Backdoor Roth Steps

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  • #7590
    KerriPaugh
    Participant

    Hi All,

    New to this forum and greatly appreciate the wealth on insights on here!

    I’m in the process of doing a backdoor ROTH. I currently have a Traditional IRA that contains a mix of post-tax $ / non-deductible contributions (as a result of being over income limits), and pre-tax $ rolled over from prior 401ks. Fortunately, my employer sponsored 401k allows rollovers from TIRAs. I just filed historical 8606s to document the non-deductible contributions. My plan is to first roll the pre-tax $ into my employer sponsored 401k, and then to convert the remaining post-tax contributions to a Roth.

    Let’s say I made $20k in non-deductible contributions and $80k in pre-tax contributions from old 401k rolloverss. As a result of some small gains, the balance in the TIRA goes from $100k to $105k. Do I roll $80k into the 401k and convert the $25k to Roth (paying taxes on the small gain)? OR do I roll $85k into the 401k (seems funny to put post-tax $ into a 401k) and convert the $20k to Roth?

    Is one way right or wrong in the eyes of the IRS? Anything else I’m missing in terms of steps to execute the backdoor Roth?

    Thanks!

    #7595
    Alan S.
    Participant

    You would roll 85k into the pre tax 401k account, then convert the 20k of IRA basis to Roth tax free. Note that you are not allowed to roll any post tax IRA money into your 401k, nor do you intend to, since the 85k is all pre tax (you have not paid taxes on any of that amount yet).

    Double check your 8606 forms to be sure that the 20k basis total is correct, since if you roll any of this basis into your 401k plan, it will result in a disallowed excess amount and that would have to be distributed from the 401k with allocated earnings, and this amount will be lost from your retirement accounts.

    Otherwise, you are on target. The hard part you have already done in documenting your IRA basis on Form 8606, the last of which should show 20k on line 14.

    Of course, if you choose to just roll 80k into the 401k and convert the 5k of taxable gains to your Roth IRA, you can do that, but since you will be taxed on the 5k, this would be a bad idea unless you are in a low bracket this year.

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