Back Door Roth
Chris is 30 and earns $270k/yr. He has a both traditional and Roth 401k options at work. He is not currently maxing out contributions to his 401k. we talked about possibly maxing out his 401k (possibly with the Roth side) and doing some back door roth conversions as well. Does this make sense or do the phase out income limits for a 401k at work also limit his ability to do the back door roth conversion? What would be the best solution in this case? Thanks
Permalink Submitted by Alan - IRA critic on Thu, 2022-10-20 16:22
There are no income limits for making non deductible TIRA contributions and converting them. However, if he has a pre tax IRA, SEP, or SIMPLE IRA balance the conversion will be mostly taxable and that would compromise the back door process. It does not matter whether his 401k contributions are pre tax or Roth.
Permalink Submitted by Michael Eastham on Thu, 2022-10-20 20:33
Am i correct in understanding that the “pro-rata” issue won’t come into play if he only has the 401k and the Roth? does the pro-rata rule only affect him if he has Traditional IRA and he tries to do the back-door conversion? Thanks
Permalink Submitted by Michael Eastham on Thu, 2022-10-20 20:33
Am i correct in understanding that the “pro-rata” issue won’t come into play if he only has the 401k and the Roth? does the pro-rata rule only affect him if he has Traditional IRA and he tries to do the back-door conversion? Thanks
Permalink Submitted by Alan - IRA critic on Fri, 2022-10-21 01:08
Right. There is no pro rating of the conversion due to balances in a qualified plan or Roth IRA. Prorating results from a pre tax balance in TIRA, SEP, or SIMPLE IRA.