2022 Financial Planning Cheat Sheet
A Back Door Roth IRA and Roth IRAs in general can be powerful tools in a retirement saver’s toolkit. The potential to accumulate a bucket of funds to be used tax free in retirement is very attractive. This is especially true when you realize how much of your 401(k) or Traditional IRAs will be taxed in the future.
Back Door Roth IRA transactions can be tricky. While there are income limits placed on Roth IRA contributions, there are no income limits to contribute to a non-deductible IRA. A non-deductible IRA is simply a regular IRA contribution without a deduction from income also known as “after tax.” However, don’t mistake income limits for contribution limits. There are still contribution limits for non-deductible IRAs.
This is where a Roth IRA conversion comes in. Converting “after tax” monies from a non-deductible IRA to a Roth IRA should result in a reduced tax bill when compared to converting a Traditional IRA (pre-tax funds). Most importantly, it allows a high income earner to get money into a Roth IRA when they would otherwise be ineligible. As a result, this strategy has been dubbed the Back Door Roth IRA.
⚠ Please don’t take this video as specific advice for your specific situation. Consult your own tax, legal and investment advisors. 👍
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CORRECTION: At 3:34 and 5:16 there is an error in the pro-rata formula. It should be as follows: Denominator should be $66,000 (non-deductible + deductible). The non-deductible portion ($6,000) is then divided by the total $66,000 to get 0.0909 or 90.9%. The difference is minor but should be noted. Special thanks to that eagle-eyed tax pro who brought it to my attention.
Thanks for this vid, this is so informative. Is the pro-rata rule applies to those who have not opened an account (like 401k or 403B) yet? I am an immigrant and planning to open this back door ROTH IRA. Thank you so very much for your response.
Hi David, can I do the following to avoid the IRA Aggregation and Pro-Rata rule?
1. Request a rollover check from my current traditional IRA (all pre-tax money) in December;
2. Deposit the check into my bank account and return it within 60 days;
3. Open a new traditional IRA and make a non-deductible contribution, convert that contribution into ROTH IRA immediately (Complete this step by 12/31);
4. Write a check from my bank account and deposit the rollover amount back to the original IRA;
Since there's no money in my IRA at the time of conversion and the end of the calendar year, do we avoid the Pro-Rata rule in this case?
If so, I can do this on an annual basis without having any 401k plan because we have a 60-day rollover rule every year. Love to hear your thoughts. Thank you.
Thanks for posting this video! I have a situation where I made a $12,000(for the years 2021 as well as 2022) non-deductible contribution to a traditional IRA, but waited a few weeks to make the transfer to my Roth IRA and have since earned $0.18 in dividend; therefore the total balance in my traditional IRA is now $12,000.18. At this point can I transfer the entire amount into my Roth IRA or can I only transfer $12,000? What are the options I have here? What should I do about the $0.18? If I can only transfer the $12,000 how does the pro-rata rule impact me for the small amount left? Appreciate any help!
the short story – make sure you don't have a regular IRA before you try to do the back-door Roth. You will get screwed.
401ks are ok. If you can, roll any regular IRAs into your 401k. Then you can do the back door Roth successfully.
In your example, you add the 60,000 and the 6,000 before you get the percentage. so 6,000/66,000
The silver lining is that your regular IRA will have basis for what you were taxed on so some of it won't be taxable when you withdraw from it. Years later…
Thank you! Great video..answered my questions. The super nice Schwab rep only “beat the bushes “and asked me to consult a tax advisor before doing the conversation. I was confused … here I got the answer!!!!Thank you
Other videos here suggest converting the same day when the money arrives to a traditional IRA or no interest, will save my energy to file for taxes… does this make sense to you?
Great content. Thank you! I have a SEP IRA. Is that subject to the rule? (new subscriber)
What happens if I have no existing traditional IRA, but only have 401K.
Hi David, I only have a rollover IRA in my name and a 401k in my wife’s name. Can I slowly convert my rollover Ira money to a Roth IRA in small chunks every year without paying large amount of taxes?
Great video I'm just learning about this technique. If I have only contributed 4k so far this year and have gained 300 due to the market going up (so my account is at 4300), do I still need to worry about the pro rata rule if I add an additional 1700 dollars this year and convert?
It is not clear whether this rule apply because you are rolling an existing ira account together or not
I made the same mistake. Can you clarify if I will be taxed on the $6000 again, or does the 90% tax apply on the earning from $6000. Is it possible to revert my Roth IRA contribution?
Isn’t the idea of finding a Roth is that you pay taxes on all the funds you contribute so that you don’t pay any taxes when you retire?
Hi David, Thank you for your information and great video about back door Roth IRA. I've started traditional IRA a couple of years ago and I only have about 10k in there (I did not make any 2021 contribution yet). I'm thinking about rolling over all the fund to back door Roth this year and start clean next year. Should I make 6k contribution this year to traditional then roll everything over or can I just roll over what I have now to backdoor roth and do 6k roll over in 2022 before file tax?
I appreciate your video, but I am confused by your example. Wouldn't the contribution be from already taxed money? If that is the case, there should not be any new tax due on the conversion, right?
Are beneficiary traditional IRAs included for purposes of this rule?
Hi David,
Please help me with your feedback on this.
