As you can see, it is important to pay attention to the pro-rata rule whenever you are considering a backdoor Roth IRA and have other existing IRA … The purpose of this rule is to prevent people from gaming the system by using nondeductible IRAs to move money into a Roth when they "should" first convert the pre-tax IRAs … The IRS Form 8606 says Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, … … That’s the pro-rata rule. You attempt the backdoor Roth IRA and convert your new $6,000 non-deductible IRA contribution to Roth IRA. That means that your total balance across all IRAs … But, if the Roth 401(k) is not an option, or you just want to put away even more money to grow tax-free, and you are making too much money for the Roth IRA, enter the “backdoor Roth IRA.” … IRA aggregation rules & pro-rata distributions of non-deductible IRA contributions: Simply put, if you have an IRA (or multiple IRAs) with deductible (pre-tax) and non-deductible (after-tax) contributions, then you have to aggregate & pay taxes on a pro-rata basis for any Roth … Only conversions from IRAs (including SEP and SIMPLEs as mentioned by @peds) to Roth IRAs are taxed under the pro-rata rule. This is the back door Roth IRA conversion. A mega backdoor Roth IRA is a strategy that allows people who have already maxed out their individual 401(k), IRA, and other tax-advantaged account contributions for the year to put in more money into a Roth IRA… A mega backdoor Roth takes this even further. Investing the Traditional IRA in Long-Term Assets and Letting It Sit. Even if you and your spouse file your taxes as “married, filing joint”, the pro-rata rule applies to you separately. Despite your IRA, your spouse can still do the backdoor IRA (or vice versa). But what if you have pre-tax money in your traditional IRA? SIMPLE IRAs and SEP IRAs are included in the calculation for the pro-rata rule, but not 401(k) plans unless you make a distribution or Roth conversion from a 401(k) in the same year. This is the Pro-Rata rule — a method of determining what money is taxable if you hold both pre- and after-tax money across ALL of your IRAs. If you convert your traditional IRA into a Roth IRA you will be taxed on any deductible IRAs you have when you file your taxes at the end of the year. The problem is that you already have a $60,000 IRA from an old 401(k) from a previous employer.As a result, the Pro Rata Rule requires you to include that as part of the calculation fo… However, this only means that some of the conversion may be taxable, so … However, the IRS released guidance that specifically addressed both backdoor Roth IRA conversions, and the so-called Mega Backdoor Roth IRA… So, for instance, my 19-year-old earned $4,000 at her jobs in 2020, so my wife and I will put this amount into her Roth … However: 1. Contributing directly to a Roth IRA is restricted for higher-income individuals; once a married couple has an AGI in excess of $193,000 (or $131,000 for an individual), the maximum … The limit is the lesser of $6,000 and their taxable comp for the year. The requirement to be able to apply all of the basis in nondeductible traditional IRA contributions to the Roth conversion is that the balance in traditional IRAs must be zero at the end of the year in which the Roth conversion … If you have an IRA with pre-tax dollars, the pro-rata rule makes it prohibitive to make backdoor Roth IRA contributions. Thanks to the pro-rata rule, you’ll need to include both balances when performing the conversion. But, if the Roth 401(k) is not an option, or you just want to put away even more money to grow tax-free, and you are making too much money for the Roth IRA, enter the “backdoor Roth IRA.” … After planning to make a $6,000 Roth IRA contribution, you discover that your modified adjusted gross income is beyond the limit and you are not eligible. All owned IRAs, including SEP and SIMPLE IRAs, are included in the pro rata calculation. Convert the non-deductible traditional IRA to a Roth IRA by … Therefore, the simplest method involves having one Traditional IRA and one Roth IRA… Note that a … We would like to move them to Roth accounts. However, you have to pay attention to the pro-rata rules. Robert Brokamp: Backdoor Roths can be a great way for people who earn too much to contribute to the Roth IRA, to get money into a Roth IRA. So in terms of pro-rata taxes (due to the pre-tax money in the inherited IRA), I have been reading that the inherited IRA … Convert the Traditional IRA to a Roth IRA. Even though your modified adjusted gross income is too high to contribute to a Roth IRA directly, you can still get in through the backdoor. When you convert a traditional IRA to a Roth IRA, it’s deemed to have come from all your traditional, SEP, and SIMPLE IRAs … We are aware of the Pro-Rata rule and that the amount in our Traditional IRA accounts need to be $0 by the end of the year in order to avoid the Pro-Rata rule. The IRS uses a pro-rata rule which essentially says you can’t cherry-pick the after-tax money out of your IRA to convert, but rather a portion of all pre-tax monies will be assumed to have been converted, triggering a tax consequence on the way over. So you know how to do the Backdoor Roth IRA conversion. … With a Roth IRA, you get no up-front tax deduction, as you do with a traditional IRA, 401(k) retirement plan or other tax-deferred account. 2. How to Create a Backdoor Roth IRA In 2021, single taxpayers with a modified adjusted gross income (MAGI) of $125,000 face lower Roth IRA contribution limits as their income increases. The barrier to the backdoor Roth—in many folks’ minds—is the pro rata rule. For example, Emmitt has a $100,000 IRA made with pre-tax dollars from many years ago when his income was lower. 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