Yeah, this was super helpful. Like Jennifer, I read multiple articles before this, but I'm only finally understanding things now, thanks to this video. Thank you for breaking things down so simply, Will!
This was so helpful! The most helpful explanation of the pro rata rule and back door roth I have encountered. Now I have an actual understanding. Love how you explained options for those who already have a traditional IRA. Most other videos just tell you not to open one if you intend to do a back door roth.
You give a better explanation of backdoor Roth’s, and, mega backdoor Roth’s Than any thing else that I’ve seen on RUclips or elsewhere. Thank you so much for the PowerPoint charts and making this easier to understand.
I'm a visual learner and this video really helped me understand this concept. I know it's making things harder on myself to contribute to a nondeductible traditional IRA on a monthly basis & convert to a roth every couple of years, but my financial advisor at the time encouraged me to do this. I listened without really understanding. Now I'm trying to convert all the monies to a Roth and navigating the tax forms has been really difficult. My tax advisor was literally clueless (he had no idea what an 8606 form was) so, thanks again for putting your wealth of knowledge out there. It would be awesome if you could fill out an 8606 form with a basis and even how to deal with a recharacterization. For example, when I opened the traditional IRA it was b/c my income exceeded the limits for direct contribution after a raise in the middle of that tax year. Some of my contributions to the Roth had to be "recharacterized" to my traditional to avoid the penalty of over-contributing to a Roth. How do you treat those monies on the 8606? Just an idea and thanks again.
You just started and the way you explained the nuance of how funds going in are already taxed was amazing. Nobody mentions that and you made it clear to avoid confusion. Great job and great video!
I love your IRA videos, but another thing to consider here that you did not mention,,,,,,,,,,you did mention the pro rata rule for PRE TAX monies or additions, but you did not mention that even if all your IRA's were non-deductible, the pro rata rule still applies to the non-deductible earnings! keep up the great work
Already did my back door for this year. Just wanted to know what will happen when I roll over a 401k to IRA later and this video answered all my questions. Thank you.
Thank you so so so much for this explanation. Everyone else makes it seem like the government is artificially penalizing a backdoor roth, but all it's doing is forcing you to convert part of the pre-tax funds as well. Much appreciated
Great video, the best explanation I have seen so far about the pro rata rule. One question that I have is what if I have earnings from the Non-Taxable Money in the Traditional IRA. For example I bought some index funds with the Non-Taxable Money and received dividends. Are those dividend earnings considered Taxable Money? Can I still shelter those dividend earnings in the Work 401k?
For sure, this is helpful !! Many professional doesnt know this better. I was asked by one fidelity guy that I can do using second IRA account.. later found out.. that it is not !!
Amazing content! I subscribed after watching your mega backdoor roth ira video. It explains better than madfientist.com. A lot of other videos (credit card churning, and backdoor roth ira, etc) are also very clear and organized. I think the reason why your videos have lower views than the quality is because of the audience. People who watch youtube videos tend to be younger or tech savvy. A lot of them don't care about retirement. They either "think" that they make too little to think about these stuff. Or they "think" that they make too much that they dont need to worry about retirement. They probably need some dicipline lol
Wow, such a good explanation! Thanks for going through multiple scenarios and real life examples of how you can have a mix of pre and post tax money sitting in the IRA account - that was the difference maker. And addressing the cans and can'ts - like opening up IRA accounts in multiple brokerages in hopes of circumventing pro rata - really helped with the nuances. Your visuals really helped as well! Great work. Subbed.
This was perfect. I have a rollover from former employer, about 11k and want to backdoor Roth. I think I will bite the bullet and just convert it all, let it grow tax free from here on out. Thanks for a great video!
This is an INCREDIBLE explanation Will, you've got my sub for it!! Correct me if I'm wrong, but for individuals making >$140,000 (Roth limit) AND work retirement plans, this is the perfect strategy because these people do not qualify for tax deductions with trad. IRA contributions right? For example a physician who gets 403b and makes their salary but has started a Roth IRA years before receiving their large salary.
Thanks for the explanation of pro rata rule. If I transfer my Traditional IRA (Pre-tax money) to my work 401k, then contribute $6000 post-tax money, and convert it to back door Roth IRA, and all these are done in 2020. Do I subject to pro rata rule? Or do I need to transfer pretax money this year and contribute post tax money next year to avoid the pro rata rule? Thanks.
Great video! I have a few questions: What happens after you move your pre tax money in your traditional IRA account to your 401k? Should you immediately move it back to get your diversity in investment choices? Do you get hit for over contributing to your 401k though since it will be more than the max 401k contribution amount?
this is the great and best video!! Will, I really had a hard time understanding backdoor roth, mega backdoor roth and pro rata rule. your videos explain everything in easy way. Being a visual learner, I really like the graphs :) Thank you!!!
Hello, does this mean that if we have never had a traditional IRA, we don't have to worry about the Pro Rata rule because we don't have any pre-tax money? Can we just take the nondeductible money and convert into a Roth IRA without paying any taxes other than filing for income tax later on? Thanks!
Thanks a lot for the video! I was having a hard time understanding this rule until I saw this. So I've learned that I'm not going to do this after all. I have a large amount saved in a rollover IRA (all pre-tax) from a previous employer. If I open a new traditional IRA, fund it with $6k, then immediately convert to Roth, 97% of it will still be considered taxable. All in order just to have a little tax-free income when I retire? Not worth it for me.
Dave, you're right about the process inside that one given event but this video did not address post tax Traditional IRA basis. If only 3% of the $6k was converted to the Roth IRA, then the remaining $5,820 is still sitting post tax in the Traditional IRA. When you retire, that amount is still free of taxes. Conversely, if you do a Backdoor conversion year after year, your basis will grow. The second year, 6% will be tax free and the third year, 9% will be tax free. Refer to page 1 of form 8606 where the IRS instructs you to maintain a log of the basis year on year inside your tax forms. If today is a good year for a Roth IRA, it's probably a good year for a conversion too. So if you do the backdoor, accept that it'll look like double taxation. But you're actually keeping track and the money that sits in the traditional is still post tax money for the rest of your life.
