you converted.
Posted on 1/19/24 at 12:05 pm to LSUFanHouston
quote:
I'd say more than half of the Backdoor Roths I see are jacked up by the pro-rata rule.
Thanks for the advice. Reading through this rule, it seems like I should not try to take any Traditional IRA deductions if I’m planning to just backdoor the Roth every year.
Not that I could take a Traditional IRA deduction this year anyways.
Posted on 1/19/24 at 2:30 pm to 98eagle
Right, but his point was when you get someone with that $100,000 Trad IRA and they are trying to convert the $7,500 contribution, people are surprised to hear that only 7% converts tax free.
Posted on 1/19/24 at 3:31 pm to UpstairsComputer
So the way to do it is have $0 in a trad IRA, add $7500, covert to Roth so 100% converts tax free?
Posted on 1/19/24 at 4:34 pm to TomRollTideRitter
If you even remotely think you'll go over the limit might as well backdoor it.
Posted on 1/19/24 at 7:58 pm to LSUFanHouston
Wait. I'm confused but definitely appreciate this tread.
I contributed with after tax money $7k in 2020 and 2021. Total of $14k. I always thought, not sure why, that those funds are technically treated like a Roth as it's taxed funds. As such, I've simply left it alone thinking I could pull it tax free at retirement.
Seems that my logic is flawed. That being said, if I wanted to backdoor the full $14k plus gains on it, what am I looking at? Am I hit with this Pro Rata tax that I'm discovering in this conversation?
I contributed with after tax money $7k in 2020 and 2021. Total of $14k. I always thought, not sure why, that those funds are technically treated like a Roth as it's taxed funds. As such, I've simply left it alone thinking I could pull it tax free at retirement.
Seems that my logic is flawed. That being said, if I wanted to backdoor the full $14k plus gains on it, what am I looking at? Am I hit with this Pro Rata tax that I'm discovering in this conversation?
Posted on 1/19/24 at 8:08 pm to JohnnyKilroy
Are you hit with the prorata each time you do it?
Posted on 1/19/24 at 8:16 pm to TomRollTideRitter
quote:
For 2024, it looks like I’m going to be falling into the income range where my Roth contributions are limited
quote:
I’m 27
Subtle brag is subtle
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