Question

Need Help With IRA (Backdoor Roth IRA, i401k, etc.)

Forum|Forum|4 years ago
April 10, 2022
2 replies
0 views

Hello, I have had a Traditional IRA for 3 years now. It contains about 2/3rds non-deductible contributions, and 1/3rd is deductible. I contributed for 2021, and once I realized it would be non-deductible, figured it would be best to try to do a backdoor Roth IRA instead. The problem is the Pro Rata Rule. It is very confusing, but overall I'm trying to avoid being taxed on my entire IRA during the conversion.

I am also planning to open an i401k this year (2022). I believe if I do a Roth conversion now, I can convert my 2021 contribution to a Roth IRA, and then move the rest of my IRA money to an i401k before December 31st, 2022, meaning there would be $0 in my IRA and no tax bill.

Does that make sense? I have read that you can't rollover non-deductible IRA contributions to a 401k. Is this true?

Not A Product Question

D

DanaB27

Yes, that is true you cannot rollover nondeductible (after-tax) IRA contributions to a 401k, and therefore you would isolate the basis and could do the Backdoor Roth.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

R

RetirementHelpAuthor

Thanks for the reply. Just to be clear, let's say I have $12,000 non-deductible in my IRA, and $6,000 deductible.

Does that mean I have to convert $12k to Roth? Is that even possible? Isn't $6k the limit for 2021?

I can roll over $6k to the 401k, but not before the April tax deadline. It would just be before December 2022.

D

dmertz

Employee

"Does that mean I have to convert $12k to Roth? Is that even possible?"

Partial Roth conversions are permitted. Any Roth conversion done in 2022 would be reportable on your 2022 tax return.

"Isn't $6k the limit for 2021?"

There is no limit on the amount that you can convert. The $6,000 limit is for new, regular contributions.

"I can roll over $6k to the 401k, but not before the April tax deadline. It would just be before December 2022."

If you have a 401(k) that will accept a rollover from your traditional IRA, you can roll over to the 401(k) up to the amount of your pre-tax money in your traditional IRAs. If you roll all of the pre-tax funds from the IRA to the 401(k), that would leave only your basis in nondeductible traditional IRA contributions to convert to Roth. That conversion would be taxable only to the extent that there were investment gains in your traditional IRAs after the initial rollover to the 401(k).

O

Opus 17

Employee

~~No, you can't do this.~~

If you only convert part of your traditional IRA to a Roth, you will be left with a non-deductible balance in your traditional IRA. Then, when you move that IRA to a pre-tax 401(k), that's a prohibited transaction, because you are moving after-tax money into a pre-tax account. In retirement, all the money you withdraw from the 401(k) will be taxable, even though some of the contributions were pre-tax. (Remember that if you leave everything as-is, then some of your withdrawals from your traditional IRA will be non-taxable because of the non-deductible contributions. You lose the benefit of those non-taxable withdrawals by moving the after-tax basis of the IRA into a 401(k).

While your tax return would show that the Roth conversion was non-taxable, moving the rest of your non-deductible IRA contributions into the 401(k) means you pay tax on that money twice. Once already and once in withdrawal.

See answer from @dmertz , although I don't understand how that gets reported. Below is an alternative way of handling the IRA.

I would instead suggest that you stop making any IRA contributions. Your 401(k) balance is not considered for the pro-rata rule since it is not an IRA. (It has the same general purpose, but is controlled by different sections of the tax code and has different rules.) You can convert the IRA to Roth gradually over several years (you don't have to do it all at once) to minimize the tax hit in any one year. At the end, you will have converted all the traditional IRA to a Roth IRA while preserving the tax benefits of the non-deductible contributions.

You might want to simply remove the 2021 non-deductible IRA contribution and use that money to fund your 401(k) in 2022, as long as you have sufficient self-employment income. And then convert the rest of the traditional IRA to Roth over time, to eventually get to a zero traditional IRA balance.