I only had to watch you once to get it, but watched it again anyway to seal the deal. Congrats and thanks to you. I've been trying to understand After Tax ROth Conversions and Pro Rata for years and it didn't make sense. It was because no actually gave me a real life example of how you get After Tax money mixed with Pretax money in the first place. The reason is, I'd never done it. I always calculated to contribute to my 401k roth and traditional accounts and never thought to go over the max per year, so according to what I just learned, I've never mixed pre and after tax money in an account to worry about pro rata rule. Thank you again!
I inadvertently put my money into an employer after tax plan instead of the Roth. I thought that it would count as Roth but it does not. I have done this for the last 7 years and realized my mistake in late 2024. Can this be fixed. I think not. Do you know of a way to fix this error on my part. About 30k is after tax and 40k in gains from my investments over the last 7 years. I started with zero in the account 7 years ago. I will move the after tax to my personal Roth since I retired this past fall. What should I do with the 40k of gains? Your Utube video is the closest I have found to an answer.
Can you fund both your roth and traditional iras with after tax dollars say with 2024 limit of 7000k each, and within the same year convert the after tax dollars of the traditional to the roth so the total roth is +14 that year? In addition, you also maximized your contributions to your roth 401k employer account? Then file IRS report form indicating used after tax fund in traditional. No pro forma, would open up new traditional just to convert.
Yes, the pro rata rule only comes into play when you have pretax dollars in an IRA. As long as you don’t, then yes you can do the backdoor Roth and get the full contributions into the Roth IRA.
Wow, incredibly helpful! Thanks for covering such a specific use case of trying to convert over after-tax TIRA to a Roth. I have this situation and was looking around for answers. Though, 100% of my TIRA is after-tax, so based on pro rata, I shouldn't be tax on the conversion. However, what happens to the capital appreciation amount that occured in the TIRA account over the last few years? Will that portion get taxed?
This is explained exceptionally well. Thank you. I have the same question as someone below, but I want to make sure your answer applies to me as well. I currently have no IRAs. Through my employer 401k plan, I’ve reached my yearly 415 (c) limits. It is now my understanding that I can open an IRA with post tax dollars, do a back door conversion to a Roth IRA and not pay any additional tax associated with the conversion? Again, the new (and only) IRA would only have post tax dollars in it since I’m not eligible for a deduction. Thanks for your help. I’m a new subscriber!
Hi Lane... Quick question... I opened up a traditonal IRA and Roth IRA. I have a 401K through my employer. I contribute $6.5K (post-tax) into the traditional IRA and then do the conversion. I have no other monies in the traditional IRA. When I do the conversion, am I paying taxes again on that $6.5K conversion into the Roth? At the end of the video, in your example, you mention eventually carving out the pre-tax dollars and you WILL NOT pay taxes on the after tax dollars that get converted. So, just checking based on my scenario... newly created trad IRA and roth... trad being funded with after-tax dollars, then converted... Am I being taxed on the conversion? Thanks! (apologies as I know this video was over a year old).
You do not pay taxes twice on the same money. What you are doing is a clean back door Roth. Because your IRA contribution is with after tax dollars there is no tax on the conversion and no pro rata rule to worry about.
If you convert a traditional IRA to a ROTH and pay tax on the distribution, is there a waiting period to be able to draw upon that ROTH? I heard 5 years.
If you are over 59 1/2 then there is no penalty and no waiting to access the converted funds. However, there is a 5 year clock on the "gains". Here is a video on Roth conversions ua-cam.com/video/24rmYA6UpZc/v-deo.html
Thank you very much, Lane. Like an angel suddenly coming into my life. May you and all who you hold dear be blessed. I fall into the category you addressed. I love the encouragement to have faith in God. I love the encouragement to believe in longevity, to truly and finally live a fulfilled life. Thanks
Thanks for great video. So if converted 100k in this case and paid taxes on the 93k, then for next year the slate is clean. Any after tax IRA contribution annually say 7k can be converted to Roth tax free each year. Is my understanding right?
If I transfer $6k of savings into my Trad IRA prior to the 4/15 tax filing deadline and designate it as a contribution for the prior year and then another $6k as a contribution for the current year, can I then backdoor the entire $12k into my Roth? Or am I only allowed to backdoor $6K per year?
What happen if you have only 1 traditional ira with only after tax tollars? Do you have to report that contributions as ordinary income? If not, what form do you have to fill out? Thanks
Hi, Lane, don't understand how did you come up with the 93/7 conversion tax ratio, can you go a bit deeper? Is it based on how much you contribute then how much it worth at time of conversion? How about the part of company matching $? Thanks.
