Although I believe a traditional deductible IRA is often better than a Roth IRA, a Roth IRA is still better than a taxable account if you aren’t eligible for a deductible contribution to a traditional IRA. When you aren’t allowed to contribute to a Roth IRA because your income is too high, there’s still a backdoor. It takes some effort but it’s worth it.
So here it goes: a complete how-to for the Backdoor Roth.
What is the Backdoor Roth?
The Backdoor Roth is an indirect way to contribute to a Roth IRA when you are not eligible to contribute directly due to high income.
Who should consider the Backdoor Roth?
If your income is “too high” for contributing to a Roth IRA, you should consider the Backdoor Roth. The IRS publishes the income limit for contributing to a Roth IRA every year.
If your income isn’t above the thresholds, stop reading — this article doesn’t apply to you. Instead, consider a deductible contribution to a traditional IRA if you qualify for one or contribute to a Roth IRA directly.
Why should someone consider doing the backdoor Roth IRA?
When you have money in a taxable account, you pay taxes on interest and dividends. When you eventually sell the assets, you also pay taxes on the capital gains. If you put money in a Roth IRA, you don’t pay those taxes.
Ready? Here it goes:
Step 1 – “Hide” other IRAs
If you don’t have any traditional IRA (say as the result of a rollover from a previous 401k or 403b), SEP-IRA, or SIMPLE IRA, you are in good shape. Skip to step 2. If you are married, please note IRAs are owned by one and only one person. Each spouse should look at his or her IRAs separately. If you don’t have any traditional IRA, SEP-IRA, or SIMPLE IRA but your spouse does, you are not affected but your spouse is affected.
If you have a traditional IRA, SEP-IRA or SIMPLE IRA, and you don’t mind paying taxes to convert all of them to a Roth IRA now, also skip to step 2. When your balances in those IRAs are small, the taxes you will have to pay when you convert them are also small.
If you have a traditional IRA, SEP-IRA or SIMPLE IRA, but you don’t want to convert them and pay taxes at a high rate just yet, rollover almost all the pre-tax money to an employer sponsored retirement plan: 401k, 403b or 457. Most employer-based plans accept incoming rollovers.
An inherited IRA doesn’t count if you keep it separate as an inherited IRA (see Inherited IRA and Roth Conversion Pro-Rata Rule).
Everything in the traditional IRA, SEP-IRA, and SIMPLE IRA, except any non-deductible contributions you made in the past, is pre-tax money. For example if your traditional IRA has $34,000 in it and you made $10,000 non-deductible contributions in the past, $24,000 is pre-tax money. Move $24,000 to an employer sponsored plan. If you never made any non-deductible contributions in the past, all $34,000 is pre-tax money.
If you’ve made non-deductible contributions to your traditional IRA in the past, a key requirement is that you leave enough money behind in the traditional IRA — at least equal to your past non-deductible contributions. Don’t cut it too close. Consider market fluctuations and leave yourself a small cushion to show that on the day the money goes from your IRAs to your employer plan you still have slightly more money in the IRAs than your past non-deductible contributions.
You are allowed to rollover only pre-tax money from a traditional IRA to an employer plan because of a special rule. Read more about this special rule in IRS Publication 590A. Look for “Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA” near the end of page 22.
If your plan doesn’t accept incoming rollovers or if you don’t like your plan, create some self-employment income and set up a solo 401k plan, also known as a self-employed 401k plan or individual 401k plan.
House-sitting, dog-walking, tutoring, helping neighbors set up computer equipment, etc. are all good ways to earn self-employment income. Remember you don’t have to make a living on it. You just need a little self-employment income in order to qualify for setting up a solo 401k plan. See Solo 401k When You Have Self-Employment Income.
Step 2 – Make a non-deductible contribution to a traditional IRA
After Step 1, you either don’t have any traditional IRA, SEP-IRA, or SIMPLE IRA, or you only have a traditional IRA with non-deductible contributions in it (maybe plus a bit of earnings). You make a non-deductible contribution to a traditional IRA. As long as you have earned income, even if your income is “too high,” you can still make a non-deductible contribution to a traditional IRA.
The IRS publishes the contribution limit ever year. Look it up.
Step 3 – Wait
The law does not impose any waiting period between a contribution and a conversion (step 4). However, some are concerned that if you convert too soon, it can be seen as an abuse.
There is no official guideline for how long you should wait. Some say a few days; some say 30 days; some say 6 months; some say wait until the end of the year. Pick a time you feel comfortable with.
