The Backdoor Roth IRA and Three Mistakes to Avoid
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- Опубликовано: 12 июл 2024
- “I want to invest in a Roth IRA, but I make too much money..." False! If you have heard that line before, let me introduce you to the Backdoor Roth IRA. You CAN still get money into your Roth IRA, but you need to add one extra step. We also share three common mistakes we see with Backdoor Roth IRAs. Looking for more Roth IRA strategies?
Key Insights 💡
- 💡 The backdoor Roth IRA is a popular strategy for high-income professionals to contribute to a Roth IRA despite income limitations.
- 💡 The pro-rata rule is an important consideration when doing a backdoor Roth IRA, as having balances in other IRAs can affect the tax consequences.
- 💡 Completing form 8606 is crucial to properly track and report backdoor Roth IRA contributions and conversions.
- 💡 It is advisable to avoid having cash in a Roth IRA and instead invest the funds for long-term growth.
- 💡 Bonds are generally not ideal for a Roth IRA, as the account's long-term nature is better suited for higher-risk investments.
- 💡 Annuities should be avoided in a Roth IRA due to their fees and surrender penalties, which can erode the tax advantages of the account.
- 💡 The Roth IRA offers unique benefits, such as tax-free growth and tax-free withdrawals, making it a valuable tool for retirement savings.
Highlights 🕒
00:00 🕒 Introduction
01:18 🕒 What is the Backdoor Roth IRA & how does it work?
04:08 🕒 Mistake 1: Pro-Rata Rule
06:23 🕒 Mistake 2: Form 8606
08:27 🕒 Mistake 3: Try to avoid these three things inside of your Roth
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Disclosures: This information is for general purposes only. This information is not intended to be a substitute for specific professional financial or tax advice, as individual circumstances vary. Please see a financial professional, CPA, and/or an attorney in regards to your own individual situation.
Is tsp considered protected against the pro rata rule and not an obstacle for a back door Roth.
Yes, all clear. TSP is not included in the pro rata calculations. 👍
Is it advisable to do the backdoor roth conversion for 2023 and 2024 at the same time? I'm planning to make contributions in my wife's name to a nondeductible IRA for 2023 and 2024 now (February 2024). I can't do the backdoor Roth myself since I have a large balance in a SEP IRA. Can I make both year's contributions for her today and then convert the entire balance at once after the cash settles? Thanks!
Yea, that is all good. Just make sure the IRA contributions are two separate events, aka $6,500 for 2023 and then the $7,000 for 2024. The conversion can be one event. If you are working with an accountant (or self prepare) just make sure they are aware of the BD Roth for 2023 and add the form 8606. Most importantly, great job! 👊
I don't know your situation, but you could look to move your SEP IRA over to a Solo-K and then you would also be able to start BD Roths.
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!
Thanks for the kind words and for subscribing! I am a little lost with notes here, but I'll take a swing. If you already recharacterized out of a Roth IRA back to an IRA, then what else would you need to recharacterize? At this point, you would have a clean slate to just proceed with your original goal (which I assume was a Backdoor Roth).
Good morning. Sorry for confusion. I did recharacterize from a TRAD IRA to a ROTH IRA. I would like to ‘undo’ this by recharacterize back to TRAD IRA but trustee is refusing to do so stating IRS guidelines. It’s my understanding that as long as timing is respected, recharacterize action can be executed limitlessly.
Unfortunately, I don’t have a good answer. This is not a situation I have encountered in the past, so I am not exactly sure how this would play out.
I would ask your custodian to send you the IRS guideline that they are referencing to add clarity.
Thank you for this video! So which brokerage firm do you recommend to process the Backdoor Roth IRA -- Fidelity or Vanguard? Also, is it possible to initiate both a 2023 and 2024 Traditional contribution in January 2024 for a total amount of $13,500 and then convert to Roth?
Custodian won't make a difference. Find one you are happy with and stick with them; Fidelity and Vanguard are both very good. Yes, you can complete 2023 & 2024 in early 2024, but do it as two separate events. $6,500 for 2023 and then $7,000 for 2024.
