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Subject:  Re: Backdoor Roth or convert spouse's trad I Date:  3/26/2019  11:20 AM
Author:  jeffbrig Number:  92673 of 102702

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.

It does all roll-ins, but the expense ratios are on the high side - not crazy high, but even a cheap index fund is charging over .6%. Over time, I think the money could do better in the IRA than the 401(k). DW has roughly $350k in this account.

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.
Agreed, and this is why I'll definitely do my backdoor Roth before worrying about DW's traditional IRA.

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.

Historically we've been in the 28/33% range, under prior tax law. Today we do get the benefit of the expanded 24% bracket, but I know that's temporary (unless they change it). Based on the deficit explosions we've seen, I think it's quite likely that tax rates will need to go back up somewhere down the line. Our retirement income should be less than today's income, but will still be in the 24 or 28% range.

Looking forward, we're getting close to the top of the 24% bracket, even after deductions, and I don't think future conversions would EVER make sense at 32%. This seems to make a strong case for rolling the trad IRA into the 401(k) to clear a path to a backdoor Roth.

On the other hand, DW's 401(k) documents do state that they allow in-service withdrawals of post-tax contributions after 3 years of service, potentially giving her the opportunity to do a mega-backdoor Roth in future years. My understanding is that those funds can be rolled directly to a Roth IRA, with no concern for the pro-rata rule?
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