Hello, Can you speak on back door Roth if you are married and filing separate? I know you can’t fund a Roth IRA if you are married and filing separate if you make over 10,000 a year so I wanted to know more info about doing a back door Roth IRA by first contributing to a traditional ira than converting it.
Anyone with earned income can do a back door Roth. There’s nothing preventing you even if your traditional IRA contributions are with after-tax dollars everybody can can do that and then you can turn around and convert that to Roth.
In a 401k no 8606 is required - the plan custodian or record keeper will keep track of the different types of contributions. After-tax dollars will be separately accounted for by the plan, just like pre-tax and Roth dollars are all accounted for and kept in different buckets. They should be clearly delineated on a statement. Form 8606 is required to track after tax contributions in an IRA.
Thank you! As long as you kept records each year of how much you contributed and how much was non-deductible you should be fine. The IRS Form 5498 and your old IRA statements show how much you contributed. IRS 1040 Form shows what, if anything, you deducted. You are allowed to file Form 8606 separately.
Your explanation of the aggregation rule is great, thank you! But questions come to my mind... My understanding is that the pro-rata percentage is calculated based on year-end values for the year the conversion was made. So if we assumed as in your example the year-end values remained the same (converted roth = 7k and trad ira = 93k), the ratio would be the same as in your example. But what if the year-end values (converted roth and trad ira) are different. How would the pro-rata ratio be calculated? Also once the pro-rata ratio/percentage is determined, is it applied to the 7k converted amount or the roth value at year-end to determine the cost-basis portion? Thank you.
Good question. The pro rata “ratio” of pre-tax vs after-tax is officially determined on the last day of the year. We can ballpark it on the day of the conversion, but if the account experiences significant market moves, or if a chunk of money is rolled in or out of the IRA before the end of the year, that will impact the final pro rata calculation. The amount of the conversion is locked in immediately. The final pro rata ratio isn’t determined until the end of the year. Pro rata applies to the traditional IRA and will determine the percentage of pre vs after tax that remains in the traditional IRA after the conversion. The Roth IRA is made up of contributions, conversions and earnings, and is ALL after tax money (assuming the 5 year clocks are satisfied). Here is a video on Roth distributions you may be interested in as well ua-cam.com/video/_Yba42dQhzY/v-deo.html
@@FinancialFastLane What if, as in your example... Traditional IRA 100% pre-tax was worth $93,000 Made a non-deductible after-tax contribution of $7,000 Then converted $7,000 to a Roth At year-end the Traditional IRA is worth $100,000 and the converted Roth is now worth $7,500 Is the pro rata ratio calculated as: Taxable ratio: 100,000 / (100,000 + 7,000) = 0.93458 Tax-free ratio: 7,000 / (100,000 + 7,000) = 0.06542 Where 100,000 is year-end value of Traditional IRA and 7,000 is non-deductible after-tax contribution or cost basis. On the $7,000 conversion, taxes would be paid on $6,542 (7000*0.93458), leaving $458 as tax free (7000*0.06542) and leaving the remaining $6,542 cost basis in the Traditional IRA for future years. And so the year-end Roth value of $7,500 has no bearing on the calculation. Your comments on the above will be appreciated, thanks again! Also I "liked" the roth distribution video you recommended, very clear and concise.
I'm an independent contractor. I don't have a retirement plan, but I want to save on IRA.What is the percentage of my gross income to keep on IRA account?
Will the 93% to 7% ratio in your example changes every time a Roth conversion is made (since my account balance changes), or the ration stays constant for the entire IRA life?
.) The ratio will change every time. We always compare the pre-tax vs after tax in the IRA each year, so each year when a backdoor Roth is done, the ratio will change as the balance in the account changes.
Absolutely! We recommend it, assuming a person has access to a 401(k) that allows reverse rollovers. You cannot roll after-tax dollars to a 401(k) - only pre-tax. So, it is a way separate pre- and after-tax dollars from an IRA. Then, you can do a tax-free conversion of the after-tax dollars remaining in the IRA (or add new basis via non-deductible contributions). It is a perfectly legal way to get around pro-rata. Just be careful NOT to bring the pre-tax dollars back from the 401(k) until the NEXT year, otherwise they will be included in the pro-rata math when it is calculated at the end of the year. Thank you for the question!