Will, Thank you for the great video! I have two follow up questions: 1) I need to roll in my IRA in to my 401k to avoid the pro rata rule, question is, do I have to wait for a year after the “roll in to 401k” event before the backdoor Roth conversion? Can both happen in the same year.? 2) can I do both the backdoor Roth conversion together with the “Mega” backdoor Roth conversion? Thank you for your videos, enjoyed all of them and learned so much!
Question #1, I cannot answer for sure. However, I believe by looking at for 8606, Line 6, it calculates the "denominator" for the pro rata rule based on the balance of your IRAs on Dec 31st of the year. So if you've rolled money into a 401k within the year, it should be "protected" from the role since your balance on Dec 31st will be zero. 2) yes absolutely, these two strategies do not conflict.
Wow this is an awesome video. Very clear. Just one question, if I open an IRA account in July and immediately convert it to a Roth IRA account, does the conversion happen immediately it does it wait until December 31st? I was a bit confused at that last point.
I have a substantial amount of pretax money in a work 403B and I have a Traditional IRA with post tax money + it's taxable earnings. Because I'm now retired, is doing a reverse rollover into a work 403B even an option? If not, would I just employ the Pro-Rata rule and make whatever Roth conversions I want and pay tax on the calculated percentage?
Can someone please clarify if the "contribution date" is the original date of the contribution, irregardless of a recharacterization? IE, I contributed $6K to a Roth IRA on 2/25/20, but I didn't realize my income was too high until the spring of 2021 when I did my taxes. I recharacterized the original Roth contribution on 4/30/21 to a non-deductible trad IRA. What date do I use as the "contribution date"? Thank you for the helpful video.
Does the order matter ? Can I convert my traditional ira to Roth IRA first and then do my back door roth? Or do the back door roth and then get rid of traditional ira money that I have already?
So if you have a large amount in your IRA can you convert the Roth max equivalent each year? So 2019 move 6000 as backdoor and 6000 taxable from the IRA? Does this satisfy the rule?
Hello Amy! There is actually NO limit on how much money you can convert from traditional IRA to Roth in a given year. The only limit is on the amount of new contributions you make in a year. So if you start with 6000 pre-tax money in your traditional IRA (from a previous year), and you make a new contribution of 6000 (and don't take a deduction), you could convert all 12,000 over to Roth. (and you would only be taxed on half of it.)
@@WillPeterson thanks for getting back to me. If I have more than 6000 in the IRA can I contribute 6000 NEW and only convert it and 6000 (to be taxed) from the original IRA amount? Or will I have to convert the entire amount IF I make a new contribution? I understand I can move it over in chunks, but I wasn't sure if I could still do this AND make new contributions.
@@amygarza1571 "will I have to convert the entire amount IF I make a new contribution?" --- No You can convert any amount regardless of how much NEW money to contribute to an IRA.
Yes, it's the same limit that applies to any normal ira contributions. For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000 ($7,000 if you're age 50 or older).
Thank you so much Will! I plan to convert my 401k to a n IRA then immediately perform the Roth IRA back door conversion. What is the maximum amount of money I can perform this transaction with? Is it $6000/year or is there no limit?
If your 401k is a pretax account, you can rollover to a traditional IRA and then move it to a ROTH IRA, but that isn't a "back door conversion." That is a typical conversion. Currently there is no annual limit on the amount you can convert, but it is a taxable event so be aware that a large conversion will be expensive.
So I need to catch up on my retirement. I don't get a 401k, but I have an old one rolled into IRA. I need to pay taxes on any growth and non taxes portion of it. My wife on the otherhand should stick all her IRAs into the current 401k. Then open an account and plug $ 6k. Then she in essence can help further us collectively. But that also means that the money she plugs back into her 401k to avoid pro rata rule will not get converted. Does this sound right? We are over all the income limits but she's maxed out her 401k.
Well explained, thanks! Two questions: 1. Do a backdoor conversion- no tax impact. Does this mean that the conversion monies won't be considered as a taxable income? 2. Income is over the allowed limit to contribute to roth. Am I allowed to contribute more than the max limit (2019 - 6,000) to a traditional ira? Let's $8,000.
If all the money in your traditional IRA is post-tax (you never took a deduction for it, and it was included in your taxable income when you earned it), then the rollover will NOT be taxable at all. Nice! However, you should have filed form 8606 in the year you made your non-deductible traditional IRA contribution (as part of your tax return)
@@WillPeterson ... I am EA and came across an interesting situation with one of my high earning clients who make upwards of $250K per year and have a question, I am hoping you can answer. My client’s income is above the threshold for deducting traditional IRA contribution. In December of 2019 my client deposited $6000 of post-tax funds into his Traditional IRA Account. Later that month he transferred the $6000 to a Roth IRA and received a 1099-R with Box 1.A showing a distribution of $6000 and Box 2A Showing a Taxable amount of $6000. Does this situation produce a double taxation situation? He already paid tax on the funds he placed into the Traditional IRA and now he has to show the Distribution on is 1040 and pay taxes on the $6000 again. Is this really the case? Is the IRS really punishing high earner this heavy for trying to save for retirement? Is there another way he could have did the transfer to a ROTH without being taxed twice? Thanks in advance for your assistance.
what if i only have post-tax non deductible contributions from both last year and this year. And I never had any other contributions in the traditional ira. After i do a single converstion, do i need to pay pro rata tax ?
Will, Thank you for the very helpful video. What if theoretically someone has been screwing up the pro rata rule for a few years. Suppose there is a $80K Rollover IRA on Vanguard and every year the filer has used separate IRA account to Backdoor into Roth to the maximum. Would this require doing a 1040X for every year, starting at the beginning, to track the right basis? Or could this individual take the tax hit now, convert everything to Roth, and effectively “fix” the situation, albeit shouldering a hefty tax bill? How would filing sequential 1040X forms work? Processing times are long and the basis needs to be carried through each year, so it seems even impractical to “fix” this with 1040X if this has been an error let’s say for 2-3 years historically? Also assume one wouldn’t simply be able to move the Rollover IRA to new employer 401k to fix this either, given the pro rata errors made historically? Thank you.
Oof. This theoretical, hypothetical situation is a bit outside my expertise. I'd make a post on www.reddit.com/r/tax . Lots of accountants and tax experts willing to give free advice there.
