After Tax IRA
A client has an IRA that is completely funded by non-deductible contributions (they were phased out of a deductible contribution because their income was too high). Is there any reason that they could not convert this to a Roth? Also, since the contributions were non-deductible ( ie after tax), i am assuming that it would be tax-free, correct? would this be considered a “back-door” roth? can you provide any resources on the Back-Door Roth so that i can become more familiar with them?
Thanks
Permalink Submitted by Alan - IRA critic on Mon, 2017-04-03 19:34
If client reports his non deductible contributions on Form 8606, that establishes the non taxable portion of his non Roth IRAs. All such IRA accounts are considered one combined account, so if client has any rollover IRAs, prior deductible contributions or gains on any of his contributions, that pre tax balance would be pro rated with the non deductible contributions to determine the taxable portion of a conversion. The back door Roth strategy is pretty simple – make non deductible TIRA contributions and convert them before earnings pile up. Many people are doing this every year. The amount of tax on the conversion is the variable that client needs to figure out before doing this. Note that if client has an employer plan that accepts IRA rollovers, he could roll his pre tax IRA balance into the plan and then convert the basis tax free since he would then have no other balance in excess of his basis.