12 Things You Must Know About A Backdoor Roth IRA (Including If It's Worth The Hassle)
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- เผยแพร่เมื่อ 11 มิ.ย. 2024
- Today we take a deep dive into a Backdoor Roth IRA. This strategy enables high-income earners to get money into a Roth IRA. We'll walk through what you need to know, and crunch some numbers to see if a Backdoor Roth IRA is worth the hassle.
Timestamps
0:00 What is a Backdoor Roth IRA
0:57 401k vs IRA
2:35 Deductible vs Non-Deductible IRA Contributions
3:49 Why Make Non-Deductible Contributions?
5:06 Backdoor Roth IRA Strategy
5:55 History of the Backdoor Roth IRA
8:04 Annual IRA Contribution Limits
10:08 Pro-Rata Rule
12:10 Mega Backdoor Roth
13:24 Backdoor Roth IRA vs Roth Conversion
14:45 Convert non-deductible and deductible contributions to a Roth IRA
15:37 5-year rule on Roth Conversions
16:20 Is it worth the hassle?
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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Thanks for this, I am in the middle of doing '23 and '24 backdoor Roth contributions. I did have a Trad IRA with a sizable balance, but am in the process of rolling that into my current employer's 401k to have a $0 balance in all other Trad IRAs before doing the conversion. This should avoid the Pro-Rata rule. Thought maybe this would help folks that might think it's impossible if they already have Trad IRA balances. If you have an active 401k that allows rollovers into it, you can clear the path for tax-free backdoor Roth conversions this way. Great vid as always, Rob!
THANK YOU for touching on the pro-rata rule! After reading many articles about the backdoor Roth being portrayed as this amazing, secret tax advantaged approach, I did my own research to see how I could implement it. I learned about the pro-rata rule and, like you, found it isn't worth it for me due to the funds I currently have in several other IRA's. You are the only person I have found that highlights the real gotcha around this backdoor Roth. Appreciate the honest insight!
You're probably going to the wrong sources for your financial information. The pro rata rule would be a standard thing to cover when talking about a backdoor Roth. It's also mentioned indirectly on the form 8606, which you have to complete when you do a backdoor.
Your videos are always well constucted and well informative. Thank you!
The best way my college mentor helped me understand the pro rata rule was: if you mix rum (non-deferred ira contribution) into your pot of hot apple cider (tax-deferred contribution), you can't just ladle out 100% rum to drink. If stirred properly, your solo cup will have the same ratio of rum to cider as is in the pot.
Merry Christmas Rob! This was one of the best explanations I've seen on the Backdoor Roth! Thank you for all your videos!
Thanks Rob, it is the most eloquent explanation I have heard about Roth conversion. Fantastic! Keep doing more such videos.
I love all the detail in the video, it answered every question that I had which is unusual for most videos or articles on these subjects.
I really appreciate that your videos explain all of the ancillary topics that surround the main topic of your video and didn't just refer us to another video explaining the other topic.
I had a traditional IRA with dollars in it but my employer allowed me to roll it over it into my 401k reducing my traditional Ira accounts down to $0. Now I can do a backdoor Roth each year.
Just found this and thank you for the explanations. We have been above the Roth IRA income limits for a long time, so I have basically put IRA's out of my mind. Every year we max out our company 401K's and have quarterly buys of $10K-$20K in stock at our brokerage (and I didn't even have an IRA yet). Definitely opening one for myself and my wife and contributing the max to each and converting to a Roth IRA - and will make sure to do so at the beginning of each year. Great way to save a bit on taxes that I wasn't doing, as no one really explained it very well until your video. With ESPPs, private stock offerings, GET/529 college programs, real estate ownership, etc. it can really be hard knowing where to put your money - coming from an immigrant family. Familiarity with US financial systems is something families who have been here for a couple generations take for granted.
Thanks so much for the video, Rob. Super useful explanations. Wishing you and your wife a Merry Christmas and Happy New Year.
Thanks Rob! you never disappoint. THANK YOU for finding this i-ORP calculator. It helped me start to think about my exact tax situation with new insight. Everyone else in the planning community wanted a few grand to answer these questions at the preliminary draft level I was seeking.
To avoid the Pro Rata issue when having a pre-tax Traditional IRA, you can convert the IRA funds to your employer 401k funds, if the administrator from that fund allows it. Fidelity allowed me to do this.
I ran simulations for Roth conversions on New Retirement and found, surprisingly, that the tax savings were minimal and my projected end of life end worth actually went down. With investments in the low 7 figures, I expected to see greater savings. Very worthwhile exercise.
