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I am in need of some advice regarding IRA's, IRS income limits, IRA conversions, etc. Here's the points pertinent to my situation:

  • My wife and I got married this year and will be filing 2012 tax returns jointly.
  • I'm in my early 30's she's in her mid 20's.
  • We will make more than the limit to be eligible for Roth IRA contributions (and obviously Traditional IRA deductions)
  • Not really thinking about the limit (I've maxed my roth since 2008 back in my single days) I've got over $4000 out of $5000 of this years contributions already sitting in my Roth (weekly automatic investments). This will need to be dealt with before I file.
  • I have a Rollover IRA with ~$25,000 from a 401K with a previous employer.
  • Both my wife and I have current and active 401K's with our respective employers where we take up to the match amount.
  • My wife has no IRA's or any other type of investments besides her 401K.

In my research, I've come across articles describing the so-called backdoor Roth IRA. This seems perfect for my situation since ideally, I'd like to continue contributing to my Roth (and start one for her!) so that we can be better in control of our finances in retirement. The big caveat I've found with this is the pro-rata rule with doing the conversion. That Rollover IRA of mine has never been taxed before, so I won't be able to open a traditional IRA and immediately convert to Roth without paying taxes on ~83% of the $5,000. Not ideal. I checked with my current employer and they do allow roll-ins into my current 401k. This is where I need a sanity check before I potentially make a mess. Here's what I'm planning on doing:

  1. Close out my Rollover IRA account and roll all the funds into my my employer's 401K plan, thereby eliminating pro-rata on my conversions.
  2. Open up a traditional IRA and recharacterize this years errant roth contributions (which I'll have maxed) as non-deductible IRA contributions..
  3. Immediately convert the newly created traditional IRA back into my roth ira.
  4. Open up a traditional IRA for my wife, dump 5k into it, convert to a roth.

My main sticking points are steps 2 & 3. Seems like a lot bouncing around to get the money where it needs to be.

Overall, I guess this is my best case scenario. My wife and I can effectively have 10K/yr put into Roths to grow and enjoy tax-free in our golden years. Does my plan raise any obvious flags? Are there any potentially better options I've not thought of, given my particular set of cirumstances? I plan on having a tax pro do my taxes this year since we also bought a house, etc. I assume one worth their salt would understand what I'll have done here. Please feel free to offer any and all advice regarding my situation. Thanks!

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    This is really something you should be discussing with a licensed professional.
    – littleadv
    Oct 29, 2012 at 1:45
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    have you considered a solo 401k or solo 401k roth? any possible business interest you or spouse may have whether unincorporated or not for nearly anything will make you eligible for that plan, up to $100,000 can be contributed to them yearly for a married couple. I know many brokers that do not have "administrative fees" for these kind of accounts too.
    – CQM
    Oct 29, 2012 at 2:05
  • @CQM: Aren't solo 401(k) contributions limited by the earnings you've paid self-employment tax on during that year? (As well as only allowing a small fraction of the taxable amount to be treated as employer contributions which bypass the $19000/person/year limit on elective deferrals) Of course it is also important to keep track of the fact that contributions in the W-2 employer's plan reduce the limits allowed in the solo.
    – Ben Voigt
    Feb 10, 2019 at 2:15

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2-3 is what it takes to get this completed, yes, it's paperwork, but let me give you an example - We have $100K in non deducted IRA money. By getting the pretax deposits out of the IRAs we are good to convert the $100K tax free. 20 years of growth (even at 7%) will grow this to $400K. That $300K growth would be taxed if it weren't for the paperwork. Even if this took a week of sitting with papers, it saves us $75K. It's well worth the hour or so of filling out forms. By the way, I'm 50. You have 40 years or more to let the benefit compound for you and your bride. So long as the 401(k) fees aren't bad, this is a great idea. If they are higher than you like, as CQM suggests, a Solo 401(k) can be the trick.

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