Question: You said if there is a married couple and only one spouse has an IRA account, it’s only subject to the spouse with the IRA account. Maybe I missed it, but what if both spouses have IRA accounts? Are the spouses, filing jointly, still treated separately? (Thanks for the advice and clear diagram explanations.)
There are no restrictions on OPENING Roth IRA accounts, nor on converting money from traditional to Roth. The only restriction is on CONTRIBUTING new money to Roth IRAs, if you make over the income limit.
Nice Video but it leads to the question of how a 457 plan account plays in to the pro rata rule. Please do a video that includes how 457 funds are affected in a similar situation. Thank you.
I’m trying to determine my applicable pro-rata calculation date. Here’s the scenario... I’ll make a tIRA contribution in 2021 that I designate as a 2020 “catch-up” contribution, so it’ll be reportable on my 2020 tax filing. I then want to convert that tIRA amount to Roth. I’ll have not taken the deduction on the 2020 contribution (presumably filing an 8606 with my 2020 tax filing). When I make the conversion of the tIRA money to Roth, what’s my magic pro-rata date (for purposes of avoiding co-mingled pre/post-tax money)? Is it 12/31/2020 (year end of the contribution year), 12/31/2021 (year end of the conversion year), or the date of the conversion? I currently have pre-tax IRA money and I am trying to figure out if I need to race to get it sheltered (moved into my 401k) before 12/31/2020 or if I have until 12/31/2021. Thanks! And great videos!
hey, sorry its a bit hard to give detailed advice here in YT comments. I recommend making a post on www.reddit.com/r/tax with all your details there, and hopefully people can help you!
I have a question: I have a non deductible traditional IRa. You said if I convert it to a Roth IRA I don’t have to pay taxes but what happen with the growth portion in the traditional IRa. Do I have to pay taxes for that money?
Can I close a contributory ROTH IRA than I opened for 2024 and put $8k in it and it made 10cents, lol. I want to close it and do a backdoor instead because I might go over the income limit. At the moment I have no traditional IRA but I can Roll some money into traditional a IRA, from a 401A. shall I wait till after I do the backdoor conversion for last year and this year and then Roll the money? Will that be under the pro rata rule or not, since I will roll it after I do the backdoor? Thanks..
You have exceptional teaching skills, Will! I have read about this dozens of times but with your visual graphics, everything became clear. I was wondering if you could help clarify how to handle a situation where the pro-rata rule is incurred: Lets say you contribute $6k to tIRA and convert to Roth IRA immediately in January 2020. However, by Dec 31, 2020 you realize that you had an unknown balance of $8k in a traditional IRA account. What taxes are owed for this pro-rata rule and for tax year 2021, if I wanted to perform a backdoor roth contribution, how can I empty the remaining $8k in traditional IRA? My employer allows rollover from traditional IRA to 401k so should I rollover the entire $8k balance in the traditional IRA to 401k? Thanks again for all your help
Basically out of the $14,000 that you actually had in tIRAs, only $6,000 was already taxed. That means when you do a conversion, ~58% of the amount of that conversion will be taxable income. walk through form 8606 line by line for 2020, and this should come out. But what's extra confusing is that now the $8k remaining in your 401k is ALSO a mixture of pre-tax and post tax money. You could probably roll it into your 401k to shelter it, but now you are dealing with both pre-tax and post-tax money. I might bite the bullet and this year, convert ALL your tIRA money to Roth (both the 8k still in there, as well as the new 6k I imagine you will contribute to do the backdoor Roth again). I recommend posting to the "/r/tax" subreddit for more advice on this if you want! easier to have a discussion there than in youtube comments :-)
@@WillPeterson "extra confusing is that now the $8k remaining in your -401k- [sic IRA] is ALSO a mixture of pre-tax and post tax money. You could probably roll it into your 401k to shelter it, but now you are dealing with both pre-tax and post-tax money." That doesn't sound correct at all! That's still $8k *pre-tax* in a *traditional* IRA.
Thank you so much for the hard work you put into your videos. So much easier to understand this stuff. One question if you could answer please. I'm 49 years old. I make over the income limit to open a Roth ira. I have an employer 401k I max out every year. So I can open a traditional IRA, deposit 7k and converted to Roth IRA right away and do that every year?
Yes that's exactly right. I have one or two other videos on the "backdoor roth" strategy, check them out. To clarify your language slightly: there is no income limit to OPEN a Roth IRA account. The income limit restricts you from CONTRIBUTING to a Roth IRA account
Nice video , I have few questions! For instance if I have 400 k in rollover Ira on December 31,2022 and did 6 k back door conversion for 2022 and I am in 24% tax bracket , how much tax I will pay ? Also tax I pay this year ( for scenario we will put 1500$ tax ) , will I get that much amount( 1500$) tax free when I start withdrawing rollover Ira in retirement ? If I stop back door Roth conversions going forward from 2023 , will there be any further tax implications?
your conversion would be almost entirely taxable, since the untaxed amount in your traditional ("rollover") IRAs is so high compared to the $6k non-deductible ("already taxed") amount you contributed. Taxable portion of the conversion would be approximately 98.5% (1 - [6,000 / 406,000]). In other words, when you converted $6k to Roth, you converted $5,910 of "not-yet taxed money" which you will owe taxes on, and $90 of non deductible "already taxed" money which you won't owe taxes on. So in the 24% tax bracket that would cost you about $6k X 0.985 X 0.24 = $1,418. The unconverted non-deductible money left behind in your tIRA ($5,910) can be withdrawn tax free in retirement since you already paid taxes on it. Filling out form 8606 for 2022 is critical to track these amounts and calculate the precentages.
@Will Peterson, thanks for the video. So if I got into situation you described, I have huge amount of pre-taxed money in my T-IRA and now I also have re-characterized Roth in there as well, I should still do asap conversion back to Roth (file in 2021 for that) and as long as I move my pre-taxed money from T-IRA to 401k before 12/31/21, Pro-Rata rule won't kick in right? I keep getting confused if it needs to be strickly in order of moving pre-tax money to 401k first and than doing backdoor conversion or not.
