Hi Reader,
The Backdoor Roth IRA Tax Trap
The Backdoor Roth IRA sounds simple. But there’s a catch: the Pro Rata Rule.
You can’t simply choose to convert only your after tax IRA dollars and avoid taxes on the rest.
Instead, the IRS looks at your Traditional, Rollover, SEP, and SIMPLE IRAs as one combined pool when determining how much of your Roth conversion is taxable.
It doesn’t matter which IRA the money actually comes from.
That means having other pre tax IRA balances can create an unexpected tax bill when using the Backdoor Roth IRA strategy.
Before doing a Backdoor Roth IRA, it’s important to understand what else you already have in your IRAs.
We’ll walk through the calculation details in our next email.
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David N. Waldrop, CFP®
Owner of Bridgeview Capital Advisors, Inc. a Registered Investment Advisor.
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