Backdoor Roth question

[Datsyl]

So as an independent contractor in healthcare I have been maxing out my yearly sep-ira but wanting in 2024 to start a solo 401k, and traditional ira moved into a roth ira for backdoor. Would roll prior sep-ira into solo-401k following the pro-rata rule. But I accidentally contributed into my sep ira the first week of 2024 with 5k. How will this mess up my backdoor Roth and a fix for 2024? Thanks

 

[LdiJ]

So as an independent contractor in healthcare I have been maxing out my yearly sep-ira but wanting in 2024 to start a solo 401k, and traditional ira moved into a roth ira for backdoor. Would roll prior sep-ira into solo-401k following the pro-rata rule. But I accidentally contributed into my sep ira the first week of 2024 with 5k. How will this mess up my backdoor Roth and a fix for 2024? Thanks

I have read that several times and I am not sure that I understand what you are asking at all. Could you restate your question without using any shorthand?

 

[adjusterjack]

I have had regular Roths and conversion Roths but never heard of a "backdoor" roth.

 

[bcr229]

I think "backdoor" means the same as a conversion. https://www.investopedia.com/terms/b/backdoor-roth-ira.asp

 

[cbg]

Backdoor Roth's are a relatively new innovation.

 

[LdiJ]

I have had regular Roths and conversion Roths but never heard of a "backdoor" roth.

A backdoor Roth is when someone has too much income to qualify for a Roth. So, they make a non-deductible contribution to a traditional IRA, and then roll that money over into a Roth via a Roth conversion. I personally cannot imagine a circumstance where contributing to a Roth would be so important/necessary that someone would feel the need to do that, but hey, each to their own. I just didn't understand his question overall due to all the shorthand in his post.

 

[cbg]

L, just for your amusement:

My employer does not offer the backdoor option to our employees for their 403(b). We had considered it and decided against it.

I had a question only last week from a new employee; do we offer that option? I answered that no, we did not.

His response: Understood, but who would I talk to to see if they could authorize one for me?

 

[LdiJ]

L, just for your amusement:

My employer does not offer the backdoor option to our employees for their 403(b). We had considered it and decided against it.

I had a question only last week from a new employee; do we offer that option? I answered that no, we did not.

His response: Understood, but who would I talk to to see if they could authorize one for me?

LOL!

 

[Datsyl]

Thanks for reading- it’s a useful tactic for 1099 physicians to reduce taxable income. Other than HSA, a SEP IRA or solo 401k are easiest options for tax shelter. Since income exceeds limits for ROTH IRA one can do a back door contributing to a traditional IRA then immediately convert to a Roth growing tax free. A solo 401k only option. Due to the pro-rata rule the Backdoor Roth IRA process requires you to either convert or rollover into into a 401k all your traditional IRAs, SEP-IRAs, and SIMPLE IRAs.

 

[LdiJ]

Thanks for reading- it’s a useful tactic for 1099 physicians to reduce taxable income. Other than HSA, a SEP IRA or solo 401k are easiest options for tax shelter. Since income exceeds limits for ROTH IRA one can do a back door contributing to a traditional IRA then immediately convert to a Roth growing tax free. A solo 401k only option. Due to the pro-rata rule the Backdoor Roth IRA process requires you to either convert or rollover into into a 401k all your traditional IRAs, SEP-IRAs, and SIMPLE IRAs.

The SEP IRA or solo 401k shelter income/defer tax. Why do you want a ROTH Account so badly? What is the benefit to you? You are either going to pay tax on the money now or tax on the money later. Since you are self employed getting the tax deferral now is of great benefit to you. Since your marginal tax rate will likely be much smaller in retirement than it is now, I don't see how a ROTH or ROTH conversion (backdoor or not) benefits you in the long or short term.

I hope this isn't a case of "everybody says ROTH's are the best thing so I have to have one", rather than a well thought out plan based on when you will pay the least amount of tax on the money.

 

[bcr229]

There's a push by those who want to do Roth backdoor conversions to get them done in 2024 and 2025. The TCJA expires at the end of next year so tax rates will increase for higher-earners unless Congress acts.

While I'm not a high enough earner for it to be an issue, based on the chatter I've seen in investment forums the high earners want investments in a Roth because it's not subject to RMD's. Many expect to be paying just as much income tax in retirement as they are now. Not a problem I expect to have...

 

[Bali Hai Again]

The SEP IRA or solo 401k shelter income/defer tax. Why do you want a ROTH Account so badly? What is the benefit to you? You are either going to pay tax on the money now or tax on the money later. Since you are self employed getting the tax deferral now is of great benefit to you. Since your marginal tax rate will likely be much smaller in retirement than it is now, I don't see how a ROTH or ROTH conversion (backdoor or not) benefits you in the long or short term.

I hope this isn't a case of "everybody says ROTH's are the best thing so I have to have one", rather than a well thought out plan based on when you will pay the least amount of tax on the money.

Agreed! Uncle Sam will get his money no matter how many layers of complexity one adds to keep from paying him.

 

[davew9128]

The SEP IRA or solo 401k shelter income/defer tax. Why do you want a ROTH Account so badly? What is the benefit to you? You are either going to pay tax on the money now or tax on the money later. Since you are self employed getting the tax deferral now is of great benefit to you. Since your marginal tax rate will likely be much smaller in retirement than it is now, I don't see how a ROTH or ROTH conversion (backdoor or not) benefits you in the long or short term.

I hope this isn't a case of "everybody says ROTH's are the best thing so I have to have one", rather than a well thought out plan based on when you will pay the least amount of tax on the money.

I can tell you that as part of tax planning this year, I recommended Roth 401(k) contributions rather than regular ones because the tax benefit of the deduction for the traditional contribution wasn't worth it where the taxpayers were in the lower tax brackets.

 

[LdiJ]

I can tell you that as part of tax planning this year, I recommended Roth 401(k) contributions rather than regular ones because the tax benefit of the deduction for the traditional contribution wasn't worth it where the taxpayers were in the lower tax brackets.

That is a legitimate opinion although I am not sure I necessarily agree with it across the board. It all depends on how much overall income they will have in retirement and what they have now. Unless their RMD's actually result in them having taxable income the benefit of even a few hundred in tax savings now may be greater than the non taxable benefit of a ROTH later. If they won't pay tax now, either way, then I agree with you.

 

[LdiJ]

There's a push by those who want to do Roth backdoor conversions to get them done in 2024 and 2025. The TCJA expires at the end of next year so tax rates will increase for higher-earners unless Congress acts.

We all know that Congress is going to do something. Things won't just go back to the way that they were. What will happen is completely up in the air but we at least know that much.

While I'm not a high enough earner for it to be an issue, based on the chatter I've seen in investment forums the high earners want investments in a Roth because it's not subject to RMD's. Many expect to be paying just as much income tax in retirement as they are now. Not a problem I expect to have...

Since ROTH distributions are not taxable anyway, it really doesn't matter that RMDs are not required.