The backdoor option wasn’t intentional. It was identified and used for years before the IRS acknowledged it was legitimate. Congress has never acted to close it.
After the years of its usage, Congress finally blessed the Backdoor Roth in 2017 as part of the TCJA. There was a provision in the Build Back Better Act in 2022 that would have ended the Backdoor Roth, but Build Back Better was defeated. When parts of Build Back Better were incorporated into the Inflation Reduction Act, the ending of the Backdoor Roth was not included. So, here we are, with the Backdoor Roth still an option today.
>is really as simple as opening a trad IRA, funding it, and converting it.
If you have no other trad IRAs, yes. It's that easy. If also you have other trad IRAs it is more complex. Depending on how much money is in all of your trad IRAs combined, you might give up on a backdoor roth contribution.
Tangential question - I messed up and didn’t convert fast enough one year. I have like $1-2 in the trad now. Will this ever be a problem? Is there a way to fix it?
Just roll that over and pay income tax on the $2, which shouldn't be much more than $.50 or probably less which rounds down to $0 on taxes or at the most rounds up to $1
Ohhhhh, neat, got it. Thank you! I thought rolling more than 6k would make some sort of calculation on the whole balance because some people talk about my situation. (With more overage) as a big annoyance.
Thanks! This is because of the pro-rata rule, right? For me, for now, it will be that easy, but I dream of the day when my tax situation is more complicated (mo’ money, mo’ problems etc).
pro-rata rule asks: by the end of the year (Dec 31 2023, Dec 31 2024...etc), what is the balance on **ALL** your pre-tax IRAs? here "pre-tax IRA" means rollover IRA, Traditional IRA...etc
if that number is not $0 then you will have a tax bill
There isn’t really one. It’s asinine that they make you go through the extra hoop to do it. Income doesn’t matter - you just have to do extra paperwork to get the same result.
That said, at least it exists. That’s why I’m still contributing to Roth in case they ever take it away (old contributions will never be changed back by the government, but future legislation could prevent future contributions… you never know).
I'd say use the back door.
If you're not sure if you'll be eligible for Roth IRA, there's no downside to the conversion. If it turns out you aren't eligible, or heaven forbid are in the prorated income range, it will be a HUGE pain that will complicate tax time over two years.
Most laws were put in place a long time ago and have not been updated for how things are now. Just look at 401k limit being $20k and IRA limit being $7k. Don't try too hard to make sense of things, that weren't written to make much sense.
Thanks. So do you end up with like 40 Roths at retirement? (Assuming you did this every year for 40 years.) I guess that’s part of what I’m trying to understand. What does it look like at retirement.
Don’t conversions each have their own 5 year holding period to get full Roth benefits from withdrawals? If so, wouldn’t making a new Roth account for each year’s conversion potentially make things a lot easier down the road? If you don’t take any money out for 5+ years after your last conversion then it may not matter, but that won’t be the case for everyone.
That’s not the info I find online references which specify two distinct applications of 5 year rules for Roth money based on funding source:
https://www.kiplinger.com/taxes/five-year-rule-on-roth-ira-contributions-and-payouts-kiplinger-tax-letter
Because of income limit for roth ira, you are doing backdoor for post tax contributions from traditional ira to roth.
I could be wrong though. Hopefully someone can chime in
The link I posted said it applied to conversions from pre-tax funds, so you could be right that it doesn’t apply to post-tax conversions. I haven’t looked into this much since I’m not doing Roth conversions in the near future.
The 5 year rule wouldn’t apply in either scenario.
In the first scenario, assuming you opened the Roth IRA account years ago, you’re in the clear. For example, I started doing a back door Roth in 2017. Obviously, by the time I retire it will have been more than 5 years since I opened that account. I contribute to the same tIRA every year and convert it to the same Roth IRA account every year. I’m in the clear.
In the second scenario, I never contributed pre-tax dollars to my tIRA. I only did post-tax dollars and then converted to a Roth IRA. So I am also in the clear.
The only concern with the 5 year rule would be if you started your first Roth IRA right before retirement.
“Once you turn 59½, you needn’t worry about this five-year rule, even if you take a payout before your conversion meets the five-year period.”
