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Subject:  Re: Backdoor Roth or convert spouse's trad I Date:  3/20/2019  1:31 PM
Author:  aj485 Number:  92531 of 102390

My wife, on the other hand, has a large balance in a traditional IRA (from a former 401k rollover), so she's effectively blocked by the pro rate rule.

Does your wife's current 401(k) allow rollovers into the 401(k)? If so, your wife could roll her entire IRA into her current 401(k) and then she wouldn't have any issues with the pro-rata rule. Or she could just roll some of the IRA into the 401(k), with the intention to do conversions on what's left in the IRA, so that the pro-rata rule wouldn't be as impactful.

We have some room in the 24% bracket still. Is it better for me to make backdoor Roth contributions, or should I consider using that money to pay for a Roth conversion instead?

Because you have no traditional IRAs, and you've already paid taxes on the money that you contributed to the Traditional IRA in order to do the back door Roth, you aren't generating any additional income to be taxed by doing a back door conversion. If you, instead, convert Traditional funds to a Roth, you will be adding additional income to be taxed. Because of that, doing a back door Roth conversion that's not impacted by the pro rata rule is always favorable compared to conversions where you do generate additional income.

The major difference as I see it is that conversions get me to a larger Roth balance more quickly. But I'd just be paying taxes today on future retirement funds, not exactly the same as adding to them. Or does it make sense to do the backdoor Roth first, and then only convert what I can afford beyond that? Or is it best to just delay paying the tax man as long as possible?

Well, it probably makes sense to do the back door Roth either way, since you already have paid the taxes on that income, and you have the chance to shelter it from future taxes. The question is - what do you want your strategy on her Traditional account to be? Understanding that when the money was initially put into the accounts it probably saved you 28% (or more), are you willing to take the 24% tax hit now, because you think it's likely to be taxed at a higher rate later? It's still a tax savings of at least 4% compared to what it saved you. But if you end up in the 15% bracket (based on current law, the rates will return to prior rates in 2026) in 15 years, you will have paid 9% more in taxes than you could have paid then. If you think that there's no chance that you will be in the 15% bracket, but will, instead probably be in at least the 25% bracket, then it probably makes sense to do conversions at 24% if you can afford the taxes.

However, you should be aware, if there's another new tax law passed between now and when you retire, you could be making a mistake. People who did Roth conversions in 2017 and prior probably paid higher rates than they would have if they'd waited until 2018. On the other hand, if a new tax law with higher rates is passed, then you could end up with a huge win.

AJ
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