Backdoor Roth Conversion – Journaling Stock
Client would like to do max contribution of 6k to traditional IRA and then convert to a Roth. On top of that, he would like to journal 9k more from the Traditional IRA to the Roth to make a 15k total Roth conversion. Question is does it matter what type of assets to journal from the Traditional IRA to Roth? Low basis stock? I assume the tax is based on the full value of the conversion, considering any nondeductible assets for the pro rata rule? So perhaps it does not matter? Thanks for any clarity.
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-01 19:19
Normally, one would convert the assets expected to grow the most in the future, meaning that the Roth would grow at a faster rate than the assets remaining in the TIRA. Individual stocks in an IRA have no basis since IRA basis is limited to the dollar amount of non deductible contributions. But the stocks have a value relative to various benchmarks that might make some more likely to grow than others. Of course only the dollar amount converted is locked in because you can sell the converted shares in the Roth anytime and replace them.
Permalink Submitted by Bruce Steiner on Sun, 2022-03-20 02:42
It’s hard to know which ones will do better. If you knew which ones would do better you would sell some of the others and buy more of those.
Permalink Submitted by Roselyn Siino on Tue, 2022-03-01 19:57
Does the answer change if part of the TIRA contains funds from a 401k rollover (all Pre-Tax money) and part of it is from nondeductible contributions? Say 70%pretax/ 30% nondeductible? The basis does not need to be a factor when looking at which assets to transfer in-kind for the Roth conversion? I should just consider transferring high-growing funds…. Correct?
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-01 20:14
Correct. The % of basis in the TIRA is determined the same way whether there was a 401k rolled in or not. That basis % should determine how much is converted, but not what assets are converted. The amount of the conversion cost for tax purposes is only the taxable portion, with the non taxable portion getting a free ride into the Roth.