Alternatives to Roth IRA? (Based in USA)

Submitted by tratratrakx t3_11d2bdd in personalfinance

I have a few thousand after-tax dollars that I would’ve liked to put in a Roth IRA. However, as of this year I am over the annual Roth IRA limit. This is new to me so not really sure what the next-best retirement plan option is. Are most people just doing after-tax non-deductible contributions to a traditional IRA?

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Mr_Evil_Dr_Porkchop t1_ja6cy2g wrote

Backdoor Roth conversion. Contribute $6500 to your traditional IRA. Once the funds clear, convert to your Roth IRA and that’s it. No income limitations and you bypass the restrictions of contributing to your Roth directly

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arbus2021 t1_ja6honf wrote

Entire account needs to be converted or just the investments within traditional can be moved ? Is there a brokerage limitation for this conversion ?

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Nagisan t1_ja6in71 wrote

You don't need to convert the entire account, however, you can't convert only after-tax dollars. When you convert Traditional IRA to Roth IRA, it's pro-rata - which means conversions are proportional to the pre vs post tax dollars. If 10% of your tIRA is post-tax and 90% is pre-tax, any conversion you do will be taxable on 90% of the conversion.

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arbus2021 t1_ja6jf8o wrote

Appreciate the response.will do some digging

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aeplus t1_ja7oc31 wrote

Most people do backdoor Roth conversions as /u/Mr_Evil_Dr_Porkchop described.

But, some people who followed the general advice of rolling their sizable 401ks over to traditional IRAs are no longer able to do the backdoor Roth without getting hit be the pro-rata rule. I am in this camp, so I generally just contribute to a tax-exempt bond fund in a taxable account. It is also possible to do an after-tax contribution to a traditional IRA account and maintain the basis on IRS Form 8606 every year.

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tratratrakx OP t1_ja7wuf9 wrote

Do you know if that pro rule applies if I roll my entire traditional ira into my 401(k)? I believe it’s possible, but does it open up any more options?

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DeluxeXL t1_ja7yzue wrote

The act of rolling over from IRA to 401k is not subject to pro rata rule. However, do not roll over after-tax balance from IRA to 401k.

If all of your traditional IRAs are 100% pretax now, you can roll all of them over to 401k. Then you can do a clean backdoor Roth.

On the other hand, if you already made, for example, a $6k nondeductible contribution, roll over all but the $6k to 401k. (Sell all investments first so the account value stops fluctuating.)

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tratratrakx OP t1_ja8009s wrote

Got it, thank you! This seems like a good option.

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aeplus t1_ja8qzxz wrote

I hope you have better luck at this than me. My current employer's plan does not allow "reverse rollovers."

I am actually thinking about finding a federal government job just because I know for certain that the TSP allows reverse rollovers.

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