Thanks for explaining this so clearly, however I have a question. I had a 401k from my previous employer which I converted to a traditional IRA and then (after about a year) mid this year transferred that to my current employer 401k. There were no contributions made at all. Fast forward December, I recently opened a new IRA and contributed 6500 to finally convert that to a roth IRA. I was wondering if this is ok.
Yes, the key is no IRA, SIMPLE IRA, or SEP IRA balances on 12/31. Don't forget to check back on your IRA as well after the conversion, as it is not uncommon for a few dollars to show up from residual interest. While that wouldn't have a devastating effect, it is just easier to move it over.
When is the best month to starting the back door Roth process?
We usually aim for January with the primary goal of an extra year of compounding growth. However, we have some clients who will complete it right before they file their past year's tax return. In short, "it depends," but just getting it done is a win. 🙌
I deposited 6k into traditional ira and by the time I transfer to Roth it had gained interest of $12. So I left the the $12 in my traditional IRA and converted 6k to my Roth. Is there gonna be issue when I file taxes. Please help.
It is okay to convert the $12. It would be taxable, but it will keep everything cleaner. This will be more common now that there are decent rates on cash. Moral of the story, it will not be an issue as long as the $12 was the only IRA funds on 12/31. You can get that all cleaned up when you file your taxes.
do you mean if my GROSS income is between 138K-153K or my NET income?
MAGI (modified adjusted gross income). It is kind of annoying that they use that, but here is a little more info: www.investopedia.com/terms/m/magi.asp
Thank you for the details. Is a rollover IRA considered to be among the account's that shouldnt have a balance. I have a balance in a rollover IRA from my previous employers 401k and i also converted $6500 for 2023.
Yes, unfortunately, that would also be included. 👎
@WealthKeel thank you for the response. Given that we are within the tax filing deadline, do I have the option to submit for an IRA excess removal and move the funds towards 2024 ROTH IRA contributions ?
@@rajatamilarasan7250 You will surely want to get that fixed. Moving it to 2024 may not help you, though, unless you are able to move the Rollover IRA somewhere (like a current 401k). If not, you will be in the same predicament in 2024.
@@WealthKeel yes, I have the option to move the rollover IRA to my current employers 401k and I am working on that right now. My IRA Excess removal with moving the funds to 2024 ROTH IRA was successful however I am trying to determine if that is considered a contribution (or) conversion. The original $6500 was indeed convereted from an traditional IRA so hoping that conversion applies to 2024 as well (though the funds were moved as being an excess from 2023 to 2024)
@@rajatamilarasan7250 The conversion year does not matter. The year you made the IRA contribution is the only thing that matters in terms of the BD Roth.
If I have an inherited IRA does that effect my ability to do a back door Roth IRA?
Inherited IRAs are not included in the pro-rata calculation.
Thank you@@WealthKeel
Hello. Thanks. But what do yiu mean to not have a traditional ira? If i go to fidelity , i want to open a trafitional ira , put in $7000. Then after it settkes in 3 days, coneet it to a roth ira. If its not traditional ira, what is it called?
Maybe you are talking about if someone already have a traditional ira account with a X balance. Don't out the $7000 into an exiting traditional IRA. Is that what you mean right?
Great question. Having the account(s) open (Trad IRA, SEP IRA, SIMPLE IRA) is okay, you just can't have a balance in any of those accounts as of 12/31 or you will have a pro-rata issue.
@@WealthKeel let me ask you another q. I have 5 rollover IRAs (aka traditional , not Roth) in Fidelity. To do the backdoor Roth, I will open a new fresh 0 balance traditional IRA, put in the 7000 in, after it settles, convert to a Roth IRA. My other 5 rollover IRAs can continue as they are. You do not mean that all 5 rollover IRAs need to be converted to Roth right? I don't think so but confirm with you.
All 5 would need to be moved. $0 balance on 12/31 for all IRAs.
Converting all 5 would likely be a tax problem, so you need to try to move them into a 401k, if that is a good option for you.
@@WealthKeel WOW. Then how about this? In my chase bank, I don't have any traditional or Roth IRA. Can I do a backdoor Roth on a Chase bank? That way my Fidelity's IRA remain untouched, since Fidelity and Chase are different financial organizations.
Oysters are good.....😮