Very Good explanation! I had not understood this strategy before hearing this video!
Very clear and helpful. Thank you!
Excellent video Rob, thanks
Love the dive deep!
Fantastic video Rob. I’m a CPA and this was a very good explanation
Why would I get a 1099R for doing this? Showing taxable income. So confused.
Thank you--this is the first time I've heard that the annual contributions(s) limit includes what you contribute to both your Roth IRA and traditional IRA. Thanks so much for this clarification.
Excellent video, thank you.
YOU are valuable in the TH-cam world 🌎. Thank you so much for all your videos.
My three favorite channels: Rob Berger, Stock Brotha, & How Money Works. Make my week complete! 🔥 🔥 🔥
Add Ben Felix to that list!
Thanks Rob for the great information! Now I clearly understood the 'Prorata' rule 🙂
But how if the prorata set?
many 401k plans allow "in-plan conversions" of after-tax $ to a Roth bucket w/in your 401k account. we use fidelity and they set up what they call a "sweep" which the same day as the $ posts, they do the conversion. b/c it happens the same day, no taxable event occurs. the big catch is the $ u're contributing is at the top of your tax bracket. btw, there are irs limits on how much u can contribute given they have a "max from all sources" value of 68k (for 2024) so u minus all your pre-tax/catch-up/employer contributions from 68k and that's the amount available to backdoor in, at least when doing it thru a 401k in-plan conversion.
Thank you!
Merry Christmas and Happy Healthy New Year!
Roth has additional functions: for inheritance(s) and for the surviving spouse.
Great video! One of my favorite features of the Roth too, and perhaps a reason for some to do the backdoor, is to provide this an inheritance vehicle. Roths can pass tax free to heirs 👍🏼👍🏼👍🏼
That's true but so do taxable accounts with a step up in basis, the difference I guess is when a roth is inherited it's still a roth and can continue to grow tax free for 10 years.
Great video!
Excellent info as usual @robberger! Could do a video on how the secure act 2.0 allows 529s to rollover to Roth IRAs?
I tried reading it but there wasn't a lot of details... thanks!
I'm sure your explanation was good, but I'd love to see a thorough explanation and examples of the pro rata rule, because it seems at odds with everything one hears about Roths and the supposed flexibility to pick and choose whether to pull Roth or non-Roth funds out depending on ones' needs in retirement.
Great video! Thank you Rob. Quick question should we consider state of current residence and future residence when thinking about Roth? For example, I currently live in California and pay a lot of income tax, but in the future when I want to retire I might retire in a state with much lower taxes. Is that an important factor to consider?
Hello and Thank you very much for the very informative presentation. I am now subscribed to your channel and I hope to learn even more. I was wondering whether I could re-characterize a quantity that I’d previously ré-characterize? I mistakenly did the first in an attempt to convert a Traditional IRA into a Roth IRA. The custodian is telling me I cannot do so but however I’m not seeing any IRS guidance saying that. I see guidelines stating that reversing a conversion is prohibited but nothing stating a re-characterization isn’t reversible. I’m attempting to do this before the tax window closes. Any help greatly appreciated!
Newer Subscriber here. I have watched several of your videos. I appreciate the content and delivery. I have a question for you. I have a Roth IRA that is over 12 years old at a broker so first 5 year clock is met, I turned 60 a few months ago so second 5 year clock met. I am planning on moving the Roth IRA to a different broker in kind due to expense fees. Does this in any way reset or start another 5 year clock. If so would it be better to leave a minimal amount in the original Roth IRA. Thanks for your help and keep the videos coming. Steve
I've heard a lot about this. Thank you so much for going over it. I've been told to start a solo 401k with my business. Then convert it over into my Roth IRA. Seems very confusing. Do I pay taxes on the money the year I convert? How does this work exactly?
Increasing tax rates are the reason I rolled over my 401k to a Roth. I don’t want to be 59 paying taxes on current income on withdrawals made from my retirement account.
Hello Rob. The annual contributions limits don’t include your employer 401k or TSP right? You can max out your TSP AND max out a back door Roth IRA right?
Thanks Rob--really enjoy your videos and content One comment on the example, if the contributor to the taxable traditional account was able to claim the 20% deduction each year--then it is a wash between the Roth and Taxable account. The Roth has to pay the 20% tax each year of contribution which is an opportunity cost in additional investment; whereas the Traditional has to pay the 20% at the end.
