Backdoor Roth and Roth conversions - no current Roth or IRA

[G-Man]

+1 Roth never came about until later in my career and many years I earned too much to contribute so whe I retired Roths were 3% of our retirement savings... today, thanks to many years of Roth conversions, Roths are 29% of our total retirement nestegg even though the sixe of the nestegg is about the same.

All of my retirement income will be taxable. I'm curious if I can do roth conversions in retirement to reduce my taxable income? Any good articles to read?

 

[Gumby]

All of my retirement income will be taxable. I'm curious if I can do roth conversions in retirement to reduce my taxable income? Any good articles to read?

Do you have a Roth already?

 

[G-Man]

Do you have a Roth already?

No. Do not qualify for one.

 

[TheWizard]

No. Do not qualify for one.

Everybody qualifies for one, but it takes Earned Income to CONTRIBUTE up to $7000 per year.
You can CONVERT whatever amount to want to pay tax on each year as well...

 

[Gumby]

No. Do not qualify for one.

I think you'll need to start one by doing a backdoor Roth before you retire and while you still have earned income. I don't know if you can do a backdoor Roth in a year when you have no earned income (i.e. after you have retired), but there are people far more knowledgeable than me on this topic.

 

[G-Man]

I think you'll need to start one by doing a backdoor Roth before you retire and while you still have earned income. I don't know if you can do a backdoor Roth in a year when you have no earned income (i.e. after you have retired), but there are people far more knowledgeable than me on this topic.

Let me check again to see if I qualify for opening a Roth IRA. I would love to open one before I retire in 2 years.

https://www.schwab.com/ira/roth-ira...If you file taxes as,214,000 for the tax year

I need to educate myself on the "backdoor Roth IRA".
https://www.nerdwallet.com/article/...=A "backdoor Roth IRA" is,IRA and you're done.

If I can open one, I assume this will then open the door for me to do roth conversions on my taxable income during retirement?

 

[G-Man]

Let me check again to see if I qualify for opening a Roth IRA. I would love to open one before I retire in 2 years.

https://www.schwab.com/ira/roth-ira...If you file taxes as,214,000 for the tax year

I need to educate myself on the "backdoor Roth IRA".
https://www.nerdwallet.com/article/...=A "backdoor Roth IRA" is,IRA and you're done.

If I can open one, I assume this will then open the door for me to do roth conversions on my taxable income during retirement?

I need to explore the back door ROTH IRA option.

 

[Gumby]

Let me check again to see if I qualify for opening a Roth IRA. I would love to open one before I retire in 2 years.

https://www.schwab.com/ira/roth-ira...If you file taxes as,214,000 for the tax year

I need to educate myself on the "backdoor Roth IRA".
https://www.nerdwallet.com/article/...=A "backdoor Roth IRA" is,IRA and you're done.

If I can open one, I assume this will then open the door for me to do roth conversions on my taxable income during retirement?

That's what I've been doing - converting to a Roth that I opened prior to retirement (although not backdoor).

 

[G-Man]

That's what I've been doing - converting to a Roth that I opened prior to retirement (although not backdoor).

The only option for me is the "backdoor" route.

Once again, I assume if I have one before retirement, that will open the door for me to do roth conversions in retirement? What are the other benefits?

 

[G-Man]

The only option for me is the "backdoor" route.

Once again, I assume if I have one before retirement, that will open the door for me to do roth conversions in retirement? What are the other benefits?

Like looks you need a non-deductible IRA in order to do the backdoor Roth.

 

[Gumby]

Like looks you need a non-deductible IRA in order to do the backdoor Roth.

You need any non-Roth IRA (deductible or non-deductible) to do a backdoor Roth. If there are any non-deductible contributions in any non-Roth IRA, it establishes a basis (as a percentage of your total IRA assets the Dec 31 of the year prior) for the assets in all your non-Roth IRA's. When you Roth convert, whether to do the backdoor Roth before you retire or just to convert to manage your RMD exposure after you retire, the percentage basis is subtracted from the income generated by the IRA withdrawal that is used to convert to the Roth account.

In other words, your non-Roth IRAs are looked at as a whole when it comes to taxing withdrawals. If you have any IRA with pre-tax contributions in it, you cannot open another IRA with post tax money in it (i.e. - non-deductible) and then convert only from that account and not pay taxes.

 

[G-Man]

Ok. My company started offering a Roth 401K years ago and allow in-plan roth conversions.

Is this a way for me to create a ROTH IRA that will open the door for Roth conversions when I retire?

 

[G-Man]

You don't actually need a funded Roth IRA to be able to do Roth conversions. The day you do your first conversion, you could open a Roth IRA and then perform the conversion. The reason to start a Roth IRA now is to start the 5 year clock.

Ok..Each roth conversion with start it's own Roth IRA 5-Year period.

https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp

Hmm. That complicates things.

 

[G-Man]

These are some good videos on setting up a back-door Roth.

 

[TheWizard]

Ok..Each roth conversion with start it's own Roth IRA 5-Year period.

https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp

Hmm. That complicates things.

Once you're over age 59-1/2, those five-year periods go away...

 

[G-Man]

Once you're over age 59-1/2, those five-year periods go away...

That is great.

If I'm able to setup this "back-door" ROTH IRA today, help me understand what type of Roth conversions that I'm able to execute in retirement (2 more years, age 57). Once again, all of my income during retirement is taxable (401K, pension, SS).

