Backdoor Roth strategy
Hello, I have a client who inherited his fathers IRA a few years ago, approx 400k. The couple have income over 300k and two children. I understand they are grandfathered into the stretch IRA. Our strategy has been to distribute enough from the IRA to contribute to TWO non deductible IRAs ( they currently have no IRAS, just 401k and ROTHS) and then immediately convert to the ROTH due to no income limits. The owner of the inherited IRA has switched jobs and wants to roll his former pension and 401k to me to manage. It is about 200k. I already manage about 500k for them.
Questions: 1)Does new legislation put any sort of kink in this strategy or a timer on it likely expiring?
2) If he rolls old plans to me in a new IRA, he will lose the tax advantage of the immediate backdoor roth. Wife can still do them. If he does the backdoor Roth contribution and conversion in January 2020, ( when he doesn’t have any IRA assets) THEN rolls his 401k and pension to IRA in say March, would that disqualify him from the strategy benefits for 2020? i.e. does not have any IRA assets at the time of backdoor roth mean something to the IRS? or is it IRA assets during the tax year?
My recommendation to him is to NOT roll. Based on their income, march to retirement with significant PRE TAX assets, the likelihood of higher taxes in retirement all point to the benefits of having this tax free strategy available to them.
BUT, if the path to continue this looks murky due to regulation, then I would like to do it one last time this Jan, then move his assets to IRA after the back door conversion is complete if that is compliant.
Any questions, please let me know. Really appreciate this forum for cases like this!!
Permalink Submitted by David Mertz on Sun, 2019-12-22 15:00
What matters for determining that taxable amount of a Roth conversion is the traditional IRA balance at the end of the year of the Roth conversion, not the traditional IRA balance at the time of the conversion. Rolling a substantial pre-tax 401(k) balance to a traditional IRA at any time during the year will largely defeat the intent of the backdoor Roth for that year and beyond. The newly enacted tax laws do not change any of this.
Permalink Submitted by Joseph Biebel on Mon, 2019-12-23 20:33
I have a question about the reply to the backdoor roth strategy query. If the client rolls over the balance of the pretax 401k to a traditional IRA, and then proceeds to do a backdoor roth conversion, isn’t the tax owed determined by the amount of the conversion?
Permalink Submitted by David Mertz on Mon, 2019-12-23 22:36
The concept of a “backdoor Roth” generally implies the involvement of nondeductible traditional IRA contributions. The taxable amount of a Roth conversion when nondeductible traditional IRA contributions are involved depends not only on the amount of the conversion but also on the year-end balance in traditional IRAs. Both enter into the calculation of the proportion of the Roth conversion that is nontaxable.