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I have been contributing to Roth IRA for several years now. At this point my income have jumped up so I cannot contribute to Roth IRA anymore, unless I use the backdoor. Currently, my tax rate is 24%. I am already contributing to Traditional IRA for this year on monthly basis.

Should I convert my traditional IRA to Roth IRA? If so when should I do this since I am contributing on monthly basis. What if my income will be lower at the time of retirement, will it still makes sense to convert Traditional IRA to Roth using the backdoor?

UPDATE: If I convert my total balance of Traditional IRA to Roth IRA then I will have to pay taxes on the earnings (since this is NOT pre-tax). At this point, what will happen to the traditional IRA account. Can I still contribute monthly to the traditional IRA and then convert it by the end of the year.

ANOTHER QUESTION: I contributed to Traditional IRA $6000 max (NOT pretax). If I convert traditional IRA to ROTH then will I still have to fill out form 8606.

QUESTION 4: Here is my situation. I have the following types of account.

Roll Over IRA - $100K (Not paid taxes) Traditional IRA - $6K (Paid taxes) Roth IRA - $10K (Paid taxes)

According to the text "When the IRS determines your backdoor Roth IRA conversion taxes, they will regard all of your current IRA accounts as one entity. This is known as the aggregation rule – no IRA stands alone; instead IRAs are regarded in the aggregate."

Does that mean if I convert my Traditional IRA account to Roth IRA, the Pro-Rata rule with apply since I have another IRA (Roll Over IRA)? If that happens I will end up paying more taxes.

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  • Do you have a 401k or similar retirement plan at work? If no, do you have a spouse that has one?
    – TTT
    Jan 13 at 6:02
  • Yes I have 401K at work. My question is that can I do backdoor Roth IRA if I have a personal Traditional IRA and also Rollover 401K IRA.
    – Mary Doe
    Jan 13 at 12:40
  • Understood. But we needed to know whether you have a 401k at work to know if the Trad IRA contributions would be deductible or not. Since you do, your Trad IRA are not deductible. (If you didn't have a 401k then your Trad IRA contributions would have been deductible, regardless of your income.)
    – TTT
    Jan 13 at 15:20
  • Does your 401k allow you to rollover money into it from Traditional IRA?
    – user102008
    Jan 13 at 17:58
  • @user102008 Unfortunately, I don't know the answer.
    – Mary Doe
    Jan 13 at 18:20

2 Answers 2

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Yes, you should rollover your Traditional IRA into a Roth IRA.

If you can no longer contribute to a Roth IRA, that means that you cannot deduct contributions to a Traditional IRA either (if you or your spouse is covered by a 401(k) at work). So, you have two choices: to let your contributions grow in your Traditional IRA tax-deferred, or to have them grow in your Roth IRA tax-free. The latter is the better option here, since you won't get the pre-tax contribution benefit from your Traditional IRA anyway.

You should do the conversion as soon as possible. You have to pay taxes on the earnings inside the Traditional IRA when you rollover. The sooner you do the rollover, the less earnings you'll have to pay taxes on. You can do the rollover once right after your last contribution into the Traditional IRA at the end of the year, or right after each contribution throughout the year. The latter takes more work, but is more efficient tax-wise.

Edit: turns out the OP has another Traditional IRA with a $100k balance in pre-tax dollars. The pro-rata rule now applies and the decision to do the rollover or not is not as straight forward anymore since doing a complete rollover would incur a massive tax bill from those $100k.