 

[Gumby]

G-Man: It strikes me that people might have more useful advice if they had more data, So let me ask:

What portfolio accounts do you have now? (not how much, just whether you have such an account)

Fully taxable
Roth IRA
Traditional IRA
SEP
Simple
401k
Roth 401k
457
403b

Any pretax money in any IRA?

 

[G-Man]

G-Man: It strikes me that people might have more useful advice if they had more data, So let me ask:

What portfolio accounts do you have now? (not how much, just whether you have such an account)

Fully taxable
Roth IRA
Traditional IRA
SEP
Simple
401k
Roth 401k
457
403b

Any pretax money in any IRA?

Retirement investments for my wife and I are all in 401Ks. No IRAs at all. That's it except for a small HSA saving.

 

[TheWizard]

That is great.

If I'm able to setup this "back-door" ROTH IRA today, help me understand what type of Roth conversions that I'm able to execute in retirement (2 more years, age 57). Once again, all of my income during retirement is taxable (401K, pension, SS).

People take different approaches to this.
What I did was to set up a spreadsheet with my various retirement income streams year by year, from start of retirement through my mid 70s.
This spreadsheet uses projections of what future income might be with inflation.
And the spreadsheet gets updated annually with actual data and improved projections.

My goal was to have a gradually increasing AGI all the way through RMDs, which started this year for me.
So I did modest Roth conversions in previous years to achieve that ramp up and to avoid a big jump in AGI when RMDs started.

I'm single nowadays, so this was fairly simple. It's more complex for MFJ folks for a few reasons...

 

[Gumby]

Retirement investments for my wife and I are all in 401Ks. No IRAs at all. That's it except for a small HSA saving.

I think (but I hope someone who knows for sure will comment) that you cannot rollover from a 401k directly to a Roth IRA without paying tax on the full amount. First, you need to rollover from the 401k to a tIRA, which I believe must wait until you are retired from the employer who sponsors the 401k. Then you can Roth convert a little at a time from the tIRA to a Roth IRA.

Again, I'm not certain that this is true, so you may want to research it.

Edit: This Investopedia article suggests I am correct https://www.investopedia.com/articl...p#:~:text=Key Takeaways,want to pay the taxes.

 

[G-Man]

People take different approaches to this.
What I did was to set up a spreadsheet with my various retirement income streams year by year, from start of retirement through my mid 70s.
This spreadsheet uses projections of what future income might be with inflation.
And the spreadsheet gets updated annually with actual data and improved projections.

My goal was to have a gradually increasing AGI all the way through RMDs, which started this year for me.
So I did modest Roth conversions in previous years to achieve that ramp up and to avoid a big jump in AGI when RMDs started.

I'm single nowadays, so this was fairly simple. It's more complex for MFJ folks for a few reasons...

Willing to share the spreadsheet template?

 

[G-Man]

I think (but I hope someone who knows for sure will comment) that you cannot rollover from a 401k directly to a Roth IRA without paying tax on the full amount. First, you need to rollover from the 401k to a tIRA, which I believe must wait until you are retired from the employer who sponsors the 401k. Then you can Roth convert a little at a time from the tIRA to a Roth IRA.

Again, I'm not certain that this is true, so you may want to research it.

Edit: This Investopedia article suggests I am correct https://www.investopedia.com/articl...p#:~:text=Key Takeaways,want to pay the taxes.

Good article. For me, I will be using the Rule of 55 (withdrawing money from my 401K plan) to bridge the income gap from 57 to 60. After that, I may consider rolling over small chucks to an TIRA then to the Roth IRA. I just need to determine how this will reduce my tax liability in retirement. It may not be worst it.

 

[Gumby]

Good article. For me, I will be using the Rule of 55 (withdrawing money from my 401K plan) to bridge the income gap from 57 to 60. After that, I may consider rolling over small chucks to an TIRA then to the Roth IRA. I just need to determine how this will reduce my tax liability in retirement. It may not be worst it.

I guess it depends on your 401k plan rules as to whether you can rollover less than the full amount to a tIRA (or take smaller amounts under the Rule of 55). Some plans may be all or nothing. You should review your plan documents to make sure you can take a little from your 401k at a time.

PS - you can use 72(t) distributions from a tIRA to tide you over between 57 and 60.

 

[TheWizard]

Willing to share the spreadsheet template?

Perhaps when I get home in a few.

In my case, I had following streams:
Pension/annuity (semi variable) from start of retirement
Divorced spouse SS from age 66-70
Own SS from age 70 on
RMDs from age 72 on
Withdrawals in lieu of SS prior to age 70

Additionally, I had to keep an eye on IRMAA tier thresholds, which increase with inflation now.
The Finance Buff has best projections on, for example, 2024 IRMAA tiers based on 2022 MAGI...

 

[G-Man]

I think (but I hope someone who knows for sure will comment) that you cannot rollover from a 401k directly to a Roth IRA without paying tax on the full amount. First, you need to rollover from the 401k to a tIRA, which I believe must wait until you are retired from the employer who sponsors the 401k. Then you can Roth convert a little at a time from the tIRA to a Roth IRA.

Again, I'm not certain that this is true, so you may want to research it.

Edit: This Investopedia article suggests I am correct https://www.investopedia.com/articl...p#:~:text=Key Takeaways,want to pay the taxes.

Is this the statement you are referencing in the article?

" To do a conversion from a traditional 401(k) to a Roth IRA, however, is a two-step process. First, you roll the money over to an IRA, then you convert it to a Roth IRA."