Posted: 10/1/2025 9:58:51 AM EDT
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My wife and I have been contributing to Roth IRAs for several years. We also are maxing out 401ks. In the last year we have hit the MAGI limit and it seems we cannot contribute to our Roth IRAs anymore because of this. Can we still contribute to a traditional IRA even though we are over the Roth IRA MAGI? I also seems that on the traditional IRA we would not be able to do any tax deductions from the contributions to the traditional IRA because we have a 401k and make too much money. Is this also correct? Last question. Is this where we would use the backdoor Roth IRA conversion? Contribute to a traditional IRA then roll it to the Roth IRA? If we can't take a tax deduction from contributions to the traditional IRA then the best way is to try and get it into the Roth IRA so we can withdraw tax free in retirement. Am I correct on my understanding? Is there anything I need to be aware of or misunderstanding? |
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Originally Posted By NY_crawler: Can we still contribute to a traditional IRA even though we are over the Roth IRA MAGI? I also seems that on the traditional IRA we would not be able to do any tax deductions from the contributions to the traditional IRA because we have a 401k and make too much money. Is this also correct? Last question. Is this where we would use the backdoor Roth IRA conversion? Contribute to a traditional IRA then roll it to the Roth IRA? If we can't take a tax deduction from contributions to the traditional IRA then the best way is to try and get it into the Roth IRA so we can withdraw tax free in retirement. Am I correct on my understanding? Is there anything I need to be aware of or misunderstanding? Correct, since you both have an employer sponsored retirement plan any traditional IRA contributions you make are not tax deductible. Yes. Any profits in your traditional IRA will be taxed at the time of the conversion, so I would make the contribution and then immediately convert it. If you and the wife are maxing out your 401k you should be well set for retirement and early retirement should be a goal. Early means before 60 when you can access your retirement accounts. So you'll need money to live on until your can turn 60 and can access your retirement accounts and until you start SS. A taxable brokerage account is an excellent way to fund the first years of an early retirement. Your income will be very low so you can take capital gains at 0% as well as roth convert some of your 401k each year. Make a comprehensive financial plan to take you through retirement - the tax savings alone will be 6-figures. The earlier you make a plan the more you will save. |
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Originally Posted By NY_crawler: Is there anything I need to be aware of or misunderstanding? Morgan answered the majority of your questions spot on but the above is near and dear to my heart. This gets glossed over too many times. Basically, if you have an old or existing Traditional IRA with a balance greater then $0, you will be exposed to the "Pro-Rata Rule" during a backdoor Trad-Roth conversion. Form 8606 is what you would fill out to do the backdoor Roth conversion. On 8606, there is a line item that literally says "Balance of ALL traditional IRA contributions". If you have a value there, you will be taxed on the conversion value in relation to the rollover value. Example, my wife has a $0 balance in her Trad IRA, we do a back door roth every year. My IRA since I've rolled old 401ks into my IRA, I do NOT do Backdoor roth conversions due to the pro-rata rule. It's not that hard to do the 8606 form as it's 1.5 pages or so then you save it to your files or provide it to your accountant. Essentially you are in the position to start using post-tax money into a "Bridge account" with mutual funds. Basically gunning for funds you could tap from age 55 years old - 59.5 years old, if you wanted to stop working. From Grok: Key Line on Form 8606 for IRA Balances Form 8606, Line 6: This line requires you to enter the fair market value of all your traditional, SEP, and SIMPLE IRAs as of December 31 of the tax year (e.g., December 31, 2025, for the 2025 tax year). This includes all accounts in your name, aggregated together, but excludes Roth IRAs. You obtain this value from year-end account statements provided by your IRA custodian(s). How It Ties to Form 1040 (MFJ) Form 1040, Line 4a and 4b: These lines report IRA distributions for the tax year: Line 4a: Total IRA distributions received (from Form 1099-R, Box 1, for each spouse). Line 4b: Taxable amount of those distributions, which may come from Form 8606, Line 15 (or Worksheet 1-1 in Pub. 590-B) if the pro-rata rule applies due to nondeductible contributions. For MFJ, distributions and taxable amounts are reported collectively, but each spouse’s Form 8606 calculates their individual IRA basis and taxable portion separately. The combined taxable amount from both spouses’ Forms 8606 flows to Form 1040, Line 4b. |
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So this got a bit more confusing but why I asked if I missed anything. My wife should only have a Roth IRA and I have both. Going forward if my wife opens a traditional IRA then does a back door Roth IRA so she keeps $0 in the traditional IRA she should be fine? But as I already have a traditional IRA I should just contribute to that so I don't have to do the form 8606 which just seems to complicate the situation? ETA do I have to do the form 8606 every time I contribute to my traditional IRA regardless if I do a backdoor or not? |
