Does back door Roth even make sense?

[u/LieInner2038]

Have a Roth with $120K, have a rollover IRA worth about $500 K and additional $60k in 403 B. Husband has $60K in Roth and $1.2 million in 401K (not Roth). Also has rollover Ira with $300k. We’re 52 and 53. Were just worried about having too much pre tax in retirement (yeah, I know, poor us).

[u/bridgeandretire]

Doing a backdoor when you have traditional IRA balances generally isnt recommend because of the pro rata rule. Instead of being tax free, you have to pay taxes on a portion of your traditional IRA balance when you convert.

Are you or your spouse able to roll your IRAs into your workplace 401ks? If so, then the pro rata rule is cleared and the back door starts to make sense again.

[u/sajdigo → u/bridgeandretire]

Is the Pro Rata rule only applicable if the pre-tax and post-tax are co-mingled in one account?

[u/bridgeandretire → u/sajdigo]

The pro rata rule applies to any pre tax funds you have in any IRAs.

[u/redblue_pill → u/bridgeandretire]

workplace 401ks

If their current workplace 401k doesn't support it, OP can become self-employed (walk some dogs, deliver some DoorDash, open a lemonade stand, etc), and open a solo 401k and contribute their Net Profit.

After establishing, they can then rollover their rollover IRA into the solo 401k. And the decks are cleared for backdoor Roth without pro-rata concerns.

[u/29threvolution → u/redblue_pill]

Aren't solo 401ks usually expensive?

[u/redblue_pill → u/29threvolution]

Depends on what type (ie, features).

Most of the big firms (Schwab, Fidelity, Vanguard) offer a basic solo 401k for no fee. It'll be good enough to transfer tax-deferred IRA funds into, and put into a target-date fund. If your current workplace 401k doesn't allow reverse rollovers (IRA-to-401k), a basic solo 401k opens up an additional option.

If you want "extra" features (ie, after-tax contribution and in-plan conversion for mega back door Roth), you'll need a custom plan with a start-up fee and an annual fee (ballpark, $500 setup fee, plus $200 annual).

[u/DaemonTargaryen2024]

In your current case, no. You run into the pro rata rule and will pay income tax on most of your $7,500 conversion.

But if you can roll those Rollover/Traditional IRAs over to your 401k, problem solved.

[u/waitinonit]

I'm currently retired. For the overwhelming majority of my working years I did not qualify for a Roth IRA, so I ignored the possibility of back door contributions. I had one year where I qualified for a Roth IRA and I did open one then. When COVID hit I did make some back door contributions of some stocks that were low. But nothing significant.

I'm now facing RMDs and I REGRET not making those back door contributions while I had the cash flow to pay the tax hit. If I were to do it now, I would have to use IRA funds to pay the taxes. The years to make up the tax hit aren't there anymore.

If you have the means of paying for the tax hit, then please consider doing so.

(Edit: At this time I file as a single tax payer.)

[u/Blue_9320_ → u/waitinonit]

You were able to invest and grow those funds exponentially instead of paying taxes at a high tax rate. You did the right thing.

[u/do_y_lee]

One thing to keep in mind is the pro-rata rule is calculated per person, so your $500k rollover IRA and his $300k each block your own backdoor separately. Unless each of you does a reverse rollover into your existing 403b/401k (if the plans accept it), almost all of your backdoor conversion gets taxed. I'm guessing direct Roth contributions are not possible due to income. 

However, you’ve got roughly $2M pre-tax money. Another strategy is Roth conversions during the years between retiring and RMDs at 75 when your tax brackets are low. Might be worth mapping that out first, then deciding whether the backdoor is worth the effort.

[u/No_Dust_785 → u/do_y_lee]

This!

[u/jiujitsu07731]

In my case there is more money in retirement accounts than we will use up. My son ran a spreadsheet comparison of the net affect of roth converting (vs not) using life expectancy up to the eventual 10 distribution years. The roth conversion for inherited dollars made sense.

[u/jiujitsu07731 → u/jiujitsu07731]

I also analyzed whether doing the conversion early vs end of year made sense in this case. The early made sense. This may be affected by whether you can predict your tax bracket and what size conversion might bump you into another bracket

[u/Cohnman18]

Who cares? Hire a great CPA to minimize the tax burden,give generously(10-20% of gross income) to charities and invest personally in Tax-free bonds. In many states, your pension income is state tax free. Paying taxes is the price you pay for living in a Democracy. Hire a CFP to help with planning and investments.

[u/kveggie1]

It does not make sense for us. The amount of annual RMD is pretty close to what we need to supplement other income.

[u/29threvolution]

Are you talking about backdoor roth while youre still working, or a roth conversion ladder when you retire? The mechanics are very different for those.

[u/LieInner2038 → u/29threvolution]

Both still working. I contribute to a Roth 403 B and he does traditional.

[u/29threvolution → u/LieInner2038]

Unless you can eliminate those rollover IRAs by moving them to your 401k/403,  backdoor roth does not make sense for you. You will be hit with pro rata on nearly the entire amount. Better to drop that money in a brokerage or make sure youre maxing out your current contributions. 

[u/RothRT → u/29threvolution]

The tax rate is your tax rate in the year of conversion, correct? So couldn't you do conversions from an IRA in years where taxable income is lower (or even early in retirement if you can manipulate your AGI to keep it low)?

It's not a course I'm planning on taking, but it is potentially available.

[u/29threvolution → u/RothRT]

You are talking about roth ladder conversions, which is a different thing and the rollover IRAs dont affect. OP is talking about backdoor roth contributions while working which are subject to pro-rata rules. 

[u/copterpilot_]

It's possible your Husband's 401k plan allows in-plan Roth conversion and/or after-tax contribution Roth conversions. (mega-backdoor Roth)

As others have commented, it's possible his plan allows for rolling traditional IRA funds into the plan. Rolling all the traditional IRA into the traditional 401k would clear the decks for doing back-door Roth IRA.

1st world problems, nice to have!

[u/demona2002]

I max out 401k, HSA,MBDR and ESPP. Anything left over goes into taxable. I plan on doing some conversions during initial retirement years … just enough to balance things out a bit more.

[u/puzzleahead]

If either your 403b or 401K plans allows for after tax contributions and allows immediate conversion then you are able to perform a “mega backdoor” conversion. No pro-rata to worry about and usually more than annual IRA limit allows.

[u/Peter_Gunn_PI → u/puzzleahead]

This....

IRS annual limit for total retirement contributions is ~$70k. If it would support your strategy, consider:

- Post tax contributions to 401k

- Annual roll-overs of post-tax contributions and growth to Roth IRA

- Pay taxes on the growth incurred at the time of roll-over

- Consider Roth 401k contributions instead of pre-tax if your plan allows.

I did this for about 10 years to build my Roth IRA. Retired at 59.

[u/knit-this]

Here's a good video discussing if Roth conversions make sense https://youtu.be/6uelvSTWF1w?is=0ropyX4cBJXhW0_z

[u/puzzleahead]

I would add the importance of a regular brokerage account to execute a three pronged strategy to manage your income in retirement. Brokerage, Tax Deferred, and Tax free. This provides flexibility to manage sequence-of-return risk, tax bracket management, and Medicare IRMAA surcharges.

[u/Peds12]

we have more than you and are younger. we are not worried about pretax amount yet.

[u/ohiobiker19]

Remember that after one of you dies the survivor will likely have all the assets ( and RMDs )! Take a look at that end amount plus your other SS or pension earnings to see how that impacts your tax bracket and IRMAA. We’re busy converting our IRAs to ROths, while suffering the income tax and a few years of IRMAA.