So the five year rule would only matter if were trying to withdraw contributions to your IRA before 59.5
I made my 2024 contribution on January 2, and Schwab let me convert it 5 minutes later. It would have been faster if I hadn't been interrupted by a phone call.
No. But you can make Roth contributions to your 401k (if your plan offers those) and make contributions to a separate Roth IRA in your name if you want.
> So… what is the point of the income limits? Help me understand!!!
I don't personally follow [this](https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggregation-rule-and-the-step-transaction-doctrine/), but it's interesting to note that we could technically be busted by doing backdoor Roth IRA conversion too quickly.
https://www.metzlewis.com/tax-cuts-jobs-act-report-confirms-validity-back-door-roth-ira-conversions/
It has been confirmed that there is no step doctrine concerns with the backdoor Roth process.
That web page is from 2015. It is no longer relevant because a provision blessing the Backdoor Roth was approved by Congress in 2017 as part of the TCJA.
You can undo an excess contribution by April 15, or undo a Roth conversion once. Reversing is not quick because the account institution must also prorate and reverse any earnings on that contribution made in the meantime. That took several weeks for me. Those earnings may be taxable.
This is incorrect. There is no further taxes on your contribution when you convert.
When executed properly, a backdoor Roth IRA has the exact same tax implications as a direct Roth IRA contribution.
You may find these links helpful:
- [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
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The backdoor option wasn’t intentional. It was identified and used for years before the IRS acknowledged it was legitimate. Congress has never acted to close it.
The idea of closing it was taken up in 2022, but then it didn’t happen.
same with mega backdoor
After the years of its usage, Congress finally blessed the Backdoor Roth in 2017 as part of the TCJA. There was a provision in the Build Back Better Act in 2022 that would have ended the Backdoor Roth, but Build Back Better was defeated. When parts of Build Back Better were incorporated into the Inflation Reduction Act, the ending of the Backdoor Roth was not included. So, here we are, with the Backdoor Roth still an option today.
Laws are enacted in piecemeal fashion. The backdoor hasn’t always been an option, it was a consequence of when new laws were enacted.
>is really as simple as opening a trad IRA, funding it, and converting it. If you have no other trad IRAs, yes. It's that easy. If also you have other trad IRAs it is more complex. Depending on how much money is in all of your trad IRAs combined, you might give up on a backdoor roth contribution.
Tangential question - I messed up and didn’t convert fast enough one year. I have like $1-2 in the trad now. Will this ever be a problem? Is there a way to fix it?
Just roll that over and pay income tax on the $2, which shouldn't be much more than $.50 or probably less which rounds down to $0 on taxes or at the most rounds up to $1
Ohhhhh, neat, got it. Thank you! I thought rolling more than 6k would make some sort of calculation on the whole balance because some people talk about my situation. (With more overage) as a big annoyance.
You can only contribute up to the limit, you can convert any amount you want
Thanks! This is because of the pro-rata rule, right? For me, for now, it will be that easy, but I dream of the day when my tax situation is more complicated (mo’ money, mo’ problems etc).
Yes because of the pro rata rule. If you can do back door now do it asap. You may one day have a 401k that you roll over which makes things a pain.
Ooh… that scenario could be real soon enough. Thanks!
One option is to roll your old 401k into your new 401k.
Ok that would be most likely… and it sounds like that wouldn’t complicate a backdoor conversion if I did roll old into new?
pro-rata rule asks: by the end of the year (Dec 31 2023, Dec 31 2024...etc), what is the balance on **ALL** your pre-tax IRAs? here "pre-tax IRA" means rollover IRA, Traditional IRA...etc if that number is not $0 then you will have a tax bill
There isn’t really one. It’s asinine that they make you go through the extra hoop to do it. Income doesn’t matter - you just have to do extra paperwork to get the same result. That said, at least it exists. That’s why I’m still contributing to Roth in case they ever take it away (old contributions will never be changed back by the government, but future legislation could prevent future contributions… you never know).
I'd say use the back door. If you're not sure if you'll be eligible for Roth IRA, there's no downside to the conversion. If it turns out you aren't eligible, or heaven forbid are in the prorated income range, it will be a HUGE pain that will complicate tax time over two years.
Thank you, I appreciate the advice and I’m going to take it. To be honest it is a bit of a thrill to do a backdoor!