Having the money sit in a traditional IRA for a short period of time is not going to kill you. The tax on the earnings won’t be much because you won’t have a lot of earnings.
Step 4 – Convert the traditional IRA to Roth IRA
Ask your IRA provider how to do this. Some can do it online. Some will want a signed form. There is no income limit for the conversion. Because your Roth IRA conversion comes primarily from your non-deductible contributions, there will be very little taxes on the conversion.
Be sure to specify you want to *convert* money in your traditional IRA to a Roth IRA, not *recharacterize* your contribution. The two are not the same. Using the wrong term can lead to bad consequences. See Traditional and Roth IRA: Recharacterize vs Convert.
Also be sure to choose “no tax withholding” for your conversion. This way 100% of the money goes into your Roth account.
Step 1 is necessary because if you didn’t do it, your conversion will be taxed by the percentage of pretax money in all IRAs (the “pro-rata rule”). Money in employer sponsored plans doesn’t count in the pro-rata rule.
Step 5 – Report on your tax return
Since you made a non-deductible contribution to a traditional IRA in Step 2, you will need to include Form 8606 when you file your taxes. It’s a very simple form. If you use tax software, it will be included automatically if you answer the questions correctly.
Contributions to an IRA can be tagged for the current year or the previous year (if done before April 15 in the following year). Conversions are always tracked to the calendar year in which it actually happened. You report on the tax return your non-deductible contribution to a traditional IRA *for* that year and your converting to Roth *in* that year. If you contribute for the previous year and then convert, you will have to report in two separate years. It’s much simpler if you contribute for the current year and then convert before December 31. See Make Backdoor Roth Easy On Your Tax Return.
If you use TurboTax, see How To Report Backdoor Roth In TurboTax for a step-by-step guide. If you use H&R Block software, see How To Report Backdoor Roth In H&R Block Software. If you use TaxACT, see How To Report Backdoor Roth In TaxACT. If you use FreeTaxUSA, see
How to Report Backdoor Roth In FreeTaxUSA.
Here’s an filled-out example of Form 8606 produced by TaxACT software. I’m assuming by the time you converted, you had $50 worth of earnings.
Step 6 – Repeat Steps 2 to 5 next year
Step 1 is a one-time task. After it’s completed, you just repeat Steps 2-5 every year.
Most IRA custodians will keep an account open for a year even after the balance goes to zero. In such case next year you just contribute to the same empty traditional IRA and convert into your existing Roth IRA. It’s not necessary to open new accounts.
No Rollover to Traditional IRA
When you are repeating steps 2 to 5 every year, remember not to roll over from an employer-sponsored plan to a traditional IRA in the same year, either before or after you do the Roth conversion. You can leave the money in the original plan, roll over from one plan to another plan, or roll over to your own solo 401k, just not roll over to a traditional IRA. If you must roll over to a traditional IRA, you will have to “hide” it again using Step 1.
Reverse the Order?
Some readers asked about reversing the order: do Step 1 after Step 4 but before December 31 in the same year. I don’t recommend it, even though it works the same on the tax form.
When you roll over from your traditional, SEP or SIMPLE IRA to a qualified plan, you are explicitly allowed to pick pre-tax money only. Not so when you do the conversion; you are not supposed to pick only after-tax money. The tax forms don’t show exact dates. If you reverse the order, you can probably get away with it if you are not audited, but I think it’ll be messier if you must explain to an IRS agent.
It’s too much trouble. Why don’t they just open the front door and let everyone contribute directly to a Roth IRA?
If the front door is wide open and everyone can contribute directly to a Roth IRA, the government will lose too much revenue. The income limit is imposed to reduce the revenue impact. Only those who know about the backdoor and are willing to perform the necessary steps can take advantage of the backdoor Roth IRA. Diligence brings rewards.
Will they close the backdoor?
It’s possible the backdoor will be closed. The President already included in his budget proposal to close it although it’s hard to get it passed by Congress. If you are afraid the backdoor will be closed, you should do it now when the backdoor is still open.
***
Comments are closed because questions are becoming repetitive. Be sure to read existing comments for answers to questions similar to yours.
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Greg says
Let me clarify my question a bit better…
Currently I have a deducible (pretax) IRA, which was a rollover from a 401k at an old job.
I already found out that my current companies 401k accepts rollover IRAs, so my plan was to initiate a rollover of this untaxed IRA account into that 401k. Ideally, I’d also like to then make maximum nondeductible IRA contributions for both 2011 and 2012, with the idea that they can both be converted to a roth with no tax consequences.
