Back Door Roth IRA Aggregation Rule
Facts:
Husband 59 and wife 61.
File joint 1040
Husband:
$2,000,000 Traditional 401k
$0 Traditional IRA
$20,000 Roth IRA
MAGI too high to be eligible to contribute to Roth IRA
Wife:
$300,000 Traditional IRA
$0 Roth IRA
$0 401k
Retired – does not work
Husband desires to contribute $7,000 to a Traditional IRA and then immediately convert it to his Roth IRA to complete a backdoor Roth IRA contribution.
If the aggregation rule only applies to him, then none of the $7,000 conversion would be taxable.
But if wife’s Traditional IRA must be included in the aggregation, then most of the $7,000 would be taxable.
Must wife’s Traditional IRA be included in the aggregation OR are only husband’s assets included in the aggregation?
Thanks!
Permalink Submitted by Alan - IRA critic on Fri, 2022-03-11 19:31
Only the husband’s since any IRAs owned by each spouse are totally separate. Form 8606 which is used to report the ND TIRA contribution and the husband’s conversion should only recognize the husband’s IRA and not include any values for wife’s IRA. Therefore, husband’s back door conversion is tax free, but wife cannot use this strategy unless she wants to be taxed on almost her entire conversion.
Permalink Submitted by Adam King on Sun, 2022-03-13 07:32
The husband may also contribute $7K to his wife’s TIRA, based on his income alone. However, if their MAGI is too high the contribution may be non-deductible, and it will become mixed with her 300K – which is likely all pre-tax. No big deal, but it has to be kept track of. IF, they have low-taxable income years (after retirement but before large IRA withdrawls), this can be a good time to begin ROTH conversions on her account. Plan for the partial conversions from her ROTH account to increase income up to the top of any low-tier tax bracket.
Permalink Submitted by William Tuttle on Sun, 2022-03-13 13:31
It is seldom a good idea to make a non-deductible traditional IRA contribution if you can not do a Roth conversion with little to no tax liability in the short term.
Any earnings on the non-deductible traditional IRA contributions will be subject to ordinary tax rates.
An individual would almost always be better off making tax efficient taxable investments. Qualified dividends and capital gains are taxed at the much lower capital gains tax rates.
Also, it is seldom a good idea to correct Alan. One of the foremost knowledgeable individuals on IRAs. Especially, given your post in this and the other thread and others.
Permalink Submitted by Adam King on Sun, 2022-03-13 16:36
I didn’t mean to imply the spousal contribution would still be a good idea if it was non-deductible, just that it’s still possible. The better circumstance is, they qualify to add $7K to her TIRA without any tax implications.
Also, not meant as a “correction” but thankfully I have a thick skin…