Non-deductible IRA to Roth IRA conversion
  • I am looking for some advice from fellow members on how to convert a traditional IRA to a Roth IRA.

    I have active investments in my IRA so not sure how the conversion would work in such a scenario.
  • @Amitphagwani - Before you convert to a ROTH and pay taxes, please read this post if not yet already and then talk out your thoughts as to why you want to do it. http://www.financialsamurai.com/2012/03/29/disadvantages-of-the-roth-ira-not-all-is-what-it-seems/

    If you still want to do it, just called up your existing IRA provider and I'm sure they will happily make the change for you.
  • @FinancialSamurai - Sorry, probably should have been more clearer with my question.

    I am trying to convert a Non-deductible IRA to a Roth IRA
    http://www.retirementincomevisions.com/retirement-income-visions/2010/03/two-steps-to-a-nontaxable-ira-for-high-income-individuals.html

    I have some active investments in my non-dedcutable IRA, so do i need to liquidate those or can i just convert with those and pay taxes on the gains ( which are very small, since this was recently done)

    Also, any thoughts on non-dectible IRA to Roth conversion ?
  • @amitphagwani, I've been looking into this as well. I believe people refer to it as a backdoor ira, and here's a few good resources:

    http://whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/
    http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

    I was thinking about starting a new thread on this topic to get the thoughts of @financialsamurai, so I'm glad to see someone already did
  • Sam, you may want to look into these and possibly revisit them in a later post. For people over a certain income threshold that have an employer sponsored 401k, they are excluded from putting money into a traditional, deductible IRA. They are allowed put put $5500 (per the limits of tax year 2013) into a nondeductible IRA, then convert it into a roth IRA. The advantage of doing this is that you can get the tax advantages of a roth IRA while technically being over the income limits (there is currently no income limit to roll over into a roth or contribute to a nondeductible IRA).

    So if you were planning on putting money into a taxable brokerage account and your income is too high to contribute to a deductible IRA, the "backdoor roth" is a good option, one that I have personally undertaken. Now be aware, since you are putting money into a Roth, you will have the restrictions imposed by the IRS, but these are actually very few and not usually bothersome. I'm not going to get into too many specifics, but the main limitation is the you cannot take out EARNINGS penalty free unless you wait five years, however you can take out your original CONTRIBUTION any time. Also, be aware that if you have money in deductible, traditional IRAs and nondeductible IRAs at the time of your roth conversion, you will encounter something called the pro rata rule, basically making some tax due at the time of the conversion (if this situation applies to you, I suggest you do more research to make an informed decision).

    If anyone here does decide a "backdoor roth" is right for them, make sure you fill out IRS form 8606 to let them know you made a nondeductible contribution, otherwise when you convert to a roth, the IRS will assume the money came from a deductible IRA and you would have to pay tax on the same money twice. This is a mistake I made the first time, but I was easily able to rectify the problem by turning in the form. Oh, if anyone is curious, I did my "backdoor roth" with vanguard, they made the process quite simple and the entire setup took less than five minutes.
  • Oh I just wanted to add very quickly, I already max my 401k and my company's ESPP along with various real estate investments. The amount I contribute into the "backdoor roth" is money that would have otherwise gone into a standard, taxable account, thus why not take advantage of not being taxed on earnings?
  • @dr_wario That's where I'm at as well. White Roth isn't ideal, it's better than a taxable account. Thanks for the tip on the 8606 form.

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