Here’s my question:
Is it too late for me to do this for a 2011 contribution? In other words, did I need to have my old IRA rolled over in 2011 for it to be “hidden” with respect to a recharacterization? Or do I just need to assure that it is hidden prior to doing the recharacterizations in 2012?
Thanks!
Harry Sit says
@Greg – The contributions and the conversion are independent of each other. You can contribute now, regardless whether it’s for year 2011 or 2012, and convert later, after you move the pretax money to your 401k.
newaustin says
Excellent article.
1. So, if our AGI is 167K (married-filing-jointly) 2011, can we just contribute directly to Roth IRA vs this back-door?
2. I have a Rollover IRA (IRA from 401k rollover form previous employer) – so – if I do a direct Roth IRA – Will I still have to pay taxes in my Direct ROTH? or, Do I have to still do Step 1 “Hide other IRA”? How will Form 8086 Line 6 will change IRA basis?
3. Do we need to file for 8086 for Roth IRAs also?
Alex says
Hi there, great article.
One quick question. Do you know for Step 1, “hiding” my pre-tax IRAs, whether it is possible to do an in-kind rollover of the Conduit IRA to a Solo 401k? The reason is, I own a large number of stocks (bought under free commission promotion), which would be expensive to sell off.
I guess it’s really a two-part question. One, is it legal. And two, which custodians (Etrade? Fidelity?) actually can carry it out without screwing up.
Thanks
Harry Sit says
@Alex -Yes it’s legal. Fidelity did an in-kind rollover for me from IRA to Solo 401k. First you transfer your IRA in-kind to a Fidelity IRA if it’s not at Fidelity already. Then you write them a letter to transfer the holdings in-kind from the rollover IRA to the solo 401k account. Call their toll-free number for the solo 401k department for the required wording. You sign the letter twice: once as the IRA owner and the solo 401k participant saying you want to roll over; a second time as the solo 401k administrator saying you accept the rollover.
Harry Sit says
@newaustin – For 2011 the Roth phaseout starts at $169k for married filing jointly. If you are married filing jointly and your modified AGI is $167k, you are under the limit. You can contribute directly and not worry about anything in this article. Since contributions to a Roth IRA are made with after-tax money, yes you do pay taxes on the contributions but you don’t pay any more or any less whether you have a rollover IRA or not. You don’t need Form 8606 if you are contributing to a Roth IRA directly.
Akshay Nagoree says
@TFB, – To Greg’s question, you mentioned that “contributions and the conversion are independent”.
Does this mean if you have deducible (Pre-Tax) IRA of 100,000 AS OF NOW.
1. You can still contribute non-deducible (post-tax) IRA of 10,000 (5,000 for year 2011 and another 5,000 for year 2012) before April 15 2012.
2. Later, convert deducible (Pre-Tax) IRA of 100,000 to 401k after April 15 2012.
3. Move non-deducible (post-tax) IRA of 10,000 to ROTH IRA after April 15th 2012.
If above is true, what will happen to “pro rata” rule?
Because at step 2, one still has non-deducible (post-tax) IRA of 10,000 combine together with deducible (Pre-Tax) IRA of $100,000.
For 2011 tax purpose, by when deducible (Pre-Tax) IRA should be rolled into 401k? Will it be by 31st Dec 2011 or 15th Apr 2012
–Akshay
Harry Sit says
Akshay Nagoree – (1) Yes. You will get to the picture before you do Step 1 in the post. (2) Yes, it’s called a rollover, not “convert.” See picture in Step 1 in the post. (3) Yes. See picture in Step 4 in the post.
The “pro-rata” rule comes in on December 31 in the year you convert to Roth, not at the time you contribute to a traditional IRA. In the scenarios you described, by December 31, you don’t have any pre-tax money in your traditional IRA any more. The deducible (Pre-Tax) IRA should be rolled into 401k before you convert the remainder to Roth.
David says
Do you have a screen shot of page 2 of the 2010 8606 form available?
Harry Sit says
David – Click on the 8606 form image in the post. I updated the link.
David says
Thank you very much for reposting. I appreciate the help and the information your site has provided for me.
Mike says
Thanks for the article. I was under the impression that if my traditional, deductible IRA was under-water (hence, worth less than my contributions) then I could add $5k as non-deductible and convert ONLY that $5k to a Roth with no taxes. Based on what I’m reading, this is not the case. So if I have $50K in a deductible IRA and try to do all this, I’m going to have to pay some tax for this portion of the conversion.