Spouse don't have a traditional IRA. We don't qualify for roth ira due to income limit. We both have our 401k maxed out. I have IRA account which was rolled over from my previous employer 401k which I don't want to touch. What really is our option for having a backdoor roth ira without having to trigger pro rata?. Can spouse open a new traditional IRA and roth IRA accounts and then do backdoor? We are on work visa. Thanks.
Thank you for this information. Good to see a real planner providing prudent advice
Hi David great video. Right after I subscribed to your channel, I noticed you haven't posted any new videos in a year, so unfortunately I had to unsubscribe and was wondering if you done with making videos. Thanks
I did a backdoor Roth IRA and it lost value during the 3 weeks that it took to convert it over to a traditional IRA. (None of the money was subject to the pro-rata rule…all of the conversion was already taxed, and it was all done within the same tax year. )
The investment lost about $1000 dollars because I started the process right before the COVID market correction. I converted it to a Roth, and the investment company tax form shows the "early withdraw exception" code 2. So all good there.
Question: CAN THE $1000 BE DEDUCTED AS AN INVESTMENT LOSS? Stated another way, can I offset the $1000 loss against other investment gains made that tax year? If the account had GAINED money, you know I'd be paying taxes.
I cant' find the answer to this question anywhere on the internet.
Hi David,
I have trading traditional IRA, i put in$6000 and invested it in stock. It’s now $7000. How do I go about doing a back door transferring?
Thank you!!
Hi David, thanks for the super helpful video! Last year I setup the Backdoor Roth IRA account by opening up a traditional IRA and then Roth and transferring 6k. My question is for this year, do I directly add 6k to the Roth IRA Account or add 6k to traditional and then transfer to Roth IRA Account ?
So does this mean according to your example, a portion of your after tax traditional ira is going to be taxed again when it is converted to a Roth ira?
Thanks for posting this video! I have a situation where I made a $6,000 non-deductible contribution to a traditional IRA, but waited to make the transfer to my Roth and have since earned $0.03 in interest; therefore the total balance in my traditional IRA is now $6,000.03. At this point can I transfer the entire amount into my Roth or can I only transfer $6,000? If I can only transfer the $6,000 how does the pro-rata rule impact me for the small amount left? Besides the $0.03 that would potentially be left in the traditional IRA, I have no other traditional or simple IRA accounts with a balance. Appreciate any help!
Based on the info presented, is it right to assume that the pro rata rule won’t be triggered if the amount of money that is already in the traditional account is less than the amount that I am trying to roll over to the Roth IRA account? For example, let’s assume that I only have $5,000 (pre tax) in the traditional ira already from the past, and I’m planning to roll over $6,000 for this year’s Roth IRA.
How do we designate the rollover to be non deductible? When is form 8606 part of the process?
How to avoid the pro rata rule? Can I just open a separate traditional and contribute so as to not commingle finds with rollover IRA?
Hi david, thank you for this video. Really appreciate the advice. so I’m clear, if I never had an ira/401k ever, I could just open a traditional ira, fund it $6k then open an ira Roth and do an immediate transfer and all of that money would be tax free withdrawal at retirement correct? Then I just rinse and repeat each year? (As long as I dont open up any other Ira’s)
Great Video Dave. Had a question – with no previous IRA accounts. i just created a New Traditional IRA account, Funded it with post tax money ($6K) and converted it to a Roth IRA in a week. For the IRS i filed a non-deductible IRA contribution. Would the the Pro-rata rule still apply (note, no previous IRAs) ?
Liked and subscribed… Great info here. My question is this…i have a old 401k that's been rolled over into a ira rollover with vanguard. Small amount of 2k that has grown to 3k now. I'm now starting to get close to that phase out so looking into backdoor Roth. What are my options in avoiding the pro rata rule? Do i just convert the 3k during in the rollover IRA to my Roth and pay the taxes on that? I don't want any issues with future rollovers… That's my goal. Thanks!!!
Question I have is Can you contribute to your Roth acct while rolling over Traditional ira funds in the same year?
I have traditional IRA with zero balance. I could not contribute to regular roth due to magi numbers. As per your explanation it appears that I should be able to do back door roth. Do i need to open non deductible IRA to accomplish this or a traditional IRA would be enough since I have zero balance there. Any thoughts are appreciated. Thank you in advance.
Wonderful video. I have 1 question. I was recently fired from my work and rolled my employee 401 K into an IRA, then moved the money after it posted to a Roth IRA. Do I still get this high tax you discussed in the video applied? I though I would only have to pay income tax in the money ? . I do have an additional previous employer IRA (all is tax free, discounted before I got paid) sitting there from 8 years ago. Thank you in advance for your answer
What if I have a separate rollover IRA and open a brand new IRA accounts and do the conversions with these brand new accounts? This way I don't touch my rollover IRA account.
Thank you for the video! I had a few follow up questions that I am really hoping you could help with. The first is, would my current 401(k) balances (they are non-Roth) be a factor at all in the pro-rata rule? Or is it only IRAs that I would include in the calculation? Second, I currently have a small rollover IRA with about $4,000 in it. It is the only IRA I own. If I roll this into my current 401(k) plan with my current employer, that also would no longer be something to include in the pro-rata calculation, correct? If I am able to do that, and proceed to contribute $6,000 for myself and $6,000 for my wife each year into a nondeductible IRA – and shortly after roll into a Roth IRA, I should not have any major tax pitfalls to worry about, correct? Sorry for the long post, but it seems too good to be true…. We only have 401(k)s and no other IRAs other than that small rollover from my last job. Thanks very much, subscribing now!