Hi Reader,
The Backdoor Roth IRA: Watch Out for the Pro Rata Rule!
You want to contribute $7,500 to a Roth IRA, but your income exceeds the limit.
Instead, you make a $7,500 nondeductible IRA contribution, intending to convert it tax-free to a Roth IRA.
Here's the catch!
You already have $75,000 in a rollover IRA from an old 401(k).
The Pro Rata Rule requires you to consider ALL your non-Roth IRA balances when calculating taxes on the conversion.
Here's the math:
💰 Existing IRA: $75,000
💰 Nondeductible contribution: $7,500
💰 Total IRA balance: $82,500
Tax-free portion: 9.1%
Taxable portion: 90.9%
⚠️ The result? Approximately $6,818 of your $7,500 Roth conversion is taxable!
The takeaway: A backdoor Roth IRA isn't necessarily tax-free. Understanding the Pro Rata Rule before converting can help you avoid an unexpected tax bill.
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David N. Waldrop, CFP®
Owner of Bridgeview Capital Advisors, Inc. a Registered Investment Advisor.
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