From 24/7 Wall St. · David Beren · · 1m 20s
She Did a Backdoor Roth. Her $300,000 Rollover IRA Made Almost All Taxable
A high earner's $7,500 backdoor Roth conversion turned taxable after IRS counted a $300,000 pre-tax IRA balance.
In brief
A high earner's $7,500 backdoor Roth conversion turned taxable after IRS counted a $300,000 pre-tax IRA balance. A high earner's $7,500 backdoor Roth conversion became taxable because IRS counted a $300,000 pre-tax IRA balance from a prior employer plan. Originally reported by 24/7 Wall St..
Quick answers
- What is a backdoor Roth?
- A backdoor Roth is a two-step move for high earners who exceed direct Roth income limits.
- What is the key takeaway from She Did a Backdoor Roth. Her $300,000 Rollover IRA Made Almost All…?
- A high earner's $7,500 backdoor Roth conversion became taxable because IRS counted a $300,000 pre-tax IRA balance from a prior employer plan.
What is a backdoor Roth?
A backdoor Roth is a two-step move for high earners who exceed direct Roth income limits.
Her $7,500 conversion became taxable
A high earner contributed $7,500 on a non-deductible basis to a new traditional IRA and converted it a week later, expecting tax-free results.
The $300,000 pre-tax IRA balance
She also held a $300,000 rollover IRA from a prior 401(k), all pre-tax, which the IRS counted.
IRS aggregation rule
The IRS requires all traditional, SEP, and SIMPLE IRAs to be aggregated into a single pool for tax calculations.
“Internal Revenue Code Section 408(d)(2)”
Why the conversion became taxable
The $7,500 conversion showed almost all taxable income because the IRS counted the $300,000 pre-tax balance.
The tax consequences
The after-tax portion remains as basis for future distributions, requiring Form 8606 filing for every non-deductible contribution.
The fix: move to employer plan
Rolling the $300,000 pre-tax IRA balance into a current employer plan that accepts rollovers leaves only after-tax money in the IRA.
The takeaway
A high earner's $7,500 backdoor Roth conversion became taxable because IRS counted a $300,000 pre-tax IRA balance from a prior employer plan.
