Good afternoon Bogleheads,
Happy new year to all! I am looking to do my first Roth backdoor IRA transaction and hoping to ensure I have a decent understanding of the aggregation and pro-rata rules as I have minor existing balances on traditional IRAs accounts.
I understand the mechanics of how to actually execute the backdoor with Fidelity (e.g: contribute to traditional IRA - do not invest and turn around and transfer to Roth IRA). But I have read about the aggregation (all types of IRA are considered as a single entity Traditional + Rollover + etc) and the pro-rata rule if there is a mixed of deductible and non-deductible contributions. The following is my actual situation and balances and want to assess my understanding below is not flawed.
I have to separate situation. His (mine) and Her (wife). My situation (I understand) is more straightforward than my wife.
His:
Traditional IRA: $21k (all contributions ever made have been non-deductible) as MAGI was over threshold to claim deduction. I checked form 8606 for the past few years to ensure all IRA contributions reported were in a non-deductible basis.
I do not have any other type of IRA out there that would contribute towards the aggregation rule (Rollover, SEP, etc).
Backdoor Options:
1) I can convert the entire exiting balance on my traditional IRA $21k + 2024 contribution of $7k for a total of c$28k. From a tax perspective because all contribution have always been non-deductible then my tax liability on this conversion should be close to none correct? The $21k are post-tax and so would be $7k.
2) I can convert only the 2024 contribution of $7k and leave the $21k in the traditional IRA. I understand this would also not cause any large tax liability as everything was non-deductible.
Are there are any arguments for doing option 1 or option 2? I am leaning towards option 1 and just converting everything assuming my understanding of the tax impact being minimal is correct.
Her:
Traditional IRA: $21k (all contributions ever made have been non-deductible) as MAGI was over threshold to claim deduction. I checked form 8606 for the past few years to ensure all IRA contributions reported were in a non-deductible basis.
Rollover IRA: $21k (this came from a previous employer traditional 401k so this I understand qualifies as deductible).
Following the aggregation rule her total IRA balance is c$42k (Traditional + Rollover) and basically a 50/50 split between pre-tax and post-tax). If this understanding is correct would my wife options be as follow?
Backdoor Options:
1) I can convert the entire exiting balance on her traditional IRA $21k + 2024 contribution of $7k for a total of c$28k. From a tax perspective because the split of pre-tax and post-tax is 50/50 the taxable portion of this conversion would be $14k (to be taxed at my ordinary income rate).
2) I can convert only the 2024 contribution of $7k and leave the $21k in the traditional IRA. From a tax perspective because the split of pre-tax and post-tax is 50/50 the taxable portion of this conversion would be $3.5k (to be taxed at my ordinary income rate).
3) I can convert the entire existing balance on her traditional IRA $21k + 2024 contribution of $7k + rollover IRA $21k for a total of c$49k. From a tax perspective because the split of pre-tax and post-tax is 50/50 the taxable portion of this conversion would be $24.5k (to be taxed at my ordinary income rate).
Is my understanding as described above even remotely correct with regards to potential tax impact for mine and wife backdoors?
Thanks a lot in advance community!
Happy new year to all! I am looking to do my first Roth backdoor IRA transaction and hoping to ensure I have a decent understanding of the aggregation and pro-rata rules as I have minor existing balances on traditional IRAs accounts.
I understand the mechanics of how to actually execute the backdoor with Fidelity (e.g: contribute to traditional IRA - do not invest and turn around and transfer to Roth IRA). But I have read about the aggregation (all types of IRA are considered as a single entity Traditional + Rollover + etc) and the pro-rata rule if there is a mixed of deductible and non-deductible contributions. The following is my actual situation and balances and want to assess my understanding below is not flawed.
I have to separate situation. His (mine) and Her (wife). My situation (I understand) is more straightforward than my wife.
His:
Traditional IRA: $21k (all contributions ever made have been non-deductible) as MAGI was over threshold to claim deduction. I checked form 8606 for the past few years to ensure all IRA contributions reported were in a non-deductible basis.
I do not have any other type of IRA out there that would contribute towards the aggregation rule (Rollover, SEP, etc).
Backdoor Options:
1) I can convert the entire exiting balance on my traditional IRA $21k + 2024 contribution of $7k for a total of c$28k. From a tax perspective because all contribution have always been non-deductible then my tax liability on this conversion should be close to none correct? The $21k are post-tax and so would be $7k.
2) I can convert only the 2024 contribution of $7k and leave the $21k in the traditional IRA. I understand this would also not cause any large tax liability as everything was non-deductible.
Are there are any arguments for doing option 1 or option 2? I am leaning towards option 1 and just converting everything assuming my understanding of the tax impact being minimal is correct.
Her:
Traditional IRA: $21k (all contributions ever made have been non-deductible) as MAGI was over threshold to claim deduction. I checked form 8606 for the past few years to ensure all IRA contributions reported were in a non-deductible basis.
Rollover IRA: $21k (this came from a previous employer traditional 401k so this I understand qualifies as deductible).
Following the aggregation rule her total IRA balance is c$42k (Traditional + Rollover) and basically a 50/50 split between pre-tax and post-tax). If this understanding is correct would my wife options be as follow?
Backdoor Options:
1) I can convert the entire exiting balance on her traditional IRA $21k + 2024 contribution of $7k for a total of c$28k. From a tax perspective because the split of pre-tax and post-tax is 50/50 the taxable portion of this conversion would be $14k (to be taxed at my ordinary income rate).
2) I can convert only the 2024 contribution of $7k and leave the $21k in the traditional IRA. From a tax perspective because the split of pre-tax and post-tax is 50/50 the taxable portion of this conversion would be $3.5k (to be taxed at my ordinary income rate).
3) I can convert the entire existing balance on her traditional IRA $21k + 2024 contribution of $7k + rollover IRA $21k for a total of c$49k. From a tax perspective because the split of pre-tax and post-tax is 50/50 the taxable portion of this conversion would be $24.5k (to be taxed at my ordinary income rate).
Is my understanding as described above even remotely correct with regards to potential tax impact for mine and wife backdoors?
Thanks a lot in advance community!
Statistics: Posted by cam240 — Sun Jan 07, 2024 1:54 pm — Replies 4 — Views 195