Wrong. Consider this NOT rare situation...Using the backdoor Roth meneuver in the presence of an "IRA on the side" means that Roth conversions are done at higher tax rates than one would ordinarily choose.
The whole purpose of the backdoor Roth maneuver is to get money that is going to be taxed anyway into Roth instead of into taxable. Pro-rating with the "IRA on the side" changes that and causes pre-tax dollars in the IRA to be taxed at one's marginal tax rate while working...instead of a lower tax rate later on in life.
So using backdoor Roth in the presence of an "IRA on the side" is not only a paperwork hassle for possibly decades, it also results in paying unnecessary tax, leaving one with less money in the long run.
People don't voluntarily choose this path for a reason.
Janet and Ken do not qualify to donate to a Roth because they exceed the income limitations. They also already have "lots" of money in tIRA. They max out all the tax preferred options they have. They still have money to invest. Their choices basically are backdoor into Roth or after tax account.
By your logic, no one would ever do any conversions which involved pretax dollars. But some (me for one) are exposed to a ticking time bomb when RMDs hit (no longer do we know that the current taxrate is higher than when retired. Then when one of us dies and we are married filing single, the rates again increase.
So no it does NOT necessarilhy result in paying unnecessary tax (all those dollars in the tIRA WILL BE TAXED (unless spent/distributed by someone in the 0% bracket which with significant RMDs is not going to happen). Also it actually may leave someone with more money in the long run. BTW, the paperwork is not difficult or cumbersome.
Even if you never actually contribute to a tIRA, (I never did) you can wind up with a large tIRA balance (pretax) that you need to deal with. Roth conversions, including back door Roths, can be a viable strategy.
Statistics: Posted by LotsaGray — Mon Mar 18, 2024 8:05 pm — Replies 14 — Views 542