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Roth IRA Conversion and Ladder : Help me makes sense of this

840 Views | 0 Replies | Last: 4 yr ago by cjsag94
BCOBQ98
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AG
First off I get that not everything the government does, especially when it comes to taxes makes sense.

1. Over Roth IRA Contribution limits aka Backdoor method : So I can contribute to traditional IRA and can then convert it to the Roth IRA? How does this work tax wise? The money I put into the traditional IRA would already be taxed income, I then claim the tax deduction during my return but then when I convert to the Roth I pay the taxes back? If so does this all happen in the same calendar year?

2. Withdrawing from Roth IRA before 59 1/2 without 10% penalty : I read the below article. So essentially I'm doing the above process but somehow if I leave this alone for 5 years I magically don't have to pay the penalty? Why? Does this apply to any money in a Roth IRA that has been in for 5 years or only these conversions? Can you really take your 401K, move to traditional ira, then convert to roth ira paying current rate taxes, and then access this money in 5 years without paying taxes or the 10% penalty? Seems too good to be true...

https://www.moneyunder30.com/roth-ira-conversion-ladder

TIA
cjsag94
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AG
Your IRA is not tax deductible. If it is, then you don't need to use backdoor method, you go straight into Roth. Therefore, no deduction and no tax on conversion.

Unless...

If you do use backdoor, understand conversation is pro rata and you will pay tax in the case you have any existing pre tax IRA anywhere (doesn't have to be same account). Lastly, all earnings are taxable, so best to fund and convert simultaneously.

On part 2, principle is available tax free, earnings are taxed if before 59.5.. and/or if withdrawn within 5 years.

Edit to add this...

Contributions are tax year based while conversions are calendar year based. So say you wanted a deduction on 2019 taxes, you could contribute now and deduct if possible. Then convert immediately, which would be taxable against 2020 taxes.
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