Nuances with Roths and Mega Backdoor Roths

And we're going to talk about some nuances with the backdoor Roth IRA and the MEGA backdoor Roth ira.

The first one is to remember the backdoor Roth IRA process is done with an ira. The mega backdoor Roth IRA process is not done with an IRA, it is done with a 401k. So in both cases you make non deductible contributions to a retirement account. And in both cases you do a Roth conversion. With the regular backdoor Roth IRA process, you contribute to a traditional ira, then move the money to a Roth ira. With the mega backdoor Roth IRA process, you make an after tax employee contribution to your 401 or 403 and then you do a Roth conversion on that within the plan.

Usually, I mean, it's possible to take it out of the plan in some plans and put it in a Roth.

Ira, but most of the time you're doing an in plan conversion. There is a pro rata calculation that occurs with the backdoor Roth ira such that you need to empty out all of your traditional IRAs by the end of the year. Traditional IRAs, simple IRAs, SEP IRAs got to be $0 on 12, 31, 2024 for last year or 2025 for this year, whatever, or you're going to get prorated now. It's not the end of the world if you get prorated on $7, you.

Know, the $7 in interest. That money made in your traditional IRA. While I was waiting for the conversion.

Step, yes, the best thing to do.

Is do another $7 Roth conversion and get rid of that.

But it's not the end of the world if you get prorated on that. That doesn't like defeat.

The purpose of doing the Roth ira, you just clean that up the next year. The next year you do a Roth conversion of, you know, your $7,000. If you're under 50 plus that $7 and you convert it, then no big deal.

With the MEGA backdoor Roth IRA there is no pro rata calculation. It doesn't matter what's in your traditional SEP or simple IRAs, you never get prorated with the MEGA backdoor Roth IRA process. Hope that's helpful. Another issue that comes up every January.

Is people get frustrated.

It's particularly frustrating if you start your MEGA or you start your backdoor Roth IRA process in December. December is not backdoor Roth IRA time, January is backdoor Roth IRA time. So don't mess with it in December. Because what happens to people is they make the contribution in December, then all of a sudden their brokerage or mutual fund company, their IRA custodian, whatever it.

Is, decides they want your money to.

Clear to settle before they let you move it to another account, like a Roth ira. So they force you to sit in the traditional IRA until the end of the year, till that money settles. And then you didn't do your conversion.

In the same year.

Now, that can cause a big problem with the pro rata issue, especially if.

You did any sort of Roth conversion in the prior year.

So in general, don't make your contribution in December.

Right?

You can do a contribution for the previous year until your tax day in the next year. So there's no rush to do it before December 31st.

All right?

So you can just wait till January of 2025 and do your backdoor Roth for 2024. That's not a big deal. The paperwork's a little more complicated than.

If you do it in the same calendar year.

But it's not a big deal. You can do the paperwork.

I assure you it's not that complicated.

I'll walk you through it on my.

Backdoor Roth IRA tutorial.

Keep in mind that this occurs at.

Different speeds at different places.

Okay.

Like, Fidelity's kind of been known for.

Waiting forever for your money to settle. Like, I've heard as many as 16 business days.

So it's probably best.

If you're going to do the backdoor.

Roth ira, the best thing to do is to already have your money where.

It'S already where it's going to be.

Right.

If you're going to do a traditional.

IRA contribution at Vanguard, have your money.

At Vanguard in your brokerage account. If you're going to do it at Fidelity, have the money at Fidelity, have.

It settled before the start of the year. That's the fastest way to do the Roth IRA. With E Trade, I think you can do both the contribution and the conversion on January 2nd.

Obviously, January 1st is a holiday with Schwab. If the money's already there, I think you can do both steps on January.

2Nd with Vanguard, they make your way today.

You do your contribution on January 2nd. You do your conversion on January 3rd.

Okay.

If you've already got the money at Fidelity, you can do that as well. If you don't, you might be doing the contribution on January 2nd, and you.

Might be doing the conversion on, like.

January 20th or something similar problem at Vanguard, they usually don't make you wait as long.

But it's not unusual to wait 4, 5, 7 days at Vanguard if the money's not settled there. If it's coming from your bank account. You make your contribution January 2nd, and they're like, nope, you got to wait till it settles before you can do your conversion.

It's not the end of the world.

Just means your money's going to earn a few bucks in interest and you can convert those dollars, too. That's not a big deal. Yes, you know, if it makes $7, you got to pay tax on $7. But you can afford that, I assure you.

All right, so hope that's helpful in sorting out backdoor Roth IRAs this year.

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.