The backdoor Roth maneuver does not apply to folks who are able to deduct a traditional IRA contribution
Thanks for your advice, it's been very helpful. On Bogleheads, what is your basis for stating "1966 was the worst time to retire"? Inflation and the stock market was still reasonable then. Inflation didn't kick in until 1973 along with poor stock market performance.
Please do a video on M1 Finance and why this is your platform of choice. BTW great videos.
This is all well and good for individuals making "earned income". Are there any similar strategies for those with nothing but "unearned income" sources such as rents, VA disability, and SSDI?
Do you know if target date funds follow market cap weighting or do they cap international at 40%? So for example over the next decade if VT changes from 60% US and 40% international to 50/50, would target date funds follow suit or would they just stay at 60/40? Then my follow-up question to that answer is how much should Americans have in US stocks at all times to reduce currency risk? I’m following the recommendations of Mr. Bogle to keep international around 20% of my portfolio. Thank you so much. Hope you see this.
If I do a Backdoor Roth IRA conversion from an older Non-deductible IRA account, are the gains that have accrued in the Nondeductible IRA subject to Capital Gains tax when I do the conversion?
Thanks Rob, great video as always. Regarding the Pro-Rata rule, are other IRA assets considered by the IRS at the time of the conversion or at the end of the calendar year? For example if I did a backdoor ROTH IRA for the 2024 tax year in January but then later in the year rollover a 401k into an IRA would I fall victim to the pro rata rule?
IIRC the pro rata rule is just that you need to have that money out of the IRA by the 31st of December of the year you did the conversion.
My late spouse left me a sizable 401k which I just converted into an inherit IRA account this year. Does the pro rata rule apply to inherited IRA account? I wonder if it still makes sense for me to continue to do backdoor Roth IRA conversion now that I have this inherited IRA account.
Non deductible contribution to Traditional IRA- If this generates any dividends from the time we contributed and converted. Does it trigger any taxes or pro rata?
ex: contributed $6500 to fidelity Traditional IRA, left it there to clear ex: 2 days, after 2 days converted to RothIRA. Now the Traditional IRA gives $3 as dividend at end of month for the 2 days we left it in for. Next year how to do Roth conversion? does this trigger pro rata rule, because I have money in my Traditional IRA ($3)
Rob, my son is 26 years old. He only has a Roth IRA. He does not have any pretax IRA account. If he puts in nondeductible money into an IRA and does a conversion will the prorata rule mean the entire nondeductible amount will be converted? Seems like if that’s true he’s the ideal person to do a backdoor Roth?
Do you have to do the backdoor Roth IRA conversion every year if I’m using the same account?
How does the pro-rata rule work if my wife has existing traditional IRAs in her name but I don't have any? I'm assuming since the "I" is for "Individual" and I don't have any existing IRA's in my name, I can open an IRA and do the backdoor conversion without worrying about the pro-rata rule. Is that correct? We are MFJ filing status if that matters.
The answer is YES
My theory is, he wears no pants.
The example at the end of the video is for no distributions for 20 years. If that is until after 59 1/2 then the example should include a third option for leaving it in a 401k. The 401k might earn the most because the money that would have gone to pay taxes can be invested for potentially even more compound growth.
In this case, does it make sense to do both 401k and Roth IRA? Thanks!
The main reason mega backdoor Roth aren't usually available in large companies/organizations is b/c of ERISA regulations. Complex topic but one aim is to prevent highly compensated employees (HCE) from having an advantage over low income earners vis a vis mega backdoor Roth strategy. There are "non-discrimination tests" such as average contribution percentage (ACP) and average distribution percentage (ADP) which are applied to the entire workforce. The data collection, analysis, and reporting takes a lot of work, so companies can avoid this by utilizing "safe harbor" provisions of ERISA, which effectively prohibits the mega backdoor Roth strategy mentioned in the video.
I dont know which large companies you are referring to...most do offer mega backdoor
I was such a person in a 20 people company. Most employees put in small amount of $$ into their retirement. I was compensated more (not lots) and wanted to put in the max like 20% as I was 50+ years old. I was penalized later for putting too much in.
Hi Rob, thanks for the video. Question for you on the last part where you where comparing the Roth vs Taxable. Is it me adding to much complexity or are you oversimplifying, but this comparison is not apples to apples? For the Roth you are using post tax 6500/13000 contribution (which is pre-tax around 7800/15600 at 20%) vs the pre-tax 6500/13000 for the Taxable. So the more accurate difference will be the "today vs tomorrow" tax rate on the contribution for the Taxable as well as the tomorrow tax rate on the Taxable earnings. This should narrow the delta, but still agree the Roth should have the advantage just from the tax free earnings.
