Can you share your "backdoor" observations/experiences? Particularly I'm interested in how much do you covert. details and tax implication?
Thx
Sure. In the mid 2000's I funded some non-deductible IRA's for my wife and I. I shut it down pretty quick since I had a lot of "setting up house" expenses, so I focused on saving with the 401(k) for a while. I did it anticipation of the 100K income limit going away in 2010 (I am a tax guy). I also had a rollover IRA from my former employer.
In 2010 my wife and I had IRA's with a FMV of 80K, 6K of basis from the nondeductible contributions. I converted all 80K in 2010, and paid the taxes for it on my 2010 return (instead of electing to pay in 2011 and 2012). At the time I was worried about the bush rates expiring in 11/12, and about my income trajectory. I actually bumped my 2010 withholding a bit, then relied on withholding safe harbors so that I funded the tax due half in 2010 and half in 2011 (my annual bonus comes pre-4/15). Cash taxes on the 74K (80-6) was taxed at 34% via AMT. All Fed tax, no PA state tax due to their rules. So ballpark 25K, that I paid with cash on hand, not withdrawing any money and paying a penalty. In effect I viewed this as another form of contributing to my retirement. After the conversion I had the 80K of roth assets, plus prior roth assets of 55K. The market did well that year and by the end of the year my Roth IRA's were worth 153K. 2010 was also the year my employer offered Roth 401(k) contributions, so I put 16.5K in there too.
2011 I didn't backdoor since I was still gathering the cash to pay my conversion taxes, but I did contribute another 16.5 to my Roth 401(k).
2012 I didn't contribute during the year, but in early 2013 I funded 21K (5000 x2 + 5500 x2) to non-deductible IRA's. A week or so later I instructed Fidelity to convert the balances to my Roth accounts. I will have to record this in my 2013 tax return, but it will basically be a conversion of 21K, with basis of 21K. No taxes.
The key to the backdoor if you haven't read up on it is that you cannot have pre-tax IRA's if you want a tax free conversion. If I hadn't cleared my balances in 2010, I would have to allocate basis across the total IRA balance. A common work around is to roll the pre-tax money back to a 401(k) if your employer's plan will take it, or a solo 401(k).
After these conversions and Roth 401(k) contributions my wife and I are sitting on about $300K in our roth IRAs and my Roth 401(k). I have about 250K as pre-tax 401(k) contributions or matches, and in my net worth calc I estimate future taxes on that balance at 30% and assume I have about $75K in future taxes related to that balance. As I said previously, if I FIRE, I'll expect to be able to selectively convert portions of that at a lower rate.
EDIT - I see others have covered my points more succinctly. Its worth highlighting that when you look at IRA's to pool, remember the I is for Individual. If a husband has 40K in a pre-tax IRA and the wife has none, even if they file joint returns they can put 5,500 into her IRA, convert it, no tax, no need to spread the basis across the 40K in his IRA.