Back Door Roth

Submitted by Krista McBeath on Fri, 2019-02-22 17:46

I have a client who would like to use the Back Door Roth by contributing to a non deductible IRA, then convert to Roth without any tax implication since there won’t be any growth. The 5 year rules are irrelevant and she is young. Here is the complication. She has IRA, SEP IRA and Roth. My thoughts are that she could roll the IRA into the SEP IRA. I know if you have an existing IRA the conversion isn’t clean because you then have to track basis in the non deductible IRA. If the IRA rolls to SEP, I see the non deductible IRA being a conduit account for essentially a tax free contribution to the roth. (I know it isn’t tax free, I’m simply stating that since she paid the tax on the contribution when earned).

Would the SEP throw a kink into this plan? She could start a 401k for her business if needed. Does this sound like a sound plan?

Also, given her age, is there any reason the converted roth funds couldn’t be added into her existing Roth? Again, she will not touch this money for at least 15 years.



Submitted by Alan - IRA critic on Fri, 2019-02-22 18:12

  • Any SEP, SIMPLE, or traditional IRA balance on 12/31 of the conversion year must be reported on line 6 of Form 8606 and will trigger pro rating of IRA basis from non deductible contributions. Client could adopt a solo or standard 401k for the business that will accept IRA rollovers, and then roll the pre tax TIRA and SEP balances into the 401k plan, leaving ONLY the IRA basis in the traditional or SEP IRA account, which could then be converted tax free.
  • No reason not to convert into the existing Roth account. Note that a non taxable conversion can be tapped anytime tax and penalty free. Only taxable conversions must be held 5 years to avoid the 10% penalty.

Submitted by Krista McBeath on Fri, 2019-02-22 18:55

Is the mega backdoor still a viable option?  I am thinking thru the ROTH 401k option and it seems that replaces the need for the mega back door?  Am  I wrong?

Submitted by Krista McBeath on Fri, 2019-02-22 18:56

Is the mega backdoor still a viable option?  I am thinking thru the ROTH 401k option and it seems that replaces the need for the mega back door?  Am  I wrong?

Submitted by Alan - IRA critic on Fri, 2019-02-22 20:51

Options for contributing to a Roth account:

  1. Direct Roth IRA contributions if income permits
  2. Roth conversions including back door Roth
  3.  Direct Roth 401k contributions – no income limit
  4.  In Plan Roth rollover – including from non Roth after tax contributions (mega back door)
  5.  Mega back door – non Roth after tax contributions rolled to Roth IRA
  6.      Several of above can be done in the same year. Basic back door and mega back door can both be done from after tax contributions.

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