Very helpful video, Will. Can I ask, does the pro-rata rule apply if I don't have an employee-sponsored retirement plan for the year I have performed a backdoor roth IRA conversion? I do have taxable money in a traditional IRA (it was once a 401k with a previous employer). Thanks.
Joel, sorry for such a late reply! If I remember correctly, the only thing that "Not having an employee-sponsored retirement plan" does for you is allow you to take the tIRA deduction even if your income would otherwise be over the limit. So in that position you wouldn't normally even need to do the non-deductible contribution to start the backdoor Roth If you've already made a non-deductible contribution to the tIRA in a previous year (so you have a mix of "not yet taxed" (your old 401k money) and "already-taxed" (AKA "non-deductable"), then yes any conversions you make to Roth will always have to involve the Pro Rata rule.
I have a question. I worked only 4 months in 2020..my total income was 30,000. I opened traditional Ira and put 7000 since I am 50 +.. now can I move it back door Roth IRA..if I move it , will have to pay tax now
Great video! What are the limits for BLUE money in Traditional IRA? Can I sell a house put $100k in traditional IRA (BLUE) and immediately roll over to ROTH IRA?
Hey! Great video! Explains a lot. So my dad opened an IRA in my name way back when I was a wee teen (at his own brokerage). I am now thinking of doing a backdoor Roth conversion at my own brokerage. The total balance in that IRA is maybe 25K? I would be subject to this pro rata rule? In my situation, better to just suck it up and pay the tax?
If I make too much money to take advantage of the deductible for traditional roth does this make the backdoor roth pointless? Bc I would have already paid the tax when i contributed to the traditional IRA and thus won't be taxed when I take that money out?
the backdoor Roth will be perfect for you! Simply putting money into your traditional IRA and NOT taking a deduction for it is not very efficient: The money is already taxed at the time you contribute it, but if you leave it in your traditional IRA, and it makes any earnings, those earnings will ALSO be taxed upon withdrawal. Instead, if you quickly convert the non-deductible money from your traditional IRA over to a Roth IRA (the backdoor maneuver), it can then grow in the Roth IRA, and the earnings will never be taxed (as long as you wait til age 59.5, etc)
Thanks for explaining the pro-rata rule in great depth Will. I have a follow-up question. Is it possible to use the back door Roth IRA conversion if one has a defined benefit plan with solo 401k? I am not sure if the money in the defined benefit plan can affect the back door Roth IRA conversion like the money in the traditional IRA does.
Does PRORATA rule come into play in aggregate or per account. For example John has two traditional IRA accounts T1 and T2. T1 has pre-tax money and T2 has post-tax money. Can John call his broker to convert money from T2 to Roth. Assume T1 and T2 are at different institutions
Great video. Assuming you did a backdoor where you needed to apply the pro rata rule, how does that affect the taxable/non-taxable status of the remainder for future conversions? Let say I have $90k in pre-tax IRAs and I contribute $10k in post tax income and convert that same amount. The rule would indicate that 90% of the total converted ($9k) is going to be taxable. If, the following year, I do Roth conversion of the remaining $90k, what portion of it is going to be taxed? It shouldn't be all of it, because I've already paid tax on $9k of it. Do I simply deduct the amounts I've paid tax on from the the pre-tax "basis" with each conversion? In other words, if I converted it all the following year, I would pay tax on $81k? Seems like you 'd need to keep a running table of how much you've already paid tax on...
You're absolutely correct. His video was excellent and correct on everything he spoke about, but I wish he had spoken to this in the video. What you are referring to is your post tax basis in your traditional IRA. This is tracked on page one of form 8606. The pre tax money does not actually contaminate the pre tax money, it just dilutes it. I hope you found the answer somewhere, but yes you were right with your initial thought.
This is THE best video explaining the back door ROTH pro rata rule! Thank you!
Yay! Glad it helped you Xinwei!
@@WillPeterson Completely agree! I've been reading articles and articles. This laid it out so simply. Thank you!!
Yeah, this was super helpful. Like Jennifer, I read multiple articles before this, but I'm only finally understanding things now, thanks to this video. Thank you for breaking things down so simply, Will!
I agree-fantastic video.
+1 really well done TY to the creator.
You are a very bright young man, Will. You took something ridiculously complicated and made it comprehensible to lay people. Thank you.
This is the best video that I have watched for the pro rata rule. The graphics were very helpful. Thank you!
This was so helpful! The most helpful explanation of the pro rata rule and back door roth I have encountered. Now I have an actual understanding. Love how you explained options for those who already have a traditional IRA. Most other videos just tell you not to open one if you intend to do a back door roth.
Can’t believe you don’t have millions of subscribers! The things you’ve been teaching, I have never come across on the internet!
Haha thanks man! We'll get there!
You give a better explanation of backdoor Roth’s, and, mega backdoor Roth’s Than any thing else that I’ve seen on RUclips or elsewhere. Thank you so much for the PowerPoint charts and making this easier to understand.
Thanks for saying that! 😊
I’ve read and watched other sources ( Forbes, Morningstar) and yours was the clearest. Kudos.
Thanks Carlos 😊👍
I'm a visual learner and this video really helped me understand this concept. I know it's making things harder on myself to contribute to a nondeductible traditional IRA on a monthly basis & convert to a roth every couple of years, but my financial advisor at the time encouraged me to do this. I listened without really understanding. Now I'm trying to convert all the monies to a Roth and navigating the tax forms has been really difficult. My tax advisor was literally clueless (he had no idea what an 8606 form was) so, thanks again for putting your wealth of knowledge out there. It would be awesome if you could fill out an 8606 form with a basis and even how to deal with a recharacterization. For example, when I opened the traditional IRA it was b/c my income exceeded the limits for direct contribution after a raise in the middle of that tax year. Some of my contributions to the Roth had to be "recharacterized" to my traditional to avoid the penalty of over-contributing to a Roth. How do you treat those monies on the 8606? Just an idea and thanks again.
Amazing ability to explain a complex topic. Well Done... Best explainer of pro rata rule on RUclips... Keep up the great work !!!
You just started and the way you explained the nuance of how funds going in are already taxed was amazing. Nobody mentions that and you made it clear to avoid confusion. Great job and great video!
