Last week in La Jolla, California, the Ed Slott team hosted another incredibly successful 2-day advisor training program. Nearly 200 financial professionals from across the country chose to join us for some intense IRA and retirement plan education. Topics included all things Roth, net unrealized appreciation, naming trusts as IRA beneficiaries, new SECURE 2.0 updates, QCDs, 10% penalty exception rules, creditor/bankruptcy protection rules, and the list goes on.
We hear it all the time. “If your income is too high for a direct Roth IRA contribution, just do a Backdoor Roth. Easy-peasy!”
Not so fast, my friend. A Backdoor Roth IRA transaction is like a musclebound hotel bellhop – it can carry a lot of baggage. However, before we can discuss said baggage…
Question:
Dear Mr. Slott,
I made $40,000 additional non-deductible (after taxes) contributions to my IRA many years ago. I have filed IRS Form 8606 every year informing the IRS of the contributions. I would like to withdraw the $40,000 this year so that when I have to take my RMDs next year, the reporting to the IRS will be simpler.
I got into some poison ivy and am suffering the consequences. It takes a few days for the welts to appear, but they are in full bloom. While I did take precautions before starting my yardwork (gloves, long sleeve shirt, etc.), in retrospect I could have been more careful. The frustrating part is, there isn’t a whole lot you can do once the swelling appears. Ice, some anti-itch spray, try not to scratch too much, and just methodically work through this incredibly uncomfortable irritation.
Last week the Ed Slott team hosted another highly successful and sold-out 2-day advisor training program at Caesar’s Palace in Las Vegas. Over 250 financial professionals from across the country attended, and we plowed through our 400-page manual. During the two day event we discussed IRA beneficiary rules, trusts as beneficiary, net unrealized appreciation, backdoor Roth IRAs, SECURE 2.0 changes, QCDs, the pro-rata rule, gifting strategies, etc.
Each week the Ed Slott team answers questions from financial advisors across the country. Sometimes we see a pattern in repeating questions, sometimes the questions are relatively basic, and sometimes they are real stumpers. We never know what the next phone call or email will bring. Recently, we’ve fielded a rash of inherited IRA inquiries. Here are a few:
Most IRA distributions will be taxable. However, if you have ever made nondeductible contributions to your IRA or rolled over after-tax funds from your company plan to your IRA, then the rules can get a little bit tricky. You will need to understand the pro-rata rule.
My November 29 Slott Report entry was titled “The Pro-Rata Rule Explained – You are Not Getting Taxed Twice.” I closed that article by stating there are exceptions to the pro-rata rule and ways to clean up an IRA that contains a mix of pre-tax and after-tax dollars (basis). Included here are three exceptions to pro-rata and how IRA owners could potentially “isolate basis” – reduce an IRA to only after-tax dollars, thereby setting the stage for a tax-fee Roth conversion.
SCENARIO: Teddy, age 60, has an existing Traditional IRA with a current balance of $93,000. This is all deductible, pre-tax money. Teddy would like to contribute to a Roth IRA, but his income level exceeds the Roth IRA income threshold. To skirt this problem, Teddy makes a 2021 $7,000 non-deductible contribution to his Traditional IRA with the idea to then covert the $7,000 as a Backdoor Roth.
Hi. My name is John and I have a Roth question. I have read your most recent book but did not find the answer to this question. I have made non-deductible contributions to a traditional IRA for many years, so about half of the account is basis. I have no Roth account (yet). I recently left my job and rolled over my 401(k) into a separate rollover IRA. Will I have to include this rollover IRA along with the traditional IRA as part of the pro-rata rule in order to take advantage of Roth conversions? Hopefully, I did not screw up by removing funds from my prior employer.
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