7

Regardless of income, is there any reason not to do a back-door Roth if you can afford it? Since you are paying tax on that income used for the contribution either way, it seems that there is only upside--all earnings on that Roth will be tax-free.

Is this correct or am I missing something?

1
  • 2
    Are you talking about backdoor Roth IRA contribution vs. regular Roth IRA contribution? Or putting money in Roth IRA in general vs. in outside taxable accounts?
    – user102008
    Apr 9 '16 at 0:48
7

There are some pitfalls to be aware of, as I recently found. The irs does not distinguish between your different Ira accounts when assessing taxes on conversions. If, in addition to funding a traditional Ira with post-tax dollars, you have traditional ira's that were funded with pre-tax dollars, your conversion to Roth will create a taxable event for the pre-tax traditional accounts. An often-cited example would be if you had an employer-sponsored retirement plan (401k for example) that was funded on a pre-tax basis, that you rolled over to a traditional Ira after you left that employer. If this applies to you, I recommend further reading on the pro-rata rule. If you don't have any pre-tax traditional iras, I am not aware of any issues with the backdoor Roth approach. For more info -- https://www.kitces.com/blog/the-impact-of-the-ira-aggregation-rule-on-after-tax-distributions-roth-conversions-60-day-rollovers-rmds-and-72t-payments/.

3
  • Ugh, yeah. I have other pre-tax IRAs that make this less than a perfect (i.e. tax-free) conversion. Apr 12 '16 at 14:10
  • 1
    Not sure why you got a downvote. I actually went through the process of opening an IRA (plus one for my wife) and had a technical problem. When I called the broker to correct it, the rep stopped me and explained the caveat of having ANY pre-tax IRAs from ANY year with ANY broker. I thought she was crazy (and wrong), but then did my own research. Situation 3 in this article explains it: investopedia.com/ask/answers/042214/…. I am now doing a return of funds on those two IRAs. Apr 13 '16 at 14:00
  • There are some who worry that the IRS will retroactively deem backdoor Roth's as constructively a direct contribution via the "step transaction doctrine." Kitces also wrote about that: kitces.com/blog/…
    – stannius
    Apr 14 '16 at 17:11
5

Assuming your IRA contributions are non-deductible and you have no deductible portion - yes, you're right.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.