Best explanation of Pro Rata Rule I have ever seen!
The diagram helped me a lot. Honestly that diagram was a great explanation and finally helped me understand this. Subbed!
This is amazing Will. I've spent countless hours googling/redditting for this answer and this explains it so clearly.
Thanks! Glad to help!
Just wanted to say thanks for the graphics. Helped visualize it. Keep up the good work.
By far the best video on backdoor mechanics.
Very helpful, thank you! I’m no longer afraid of converting my entire ira to a Roth, now that I understand this rule.
Man!! you are beauty with brains:-)grateful to find ur channel. You have a big heart to share your knowledge
I love your IRA videos, but another thing to consider here that you did not mention,,,,,,,,,,you did mention the pro rata rule for PRE TAX monies or additions, but you did not mention that even if all your IRA's were non-deductible, the pro rata rule still applies to the non-deductible earnings! keep up the great work
This is the best explanation i have seen this far on this topic great video thanks
That's great feedback, thanks G C!
Dude, you made that so easy to understand. Wish I would have found your video first!
Already did my back door for this year. Just wanted to know what will happen when I roll over a 401k to IRA later and this video answered all my questions. Thank you.
He is best, very well explained and cleaned all confusion & doubts. Thanks
Thank you so so so much for this explanation.
Everyone else makes it seem like the government is artificially penalizing a backdoor roth, but all it's doing is forcing you to convert part of the pre-tax funds as well.
Much appreciated
Wow this really solved my questions that's bugging me for quite some time. Well explained!!! Thank you so much!!
Thank you so much for the visuals! They were so helpful in understanding this!
Omg finally a clearly explained video on this. Thank you thank you 🙏
Thanks so much! I read several articles, but none made sense. This was extremely helpful and clear.
I just realized I owe taxes now, though. 😔
Great video, the best explanation I have seen so far about the pro rata rule. One question that I have is what if I have earnings from the Non-Taxable Money in the Traditional IRA. For example I bought some index funds with the Non-Taxable Money and received dividends. Are those dividend earnings considered Taxable Money? Can I still shelter those dividend earnings in the Work 401k?
For sure, this is helpful !! Many professional doesnt know this better. I was asked by one fidelity guy that I can do using second IRA account.. later found out.. that it is not !!
Excellent video! I’ve watched a few videos on the topic, and you explained it most clearly. Thanks!
WOW! This was simple to understand.
Amazing content! I subscribed after watching your mega backdoor roth ira video. It explains better than madfientist.com. A lot of other videos (credit card churning, and backdoor roth ira, etc) are also very clear and organized.
I think the reason why your videos have lower views than the quality is because of the audience. People who watch youtube videos tend to be younger or tech savvy.
A lot of them don't care about retirement. They either "think" that they make too little to think about these stuff. Or they "think" that they make too much that they dont need to worry about retirement. They probably need some dicipline lol
Really good feedback, thanks Andrew!
Simple, clear explanation with applicable examples for different situations. Well done. Thank you!
Wow, such a good explanation! Thanks for going through multiple scenarios and real life examples of how you can have a mix of pre and post tax money sitting in the IRA account - that was the difference maker. And addressing the cans and can'ts - like opening up IRA accounts in multiple brokerages in hopes of circumventing pro rata - really helped with the nuances. Your visuals really helped as well! Great work. Subbed.
This was perfect. I have a rollover from former employer, about 11k and want to backdoor Roth. I think I will bite the bullet and just convert it all, let it grow tax free from here on out. Thanks for a great video!
Yeah I've come to that conclusion too. It's just so much easier to get it over with and empty out the traditional IRA. Cheers!
Extremely well explained. Thank you
Great explanation --visually did it for me
🎉🙌🏽
Best explanation ever. Thanks for the information 👍
This is an INCREDIBLE explanation Will, you've got my sub for it!! Correct me if I'm wrong, but for individuals making >$140,000 (Roth limit) AND work retirement plans, this is the perfect strategy because these people do not qualify for tax deductions with trad. IRA contributions right? For example a physician who gets 403b and makes their salary but has started a Roth IRA years before receiving their large salary.
That's absolutely right!
This is an excellent explanation 👍🏼
Thanks for the explanation of pro rata rule. If I transfer my Traditional IRA (Pre-tax money) to my work 401k, then contribute $6000 post-tax money, and convert it to back door Roth IRA, and all these are done in 2020. Do I subject to pro rata rule? Or do I need to transfer pretax money this year and contribute post tax money next year to avoid the pro rata rule? Thanks.
Brilliant simplifying a complicated process !
Great video! I have a few questions: What happens after you move your pre tax money in your traditional IRA account to your 401k? Should you immediately move it back to get your diversity in investment choices? Do you get hit for over contributing to your 401k though since it will be more than the max 401k contribution amount?
this is the great and best video!! Will, I really had a hard time understanding backdoor roth, mega backdoor roth and pro rata rule. your videos explain everything in easy way. Being a visual learner, I really like the graphs :) Thank you!!!
That means a lot Hanna! Thanks for the kind words
Hello, does this mean that if we have never had a traditional IRA, we don't have to worry about the Pro Rata rule because we don't have any pre-tax money? Can we just take the nondeductible money and convert into a Roth IRA without paying any taxes other than filing for income tax later on? Thanks!
Correct!
Wow, I really wish I wouldn't have done a roll over now. This sounds like a PITA. Thanks for the video.
Thank you so much for the video. Clearest explanation on this subject!
Thanks a lot for the video! I was having a hard time understanding this rule until I saw this.
So I've learned that I'm not going to do this after all. I have a large amount saved in a rollover IRA (all pre-tax) from a previous employer. If I open a new traditional IRA, fund it with $6k, then immediately convert to Roth, 97% of it will still be considered taxable. All in order just to have a little tax-free income when I retire? Not worth it for me.
Makes sense!
Dave, you're right about the process inside that one given event but this video did not address post tax Traditional IRA basis. If only 3% of the $6k was converted to the Roth IRA, then the remaining $5,820 is still sitting post tax in the Traditional IRA. When you retire, that amount is still free of taxes. Conversely, if you do a Backdoor conversion year after year, your basis will grow. The second year, 6% will be tax free and the third year, 9% will be tax free. Refer to page 1 of form 8606 where the IRS instructs you to maintain a log of the basis year on year inside your tax forms.