My dilemma is step 1. I like have my rollover IRA in a fund (not my new employer 401k) b/c I can trade stocks and have ultimate freedom. My 401k restricts me so much, esp. on trading frequency, that’s it’s not worth it.
If I’m missing something, a reply would be awesome. Thanks.
Dustin says
Thanks for the great article. For clarification on basis calculation, in 2010 I opened a traditional IRA and funded it with a 5K non-deductible contribution and then converted it the next day into my roth IRA. However, the value had gone down $10 during that day and so only $4990 went into my roth. Because I used all the funds from the traditional account, on December 31, 2010 my traditional IRA account value was $0. I do not have a $10 basis to carryover into tax year 2011 because it is now as if that traditional IRA account no longer exists… correct? I ask because the 8606 form states that I would have a basis of $10 (but it’s my understanding that you can’t have a negative or carryover a basis from an account with a zero balance). So when I do the same backdoor plan for tax year 2011, it’s as if I’m starting over with opening a new traditional IRA account and that past $10 has no relevance… does that seem accurate? Thanks again!
Harry Sit says
Dustin – I would think you still have $10 basis left but if you are willing to give it up, it’s only $10. Not a big deal.
RobertC says
TFB, Sorry if you covered this above – if so I missed it:
I have a rollover regular IRA, and so does my spouse. If I rollover my regular IRA into the Federal TSP, I can then do a backdoor Roth without worry of aggregation?
Lets say I contribute $10K after I zero out my regular IRA by transferring to the TSP. My spouses IRA would not be aggregated and I would owe no tax if I immediately (after a few months) converted the $10K to my existing Roth?
RC
Harry Sit says
RobertC – That’s correct. I wrote under Step 1 “If you are married, please note IRAs are owned by one and only one person. Each spouse should look at his or her IRAs separately.” I assume when you said you would contribute $10k you meant $5k for 2011 plus $5k for 2012, not $5k for yourself plus $5k for your spouse. If you only transferred your own rollover IRA to the TSP, you can do the backdoor Roth but she still can’t if she still has her rollover IRA.
RobertC says
TFB, Yes that woud be $5K 2011, $5K for 2012. Thanks for the response.
In follow-up, can I later transfer a portion from my TSP, identified as ‘contributions’ with no earnings, back to a new regular IRA, which I could then rollover in total to my Roth with no tax consequence?
Could this be done while leaving the earnings in the TSP?
Harry Sit says
RobertC – You can rollover from TSP directly to a Roth IRA without an interim stop at a traditional IRA. You can’t separate contributions and leave earnings behind but it’s also not necessary. All money in the TSP is pre-tax whether it’s from contributions or earnings, unless you are talking about contributions from non-taxable military combat pay or the yet to be implemented Roth TSP. If you rollover pre-tax money to a Roth IRA, you will pay tax. There is no advantage in separating earnings from contributions because they are both pre-tax.
David C says
It’s not definitive (in particular we don’t get a name for the IRS spokesperson)… but then again I don’t believe TFB was really worried about the legality of the “backdoor” anyway:
“The Internal Revenue Service hasn’t raised any red flags on backdoor Roths that are properly reported on form 8606. According to a spokesman: ‘The law is pretty clear on this issue.’ ”
See also http://online.wsj.com/article/SB10001424052702304072004577325551162426954.html and http://www.bogleheads.org/forum/viewtopic.php?f=10&t=94372
John L. says
I will be submitting an extension to file for my 2011 Federal income taxes, and expect to file in June of 2012. Am I allowed to do all of the necessary initial mechanics (roll my SEP-IRA into a 401(k), then set up and non-deductably fund the TIRA) between now (April 9, 2012) and when I actually file in June of 2012? And am I correct to assume that the conversion of the TIRA to the RIRA can happen more or less any time (with an appropriate delay) after the initial mechanics, regardless of when the tax return is filed?
Harry Sit says
John L. – If you are making an IRA contribution for 2011, you must do so before April 17, 2012. Otherwise everything can be done at any time in 2012, either before or after you file taxes for 2011.
John L. says
TFB – Thank you. I funded two nondeductable TIRAs today, one for me and one for my wife (2011 and 2012 contributions, into a money market fund), but it will take a week or two for me to complete the roll-in of the pre-existing SEP-IRA into my work 401(k). Per your replies above, I presume that once this roll-in is completed, we can subsequently convert each TIRA into a RIRA (say, a few months from now), but is there a deadline for this conversion (Dec. 31, 2012)?