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Originally Posted By NY_crawler: So this got a bit more confusing but why I asked if I missed anything. My wife should only have a Roth IRA and I have both. Going forward if my wife opens a traditional IRA then does a back door Roth IRA so she keeps $0 in the traditional IRA she should be fine? But as I already have a traditional IRA I should just contribute to that so I don't have to do the form 8606 which just seems to complicate the situation? ETA do I have to do the form 8606 every time I contribute to my traditional IRA regardless if I do a backdoor or not? Doing the 8606 is easy, it's the implications of it that you should try to avoid. You have to convert a proportional amount of pretax and posttax tradtional ira amount into your roth ira and that form will determine what fraction is taxable. An easy way to avoid it would be to either roth convert your existing traditional IRA until it is zero or to roll it over into your 401k. Depending on your situation either of those options may or may not be worthwhile. ie. how old are you, what are the dollar amounts involved, and is your traditional IRA pre or post tax money? I'd encourage you to make a plan. Simply squirrelling money away is great, but if you do it with a plan you stand to gain a lot more. The tax implications at/after retirement based on what type of savings you have are enormous - easily multiple 6-figure amounts during an average retirement. |
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Originally Posted By NY_crawler: So this got a bit more confusing but why I asked if I missed anything. My wife should only have a Roth IRA and I have both. Going forward if my wife opens a traditional IRA then does a back door Roth IRA so she keeps $0 in the traditional IRA she should be fine? But as I already have a traditional IRA I should just contribute to that so I don't have to do the form 8606 which just seems to complicate the situation? ETA do I have to do the form 8606 every time I contribute to my traditional IRA regardless if I do a backdoor or not? You can also take the money you were going to contribute and use it to pay taxes on Roth conversions from your IRA rather than making your existing pre-tax balance bigger. Kill 2 birds. Get the pre-tax to 0 and you now can do backdoor Roth conversions without worrying about pro rata. |
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Morgan321 nailed it: “A taxable brokerage account is an excellent way to fund the first years of an early retirement. Your income will be very low so you can take capital gains at 0% as well as roth convert some of your 401k each year” Don’t discount taxable brokerage accounts as long as capital gains taxes stay like they are or hopefully better. |
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Originally Posted By SkiandShoot: Morgan answered the majority of your questions spot on but the above is near and dear to my heart. This gets glossed over too many times. Basically, if you have an old or existing Traditional IRA with a balance greater then $0, you will be exposed to the "Pro-Rata Rule" during a backdoor Trad-Roth conversion. Form 8606 is what you would fill out to do the backdoor Roth conversion. On 8606, there is a line item that literally says "Balance of ALL traditional IRA contributions". If you have a value there, you will be taxed on the conversion value in relation to the rollover value. Example, my wife has a $0 balance in her Trad IRA, we do a back door roth every year. My IRA since I've rolled old 401ks into my IRA, I do NOT do Backdoor roth conversions due to the pro-rata rule. It's not that hard to do the 8606 form as it's 1.5 pages or so then you save it to your files or provide it to your accountant. Essentially you are in the position to start using post-tax money into a "Bridge account" with mutual funds. Basically gunning for funds you could tap from age 55 years old - 59.5 years old, if you wanted to stop working. From Grok: Key Line on Form 8606 for IRA Balances Form 8606, Line 6: This line requires you to enter the fair market value of all your traditional, SEP, and SIMPLE IRAs as of December 31 of the tax year (e.g., December 31, 2025, for the 2025 tax year). This includes all accounts in your name, aggregated together, but excludes Roth IRAs. You obtain this value from year-end account statements provided by your IRA custodian(s). How It Ties to Form 1040 (MFJ) Form 1040, Line 4a and 4b: These lines report IRA distributions for the tax year: Line 4a: Total IRA distributions received (from Form 1099-R, Box 1, for each spouse). Line 4b: Taxable amount of those distributions, which may come from Form 8606, Line 15 (or Worksheet 1-1 in Pub. 590-B) if the pro-rata rule applies due to nondeductible contributions. For MFJ, distributions and taxable amounts are reported collectively, but each spouse’s Form 8606 calculates their individual IRA basis and taxable portion separately. The combined taxable amount from both spouses’ Forms 8606 flows to Form 1040, Line 4b. This is not really true. The Prorata rule deals with contributions to a traditional IRA that were paid with pre-taxed dollars (not taxed). When you do a back door conversion the IRS requires you to pay taxes on those pretax contributions. The Prorata rule is how to compute the required tax. |
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Originally Posted By Morgan321: I'd encourage you to make a plan. Simply squirrelling money away is great, but if you do it with a plan you stand to gain a lot more. The tax implications at/after retirement based on what type of savings you have are enormous - easily multiple 6-figure amounts during an average retirement. This "plan" you speak of, how does one make it? I have many types of squirrelled away assets. |