If today is a good year for a Roth IRA, it's probably a good year for a conversion too. So if you do the backdoor, accept that it'll look like double taxation. But you're actually keeping track and the money that sits in the traditional is still post tax money for the rest of your life.
Will, Thank you for the great video! I have two follow up questions: 1) I need to roll in my IRA in to my 401k to avoid the pro rata rule, question is, do I have to wait for a year after the “roll in to 401k” event before the backdoor Roth conversion? Can both happen in the same year.? 2) can I do both the backdoor Roth conversion together with the “Mega” backdoor Roth conversion? Thank you for your videos, enjoyed all of them and learned so much!
Question #1, I cannot answer for sure. However, I believe by looking at for 8606, Line 6, it calculates the "denominator" for the pro rata rule based on the balance of your IRAs on Dec 31st of the year. So if you've rolled money into a 401k within the year, it should be "protected" from the role since your balance on Dec 31st will be zero.
2) yes absolutely, these two strategies do not conflict.
really appreciate your reply. Looking forward to more videos from you !
Wow this is an awesome video. Very clear. Just one question, if I open an IRA account in July and immediately convert it to a Roth IRA account, does the conversion happen immediately it does it wait until December 31st? I was a bit confused at that last point.
Thank you so much for explaining this!! I finally understand this. I’m just in an unlucky situation.
Great video!
Does the roll in to the work 401k count toward the years contribution limit 19.5 or 57k?
No. Rollovers and conversions don’t affect contribution limits.
Can you do a video on the different types of cost basis? Like First-in-First-out, First-in-Last-out...etc.
Thank you. Does this pro rata apply the same for SIMPLE Ira money?
Great explanation of how it works!
Thanks - this was incredibly helpful. Am now subscribing to your channel 🙂
Great video!! Well explained. Thank you very much 👍🙏😃
Thank you for such clear explanation
Are SEP IRAs included in the pre-tax money calculation?
I have a substantial amount of pretax money in a work 403B and I have a Traditional IRA with post tax money + it's taxable earnings. Because I'm now retired, is doing a reverse rollover into a work 403B even an option? If not, would I just employ the Pro-Rata rule and make whatever Roth conversions I want and pay tax on the calculated percentage?
great explanation-- something complicated made simple. thanks!
Another really well made video. Great visuals and really easy to understand. Keep it up!
Can someone please clarify if the "contribution date" is the original date of the contribution, irregardless of a recharacterization? IE, I contributed $6K to a Roth IRA on 2/25/20, but I didn't realize my income was too high until the spring of 2021 when I did my taxes. I recharacterized the original Roth contribution on 4/30/21 to a non-deductible trad IRA. What date do I use as the "contribution date"? Thank you for the helpful video.
Great video as always - keep the content coming!
Awesome just what I was looking for!!!
Does the order matter ? Can I convert my traditional ira to Roth IRA first and then do my back door roth? Or do the back door roth and then get rid of traditional ira money that I have already?
Excellent explanation
So if you have a large amount in your IRA can you convert the Roth max equivalent each year? So 2019 move 6000 as backdoor and 6000 taxable from the IRA? Does this satisfy the rule?
Hello Amy! There is actually NO limit on how much money you can convert from traditional IRA to Roth in a given year. The only limit is on the amount of new contributions you make in a year. So if you start with 6000 pre-tax money in your traditional IRA (from a previous year), and you make a new contribution of 6000 (and don't take a deduction), you could convert all 12,000 over to Roth. (and you would only be taxed on half of it.)
@@WillPeterson thanks for getting back to me. If I have more than 6000 in the IRA can I contribute 6000 NEW and only convert it and 6000 (to be taxed) from the original IRA amount? Or will I have to convert the entire amount IF I make a new contribution? I understand I can move it over in chunks, but I wasn't sure if I could still do this AND make new contributions.
@@amygarza1571 "will I have to convert the entire amount IF I make a new contribution?" --- No
You can convert any amount regardless of how much NEW money to contribute to an IRA.
Is there contribution limit on post-tax money put into the traditional IRA prior to backdooring it into the Roth?
Yes, it's the same limit that applies to any normal ira contributions. For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000 ($7,000 if you're age 50 or older).
First video I've watched from you..... definitely subscribing to your channel!!
Thanks man! Hopefully it's helpful!
Thank you so much Will! I plan to convert my 401k to a n IRA then immediately perform the Roth IRA back door conversion. What is the maximum amount of money I can perform this transaction with? Is it $6000/year or is there no limit?
If your 401k is a pretax account, you can rollover to a traditional IRA and then move it to a ROTH IRA, but that isn't a "back door conversion." That is a typical conversion. Currently there is no annual limit on the amount you can convert, but it is a taxable event so be aware that a large conversion will be expensive.
So I need to catch up on my retirement. I don't get a 401k, but I have an old one rolled into IRA. I need to pay taxes on any growth and non taxes portion of it. My wife on the otherhand should stick all her IRAs into the current 401k. Then open an account and plug $ 6k. Then she in essence can help further us collectively. But that also means that the money she plugs back into her 401k to avoid pro rata rule will not get converted. Does this sound right? We are over all the income limits but she's maxed out her 401k.
Well explained, thanks!
Two questions:
1. Do a backdoor conversion- no tax impact. Does this mean that the conversion monies won't be considered as a taxable income?
2. Income is over the allowed limit to contribute to roth. Am I allowed to contribute more than the max limit (2019 - 6,000) to a traditional ira? Let's $8,000.
If all the money in your traditional IRA is post-tax (you never took a deduction for it, and it was included in your taxable income when you earned it), then the rollover will NOT be taxable at all. Nice!
However, you should have filed form 8606 in the year you made your non-deductible traditional IRA contribution (as part of your tax return)
Thanks Will.