Harry Sit says
John L – You are good to go. There is no deadline for the conversion. If you convert before 12/31/2012, you report the conversion on 2012 return in 2013. Or you can wait for a clean slate until 2013 if you’d like. Then you would report the conversion on 2013 return in 2014.
John L. says
One more question, please, about rolling-in my pre-existing SEP-IRA at Vanguard to my employer’s 401(k) at Fidelity. The Fidelity rep said this is acceptable to that 401(k) plan. In my SEP-IRA, the balance is of course comprised of the “basis” (contributions, made “pre-tax”) and there are tax-deferred earnings as well. This SEP-IRA began life in 1990, as a Keogh Profit sharing plan and a Keogh Pension plan at Merrill Lynch, both of which I then rolled over/converted in 2007 to the one SEP-IRA at Vanguard. I’ve contributed something every year since 1990 to these things, and only with a lot of work could I could figure out the basis. Can’t I just roll over the entire balance into my 401(k) at Fidelity?
John L. says
OK, so one more question, and this time I mean it. I also have a Vanguard 403(b) from my previous employer, to which I have not contributed anything since 2008. Can I just roll-in my Vanguard SEP-IRA into this Vanguard 403(b) plan and save the trouble dealing with sending it to the 401(k) plan at Fidelity ? (Plus the investment choices are better in the Vanguard 403(b) plan).
Harry Sit says
John L – You have basis only if you contributed after-tax money. If it was all pre-tax, your basis is zero. Some plans only allow incoming rollovers if you are still a current employee. If the 403(b) accepts it, sure.
Paul G. says
Awesome site! First, thank you! Second, is there a limit on conversions in 2012? I just opened a converted an IRA for the 2011 year, but the conversion will be taxed in 2012. I want to contribute another 5K for 2012. If I convert in 2012 (which I would plan to do), is that okay? I’ll have 10k of conversion in the same year. I think that’ll be fine, just wanted to check with the boss.
Harry Sit says
Paul G. – That’ll be fine.
Lisa says
I opened a 2011 non deductable ira on 3/29/12 and was planning on doing a backdoor roth conversion early next year along with a 2012 non deductiable contribution to be deposit later this year as mention in your article. But because my company sold my part of the company to another company, this allow me to retire from my current company once I start working for the new company. Included in my penion is a lump sum along with a monthly payment. To avoid paying a penalty and taxes, I will have to roll the lump sum into an ira account. The question is – currently, I don’t have any ira. if I convert my 2011 non deductable ira to a roth before I roll my lump sum into an ira, will this be a clean conversion? If so, can I contribute my 2012 and convert both at the same time before I roll my pension into a new ira? Thanks!
Harry Sit says
Lisa – No it will not be a clean conversion because whether it’s clean is determined by the balance in the IRA at the end of the year, not at the time you converted. If you put additional pre-tax money into a traditional IRA in the same year, you will “taint” your conversion. That’s why I wrote under Step 6:
“Remember not to rollover from an employer sponsored plan to an IRA when you are doing the backdoor Roth IRA. You can rollover from one plan to another plan, or to your own solo 401k, just not to an IRA.”
Do you have to retire from your current company? Will you receive more if you wait? If not, see if you can rollover the lump sum into your new employer’s plan.
Tapan Karwa says
Consider that I contributed $5000 for 2011 as non-deductible IRA contribution in Jan 2011. The money contributed in 2011 was used to buy stocks. That $5000 has become $6500.
In addition, consider that I contributed $5000 for 2012 as non-deductible IRA contribution in Jan 2012.
So, the total in that account will now be $11500.
Can I convert the entire $11500 if I am willing to pay tax on the $1500 that has been earned? Note that $10000 is non-deductible IRA contributions and so I would have already paid tax on it.
Thanks.
Harry Sit says
Tapan Karwa – If this is your only traditional IRA (including SEP and SIMPLE) and you only made these two contributions, sure, just convert and pay tax on the $1,500.
bytre says
As I understand it, I can contribute $5k for 2011 and $5k for 2012 into a new non-deductible IRA, and then convert to a Roth IRA paying only minimal tax on any gain from the $10k basis, given that:
1. our married joint income is above the roth limit
2. I contribute to a 401k at work
3. I do not have a traditional IRA in my name (although my wife has one)
4. I declare the non deductible contribution on my 2011 tax return, form 8606
Does that sound right?
Harry Sit says
bytre – That’s correct, although if you contribute for both 2011 and 2012, you only report the $5k contribution on your 2011 return. You report the other $5k contribution and the $10k conversion on your 2012 return. The $5k for 2011 must be done by April 17, 2012.
bytre says
Of course, thank you!
