SIMPLE IRA to backdoor Roth IRA conversion question

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xemit
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SIMPLE IRA to backdoor Roth IRA conversion question

Post by xemit »

My wife and I have each had our own "backdoor Roth IRA" for several years.

Her employer recently offered her the chance to participate in their SIMPLE IRA with a 3% employer match (100% vested from day 1); however, I'm inclined to "pass" on this opportunity out of concern Re: getting tripped up by the ProRata Rule and screwing up the Backdoor Roth, even though we hate to give up on "free money".

three questions:
1) can i use her SIMPLE IRA to fund the backdoor Roth every year, provided i zero out her SIMPLE every year to avoid the ProRata Rule?
2) if "yes" to question #1, but her SIMPLE balance is less than $6K each year, can i also use a separate conventional IRA in her name to top off her max annual Roth contribution?
3) if "yes" to questions #1 and 2: how much of a pain is it to do this transfer btw 2 separate fund companies (ie. from Vanguard to Fidelity)?

thanks, in advance, for your advice.
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Duckie
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Re: SIMPLE IRA to backdoor Roth IRA conversion question

Post by Duckie »

xemit wrote: Sat Nov 27, 2021 3:10 pm My wife and I have each had our own "backdoor Roth IRA" for several years.

Her employer recently offered her the chance to participate in their SIMPLE IRA with a 3% employer match (100% vested from day 1); however, I'm inclined to "pass" on this opportunity out of concern Re: getting tripped up by the ProRata Rule and screwing up the Backdoor Roth, even though we hate to give up on "free money".
I recommend she contributes the $14,000 max to the SIMPLE IRA. Free money is free money. Although it would affect her "backdoor Roth" process it would not affect yours.
can i use her SIMPLE IRA to fund the backdoor Roth every year, provided i zero out her SIMPLE every year to avoid the ProRata Rule?
No. The money she contributes to the SIMPLE IRA will stay in the SIMPLE IRA. She can't even transfer it for the first two years. She can't use it to covert to a Roth IRA. If she wants to contribute $6,000 to her TIRA and convert to her Roth IRA she can still do that, it's just that a portion of the conversion will be taxable every year. Or she could make non-deductible contributions and not convert at this time. And who knows if the process will even exist next year.
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LadyGeek
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Re: SIMPLE IRA to backdoor Roth IRA conversion question

Post by LadyGeek »

xemit - You had a duplicate post in a different forum, which I've removed. There were no replies.

(Thanks to the member who reported the post and provided a link to this thread.)
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retiredjg
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Re: SIMPLE IRA to backdoor Roth IRA conversion question

Post by retiredjg »

Your wife now has a work plan that interferes with her ability to use the backdoor Roth. She should use the work plan and put her "Roth IRA money" into a taxable account instead.

First, she should participate in the plan (tax deferral) and get the match (free money). Second, there is no way to zero out a SIMPLE IRA in the first two years of employment. Even after that it would be tricky or impossible.

You can continue to use the backdoor Roth process with no problem.

Losing the ability to do one backdoor Roth process is not a big deal. Don't let this become important to you...because it is not. It's just different from what you had in mind.

When she starts using the SIMPLE IRA (and she should), that money cannot be moved anywhere but to another SIMPLE IRA for the first 2 years. After that, it can be moved to another IRA (traditional or Roth if you pay the tax).
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xemit
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Re: SIMPLE IRA to backdoor Roth IRA conversion question

Post by xemit »

thanks for the advice.
one follow-up question for when my wife starts contributing to her SIMPLE IRA at work...

I understand that she cannot contribute to BOTH the backdoor Roth and SIMPLE IRA's in the same year; however, does contributing to her SIMPLE IRA this year affect her backdoor Roth contributions from previous years?

(we file our state/federal income taxes jointly)
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Duckie
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Re: SIMPLE IRA to backdoor Roth IRA conversion question

Post by Duckie »

xemit wrote: Wed Dec 01, 2021 7:18 pm I understand that she cannot contribute to BOTH the backdoor Roth and SIMPLE IRA's in the same year;
She is allowed to contribute to both her employer's SIMPLE IRA and her personal IRA in the same year. In her case it may not be fiscally prudent to do so.
however, does contributing to her SIMPLE IRA this year affect her backdoor Roth contributions from previous years?
The existence of her SIMPLE IRA does not affect contributions to her TIRA but does affect the conversion which is pro-rated. If at the end of 2022 she has $14,000 in her SIMPLE IRA and she made a $6000 non-deductible contribution to her TIRA and converted that $6000 to her Roth IRA, part of her conversion would be taxable. See Part I of Form 8606 (for tax year 2020 but probably the same for 2022). For example:
  • Part I
    Line 1 -- 6,000 (2022 non-deductible contributions)
    Line 2 -- 0 (previous basis)
    Line 3 -- 6,000
    Line 4 -- 0
    Line 5 -- 6,000
    Line 6 -- 14,000 (this is the line that hurts)
    Line 7 -- 0
    Line 8 -- 6,000 (2022 conversions)
    Line 9 -- 20,000
    Line 10 -- 0.300
    Line 11 -- 1,800
    Line 12 -- 0
    Line 13 -- 1,800 (non-taxable amount of conversion)
    Line 14 -- 4,200 (basis, goes on line 2 next year)
    Line 15a -- 0
    Line 15b -- 0
    Line 15c -- 0

    Part II
    Line 16 -- 6,000 (total amount converted)
    Line 17 -- 1,800 (non-taxable amount converted)
    Line 18 -- 4,200 (taxable amount converted, goes on Form 1040 line 4b)
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retiredjg
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Re: SIMPLE IRA to backdoor Roth IRA conversion question

Post by retiredjg »

xemit wrote: Wed Dec 01, 2021 7:18 pm I understand that she cannot contribute to BOTH the backdoor Roth and SIMPLE IRA's in the same year; however, does contributing to her SIMPLE IRA this year affect her backdoor Roth contributions from previous years?
It is not about "in the same year" (except for this year).

Once she or her employer puts money into the SIMPLE IRA, she should not use the backdoor Roth IRA process at all. That includes this year - if she has already done the backdoor Roth this year, she should not use the SIMPLE IRA (or allow employer contributions either) during this year.

No, the SIMPLE IRA if started next year now does not affect previous year's backdoor Roth contributions.
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