Thank you for your advise. Isn't the outcome of the pro-rata rule the same as a person converting a deductible IRA to a Roth IRA, with the exception that it benefits high earners that would be shut out of Roths entirely? I'm one of those thinking of converting deductible to Roth anyway so seems almost the same. Thank you again.
Can you do more than one conversion in the same year?
In March of 2023 my son made a non deductible contribution to a traditional IRA for tax year 2022. Then a few days later did a conversion in March 2023 for the 2022 contribution..
Last week in December 2023 he made a non deductible contribution to his traditional IRA for tax year 2023. Can he do a Roth conversion now even though he already did a conversion in March? The contributions are for 2 different tax years
Hello Rob. On Target Date Retirement funds, I had been investing in one through work for years. I realized that by time you are within 10 years of retirement, the allocation is 50/50 stocks and bonds. That seems way too conservative to me. Your thoughts?
Hey Rob I need some advice I'm 37 looking to retire in my mid 60s. I'm my taxable account I have fxaix 80% fssnx at 20%
And maxing out my Roth with $O reality income and reinvesting dividends. My employer is also matching 401k in a vanguard s&p 500. Is this an Ok setup?
Can you do both backdoor conversion (limit $7500/y with catch up contribution) AND mega-backdoor conversion (limit $73,500/y minus 401k contributions minus employers match) within the same year?
Yes
Hello Sir, I am so glad I discovered you on TH-cam. I love your videos and I have learned a lot. You explain things very well. I do have a very general question as I approach retirement. If I am going to live 20-30 years in retirement what is wrong with just staying 100% invested in a S&P 500 Index Fund. Theres plenty of time to weather the bad years and end up at 10-12% average over time. I compare this to the 60% stocks, 40% bonds, etc. I would love your expert input on this. Thank for your help!
Volatility and sequence-of-return risk. I think you could pull it off if you had 3 years of living expenses saved in cash.
I receive regular monthly retirement payments from the state of Illinois. These payments have been taxed. Can I take money I received in the last 60 days and roll into a traditional IRA then roll it into a Roth IRA. And then repeat this every 60 days.
Thanks Rob! Great video. Just so I understand, if all my contributions to my traditional IRA for the past 20 yrs were non deductible (paid after tax), I can backdoor convert the total amount to a Roth with no tax implications? Don’t I need to pay income taxes one time on the growth that I’ve made with this money tax sheltered? So I guess the question is that tax less than what the RMD taxes will be when I retire?
Imagine you had made those non-deductible contributions to a Roth for 20 years. That is essentially the same scenario. Qualified Roth withdrawals are tax free, regardless of how much the account has grown above the contributions. I suppose your scenario would make sense for someone whose income is above the Roth income limits and did not have access to a workplace retirement plan.
Hey Rob, after you do roth conversion can you contribute normally to roth after that even if magi income is above the requirement or should you keep doing conversion every year?
You do the conversion every year if your MAGI for that year is above the limit for Roth
Hi! Thanks for the videos… I contributed to my Roth IRA directly and refently learned that in 2022 and 2023 I was above the contribution income limit, so I need to correct this. Do you know any professional that can support with thus process? The CPA that is tryinf to support me wasnt super helpful
Can you do a backdoor Roth conversion from a 401k into a Roth 401k?
Just putting a question out there. I’ve gone to two CPAs asking for help for a strategy to do conversions to Roth, including does it even make sense for me to do so? Also, they know I’m ready to pay for their services for this guidance. In each case I’ve been told I need to speak with my financial advisor. I speak with my financial advisor at Fidelity, and he says I need to speak with a CPA. My financial advisor is for my employer’s 401k plan. I do not use a managed relationship with Fidelity?(i.e., I’m not paying thousands of dollars to someone to manage my money). I’ve been told that that’s the only way I can get this kind of advice regarding tax implications and opportunities to minimize tax in retirement. It just seems crazy to me that this has to be so difficult. Does anyone else have this kind of issue in receding guidance for a tax minimization plan? Thanks for any perspectives shared.
