Is Mixing Deductible and Non-Deductible Funds in a tIRA a Headache for Roth Laddering?
One common retirement planning strategy is to use a Roth IRA ladder to gradually move money from a traditional IRA (tIRA) to a Roth IRA. This can provide tax savings in retirement. However, if you have both deductible and non-deductible contributions in your tIRA, it can complicate the process.
The Pro Rata Rule
When you convert funds from a tIRA to a Roth IRA, the IRS uses the pro rata rule to determine how much of the distribution is taxable. This rule applies to both deductible and non-deductible contributions.
The pro rata rule calculates the taxable portion of the distribution based on the percentage of deductible and non-deductible contributions in your tIRA. For example, if you have $100,000 in your tIRA, and $60,000 is deductible and $40,000 is non-deductible, then 60% of any distribution will be taxable.
Roth Laddering with Mixed Funds
If you have both deductible and non-deductible contributions in your tIRA, it can complicate Roth laddering. When you convert funds to a Roth IRA, you will need to pay taxes on the taxable portion of the distribution. This can reduce the amount of money you can move to your Roth IRA.
Additionally, you will need to track the deductible and non-deductible portions of your tIRA balance. This can be complex and time-consuming.
Avoiding the Headache
If you are considering a Roth ladder, it is best to avoid mixing deductible and non-deductible contributions in your tIRA. If you have already mixed funds, you may want to consider reversing the non-deductible contribution if possible. This can simplify the Roth laddering process and reduce the amount of taxes you will owe.
Seek Professional Advice
Roth laddering can be a complex process. If you are considering this strategy, it is important to seek professional advice from a qualified tax professional. They can help you determine if Roth laddering is right for you and can assist you with the process.
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