So you know how to do the Backdoor Roth IRA conversion. But what if you have pre-tax money in your traditional IRA? The “Pro-Rata Rule” comes into effect, determining how much of your conversion is taxable. This video explains everything you need to know about the Pro Rata Rule!…(read more)
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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?
Wow this really solved my questions that's bugging me for quite some time. Well explained!!! Thank you so much!!
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.
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?
This is the best video that I have watched for the pro rata rule. The graphics were very helpful. Thank you!
The diagram helped me a lot. Honestly that diagram was a great explanation and finally helped me understand this. Subbed!
He is best, very well explained and cleaned all confusion & doubts. Thanks
Great explanation of how it works!
Amazing ability to explain a complex topic. Well Done… Best explainer of pro rata rule on Youtube… Keep up the great work !!!
Extremely well explained. Thank you
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…
Super helpful and very clear! Thanks! Please do make some videos on how people on work visas can save up money (many side hustles that FIRE folks do aren't permitted legally for us) and reach Financial Independence.
okay you pay taxes I understand now but do you grow your money tax free after that?
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 !!
Just wanted to say thanks for the graphics. Helped visualize it. Keep up the good work.
Hi Will, first of all, best video on the pro rata rule I've come across. Thanks for sharing the knowledge. May I ask a question related to the rolling in taxable money from a traditional IRA to 401k (~6:24). I have two traditional IRA accounts with different financial institutes. One account contains ONLY taxable money (from IRA CD) and the other account contains ONLY non-taxable money. I'm looking to do a backdoor converting the non-taxable money to Roth IRA. If I were to first roll in all the taxable funds to my 401k, then that leaves me with only non-taxable money in any of the Traditional IRAs. At a later date, can I then backdoor-convert the existing non-taxable money to a Roth IRA without any Pro Rata rule implication? Thank you in advance for your advise!
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.
Hi Mr. Peterson, I have pretax money (>6k) in my 403b plan from my previous employer and I am thinking of moving that into back door roth ira this year. Does the 6k limit apply to that transfer? When will I be paying taxes – at the time of moving or filing taxes? Do I need to pay the taxes out of my pocket or the remaining 403b money? Other than the taxes, do I need to pay any penalty (early withdrawal)? Please clarify. Thanks.
Does anyone know which other video mentioned in this video explains back door IRA?
Dude, you made that so easy to understand. Wish I would have found your video first!
great explanation– something complicated made simple. thanks!
Thank you. Does this pro rata apply the same for SIMPLE Ira money?
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
You are a god damned hero.
Hi Will. Great video! I want to roll over an old an after tax account to a Roth and my 401k account. So I have after tax account with say a $100K value. I have $30K of after tax contributions over the last decade and $70k of dividends and capital gains. I want to roll over my $30K contribution to a Roth account and remaining pretax earnings to my 401k. I have no other IRA accounts but this one (All other tax deferred monies are in my Individual 401k or employer 401k accounts). A complicating factor is the $100k is sitting with broker "A" and I want to move to broker "B" accounts where my other holdings are. Broker A is not playing nice and making this difficult. Per IRS, I should be able to do this without any taxable transaction. Can I simply ask broker "A" to sell all holdings and then create two rollover checks (one at $30k for Roth IRA and one at remaining amount for my I 401k)? What do I need to be concerned about?
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?
If I'm under the income limits where I can still make 6k contribution to my traditional IRA and deduct the full amount, is it possible to put 6k pretax money into my traditional IRA, deduct all that money on my returns (since its pre tax), convert that all into my roth IRA, and then let it grow tax free, thus never paying taxes on my 6k? This would allow me to invest 6k pre tax and grow tax free, instead of the normal 6k post tax and invest straight into a roth. Make sense?
Are SEP IRAs included in the pre-tax money calculation?
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.
Such a great video! Thank you!
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