Spouse #1 is covered under a Simple IRA Plan and spouse #2 is covered under a 403(b) plan. Is my understanding correct that Spouse #1 cannot do a backdoor Roth IRA transaction because of participating in the Simple IRA Plan. Spouse #2 can make a backdoor Roth IRA transaction even though participating in a 403(b) plan.
Can spouse #1 convert his Simple IRA balance to a Roth IRA?
Thank You
It would not matter which IRA or part of an IRA is converted, because they are all treated as one combined account for purposes of calculating the tax for the conversion. Likewise, the non taxable portion of any conversion is determined by dividing the IRA basis (non deductible contributions total) by the total value.
Since the SIMPLE is active, the balance will be constantly increasing and will be pre tax. The new contributions will probably be more than the 7000 of non deductible contributions added to the TIRA, therefore conversions done in each year will be partly (maybe mostly) taxable. That won’t stop until the spouse has access to a 401k or 403b plan instead of the SIMPLE IRA, since only IRAs count in the calculation.
Check Form 8606 Part I, particularly lines 3, 6, and 10 to clarify how the math works. The taxable portion of the conversion can be controlled by limiting the amount converted each year. The same ratio will apply, but for a lower amount than converting the entire balance of all IRAs.
Permalink Submitted by Alan - IRA critic on Tue, 2024-08-13 17:28
Spouse 1 can do the back door, but it will not be ideal because the SIMPLE IRA balance will make the conversion mostly taxable. This spouse can only convert if the SIMPLE IRA 2 year waiting period has been satisfied.
Converting the SIMPLE IRA will cause that balance to be taxable, but partial conversions each year would spread out the taxable amount over multiple years.
And if the SIMPLE IRA is active, more pre tax amounts will be added every pay period, so any back door conversion will have a taxable component, the question is what portion as calculated on Form 8606.
Permalink Submitted by Janis Farrow on Wed, 2024-08-14 09:22
Let me clarify with more information.
The Simple IRA 2 year waiting period has been met; the spouse continues to participate in the IRA Simple and is fairly young. With the Secure Act 2.0 his intention is to add the Roth component to the IRA Simple Plan. His desire is to convert the balance of his IRA Simple Plan pre-Roth deferrals to a Roth IRA which the full conversion would be taxable at that time – correct? I have discussed partial conversions each year with the client.
As for a backdoor Roth for his previous traditional IRAs, participating in the IRA Simple Plan and/or converting the IRA Simple Plan should not affect the backdoor Roth for his previous traditional IRAs – is the second question.
Thank you