Downside of leaving a Non-deductible IRA as is without doing back-door roth
Hello,
what are some disadvantages of having a non-deductible IRA as they are and not doing back-door roth transaction?
I have a client who has form 8606, showing non-deductible balance, but does not have a Roth account.
Would future tax treatment be the same as Roth as long as client keeps good track of contributions and gains?
or would it be different?
Thank you!
Permalink Submitted by Alan - IRA critic on Tue, 2021-09-14 18:18
No, it would not be as beneficial as tax free Roth IRA distributions. Without converting to Roth, the entire TIRA balance will continue to grow for life and become subject to RMDs. Since all growth is pre tax, even though Form 8606 provides pro rata credit for the non deductible contributions, the gains will cause the taxable portion of the RMDs to also grow. A Roth conversion eliminates future RMDs on that money and all future gains are tax free.
Since client has pre tax IRA value, probably more than the 8606 basis, simply making a new contribution and converting it will result in the conversion being mostly taxable, since all non Roth IRA accounts must be included in the 8606 calculation for distributions and conversions.
If client is still working and their workplace plan will accept IRA rollovers, client could roll the pre tax balance of all non Roth IRAs into the workplace plan, and could then convert the 8606 TIRA basis tax free, then continue to make ND contributions and converting them tax free year after year without pro rating issues.