Reach out to Mark Zoril, one of the advisors that Rob uses and recommends. After you pay his reasonable fee, he’ll have you talk to his CPA on staff who can advise. Talking to his CPA for your situation is part of the fee you pay to Zoril.
only about 20% employer plans allow after-tax contributions, but for those that do, you still have a similar pro rata tax consideration in doing a mega backdoor roth as you would a regular backdoor roth ira conversion. The key point on after-tax 401k contributions is that the earnings on after-tax 401k contributions are tax deferred. You must rollover or convert earnings from any after-tax contributions you rollover or convert. some plans have auto conversion of after-tax 401k into roth 401k. That should presumably negate any possibility of earnings, so there wouldn't be pre-tax earnings to also convert, so no taxes. Plans that allow in-plan conversion but not automatic conversion, you normally would be allowed to do this once a year, which means you would presumably have earnings associated with your after-tax contributions. So, you'd have to convert the earnings proportional to the amount of after-tax contributions you wanted to convert to roth 401k. because pre-tax earnings, you'd have to pay regular income tax on that converted amount, although there wouldn't be early withdrawal penalties.
Some plans that allow in-service distribution rather than in-plan conversion, allow once a year in-service distribution. You can directly rollover the after-tax contribution into to a rollover roth ira, but again you have to also take a distribution on the earnings associated with the contributions you are rolling over. The good thing is that unlike in-plan conversion where you forced to convert earnings proportional to your after-tax contribution conversion, in-service distribution you can rollover the earnings associated with the after-tax contributions into a traditional ira. Now, if you don't have a huge trad ira balance, you could then do a backdoor conversion of the rolled over earnings into a roth with associated taxes. you can also cash out the earnings portion, but you would have to pay taxes and early withdrawal penalty.
The 401k of a past employer required me to submit a hand-signed form every time to convert after-tax contributions to 401k Roth. That was every two weeks if I wanted to avoid taxable earnings, and even then I would miss some small amount, as it was by dollar amount and not percentage. This was intentional I'm sure. It was such a pain I only did it quarterly. My current 401k with Fidelity allows a standing automatic sweep to Roth. Much easier.
In service withdrawal of "after tax" 401k, results in two distribution. One is "amount contributed," which can be rolled into roth ira. The other one is "earnings on contributions"; which can be rolled into traditional ira. In both rollover, no tax to be paid.
Also, doing this (a mega backdoor Roth) has no pro rata rule, making it truly ‘mega’!
Would I still be able to do backdoor IRA for 2023, even if I already filed my taxes? How can I report the backdoor IRA now that my taxes have already been filed.
Thank you for this video!! Question: I have significant amount of Traditional IRA so due to the pro-rata rule it’s not wise for me to do the back door rollover to IRA Roth. My wife has $0 in traditional IRA (in her name), can I then make the back door conversion to Roth IRA for her retirement account without triggering taxes? Or does the IRS look at the combined traditional IRA balance for the two of us since we are married and file jointly? Thanks!
Q1 Yes
Q2 No
Thank you!!
What about the growth on your non deductible $$ is that tax free ?? Or just the $6500 contribution??
Not direct to the subect, but feels like a good topic for a video (unless you covered it, point to your video please!)
Let's say a person thinks he needs $150k/year "spending" . how do we get a calculator (I can't find any) that can answer "how much do we need to have" assuming SWR of X% in Taxable (capital gains), cash, Roth and IRA ? it is of course complex and has many variables (what is the mix, which state, what portion of the brockagre funds are approicated vs cost basis..) but.. surely there is "a" sheet or calculator that can give me an idea?
today my sheets assume a target number and a SWR to tell me when I am ready, but that ignores the fact that the number I track is as if there will be no taxes on the money, and clearly there will be depending on all the parameters mentioned above.
New Retirement is just such a ‘calculator’ that Rob talks about a lot. It’s very reasonably priced at $120/yr. Well worth it to do the calcs you’re talking about.
Hi, good morning. I already contributed to my IRA ROTH the very first month of the yr for 2024. My MAGI for 2023 was $187,000. I have some nice gain in my brokerage account. I am tempting to take some profit. But I am worried because that may increase my MAGI above $230,000 because that will put me not eligible for IRA contribution. Do I have to take my contribution from IRA and also pay the IRS penalty? What are my options? I badly want to take some profit from my investment. should have held onto the IRA contribution till the end of the yr.
stressed.
Are 401k funds left with a prior employer (ie not a "rollover IRA") part of Pro Rata? I have a 401k from prior employer and a non-deductible IRA and want to convert the non-deductible IRA into a Roth IRA (backdoor conversion).
401ks are not part of the pro rata rule.
Check with a tax advisor, but I am pretty sure the answer is No. A 401k left with a prior employer’s custodian does not subject you to the pro rata rule, because it’s not in an IRA.
I’m a little confused on the following: if you can only contribute $6,500 or $7,500 as 0:02 applicable, yearly to either a deductible or non deductible IRA how is it that I always hear that millionaires have made huge (Millions or Billions) back door Roth IRA conversions? How many years @ $6,500/$7,500 would this have to take for them to get these conversion amounts?
