Retirement account options - backdoor Roth

Sure.

Things to consider, which may be stating the obvious:

1) If you are at a high enough income to consider a backdoor roth, many people would advocate maxing your 401k first before contributing to backdoor roth. Thought process is that with a 401k you are deferring taxes now at a higher rate to presumably be taxed at lower rate on withdrawal. Whereas with doing a backdoor roth, you are contributing money that is taxed at that higher rate now, although obviously be able to withdraw it tax free in the future.


2) Some people might advocate to do a backdoor roth for tax diversification even if you cannot max out your 401k.

3) Lastly make sure you don't have any other accounts that would be subject to the pro rate rule prior to committing to a backdoor roth.

quote:

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do have some traditional IRAs in some accounts external from my current employer sponsored plan. These were non-Roth 401ks from previous employers.

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. Did you roll them into IRA or are they still 401k?


It’s probably best explained with an example. If you have multiple 401k, then you have multiple 401ks. But if you have multiple IRA, the government views it as a single sum of money.
So, you have $15,000 in t401k and $5000 in Roth 401k and $5000 in tIRA, you have 3 accounts that function as different places you can pull money from.

But if you have $15,000 in tIRA and $5,000 in a Roth IRA, you must fill out form 8606 Every year with your tax return, and you will find that what you actually have is $20,000 of IRA money, 75% of which is traditional and 25% of which is Roth. You leave it in until retirement age. It grows to, let’s say $150,000 and $50,000. You keep them in their own accounts. You think, “I want to grab that $50K of Roth money and take it out since I don’t owe any taxes on it.” Problem: you don’t have a separate Roth account in practice. Whether you take $50,000 out from one account or the other, you owe your deferred taxes on 75% of the withdrawal. This rate (your pro-rata calculation) applies to every dollar that comes out of any IRA you own (traditional, Roth, SEP, SIMPLE...), regardless of which account it comes out of.


To confuse things further, let’s say you had 50K in each of a t401k, r401k, tIRA, and rIRA, your pro-rata calc is 50%, but it only applies to the two IRA accounts (the 401k are totally separate. It doesn’t matter if there is 2MM in one and 3,000 in the other. They don’t factor in at all). So you can, at retirement, say, “I want my $50K from my Roth 401k” and you can have it. And you could pull $20K from t401k (and pay income tax on it) and $30K from the Roth 401k, but you still owe taxes on 50% of what comes out of either IRA.

I transferred a traditional Roth (rollover from a previous 401k) into my current 401k to keep all of my tax deferred funds together...allowed me to start with a clean slate “0” to do back door Roth’s.