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Back Door IRAs


Sydney

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Okay I am going to make this easy as I swear I've read something, somewhere on this topic:

Person does not qualify to make the Roth IRA contribution due to income.  They open a traditional (back door) IRA and convert to Roth.

Question:  Can they do that regardless of any other rules?  For example, I swore I read somewhere that if the person had any other traditional IRA established, there would be taxation on the back door contribution other than conversion.  Am I losing it?  I've talked to a few IRA custodians and they no worries, I can do make the contribution without any regard to whether I have any other IRA(s) established.  True?

Thanks in advance.

 

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False.  While you can do the backdoor IRA, if you already have pre-tax money in one or more IRAs a portion of the amount converted will be taxable.  Rough Example:  You have $45,000 in a pre-tax IRAs from the days when you were able to make tax-deductible IRA contributions.  Now, on Tuesday, you make a non-deductible contribution to a separate IRA of $5,000, then on Wednesday you convert that IRA to a Roth.  You can do that, but only $500 will be tax-free, and $4,500 will be taxable.  

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jpod, thank you!!  I am not losing it.  Well, maybe losing it that I didn't remember the reference, but all these people and custodians are saying you can do that....and, I am like, "uh, I think there may be something that limits that ability."

Thanks so much, I truly appreciate it.

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Sydney -

Was your question whether you could do the conversion, or whether you could do the conversion without any tax consequences? Because you can do the conversion -- with or without other IRA money not being converted. If the "problem" is that all or a portion of the converted balance will be taxable to you. How is that different from any other Roth conversion? If you are converting pre-tax money, you will be taxable on that converted pre-tax balance. All that is different here is using the pro-rata calculation to determine the amount of the pre-tax portion of the conversion.

Were the IRA custodians telling you that you could do the conversion tax-free without regard to other IRA balances? Or just that you could do the conversion (which would then be subject to "regular" tax rules)? If they told you the former, then my apologies -- I misread your question and they were obviously wrong. But I suspect that what they were telling you was the latter.

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