Rollover IRA/back door Roth quandary

[coalcracker]

I would like to be able to start contributing via the back door Roth IRA route, but I have approximately $40,000 in a rollover (traditional) IRA from a previous employer. From my understanding the IRS somehow looks at your entire IRA holdings when you convert a non-deductible traditional IRA to a Roth, and it would have unfavorable tax implications that would make it not worth doing?

I cannot place my rollover IRA into my current 401k because it is an individual 401k and not permitted per the folks at Vanguard.

So, what do I do? Convert the $40,000 rollover to a Roth and eat the taxes, then I should be able to use the back door Roth IRA route without additional tax implications? Or scrap the back door Roth IRA idea for the time being?

I should mention I am in the highest marginal tax bracket.

[justplainbll]

If you have deductible as well as non-deductible IRA contributions the ROTH conversion will require you to pay income tax on the proportion of the conversion that constitutes deductible IRA contributions. For example if 75% of your total IRA contributions were non-deductible you would have to pay income tax on 25% of the amount converted to a ROTH.

[pb4uski]

If you plan to do much more than $40k in contributions to the Roth, even if over a number of years, then the benefit of tax free earnings in the Roth may exceed the up-front tax costs. For example, let's say you are 10 years from retiring and plan to contribute $300k into the Roth over that 10 years - then the benefit of the tax free income may exceed the $16k tax cost.

If it is just the $40k, then I would hold, particularly of you expect to be in a lower tax bracket in retirement.

[Animorph]

Any Roth conversions you do now will incur your current marginal tax rate for the entire conversion amount. That's about worst case for a TIRA withdrawal.

If you RE before SS and pensions kick in and you have enough funds in taxable accounts to live for a couple of years and pay conversion taxes, then wait until then to do your Roth conversions. You convert an amount that takes you just up to a lower tax bracket, minimizing the taxes on the TIRA funds. If you can do that for several years that's great.

Otherwise it may just be best to forget the Roth unless you think your retirement taxes will be higher than your current marginal taxes.

[Alan]

Quote:

Originally Posted by Animorph Any Roth conversions you do now will incur your current marginal tax rate for the entire conversion amount. That's about worst case for a TIRA withdrawal. If you RE before SS and pensions kick in and you have enough funds in taxable accounts to live for a couple of years and pay conversion taxes, then wait until then to do your Roth conversions. You convert an amount that takes you just up to a lower tax bracket, minimizing the taxes on the TIRA funds. If you can do that for several years that's great. Otherwise it may just be best to forget the Roth unless you think your retirement taxes will be higher than your current marginal taxes.

+1

[REattempt]

Quote:

Originally Posted by coalcracker I cannot place my rollover IRA into my current 401k because it is an individual 401k and not permitted per the folks at Vanguard. So, what do I do? Convert the $40,000 rollover to a Roth and eat the taxes, then I should be able to use the back door Roth IRA route without additional tax implications? Or scrap the back door Roth IRA idea for the time being? I should mention I am in the highest marginal tax bracket.

Change your solo [individual] 401k provider from Vanguard to one that accepts incoming IRA money.

I believe Schwab and Fidelity both have free solo 401Ks that accept incoming IRA rollovers.

Once you rollover the balance, assuming you have no other IRA money, you can backdoor all you want.