With catch-up, my contribution to my Solo Roth 401-k for 2023 was 30K.
Right. Mostly these huge contributions or Roth balances are coming from 1) mega backdoor Roth conversions like @heidikamrath1951 mentions above, which are much larger than $6500, and / or 2) one purchases stock after one has put those dollars in a Roth, and the stock goes up by 10,000% or some very large returns. See news stories about Peter Thiel who did this. Then congress changed the law for him so he’s getting taxed on it anyway, so if you’re super rich or make the news, congress may get you anyway!! 😅😂
🎯 Key Takeaways for quick navigation:
00:14 *🤔 A backdoor Roth IRA involves making non-deductible contributions to an IRA and then converting that money into a Roth IRA.*
01:50 *📝 Deductible IRA contributions are reported on tax forms to reduce taxable income, while non-deductible contributions are not deducted but still reported.*
03:38 *💰 Some individuals may not qualify to deduct IRA contributions due to income limits, leading to non-deductible contributions.*
05:15 *🔄 The backdoor Roth IRA strategy allows high-income earners to contribute to a Roth IRA by first making non-deductible contributions to a traditional IRA.*
07:34 *🚪 Initially, there were concerns about the legality of the backdoor Roth IRA strategy,but IRS rulings have validated it as a legitimate approach.*
08:58 *⚖️ Non-deductible contributions to an IRA count towards the annual contribution limit, which applies to both traditional and Roth IRAs.*
10:17 *🚫 The pro-rata rule requires considering all IRA funds collectively, affecting the tax implications of conversions, especially if there are pre-tax contributions.*
12:24 *🔄 The mega backdoor Roth IRA involves making after-tax contributions to a workplace retirement account and potentially rolling them over to a Roth IRA.*
13:45 *🔄 Roth conversions generally involve converting pre-tax or deductible dollars to a Roth IRA, which triggers taxes upon conversion.*
14:56 *🔄 It's possible to convert both non-deductible and pre-tax IRA contributions to a Roth IRA, each with different tax implications.*
16:08 *⏳ The five-year rule applies to Roth IRA conversions, requiring waiting to avoid penalties for early withdrawals.*
18:56 *💡 A backdoor Roth IRA can potentially save taxes in the long run compared to leaving funds in a taxable account, though consulting a tax professional is advisable.*
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Hey Rob, thanks for great videos, I learned a lot from you over the last couple years. But sometimes it gets a bit too lengthy to understand the main points, so if you, maybe, could do a quick summary at the beginning, it would be awesome. I know tax laws are crazy and certainly deserve deep dive, but sometimes I find myself getting lost watching some of your videos or not being able to finish them and extract the juice, if you know what I mean. A couple of summary slides up front May serve this purpose very well. Just a suggestion.
Yes. Summary slides would be amazing! Your videos are quite dense (in a good way!)
Being retired, I converted from my IRA into a Roth paid the taxes. Do I have to claim the conversion amount as taxable income on my taxes, can I deduct that amount on my ago.
It is taxable income in the year that you did the conversion. But subject only to income taxes (federal and state) and not to Medicare/SS taxes.
All this talk needs to be around the taxes when doing Roth or IRA. Right now your paying 24% taxes on money your putting in Roth IRA. If you put that money in pre tax and only withdrawal for 12% tax bracket you are automatically gaining 12% in taxes.
Right. But RMDs will force funds into a higher tax bracket. You will want to do Roth conversions after 59 1/2 and retirement and before ssc will be withdrawn. After that it will get much worse with taxes on ssc and IRMAA.
@@FrankGranseealso ROTHs have no required minimums so you can play around taxes through other investments
I find it interesting that I hear so many statistics about how people don't save what they should. When I hear about these ROTH conversion stategies, they sound like a lot of work. It makes me wonder who these super saver people are? Not only do they want to save as much as legally possible, they also want to jump through all these hoops to maximize their savings. Many people don't care about saving and some a supersavers who will do anything to save. Quite a difference in behavior.
It’s a bit of work at the initial stage but worth it and once you’re set up with the right brokerage doing backdoor Roths is relatively painless. This year I opened a Solo 401k with E*Trade (which anyone with 1099 income can do as long as you have no employees), and rolled my IRAs into that which made me no longer subject to the pro rata rule. That was a bit of paper work but not too bad. Then, after that was set up, doing a backdoor Roth was as simple as putting money into my now-empty IRA, waiting a few days and then doing the Roth IRA conversion with a few clicks. I just wish I had done all this 20 years ago(!).