Hi , this is so informative. Thank you. I need your feedback though. My husband and I , both 58,decided to retire early, living frugally. We sold our house , use this money for living expenses until we start collecting Social security at 62. We have no income .We started Roth conversion, year 2020 paying the conversion taxes from IRA funds. (These conversion are our only income)This was a mistake. So this year ,2022, we plan to do our 3rd Roth conversion but will pay the conversion tax out of our savings account. We kept our bracket at 12%. We have enough money to complete the conversion until 2025. By then we are 62. Any feedback?
Thank you! I have more questions before I could give any answers. I recommend taking advantage of our free consultation. Just contact my office at 480-550-6556 to make an appointment.
@@julhe8743 if you have no other income the standard deduction will allow for some of that to be tax-free and then the 10% bracket and then some in the 12 depending on how much you convert.
@@julhe8743 yes we only convert at 12% bracket. We rely on the sale of our house for living expenses until we start collecting our social security at 62.
TY for the quick response!. Definitely soaking up the knowledge.
I only had to watch you once to get it, but watched it again anyway to seal the deal. Congrats and thanks to you. I've been trying to understand After Tax ROth Conversions and Pro Rata for years and it didn't make sense. It was because no actually gave me a real life example of how you get After Tax money mixed with Pretax money in the first place. The reason is, I'd never done it. I always calculated to contribute to my 401k roth and traditional accounts and never thought to go over the max per year, so according to what I just learned, I've never mixed pre and after tax money in an account to worry about pro rata rule. Thank you again!
I'm happy to know this video was helpful to you. Thank you for the nice comment!
Best video I’ve seen on the concept this far, thanks!
I inadvertently put my money into an employer after tax plan instead of the Roth. I thought that it would count as Roth but it does not. I have done this for the last 7 years and realized my mistake in late 2024. Can this be fixed. I think not. Do you know of a way to fix this error on my part. About 30k is after tax and 40k in gains from my investments over the last 7 years. I started with zero in the account 7 years ago. I will move the after tax to my personal Roth since I retired this past fall. What should I do with the 40k of gains? Your Utube video is the closest I have found to an answer.
I happen to watch your video many times to make sure I understand it.
Very helpful, as we're going to keep one IRA and file form 8606.
Wow I was more confused 😳😳ty for the video I have to watch again and again.
I was told by my investment co that since I am retired both Roth and regular Ira are not available for me to start.
Can you fund both your roth and traditional iras with after tax dollars say with 2024 limit of 7000k each, and within the same year convert the after tax dollars of the traditional to the roth so the total roth is +14 that year? In addition, you also maximized your contributions to your roth 401k employer account? Then file IRS report form indicating used after tax fund in traditional. No pro forma, would open up new traditional just to convert.
Yes, the pro rata rule only comes into play when you have pretax dollars in an IRA. As long as you don’t, then yes you can do the backdoor Roth and get the full contributions into the Roth IRA.
Wow, incredibly helpful! Thanks for covering such a specific use case of trying to convert over after-tax TIRA to a Roth. I have this situation and was looking around for answers. Though, 100% of my TIRA is after-tax, so based on pro rata, I shouldn't be tax on the conversion. However, what happens to the capital appreciation amount that occured in the TIRA account over the last few years? Will that portion get taxed?
Glad to hear the video was helpful! The growth is not part of the basis so the pro rata rule will apply.
This is explained exceptionally well. Thank you. I have the same question as someone below, but I want to make sure your answer applies to me as well.
I currently have no IRAs. Through my employer 401k plan, I’ve reached my yearly 415 (c) limits. It is now my understanding that I can open an IRA with post tax dollars, do a back door conversion to a Roth IRA and not pay any additional tax associated with the conversion? Again, the new (and only) IRA would only have post tax dollars in it since I’m not eligible for a deduction.
Thanks for your help. I’m a new subscriber!
@@BRTardiff yes absolutely that works! I do that exact same thing every year.
Thank you so much for this video!!!
Hi Lane... Quick question... I opened up a traditonal IRA and Roth IRA. I have a 401K through my employer. I contribute $6.5K (post-tax) into the traditional IRA and then do the conversion. I have no other monies in the traditional IRA. When I do the conversion, am I paying taxes again on that $6.5K conversion into the Roth? At the end of the video, in your example, you mention eventually carving out the pre-tax dollars and you WILL NOT pay taxes on the after tax dollars that get converted. So, just checking based on my scenario... newly created trad IRA and roth... trad being funded with after-tax dollars, then converted... Am I being taxed on the conversion? Thanks! (apologies as I know this video was over a year old).
