How can we rollover a traditional IRA into a back door Roth IRA?
My husband transferred his 401k to a traditional IRA in Nov 2015. Can he still transfer it to a back door IRA?
Yes. Anyone, regardless of income, is eligible to convert his or her Traditional IRA into a Roth IRA. You can do this quickly and simply with a low-cost ETF portfolio in a managed account at Betterment (after initial setup, add a Roth IRA account then start a rollover).
Important things to note:
- If you would like to complete a conversion for the 2017 tax year, the IRS requires that the conversion completes by December 31, 2017. Please note, if the last day of the year falls on a weekend, the conversion needs to be completed during market hours on the last business day of the year.
- Betterment does not withhold taxes for you, because it reduces the amount of money that can grow tax-free in your Roth IRA.
- Generally, any funds you convert from Traditional to Roth which were previously deducted will be subject to income tax. Since Betterment cannot provide specific tax advice, we recommend you consult a tax advisor and the IRS Publication 590.
Please note that if you live in Michigan, there are special requirements for completing your conversion.
Probably not. While the backdoor Roth IRA conversion is a very good strategy to invest in Roth IRA if you are a high-income earner, it can only work under a strict set of rules.
If the entire balance in your Traditional IRA is tax-deferred, then you can not do a backdoor IRA. You can only do it with after-tax IRA contributions. Even in that case, all conversions are done proportionately to your entire IRA balance. Which can defeat the purpose if your IRA balance is significantly higher than the annual contribution limit.
I think this is one of the smartest and most overlooked strategy! Yes, you can still convert your traditional IRA to a Roth IRA. You want to make sure you have consulted with your tax preparer to hold out enough for the taxes.
A back-door Roth IRA contribution refers to a situation in which your income exceeds the Roth maximum. What you do in that case is to contribute 5500 per year for yourself and 5500 for your spouse (6500 if you are over age 50) into a non-deductible traditional IRA. You then immediately convert the money into a Roth IRA. Since the original contribution was non-deductible, the conversion is non-taxable.
In your situation you are supposed to transfer the 401(k) into two parts: 1) the pre-tax amount into a traditional IRA, and 2) the after-tax amount into a Roth IRA. If this was done incorrectly then it may be too late to change it, but you can ask. Your broker with the traditional IRA may allow the original after-tax amount to be moved into a Roth IRA, but act soon.
At any time you can convert assets from a traditional IRA to a Roth IRA. This is called a Roth conversion. The best plan is to do this in a way which uses up your current federal tax bracket, so if you can have another 60 thousand of income before you move from the 28% into the 33% federal tax bracket then you should convert 60 thousand dollars for that tax year. Always convert the most depressed shares at any given time which you think will rebound the most; you will pay taxes based upon their valuations at the time that they are converted and all future gains in your Roth IRA will be tax-free. If the shares instead decline further then you can recharacterize (i.e., undo) the conversions back into a traditional IRA and then convert them later on at a low price.
Almost anyone who makes an income above the IRS’s threshold can do the back-door IRA, but the question is if you would like to pay the tax upfront. Ideally you want to take your time to gradually convert the rollover IRA to the Roth so that you can stay within your same tax bracket each year.