I made 18k of non-deductible contributions, how do I move it over to roth without the penalties?
I started a new LLC for e-commerce. Can i use my IRA (roth or traditional) to fund it? What would the pros and cons be?
IMO, the Best thing to do is to open a Solo 401k. You can roll over all your existing IRAs into it and then not be subject to the pro-rata rule in the event you'd like to do a back door Roth. And you can also do both Roth and traditional contributions to the Solo 401k with limits that are much higher than an IRA. The only stipulation is that you can't have any full time employees, unless it's your spouse, in which case you can open and fully fund one for your spouse as well.
@bklynbass thanks. I was looking at taking $10k and investing into the LLC vs a loan. I have to capital but I was wondering if I could invest in my business like I would buying the S&P.
@@kenhicksjrlook up ROBS, Rollovers as Business Start-Ups it requires a C corp though, and NOT a LLC taxed as C corp. You would need to reform your business but you can technically do it. Look into the pros/cons tho
@@kenhicksjr Oh, I see... I'm not a financial pro but I'd avoid taking out a loan, either a small business loan or especially a loan against your IRAs. If you have an extra 10K to invest in your business to help it to grow then go for it. Otherwise, if you're looking for a good retirement account option as an LLC/sole proprietor I recommend looking into the Solo 401k.
Question: what if I don't have any traditional IRA now and do the backdoor Roth IRA contribution-conversion. In 2 weeks, I roll over my 401k into traditional IRA. Will the IRS pro-rata the Roth conversion when doing the backdoor Roth IRA?
Pro rata tax applies if your traditional IRA balance is greater than $0.00 on Dec 31 of this year.
@@alrocky Thank you for explaining.
I contributed $6,500 to both mine and my husbands Traditional IRA's in December but forgot to do the roll over by Dec 31st, am I still able to roll the money into our Roth IRAs or will we be be taxed on it now as income if I do that?
You can still convert up until tax day. The conversion will ask for what year (prior or current) it is for. It'll just make filling out form 8606 a little trickier for the following tax year. You'll only pay taxes on the dividends it accrued. Your IRA custodian will send form 5498 reflecting that. Don't forget, you and your spouse have to Individually fill out form 8606, even if filling jointly.
I made about $1500 to non deductible traditional IRA years ago. Do I leave it there or should I move it to the Roth IRA now?
I was in the same boat. I put $1000 in a non-deductible in 2022 and let it sit. It grew a little bit, which is a problem when you convert it to a Roth. Those gains are taxable. I went ahead with the conversion earlier this week, but I think my taxes just got more complicated 😅
I am from Delaware so learning that Roth was a DE senator was a great
unexpected fun fact!
I have been trying to understand the backdoor Roth for so long and now that it actually applies to me, I am very grateful for this video!
Does the pro-rata rule apply to 401(k)s?
I continued watching your video and your next segment answered the question
In your spreadsheet you failed to offset the tax savings of the backdoor Roth IRA over 20 years by the tax savings of contributing to a deductible traditional IRA over 20 years. Unless you assumed the taxpayer exceeded the income limits allowing deductible traditional IRA contributions.
Nit: The IRS DOES know if you've made an IRA contribution. IRA custodians are REQUIRED to send the IRS a Form 5498 by May 31st for any account that receives a contribution, conversion or rollover. So yes, the IRS KNOWS you made your IRA contributions.
However, they don't know if it's deductible or not until you file your tax return. You declare the deduction on Schedule 1 or you add it to the cost basis of your T-IRA on Form 8606, Part I.
I was doing non deductible IRA contributions for 6 years because I make to much. I asked my accountant why we're not doing a backdoor ROTH IRA. He looked at me and said, yeah, why aren't you doing that? I now use turbo tax. I noe have around $40k in non deferred contributions in my IRA. no clue how to convert them to a Roth or if that ship just sailed. I'm 44
It's still worth doing the roth conversion. Think of $6500 that you should have contributed to a roth as a tax amount that you would pay for the conversion. Depending on tax bracket you can convert the entire 40K in one shot paying $6500 as taxes. Do it.
It is absolutely worth it if you make more money than they allow for you to open a roth, catch is you need the roth invested properly over time so the gains in the long run outweigh the the taxes you pay upfront. So your ira has to perform well over years in capital appreciation so when you start takiyour Roth $ you are not paying tax then, so that’s where you would want to pull from there first when your in retirement time, before pulling from your 401k or other investments.