Sam says
Hi TFB, Great article!!! It looks like if someone’s filing status is ‘married filing separately’, they can still benefit from this technique even though their income is not ‘too high’? The AGI limit for Roth is just $10,000. Your thoughts please?
Harry Sit says
Sam – Yes, for married filing separately, an income above $10,000 is “too high.” I added it to the post.
Dee says
Thanks so much for writing the article. I already have a SEP IRA with Vanguard and I’m contributing to this account for current year of 2012. After reading your article I feel the need of setting up a solo 401k with Fidelity and then roll over the SEP to it (and then go with Step 2, 3…). My question is, would it be okay if I stop contributing to the SEP IRA and set up a solo 401K for the same business (and within the same year)? I talked with one of the representatives with Fidelity and she suggests to set up the solo 401k starting from next year. Can you please advise?
bytre says
Can a nondeductible contribution be made by a nonworking spouse towards an IRA that we then convert as well?
Harry Sit says
@Dee – It’s OK to have both in the same year although it’s cleaner to have just one type of plan in any given year. If you set up solo 401k this year, just make sure you don’t go over the limit on a combined basis.
@bytre – Yes if the working spouse has enough earned income (> $12k) to make the nonworking spouse eligible for a contribution to a traditional IRA.
Dee says
Thank you so much TFB! Today I talked with Fidelity about my situation and setting up a solo 401k. They told me that I will have to set up the solo 401k next year since I already contributed to the SEP this year. So now I plan to open a solo 401k in Jan 2013 and then roll over the SEP from Vanguard. After that I will make nondeductible contribution to a traditional IRA and convert it to Roth IRA before April 15th. I’m thinking that this can still be counted as the 2012 Roth contribution since it’s before April 15th. Can you please let me know if this is practical?
Harry Sit says
Dee – Yes that will work.
bytre says
Great, thank you for the advice!
Thankful Questioner says
TFB – Can I complete step 1 after step 3? On December 20, 2010 you said that theoretically step 1 should be done first, but practically it can be done afterwards, before the end of the year. But later (February 8, 2011) you mentioned that it is a requirement to do step 1 before step 3. Since I had not done step 1, and will do it now, after I had completed step 3 earlier this year, is this ok? Or do I need to undo step 3 by un-converting the Roth conversion, complete step 1, and re-do step 3? Thank you.
fan says
TFB – Where are you? We need you…
Motts McGregor says
TFB — great article and thread. I am Looking for reality check on how to do my slow-motion backdoor Roth IRA with no tax impact in 2012 with a focus on old IRA contributions, not 2012 contributions.
Current holdings are as follows:
Regular tIRAs: $130k ($25k basis in non-deductible contributions made from 2003-2008)
Rollover tIRAs: $60k (all pre-tax / deductible contributions made as employee, and kept separate)
Roth IRAs: current balance irrelevant to this case
Solo 401(k): current balance irrelevant (I own my business so I control this 401(k) plan)
Step 1 — move Rollover assets into 401(k) plan. Easy. Just like you wrote about — very impressed with Fidelity’s knowledge here.
Step 2 — move deductible portion of Traditional accounts to 401(k) plan. Not easy. The assets have been mixed together so I need to determine how much I am allowed to move.
Is this as simple as subtracting the basis ($25k) from the total tIRA account value ($130k — but as of what date is this measured?) and thus determining that $105k is the deductible amount which can also be moved into the 401(k)? This doesn’t seem to properly account for value changes. If this is the case I’d be left with $25k of value in the accounts, all of which is non-deductible. Then,
Step 3 — Convert $25k of non-deductible contributions with no tax impact.
Does this seem right? Thanks.
-Motts
Greg says
Does the tsp plan for (former) military employees qualify as a substitute for the 401k to transfer existing tIRA into?
Harry Sit says
Greg – Yes, TSP will work if you can rollover pre-tax money into it.
Lisa says
TFB – Is following the order of the steps important, or I complete step 1 after step 3, in case I have not done step 1 originally?
bytre says
TFB,
Any guidance on whether the contributory IRA should be rolled into a standalone Roth IRA, or a new independent one?
Harry Sit says
bytre – An existing Roth account will work just fine. Not necessary to create an independent one.
Carol says
TFB,
If I already converted my post-tax traditional IRA to Roth IRA, can I still open a 401k to “hide” the pre-tax contributions? thank you.