Hi! I know this topic comes up periodically, but I wanted help to calculate what my wife and I would owe on a backdoor roth conversion before we pulled the trigger. Our situation is only slightly different but I cannot find an answer to this situation online.
Situation
- We do not qualify to deduct traditional IRA contributions from our earned income.
- We have ~200k in work sponsored 401k plans. It is 100% pre-tax in that we deducted all of our 401k contributions from our income when filing taxes each year.
- We have 24k in two traditional IRAs. We opened them in mid-March 2020 and made a one-time 6k contributions to each. With our incredible timing, they have now doubled. We have not contributed any more money to these (or any) IRAs.
Because our income was too high last year, we did not qualify to deduct the 12k contributions from our income while filing taxes, so we already paid taxes on the contribution.. I am kicking myself a little for not rolling this over sooner but I did not know the full implications.
Our Intent
We want to convert the 24k of traditional IRAs into a Roth IRA. Our reasons are:
- We have already paid taxes on the contribution that we made and would like to see tax-free growth going forward.
- We don't want our contributions to have a 10% early withdrawal fee should we need the contribution amount earlier than retirement age.
- We want a mixture of pre-tax and post-tax accounts since we do not know what our income and tax rates will be in the future.
So, our plan this year is to add another 12k to the 24k already in the traditional IRAs, and immediately roll over the total 36k into a Roth IRA.
Question
- Per pro rata rule, how much would we owe on the conversion? The confusing point for me is that we did not deduct the original 12k of traditional IRA contributions from our taxes in 2020. I feel like we'd be paying taxes twice (last year's income tax PLUS traditional->roth conversion tax) on the same 12k if it didn't factor in here.
- Do we have to pay taxes on the conversion immediately (i.e. 'now' and not next year tax season)?
- Are there any other options or better approaches available to get this money into a tax advantaged account?
Thanks!
Submitted June 19, 2021 at 07:50AM by cool_its_patties https://ift.tt/35DPeaQ