Hi Rob 😀😀 , I'm a BIG fan of yours! Please tell me how I would invest 1,100,000 .I was going to lump sum 500k and DCA 20k each month for 30 months in S&P 500 index fund or do you have better strategy. I'm begging you to PLEASE give me advice? Thank you very much
The reason you do it is you want to pay your taxes later when you have no income and many states do not tax IRAs, it gives you more money to invest. If things work out and you end up with more money than you need and taxes become an issue. I don't think paying too much tax is an issue in old age where most people have a problem getting much beyond Social Security. Paying too much in taxes is a problem most retirees would like to have.
So to clarify, there is a loophole to contributing the max to a roth the regular way ($7K) AND the backdoor way ($7K), both in the same tax year (grand total $14K)?
1. Contribute $7K to a an existing roth.
2. Put $7K after tax money (non-deferred) in a traditional ira, then immediately convert the whole amount into the roth. Pro rata wouldn't apply to me because my traditional ira has $0 currently.
3. Only #1 is considered a "contribution" (and I maxed out). #2 is considered a "conversion" and didn't count toward the $7K.
4. However, if I had left the $7K in traditional and forget to convert, I'm now in violation as I contributed twice the annual amount across all accounts.
This is not Correct. The backdoor Roth is considered a contribution and is part of your annual limit.
@@davidtvedte1337 Thank you. I was listening to him at 9:22 and it sounded too good to be true.
Do the backdoor Roth conversion when your non-deductible traditional IRA contribution falls below your initial contribution amount, no 5 year rule as there’s no earnings
If I start a Roth now, can I contribute non deductible amounts for the past years I worked and didn’t contribute to any Roth? :)
No. You must make a contribution by the due date of your return including extensions, so the only prior year you could possibly make a contribution for at this point is 2023, by April 15, or Oct 15 (2024) if you file an extension.
@@likethesky thank you 🙏🏼
Worth the hassle 100% of the time. 👍🏼
I disagree. I also disagree with the section of the video that analyzes is it worth it. I love Rob, but he is comparing apples and oranges. Instead of comparing Roth IRA to a Taxable Account, he should be comparing ROTH IRA, to a Traditional IRA or 401K. In a correct apples to apples comparison like this it really only makes sense to do these conversions if your retirement tax bracket is going to be higher than your current tax bracket.
In my opinion ROTH is king, so in the event of a tie, I would leans towards ROTH, but it doesn't make tax or financial sense to do it 100% of the time.
Rob, thoughts on this work 401 K portfolio : 45% Vanguard total market index, 45% vanguard 500 index fund, 10% vanguard total international fund. Approximately 12,000 stocks.
Husband and I did this a few months ago on Fidelity. Takes them so long to make the money available in your Traditional that we both got a few dollars in dividends from the traditional account before we did the back door Roth. Now we have to report the dividends and take penalty for getting it out. It’s not a lot of money but a pain in the rear.
This happened to me today. I have like 1 day of gain from the core position. So annoying
What is the definition of HIGH INCOME earner? 150k?
6k a year doesn’t seem like enough for the hassle.
Hello, do you provide financial planner services? I'm looking for an overall planning advisor. I will appreciate for direction in case you don't provide the service.
I don't think Rob does this. But I would recommend a "fee only" advisor. Do not get a "AUM"(assets under mgmt) advisor. The difference in price can be literally millions of dollars or the course of your investing career. Yes, spend a couple hundred for a fee only advisor - and it would probably be well worth it. Also if the fee only advisor tries to sell you a product, especially insurance related or an annuity - run away and find another one.
Rob, I’ve spent a lot of time looking at back door ROTH conversions from my IRA to a Roth IRA. Your explanation was the most confusing I’ve ever seen. Your last explanation was not a Backdoor Roth conversion… it was a simplified explanation of contributing to a Roth account vs a taxable account. You covered a lot a ground in this video and bypassed many of the details that make or break the value of a conversion. I found this video to be of less value than most of your videos.
i agree that the last spreadsheet calculation was a bit confusing as to what was being calculated. It seemed to compare roth ira with taxable rather than backdoor conversion, since it used long term cap gains rather than marginal rate. Realistically, the 2 minute segment on pro rata is the only important part in terms of determining if back door roth is erstwhile. bottom line, though, if almost always makes no sense to do a backdoor roth if you have a large trad ira balance because of pro rata.
@@hanwagu9967 I have to disagree…. Converting a significant portion of an $1 million plus IRA to Roth saves significant amount of income tax on both withdrawals AND on tax on social security along with IRMA surcharges. It also provides freedom to draw the amount out that you need vs the forced withdrawal rates on RMDs.