1. Contribute money to an IRA, and then roll over the money to a Roth IRA. For this strategy to work, you should contribute to a traditional IRA with no balance. If there’s a balance in the IRA, there could be a taxable event when you convert. Once you contribute to the account and wait for any required holding period, you’ll then convert the account to a Roth IRA. Any money earned due to market performance before the conversion takes place is subject to taxes. The contribution is considered nondeductible once you fill out IRS Form 8606 and complete your tax return. Note that there’s no tax benefit for the year you establish a backdoor Roth IRA.
2. If your 401(k) plan allows, you may be able to do a mega backdoor Roth conversion. Some 401(k) plans permit automatic Roth conversions, which means you can make after-tax contributions and have them automatically convert to Roth within their accounts. Check with your plan to see if this option is available to you.
I have 130k in a traditional IRA that I rolled out of the 401k from my first job. I missed the boat on converting that when I was in a lower tax bracket. I assume at this point my best option is to do that in a year early in my retirement when I can keep my taxable income low and live off other taxable accounts?
I’m a bit confused how you are “living off other taxable accounts” while keeping your taxable income low. If you have other Roth balances you could do it while living off of those. Or just live heavily off of cash savings, not investments.
However, I believe your general idea can be ideal, situationally. If you can stay at the 12% bracket, reclassify as much as you can fit into 12%.
The savings component would not be taxable, only any gains that I have to recognize along with the dividend income.
But really, the question is if I can recover ~25k in taxes that I would have to pay now if that enables me to put in the 7-8k a year into a roth (rather than a taxable account). It seems like it would be difficult to justify, especially with future tax policy only likely to make the outcome less favorable.
on #1, i started this last year. opened a new traditional IRA. funded it. investment choice was none.
3 days later rolled it into a roth. fortunately had 0.00 investment gain so the amount i deposited converted. note to self in future to leave about $10 of cushion just in case (bc I don’t want any tax headaches).
no. trad IRA stays open w account balance =0 after the conversion. no fakes.
i mean i would leave the initial deposit into the trad IRA $10 light. So if i can put $7000 into the trad IRA, I’ll put $6990 into it instead. I will def convert the whole balance to roth. but that way in case the account gained some investment/interest gain in 3 days (or whatever) I’m still below the $7K amount. (it is possible I’m wrong on that. for $10 i don’t care to confirm. i just want to jump through the hoops and get no more than $7000 into the roth)
Eh I still stick the max $7k into my trad IRA since that is the max
There is no max on trad to Roth IRA conversions so there is no penalty on the $10 or whatever amount of interest income you accrue in between the time you transfer the money into your trad IRA and when you convert it Roth dollars. You just gotta pay tax on the interest income which winds up being like an extra $3 on the $10 come tax time
Leaving $10 behind is more likely to create a tax issue than not moving it all. Any gains you get in 3 days would be pennies, and the tax implication would be less than pennies. Anything under 50 cents rounds down to $0 on tax forms (at least that’s what I do). By keeping a $10 balance you’re more likely to earn some $ over the years that eventually adds up to a tax implication. IMO I would still ignore that but by the book you might have some forms to fill out to give the gov an extra buck down the line.
for 2025:
max out HSA
max out 401k
backdoor roth ira $7k
do all the above x2 (married)
contribute to 529 x2 like $1-$2k or so. I don’t have a long term plan for 529’s yet.
don’t get fired
get raise
increase dividend earnings in taxable accounts by contributing everything i dont spend.
don’t spend too much
I don’t plan too much. As long as I get the logistics right on the first 3 im ok.
i don’t leave a balance behind. you’ve convinced me - 7K (or whatever is max) and deal with any tiny gains after I convert 100% of the new day balance to roth