Also you can still only contribute 6k this way
@@WillPeterson ... I am EA and came across an interesting situation
with one of my high earning clients who make upwards of $250K per year and
have a question, I am hoping you can answer. My client’s income is above the threshold for deducting traditional IRA contribution. In December of 2019 my client deposited $6000 of post-tax funds into his Traditional IRA Account. Later that month he transferred the $6000 to a Roth IRA and received a 1099-R with Box 1.A showing a distribution of $6000 and Box 2A Showing a Taxable amount of $6000. Does this situation produce a double taxation
situation? He already paid tax on the funds he placed into the Traditional IRA
and now he has to show the Distribution on is 1040 and pay taxes on the $6000
again. Is this really the case? Is the IRS really punishing high earner this heavy for trying to save for retirement? Is there another way he could have did the
transfer to a ROTH without being taxed twice? Thanks in advance for your assistance.
what if i only have post-tax non deductible contributions from both last year and this year. And I never had any other contributions in the traditional ira. After i do a single converstion, do i need to pay pro rata tax ?
Thank you for the clarification on the rule to take all iras into consideration. And thank you for the 401k alternative solution.
Excellent video. Does this Pro Rata rule apply to Mega backdoor roth conversion?
Nope, with the mega back door, the money has always already been taxed, and never touches a "pre tax" ("traditional") account.
Will,
Thank you for the very helpful video. What if theoretically someone has been screwing up the pro rata rule for a few years. Suppose there is a $80K Rollover IRA on Vanguard and every year the filer has used separate IRA account to Backdoor into Roth to the maximum.
Would this require doing a 1040X for every year, starting at the beginning, to track the right basis? Or could this individual take the tax hit now, convert everything to Roth, and effectively “fix” the situation, albeit shouldering a hefty tax bill?
How would filing sequential 1040X forms work? Processing times are long and the basis needs to be carried through each year, so it seems even impractical to “fix” this with 1040X if this has been an error let’s say for 2-3 years historically?
Also assume one wouldn’t simply be able to move the Rollover IRA to new employer 401k to fix this either, given the pro rata errors made historically?
Thank you.
Oof. This theoretical, hypothetical situation is a bit outside my expertise. I'd make a post on www.reddit.com/r/tax . Lots of accountants and tax experts willing to give free advice there.
Question: You said if there is a married couple and only one spouse has an IRA account, it’s only subject to the spouse with the IRA account. Maybe I missed it, but what if both spouses have IRA accounts? Are the spouses, filing jointly, still treated separately? (Thanks for the advice and clear diagram explanations.)
Yes, treated completely separately.
How can you open a Roth if you make more than the limit? i.e. doesn't fidelity, vanguard check your adjusted gross income from last year?
There are no restrictions on OPENING Roth IRA accounts, nor on converting money from traditional to Roth.
The only restriction is on CONTRIBUTING new money to Roth IRAs, if you make over the income limit.
Great video! Keep up the awesome content. You deserve more subscribers!
Nice Video but it leads to the question of how a 457 plan account plays in to the pro rata rule. Please do a video that includes how 457 funds are affected in a similar situation. Thank you.
I’m trying to determine my applicable pro-rata calculation date. Here’s the scenario... I’ll make a tIRA contribution in 2021 that I designate as a 2020 “catch-up” contribution, so it’ll be reportable on my 2020 tax filing. I then want to convert that tIRA amount to Roth. I’ll have not taken the deduction on the 2020 contribution (presumably filing an 8606 with my 2020 tax filing). When I make the conversion of the tIRA money to Roth, what’s my magic pro-rata date (for purposes of avoiding co-mingled pre/post-tax money)? Is it 12/31/2020 (year end of the contribution year), 12/31/2021 (year end of the conversion year), or the date of the conversion? I currently have pre-tax IRA money and I am trying to figure out if I need to race to get it sheltered (moved into my 401k) before 12/31/2020 or if I have until 12/31/2021. Thanks! And great videos!
hey, sorry its a bit hard to give detailed advice here in YT comments. I recommend making a post on www.reddit.com/r/tax with all your details there, and hopefully people can help you!
I have a question: I have a non deductible traditional IRa. You said if I convert it to a Roth IRA I don’t have to pay taxes but what happen with the growth portion in the traditional IRa. Do I have to pay taxes for that money?
Can I close a contributory ROTH IRA than I opened for 2024 and put $8k in it and it made 10cents, lol. I want to close it and do a backdoor instead because I might go over the income limit.
At the moment I have no traditional IRA but I can Roll some money into traditional a IRA, from a 401A. shall I wait till after I do the backdoor conversion for last year and this year and then Roll the money? Will that be under the pro rata rule or not, since I will roll it after I do the backdoor? Thanks..
You have exceptional teaching skills, Will! I have read about this dozens of times but with your visual graphics, everything became clear. I was wondering if you could help clarify how to handle a situation where the pro-rata rule is incurred: Lets say you contribute $6k to tIRA and convert to Roth IRA immediately in January 2020. However, by Dec 31, 2020 you realize that you had an unknown balance of $8k in a traditional IRA account. What taxes are owed for this pro-rata rule and for tax year 2021, if I wanted to perform a backdoor roth contribution, how can I empty the remaining $8k in traditional IRA? My employer allows rollover from traditional IRA to 401k so should I rollover the entire $8k balance in the traditional IRA to 401k? Thanks again for all your help
Basically out of the $14,000 that you actually had in tIRAs, only $6,000 was already taxed. That means when you do a conversion, ~58% of the amount of that conversion will be taxable income. walk through form 8606 line by line for 2020, and this should come out.
But what's extra confusing is that now the $8k remaining in your 401k is ALSO a mixture of pre-tax and post tax money. You could probably roll it into your 401k to shelter it, but now you are dealing with both pre-tax and post-tax money. I might bite the bullet and this year, convert ALL your tIRA money to Roth (both the 8k still in there, as well as the new 6k I imagine you will contribute to do the backdoor Roth again).
I recommend posting to the "/r/tax" subreddit for more advice on this if you want! easier to have a discussion there than in youtube comments :-)
@@WillPeterson "extra confusing is that now the $8k remaining in your -401k- [sic IRA] is ALSO a mixture of pre-tax and post tax money. You could probably roll it into your 401k to shelter it, but now you are dealing with both pre-tax and post-tax money." That doesn't sound correct at all! That's still $8k *pre-tax* in a *traditional* IRA.
