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I am in USA and have a Traditional IRA account. It has around $300K. I cannot contribute to Roth IRA due to my income limits. This is my personal traditional IRA. This means after I get a check from the employer, I contribute to this account. Each year I file 8606.

My question is that would it make sense to convert my traditional IRA to Roth so when I retire I don't have to pay taxes on the gains. My main hurdle is that the amount I will convert will be added to my already high income and may even push me into different bracket, ending up paying more tax.

OR should I keep the money in traditional IRA and when I retire, I can take the money out and pay taxes on it?

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    The filing of Form 8606 each year suggests that your income is high enough that you are making nondeductible contributions to your Traditional IRA. Is this correct? Also, all IRAs are personal; that I in IRA means individual and there is no such thing as a joint IRA.
    – Dilip Sarwate
    Commented Aug 18 at 13:31
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    Can you roll it over into 401K? The problem with the IRA to Roth conversions is a prorata rule, so you can't just convert the basis of the non-deductible contribution. Generally, you'd want to keep your traditional IRA at $0 balance if you want to do tax-efficient Roth conversions.
    – littleadv
    Commented Aug 18 at 19:27
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    It means that essentially any conversion you'd make would be taxable almost fully (except the 1/30th per the deductible ratio), so for all intents and purposes your conversions would be fully taxabale. You'll need to decide when to take the tax hit, and it's hard to advise you on this without knowing all the details of your financial situation and future outlook. I'm voting to close.
    – littleadv
    Commented Aug 18 at 19:37
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    @johndoe: The benefit is that it can separate the pre-tax and post-tax amounts, because only pre-tax amounts can be rolled over into 401k, leaving post-tax amounts in the Traditional IRA, which can be converted to Roth IRA without tax.
    – user102008
    Commented Aug 19 at 1:44
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    @johndoe one doesn't preclude the other
    – littleadv
    Commented Aug 20 at 3:37

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Since your comments state you have a Roth 401(k), I'm assuming you also have a pre-tax 401(k), and it accepts rollovers.

What you want to do is roll your $300k Rollover IRA and $39,500 from your Traditional IRA into your pre-tax 401(k). Most of the time when you take money from a non-Roth IRA it is prorated according to the deductible and non-deductible amounts across all your non-Roth IRAs. However, the IRS has an exception for this particular case. Once these rollovers are done, you should be left with nothing in your Rollover IRA and $10,500 in your Traditional IRA. The latter you can convert to your Roth IRA. This should be non-taxable because you have the same amount of non-deductible basis as per your 2023 Form 8606.

Going forward, as long as you continue to have nothing in your non-Roth IRAs, you should be free to do the backdoor Roth every year, where you make a non-deductible contribution to your Traditional IRA, and then immediately convert it to Roth.

If your 401(k) doesn't accept rollovers, or you don't want to move that much money into it because it has high fees or poor investment choices, then you are basically stuck. Doing conversions would be mostly taxable, which probably doesn't make sense until you're in a lower tax bracket. Make sure you keep good records of your non-deductible basis, and start doing conversions after you retire. Also stop doing non-deductible Traditional IRA contributions because in general, they aren't worth the trouble unless you plan to convert them immediately.

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Roth Conversion is a great thing to do in "gap years" or soon after you retire.

The math whizzes will tell you it's exactly the same to stay in the IRA or switch to the Roth, except for the lousy tax bracket, so they want to make that decision based on the tax bracket the expect to be in. They're not wrong, but they haven't spent too much time volunteering in skilled nursing facilities.

What actually happens is you get forced to do massive distributions from that IRA to cover medical bills. Non-covered work, donut holes, aides, assisted living facilities, or SNFs. You wind up in the highest tax brackets of your entire life if you didn't Rothify.

If you don't have any traditional IRAs, Roth backdoors are easy. You contribute $x to a NDIRA and place it in a cash investment, then the very next day convert to Roth. You pay income tax on the 3 cents of interest which has accrued. "That was easy".

However when you already have amounts in an IRA, your conversion takes your entire portfolio in proportion. You must pay tax on the portion which is appreciation.

  • Say the IRA is worth $291,000 but $91,000 of that was NDIRA contribs made in past years.
  • And you do a NDIRA contribution of $9,000 more and convert $9,000. Now it's worth $300,000 with $100,000 being non-deductible contribs (a 2:1 ratio).
  • When you convert $9,000 to Roth, you are converting $3000 of NDIRA contribs (not taxable) and $6000 of gains, and you pay tax on the $6000 gains.
  • This reduces your NDIRA basis in the account to $97,000, and you have to keep track of that and use it next year. Ugh.

So, the Roth backdoor kinda falls apart (or at least, is a royal PITA) if you already have a large Trad IRA.

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  • Much of what you spend on long term care may be tax deductible- if you're self insuring, this is a reason to consider keeping some tax deferred funds.
    – Brian Borchers
    Commented Aug 27 at 3:07

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