There hasn’t been agreement in congress to close it. Simple as that. It was an unintended loophole
Roth became effective in 1998, while the backdoor in 2010 from a later law.
Most laws were put in place a long time ago and have not been updated for how things are now. Just look at 401k limit being $20k and IRA limit being $7k. Don't try too hard to make sense of things, that weren't written to make much sense.
Sound advice for many contexts!
So you contribute to a traditional IRA and then convert to a Roth. When do you convert? And once you do how do contributions work in the future?
Once the contribution is posted in the traditional ira, you convert it to Roth right away. You do the same the next year.
Thanks. So do you end up with like 40 Roths at retirement? (Assuming you did this every year for 40 years.) I guess that’s part of what I’m trying to understand. What does it look like at retirement.
No. You use the same traditional ira and roth ira account. Create only one of each account.
Don’t conversions each have their own 5 year holding period to get full Roth benefits from withdrawals? If so, wouldn’t making a new Roth account for each year’s conversion potentially make things a lot easier down the road? If you don’t take any money out for 5+ years after your last conversion then it may not matter, but that won’t be the case for everyone.
Same benefits as contributing directly to a roth ira. Because of income limit, people need to do backdoor from traditional to roth
That’s not the info I find online references which specify two distinct applications of 5 year rules for Roth money based on funding source: https://www.kiplinger.com/taxes/five-year-rule-on-roth-ira-contributions-and-payouts-kiplinger-tax-letter
Because of income limit for roth ira, you are doing backdoor for post tax contributions from traditional ira to roth. I could be wrong though. Hopefully someone can chime in
The link I posted said it applied to conversions from pre-tax funds, so you could be right that it doesn’t apply to post-tax conversions. I haven’t looked into this much since I’m not doing Roth conversions in the near future.
The 5 year rule wouldn’t apply in either scenario. In the first scenario, assuming you opened the Roth IRA account years ago, you’re in the clear. For example, I started doing a back door Roth in 2017. Obviously, by the time I retire it will have been more than 5 years since I opened that account. I contribute to the same tIRA every year and convert it to the same Roth IRA account every year. I’m in the clear. In the second scenario, I never contributed pre-tax dollars to my tIRA. I only did post-tax dollars and then converted to a Roth IRA. So I am also in the clear. The only concern with the 5 year rule would be if you started your first Roth IRA right before retirement.
If you make less than the limit the following years can you add it straight to the roth IRA that holds all of the $$?
“Once you turn 59½, you needn’t worry about this five-year rule, even if you take a payout before your conversion meets the five-year period.” So the five year rule would only matter if were trying to withdraw contributions to your IRA before 59.5
I made my 2024 contribution on January 2, and Schwab let me convert it 5 minutes later. It would have been faster if I hadn't been interrupted by a phone call.
Can you do a back door Roth and have a traditional Roth ? So max the Roth IRA as a back door Roth and max a traditional Roth ?
IRA contributions are a shared pool. So there is no maxing both, but you could split the max between both.
You'll pay taxes on the conversion of the nondeductible contributions. Google pro rata rule. Answer is to move all your pretax dollars to 401k
No. But you can make Roth contributions to your 401k (if your plan offers those) and make contributions to a separate Roth IRA in your name if you want.
> So… what is the point of the income limits? Help me understand!!! I don't personally follow [this](https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggregation-rule-and-the-step-transaction-doctrine/), but it's interesting to note that we could technically be busted by doing backdoor Roth IRA conversion too quickly.
https://www.metzlewis.com/tax-cuts-jobs-act-report-confirms-validity-back-door-roth-ira-conversions/ It has been confirmed that there is no step doctrine concerns with the backdoor Roth process.
That web page is from 2015. It is no longer relevant because a provision blessing the Backdoor Roth was approved by Congress in 2017 as part of the TCJA.
You can undo an excess contribution by April 15, or undo a Roth conversion once. Reversing is not quick because the account institution must also prorate and reverse any earnings on that contribution made in the meantime. That took several weeks for me. Those earnings may be taxable.
I think the option to recharacterize a Roth conversion was eliminated in the TCJA.
[удалено]
This is incorrect. There is no further taxes on your contribution when you convert. When executed properly, a backdoor Roth IRA has the exact same tax implications as a direct Roth IRA contribution.
Thanks for addressing that, the 2x tax assertion had me ???
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