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Originally Posted By bugs: This "plan" you speak of, how does one make it? I have many types of squirrelled away assets. Everybody's situation is different, but in general treat your financial life like a budget. Once you know how much you make and how much you spend it's an easy calculation to figure out when you can retire. If you want to retire earlier then make more, spend less, or take more risk on your investments. There's tons of free retirement planners out there. Any decent investment/brokerage firm will have them. The free planners or a spreadsheet you make don't address the finer details of retirement though, things like tax avoidance, leveraging advantages like retiring early or having some sort of pensions, etc. Those typically require a smart human. Those also make huge differences in your finances. |
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Originally Posted By NY_crawler: So this got a bit more confusing but why I asked if I missed anything. My wife should only have a Roth IRA and I have both. Going forward if my wife opens a traditional IRA then does a back door Roth IRA so she keeps $0 in the traditional IRA she should be fine? But as I already have a traditional IRA I should just contribute to that so I don't have to do the form 8606 which just seems to complicate the situation? ETA do I have to do the form 8606 every time I contribute to my traditional IRA regardless if I do a backdoor or not? Let me make this a little more simplified for you: 1. If your wife does not have any pre-tax money in a traditional IRA, then yes, you can (and should) open a personal traditional IRA for her under her account, for the purposes of making a non-deductible post-tax contribution each year, then immediately converting it to Roth IRA. This is not a taxable event and really easy to do. 2. If you have pretax money in a personal traditional IRA in your name, then you cannot/should not do Backdoor Roth conversions, due to the pro-rata rules. However, what you can consider is doing a Roth conversion of your existing IRA (which is a taxable event, so there is much to consider in this approach) OR see if your current 401k plan allows for "roll ins" where you can rollover your existing pre-tax IRA into your company 401k, which frees up your ability to do Backdoor Roth conversions. This is what I did with my IRA to free up my ability to do this. This is the best guide I have found and often recommend because it explains things as simply as possible but covers all the bases: https://thecollegeinvestor.com/38006/how-to-do-a-backdoor-roth-ira/ |
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Originally Posted By Morgan321: How long is a piece of string? Everybody's situation is different, but in general treat your financial life like a budget. Once you know how much you make and how much you spend it's an easy calculation to figure out when you can retire. If you want to retire earlier then make more, spend less, or take more risk on your investments. There's tons of free retirement planners out there. Any decent investment/brokerage firm will have them. The free planners or a spreadsheet you make don't address the finer details of retirement though, things like tax avoidance, leveraging advantages like retiring early or having some sort of pensions, etc. Those typically require a smart human. Those also make huge differences in your finances. I'm thinking I need one of those smart humans regarding tax avoidance. My 401k says I'm at 275% of my retirement goal. And I'm sort of sure my non 401k investments can 100% fund my retirement. I think I need to read some books about finances and retirement. |
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Originally Posted By bugs: I'm thinking I need one of those smart humans regarding tax avoidance. My 401k says I'm at 275% of my retirement goal. And I'm sort of sure my non 401k investments can 100% fund my retirement. I think I need to read some books about finances and retirement. If you're within 10 years of retirement a few meetings with a fiduciary advisor will be well worth the money. I did it for a year in 2024 and it was worth every penny. You may find that you don't appreciate just how significant even some things that you know are until it's all laid out in front of you. You can even get an 80% answer right here just by sharing a few things like age, when you want to retire, what savings you have, and what your expenses are. |
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Originally Posted By Morgan321: Be careful about "275% of goal" from a system that you didn't provide any input to! How does it know how much money you need in retirement? If you're within 10 years of retirement a few meetings with a fiduciary advisor will be well worth the money. I did it for a year in 2024 and it was worth every penny. You may find that you don't appreciate just how significant even some things that you know are until it's all laid out in front of you. You can even get an 80% answer right here just by sharing a few things like age, when you want to retire, what savings you have, and what your expenses are. I need to get my investments organized first. I quit working last year, been living off savings and based on my current burn rate, I can easily go another 3-4 years just on that. Wife still works so we get health care through her job. And since she's still working I'm continuing to contribute to our Roth IRA's from savings. My 401k is with Empower, so the 275 % is based on current investments in the 401k and Social Sercurity. I also have individual stocks, mutual funds, T-bills, and CD's. Also, I'm debt free. My net worth is in the top 5 %, but I live very modestly and am completely happy doing so. |