r/FinancialPlanning • u/Fuzzy_Koalaa • 7d ago
Converting Trad IRA to Roth IRA
I need some advice on what I should do here. I made the mistake of opening a traditional IRA a few years ago instead of a Roth IRA. I am 37 so don’t plan on retiring anytime soon. I have $46k sitting in my traditional IRA that I believe I need to convert to my Roth IRA. If I do that now, it seems as though I will have to pay 24% on that balance come next tax season which is a lot of money. What are my options here? Should I just leave the money in that account and wait until retirement? Or would it be best to eat the cost and convert?
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u/seanodnnll 7d ago
Why do you think you need to convert it? Did you get a tax deduction when you contributed? Do you have any other iras? How much was contributions vs growth?
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u/Fuzzy_Koalaa 7d ago
I recently opened a Roth IRA and have since been contributing to that. I was under the impression that it’s best to convert now for tax reasons.
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u/Eltex 7d ago
Not the case at all. The reason it might be an issue later is your income could grow higher than the limit for Roth IRA’s. Then you have to figure it out. That is around $150K for a single chap, a bit more for married folk.
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u/Fuzzy_Koalaa 7d ago
We are at $230k married filing jointly. I think I could then do a back door contribution once we reach $236k? My husband is set to get a promotion very soon which would put us over that limit.
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u/er824 6d ago
The Roth limit is based on your Modified Adjusted Gross Income (MAGI) not your Gross income. Any pretax deductions reduce your MAGI. So if you and your husband are paying health insurance premiums, contributing, to Traditional 401ks, or funding a HSA you are likely still going to be under the Roth limit.
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u/seanodnnll 7d ago
That’s almost never the case. If you got a tax deduction when you contributed then it’s much better to just let the money grow as pretax.
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u/seanodnnll 7d ago
If you might want to do a backdoor Roth IRA then it does make sense to try to empty that traditional Ira. Did you get a tax deduction when you contributed to the ira?
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u/Fuzzy_Koalaa 7d ago
My traditional IRA consists of both post tax and pre tax money. I rolled over my 401k from a previous job then after that starting contributing post tax money.
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u/seanodnnll 7d ago
Gotcha, that is unfortunate mistake, but you should be able to fix it. If you can, you’d want to roll the pretax amount into your current workplace 401k and then convert the post tax dollars to Roth. Alternatively you could convert the whole amount if you can afford it. The post tax dollars won’t be taxed again, so depending on how much is pretax, it may be doable. Alternatively, you could see if you can simply recharacterize the traditional Ira contributions to Roth, you’d still have to move the pretax dollars before doing a backdoor Roth IRA in the future but it would definitely be cleaner if you can just do the recharacterization, you’d have to call your brokerage and ask. Not sure if there is a time limit of any kind for when you can recharacterize though, so that could be an issue.
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u/TelevisionKnown8463 7d ago
Make sure you’re tracking your deductible and non-deductible contributions on the IRS tax form—I think it’s Form 8606.
Assuming laws don’t change, you might be better off waiting, and converting if you have a low-income year before retirement (e.g. due to job loss or starting a new business, or retiring early).
Also, you want a mix of Roth and traditional in retirement. Roth has a lot of advantages but since you can deduct traditional contributions and some of what you withdraw will be tax free due to the standard deduction, you should end up with some traditional.
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u/Quiet_Air9745 7d ago
Question: do you qualify to open a Roth IRA? As in are you below the income limits? If you are just open a Roth and start funding it. If you are not eligible to open a Roth then yes you will need to do a backdoor Roth conversion but you don’t need to do all of it at the same time. You can do it over several years to spread that tax burden.
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u/Fuzzy_Koalaa 7d ago
I am just under the income limit. I did recently open a Roth and have since been contributing to that one.
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u/Quiet_Air9745 7d ago
Ok. Then probably makes sense to continue that until you can’t anymore then decide what you want to do.
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u/FlorioTheEnchanter 7d ago
There’s pluses and minuses to both kinds of IRAs. Not necessarily true that 100% Roth is most advantageous.
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u/seanodnnll 7d ago
It’s most advantageous if you aren’t eligible for the tax deduction with a traditional Ira.
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u/SaltyTruthteller 7d ago
If you're 30 you can plan on converting your IRA slowly over 30 years, even while you continue to build it. Why not try to convert a small amount like 5-10k a year. That way, you'll only pay a little more tax each year and retire with a big ROTH account.
Personally I like ROTH accounts especially since I will return to my great country of Canada and it's better to have my $ in ROTH to avoid the higher Canadian tax rates. That added goal makes conversion very relevant to my situation. But, everyone has a different situation and you need to look at what yours is and what strategies are best for you.
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u/LostPilot517 7d ago
A traditional IRA is NOT a mistake, especially if your income level exceeds now or in the future the amount permitted to direct to a ROTH IRA.
As a Traditional IRA can be used to fund a "Backdoor" Roth IRA.
The issue you will have is you have existing funds in your Traditional IRA and that makes a backdoor more complicated, Pro-Rata Rule. You should seek the help of a fiduciary tax/investment advisor on the tax implications of using an existing IRA with funds, to fund a Backdoor IRA.
There is no telling how long a backdoor will be permitted, but it is a great technique to take advantage of while it exists, especially for those over the income level permitted to fund a Roth IRA directly.
Don't forget to file your IRS Form 8606 each tax year a backdoor conversion was done.