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  • Thank you so much! For 2021 I contributed max ($6000) to my Traditional IRA. Can I still convert that into Roth using backdoor. Since my traditional IRA contributions are NOT pre-tax I will have to pay tax on earnings. How will I know about those earnings? Will T Rowe Price generate a form automatically.
    – Mary Doe
    Jan 13 at 2:53
  • Updated my original question with another question.
    – Mary Doe
    Jan 13 at 3:07
  • You can rollover whatever amount you want. Your broker should send you a form detailing how much of the rollover was contributions and how much was earnings. Also, keep in mind that you might owe taxes on contributions as well if you took a tax deduction when that contribution was made. This is something you have to keep track of yourself, since your broker does not know about your particular tax situation from years past. Jan 13 at 4:22
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    When you file your 2021 taxes, that's when it's determined if you get the tax deduction or not. From your original question, it looks like you don't qualify for the deduction, so when you rollover those $6,000 into a Roth IRA this year, you won't have to pay taxes on that when you report the rollover in your 2022 taxes you'll be filling in 2023. Jan 13 at 4:40
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    If you have another IRA with pre-tax contributions in it, the pro-rata rule will apply. So you will have to pay taxes on a big chunk of the contributions when you do the rollover. Jan 13 at 15:52
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Does that mean if I convert my Traditional IRA account to Roth IRA, the Pro-Rata rule with apply since I have another IRA (Roll Over IRA)? If that happens I will end up paying more taxes.

Correct. You effectively have "one IRA" with $100k of pre-tax contributions and $6K of after-tax contributions (you don't say how much of the 6K is contributions versus growth, but I'm assuming it's mostly contributions). So for every $6 of Post-tax IRA you want to convert, you have to convert $100 of pre-tax IRA money. (more precisely, if you roll over $100, then $94.30 (100/106) of it will be taxable, regardless of what account you roll over from). If you want to roll over the whole $6k you have to roll over the full $106k, $100k of which will be taxable.

Unless you have the cash to pay the tax on a $100k rollover, I would just leave them alone. The only drawback is that the growth of the $6k will not be tax-free, but it is still tax deferred. So even if it triples to $18k (meaning $12k is growth), you'll be paying tax on "only" $12k of growth.

It doesn't seem like a big enough benefit to pay tax now on $100k. If the account grows by X and your tax rate T is the same when you withdraw, there's no difference mathematically in paying tax on $100k now (leaving you 100*T) left now to invest or borrow versus paying tax on 100+X when you withdraw.

I would just max out you 401(k) and contribute to either your traditional or Roth IRAs after that. Again, the decision point for Trad vs Roth is whether you think your tax rate will be higher or lower in the future. If you think it will be higher, it's better to pay a lower tax rate now by contributing to a Roth. If you think it will be lower, it will be better to get the tax deduction now by contributing to a Trad. If they are the same it doesn't matter.

---- EDIT ----

I just noticed this comment:

Last year 2021, I contributed $6000 to traditional IRA. All that money was after tax, meaning I already paid taxes on my contributions. I have yet not filled taxes for 2021.

I would check with your broker and see if you can get this reclassified as a pre-tax contribution, and take the deduction. It will simplify your IRA setup since now all of your money is pre-tax. Then take the tax refund and invest it for 2022 (or do something else with it).

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  • I don't contribute anything to Roll Over IRA. My contributions are after tax to my traditional IRA account and I was planning to convert my Traditional IRA to Roth. but since the Pro-rata rule will apply I might not go that route.
    – Mary Doe
    Jan 13 at 14:59
  • Your rollover from a 401k is considered a "contribution" for these purposes, even if some of that was contributed by your employer or was earnings.
    – D Stanley
    Jan 13 at 15:00
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    Also, keep in mind that it only makes sense to convert to Roth if you think your tax rate is lower now than it will be later.
    – D Stanley
    Jan 13 at 15:03
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    Thanks! I believe my income will be lower at retirement. Having said that the income tax brackets might also change in next 20 years.
    – Mary Doe
    Jan 13 at 16:10
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    @MaryDoe Yes it's a gamble either way, but you don;t really "lose" if you're wrong - it's just no "optimal" the fact that you're saving that much to begin with means you're "winning". Don't stress over it too much or make it more complicated than it needs to be.
    – D Stanley
    Jan 13 at 16:43

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