You do not pay taxes twice on the same money. What you are doing is a clean back door Roth. Because your IRA contribution is with after tax dollars there is no tax on the conversion and no pro rata rule to worry about.
@@FinancialFastLane Awesome! Thank you!
If you convert a traditional IRA to a ROTH and pay tax on the distribution, is there a waiting period to be able to draw upon that ROTH? I heard 5 years.
If you are over 59 1/2 then there is no penalty and no waiting to access the converted funds. However, there is a 5 year clock on the "gains". Here is a video on Roth conversions ua-cam.com/video/24rmYA6UpZc/v-deo.html
Thank you very much, Lane. Like an angel suddenly coming into my life. May you and all who you hold dear be blessed. I fall into the category you addressed. I love the encouragement to have faith in God. I love the encouragement to believe in longevity, to truly and finally live a fulfilled life. Thanks
thanks so much, very helpful !!
Thank you very much for the video! Silly question, are roth IRA balances never counted in pro rata calculations?
You can convert pretax Ira to 401k, and then do the backdoor conversion. In this way, all Ira will be non deductible.
Yes! if you have an 401k
Thanks for great video. So if converted 100k in this case and paid taxes on the 93k, then for next year the slate is clean. Any after tax IRA contribution annually say 7k can be converted to Roth tax free each year. Is my understanding right?
If I transfer $6k of savings into my Trad IRA prior to the 4/15 tax filing deadline and designate it as a contribution for the prior year and then another $6k as a contribution for the current year, can I then backdoor the entire $12k into my Roth? Or am I only allowed to backdoor $6K per year?
What happen if you have only 1 traditional ira with only after tax tollars? Do you have to report that contributions as ordinary income? If not, what form do you have to fill out? Thanks
Hi, Lane, don't understand how did you come up with the 93/7 conversion tax ratio, can you go a bit deeper? Is it based on how much you contribute then how much it worth at time of conversion? How about the part of company matching $? Thanks.
Hello, Can you speak on back door Roth if you are married and filing separate? I know you can’t fund a Roth IRA if you are married and filing separate if you make over 10,000 a year so I wanted to know more info about doing a back door Roth IRA by first contributing to a traditional ira than converting it.
Anyone with earned income can do a back door Roth. There’s nothing preventing you even if your traditional IRA contributions are with after-tax dollars everybody can can do that and then you can turn around and convert that to Roth.
I am 60 and have both IRA and Roth
How or should I convert to all Roth ?
What about after tax 401k contributions? I have never heard of form 8606?
In a 401k no 8606 is required - the plan custodian or record keeper will keep track of the different types of contributions. After-tax dollars will be separately accounted for by the plan, just like pre-tax and Roth dollars are all accounted for and kept in different buckets. They should be clearly delineated on a statement. Form 8606 is required to track after tax contributions in an IRA.
I recently found your channel and love it! I forgot to file 8606 for 2019 and 2020. Can I file retroactively? Thanks so much.
Thank you! As long as you kept records each year of how much you contributed and how much was non-deductible you should be fine. The IRS Form 5498 and your old IRA statements show how much you contributed. IRS 1040 Form shows what, if anything, you deducted. You are allowed to file Form 8606 separately.
Your explanation of the aggregation rule is great, thank you!
But questions come to my mind...
My understanding is that the pro-rata percentage is calculated based on year-end values for the year the conversion was made.
So if we assumed as in your example the year-end values remained the same (converted roth = 7k and trad ira = 93k), the ratio would be the same as in your example.
But what if the year-end values (converted roth and trad ira) are different.
How would the pro-rata ratio be calculated?
Also once the pro-rata ratio/percentage is determined, is it applied to the 7k converted amount or the roth value at year-end to determine the cost-basis portion?
Thank you.
Good question. The pro rata “ratio” of pre-tax vs after-tax is officially determined on the last day of the year. We can ballpark it on the day of the conversion, but if the account experiences significant market moves, or if a chunk of money is rolled in or out of the IRA before the end of the year, that will impact the final pro rata calculation. The amount of the conversion is locked in immediately. The final pro rata ratio isn’t determined until the end of the year.
