I want to start making backdoor contributions, but I have a traditional IRA with $200K. My income is $300K, so converting the $200K to a Roth IRA would mean a huge tax bill. I’m 50 years old and wondering if it’s worth it for 10 years of backdoor contributions. What do you think?
Does your current employer offer a 401k or similar plan that could take a rollover of your IRA? That might solve the problem.
Brett said:
Does your current employer offer a 401k or similar plan that could take a rollover of your IRA? That might solve the problem.
Exactly. Rolling over pre-tax funds to your employer’s plan clears the way for backdoor contributions without the tax hit.
Paying 35% federal tax, plus state taxes, feels like too much at your age. I wouldn’t do it.
Do you expect to have a lot of taxable income in retirement? Converting to Roth now is a huge tax hit. If you have a 401k, you could roll the IRA into it to avoid issues with backdoor contributions.
Fun fact: Roth is the name of the guy who came up with it, not an acronym. Writing it as ROTH is like yelling his name.
You’re close to retirement. I’d just leave it as it is.
Whether a conversion makes sense depends on your future tax situation. Paying over 32% in taxes now might not be worth it. If you’re trying to reduce future tax liabilities, you could limit the conversion to stay within the 24% bracket. Another option is rolling the IRA into a 401k if possible.
If your employer’s 401k allows rollovers, that’s your best bet. Move the $200K there to avoid the tax hit and start backdoor Roth contributions. If not, consider converting in smaller chunks over a few years to spread out the taxes.
You might want to wait until you stop working, so your tax bill will be lower. I converted mine after getting laid off and saved a lot.
Converting $200K will push you into the highest tax bracket, which means a big upfront cost. If you plan to stay in a high tax bracket in retirement, it could still be worth it for the long-term growth. Spreading the conversion over several years might help reduce the impact.
You’re probably in too high of a tax bracket for this to make sense right now. Maybe wait for a market drop or until retirement to convert.
Doesn’t seem worth it when you’re in a 30+% tax bracket.
What’s your main goal? Reducing RMDs? Passing money to heirs tax-free? If you’re mainly focused on building retirement funds, I’d max out your 401k or IRA instead of converting.
Roth money grows tax-free, so converting could pay off long-term. If you don’t convert, you’ll pay taxes on the full balance and earnings later.