Thank you so much for the hard work you put into your videos. So much easier to understand this stuff. One question if you could answer please.
I'm 49 years old. I make over the income limit to open a Roth ira. I have an employer 401k I max out every year. So I can open a traditional IRA, deposit 7k and converted to Roth IRA right away and do that every year?
Yes that's exactly right. I have one or two other videos on the "backdoor roth" strategy, check them out. To clarify your language slightly: there is no income limit to OPEN a Roth IRA account. The income limit restricts you from CONTRIBUTING to a Roth IRA account
Thank you for answering my question. I'll be sure to see your other videos. Happy new year.✨🎆🎇
LOVE YOUR VISUAL! Thanks for sharing
Nice video , I have few questions!
For instance if I have 400 k in rollover Ira on December 31,2022 and did 6 k back door conversion for 2022 and I am in 24% tax bracket , how much tax I will pay ?
Also tax I pay this year ( for scenario we will put 1500$ tax ) , will I get that much amount( 1500$) tax free when I start withdrawing rollover Ira in retirement ?
If I stop back door Roth conversions going forward from 2023 , will there be any further tax implications?
your conversion would be almost entirely taxable, since the untaxed amount in your traditional ("rollover") IRAs is so high compared to the $6k non-deductible ("already taxed") amount you contributed. Taxable portion of the conversion would be approximately 98.5% (1 - [6,000 / 406,000]). In other words, when you converted $6k to Roth, you converted $5,910 of "not-yet taxed money" which you will owe taxes on, and $90 of non deductible "already taxed" money which you won't owe taxes on.
So in the 24% tax bracket that would cost you about $6k X 0.985 X 0.24 = $1,418.
The unconverted non-deductible money left behind in your tIRA ($5,910) can be withdrawn tax free in retirement since you already paid taxes on it.
Filling out form 8606 for 2022 is critical to track these amounts and calculate the precentages.
@Will Peterson, thanks for the video. So if I got into situation you described, I have huge amount of pre-taxed money in my T-IRA and now I also have re-characterized Roth in there as well, I should still do asap conversion back to Roth (file in 2021 for that) and as long as I move my pre-taxed money from T-IRA to 401k before 12/31/21, Pro-Rata rule won't kick in right? I keep getting confused if it needs to be strickly in order of moving pre-tax money to 401k first and than doing backdoor conversion or not.
Very helpful video, Will. Can I ask, does the pro-rata rule apply if I don't have an employee-sponsored retirement plan for the year I have performed a backdoor roth IRA conversion? I do have taxable money in a traditional IRA (it was once a 401k with a previous employer). Thanks.
Joel, sorry for such a late reply! If I remember correctly, the only thing that "Not having an employee-sponsored retirement plan" does for you is allow you to take the tIRA deduction even if your income would otherwise be over the limit. So in that position you wouldn't normally even need to do the non-deductible contribution to start the backdoor Roth
If you've already made a non-deductible contribution to the tIRA in a previous year (so you have a mix of "not yet taxed" (your old 401k money) and "already-taxed" (AKA "non-deductable"), then yes any conversions you make to Roth will always have to involve the Pro Rata rule.
I have a question. I worked only 4 months in 2020..my total income was 30,000. I opened traditional Ira and put 7000 since I am 50 +.. now can I move it back door Roth IRA..if I move it , will have to pay tax now
Great video! What are the limits for BLUE money in Traditional IRA? Can I sell a house put $100k in traditional IRA (BLUE) and immediately roll over to ROTH IRA?
got my answer via google, $37,500 per year
Hey! Great video! Explains a lot. So my dad opened an IRA in my name way back when I was a wee teen (at his own brokerage). I am now thinking of doing a backdoor Roth conversion at my own brokerage. The total balance in that IRA is maybe 25K? I would be subject to this pro rata rule? In my situation, better to just suck it up and pay the tax?
If I make too much money to take advantage of the deductible for traditional roth does this make the backdoor roth pointless? Bc I would have already paid the tax when i contributed to the traditional IRA and thus won't be taxed when I take that money out?
the backdoor Roth will be perfect for you! Simply putting money into your traditional IRA and NOT taking a deduction for it is not very efficient: The money is already taxed at the time you contribute it, but if you leave it in your traditional IRA, and it makes any earnings, those earnings will ALSO be taxed upon withdrawal.
Instead, if you quickly convert the non-deductible money from your traditional IRA over to a Roth IRA (the backdoor maneuver), it can then grow in the Roth IRA, and the earnings will never be taxed (as long as you wait til age 59.5, etc)
Reverse rollover! Best video ever!!
Thanks for explaining the pro-rata rule in great depth Will. I have a follow-up question. Is it possible to use the back door Roth IRA conversion if one has a defined benefit plan with solo 401k? I am not sure if the money in the defined benefit plan can affect the back door Roth IRA conversion like the money in the traditional IRA does.
Does PRORATA rule come into play in aggregate or per account. For example John has two traditional IRA accounts T1 and T2. T1 has pre-tax money and T2 has post-tax money. Can John call his broker to convert money from T2 to Roth. Assume T1 and T2 are at different institutions
The video does address this question around time 7.02
Great video, thank you! It was very informative.
Excellent video....
Great video.
Assuming you did a backdoor where you needed to apply the pro rata rule, how does that affect the taxable/non-taxable status of the remainder for future conversions?
Let say I have $90k in pre-tax IRAs and I contribute $10k in post tax income and convert that same amount. The rule would indicate that 90% of the total converted ($9k) is going to be taxable.
If, the following year, I do Roth conversion of the remaining $90k, what portion of it is going to be taxed?
It shouldn't be all of it, because I've already paid tax on $9k of it.
Do I simply deduct the amounts I've paid tax on from the the pre-tax "basis" with each conversion?
In other words, if I converted it all the following year, I would pay tax on $81k?
Seems like you 'd need to keep a running table of how much you've already paid tax on...
You're absolutely correct. His video was excellent and correct on everything he spoke about, but I wish he had spoken to this in the video.
What you are referring to is your post tax basis in your traditional IRA. This is tracked on page one of form 8606.
The pre tax money does not actually contaminate the pre tax money, it just dilutes it. I hope you found the answer somewhere, but yes you were right with your initial thought.