Pro rata applies to the traditional IRA and will determine the percentage of pre vs after tax that remains in the traditional IRA after the conversion. The Roth IRA is made up of contributions, conversions and earnings, and is ALL after tax money (assuming the 5 year clocks are satisfied). Here is a video on Roth distributions you may be interested in as well ua-cam.com/video/_Yba42dQhzY/v-deo.html
@@FinancialFastLane
What if, as in your example...
Traditional IRA 100% pre-tax was worth $93,000
Made a non-deductible after-tax contribution of $7,000
Then converted $7,000 to a Roth
At year-end the Traditional IRA is worth $100,000 and the converted Roth is now worth $7,500
Is the pro rata ratio calculated as:
Taxable ratio: 100,000 / (100,000 + 7,000) = 0.93458
Tax-free ratio: 7,000 / (100,000 + 7,000) = 0.06542
Where 100,000 is year-end value of Traditional IRA and 7,000 is non-deductible after-tax contribution or cost basis.
On the $7,000 conversion, taxes would be paid on $6,542 (7000*0.93458), leaving $458 as tax free (7000*0.06542) and leaving the remaining $6,542 cost basis in the Traditional IRA for future years.
And so the year-end Roth value of $7,500 has no bearing on the calculation.
Your comments on the above will be appreciated, thanks again!
Also I "liked" the roth distribution video you recommended, very clear and concise.
So someone with employer covered 401k plan can still contribute to after-tax ira account over $6000 limit (since not getting the deduction)
Then convert the $$$ (over 6000 limit) in the after-tax ira into roth ira? Do i follow you correctly?
I'm an independent contractor. I don't have a retirement plan, but I want to save on IRA.What is the percentage of my gross income to keep on IRA account?
If you are over 50 the maximum IRA contribution for 2023 is $7,500. If you are married your spouse can also contribute $7,500 for a total of $15,000.
Hi can I convert 20 k into my Roth IRA? Thanks
Will the 93% to 7% ratio in your example changes every time a Roth conversion is made (since my account balance changes), or the ration stays constant for the entire IRA life?
.) The ratio will change every time. We always compare the pre-tax vs after tax in the IRA each year, so each year when a backdoor Roth is done, the ratio will change as the balance in the account changes.
Care to comment on the option of rolling pre-tax IRA funds into your 401k (if you have one) as a way to avoid the IRA pro-rata rule?
Absolutely! We recommend it, assuming a person has access to a 401(k) that allows reverse rollovers. You cannot roll after-tax dollars to a 401(k) - only pre-tax. So, it is a way separate pre- and after-tax dollars from an IRA. Then, you can do a tax-free conversion of the after-tax dollars remaining in the IRA (or add new basis via non-deductible contributions). It is a perfectly legal way to get around pro-rata. Just be careful NOT to bring the pre-tax dollars back from the 401(k) until the NEXT year, otherwise they will be included in the pro-rata math when it is calculated at the end of the year. Thank you for the question!
Thank you, clear explanation
Thank you! It looks like the laws may be changing soon and the backdoor Roth maybe coming to and end.
@@FinancialFastLane Yup, it has to happen just when I finally discovered back door Roth haha
Hi , this is so informative. Thank you. I need your feedback though. My husband and I , both 58,decided to retire early, living frugally. We sold our house , use this money for living expenses until we start collecting Social security at 62. We have no income .We started Roth conversion, year 2020 paying the conversion taxes from IRA funds. (These conversion are our only income)This was a mistake. So this year ,2022, we plan to do our 3rd Roth conversion but will pay the conversion tax out of our savings account. We kept our bracket at 12%. We have enough money to complete the conversion until 2025. By then we are 62. Any feedback?
Thank you! I have more questions before I could give any answers. I recommend taking advantage of our free consultation. Just contact my office at 480-550-6556 to make an appointment.
To Rico Cris, Question if you don’t have any income only your conversion your tax will be minimal because you will be in a 12% bracket??
@@julhe8743 if you have no other income the standard deduction will allow for some of that to be tax-free and then the 10% bracket and then some in the 12 depending on how much you convert.
@@FinancialFastLane Thank you for the information ❤️ your channel 🙏
@@julhe8743 yes we only convert at 12% bracket. We rely on the sale of our house for living expenses until we start collecting our social security at 62.
Well explained
A very thorough analysis and discussion of an often complex matter. You hit every nail on the head.
Why don't you show viewers how people like me could potentially contribute in excess of 30,000 a year to Roth IRA
Great suggestion for a future video. Thank you!
The only Americans with good retirement are government workers and I bet they got dental and vision and paid prescription