Sell Investment to fund Ronth IRA?

[schildi]

Hi All!
I usually add the max allowed to my Roth IRA at the end of the year, doing the back door Roth approach.
This year, we are unfortunately a little low on cash because of both medical and college expenses, so I won't have the funds available in cash.

The only way I could fund my Roth would be by liquidating some mutual fund investments from my brokerage (after tax) account, paying taxes on the gains now in the process of doing so.

Do you think it makes sense to do that, or should I just skip this year's Roth funding?

[myrrh]

I admit I don't know how backdoor Roths work. But for regular Roths, you have until April 15th of the following year to fund them.

Otherwise, I don't think it's a bad idea to convert some of your taxable to Roth, assuming you'd be selling things that would have long-term gains. Pay a small amount of taxes once and never worry about taxes for that bit of your hoard again. 

[The Walk of the Penguin Mich]

Nov 29, 2023 13:41:54 GMT -5 schildi said:

Hi All!
I usually add the max allowed to my Roth IRA at the end of the year, doing the back door Roth approach.
This year, we are unfortunately a little low on cash because of both medical and college expenses, so I won't have the funds available in cash.

The only way I could fund my Roth would be by liquidating some mutual fund investments from my brokerage (after tax) account, paying taxes on the gains now in the process of doing so.

Do you think it makes sense to do that, or should I just skip this year's Roth funding?

I think it really depends on your age and what your retirement goals are.  It also depends upon where selling off these investments are going to put you for your marginal tax rate.  

We have found that it's pretty important to have different pots of money for different purposes.  

It's not always a 'one size fits all'.  

[minnesotapaintlady]

I wouldn't hit the taxable personally, but I only have a very small taxable account (like 10K), and as long as tax laws stay the same I'll be in the 0% LTCG bracket in retirement and not pay taxes on those gains anyhow so I wouldn't be gaining anything, and it would mess up my current taxes.  I have cashed in my EF and I bonds to fund my Roth IRA though, in fact I've taken a loan to max it out before when rates were really low.  

Your situation may be totally different though.  It's better than converting pre-tax to Roth and people recommend doing that all the time.

[Rukh O'Rorke]

Nov 29, 2023 13:41:54 GMT -5 schildi said:

Hi All!
I usually add the max allowed to my Roth IRA at the end of the year, doing the back door Roth approach.
This year, we are unfortunately a little low on cash because of both medical and college expenses, so I won't have the funds available in cash.

The only way I could fund my Roth would be by liquidating some mutual fund investments from my brokerage (after tax) account, paying taxes on the gains now in the process of doing so.

Do you think it makes sense to do that, or should I just skip this year's Roth funding?

yes, i think so! pay tax now and let it grow tax free forever!

[schildi]

Thanks everybody!
I already hit the "sell" button and will do the back door Roth conversion next week.

[tallguy]

Nov 29, 2023 16:34:48 GMT -5 myrrh said:

I admit I don't know how backdoor Roths work. But for regular Roths, you have until April 15th of the following year to fund them.

Otherwise, I don't think it's a bad idea to convert some of your taxable to Roth, assuming you'd be selling things that would have long-term gains. Pay a small amount of taxes once and never worry about taxes for that bit of your hoard again. 

A back-door Roth is a strategy used by people who are over the income limit to contribute to a Roth account.  What they do is open a traditional IRA and make non-deductible contributions to that account.  They then convert the amount of the contribution to Roth.  Because the money contributed was taxed originally, there is no additional tax on the conversion.  There is no real reason that back-door Roth conversions should be allowed, since they are a clear bypass of the income limits, but to this point they have not been shut down. 

There is another complication for those who have previously made deductible contributions to any IRA.  The pro-rata rule applies to any conversion in that event.  The IRS does not by law allow you to designate which of your contributions can be converted.  If you have, say $93,000 (to make the example simple) in your IRA that came from deductible contributions, and you then make a $7000 non-deductible contribution with the intent of doing a back-door conversion, you will owe tax on the conversion.  Because 93% of your conversion is coming from monies that have never been taxed, you will owe tax on 93% of the converted amount.  You would then have to keep records from that point onward denoting which of the monies in the account came from deductible vs. non-deductible sources.  Seems like a nightmare to me if you don't convert the entire account up front.  Anyway, that is the simple explanation of back-door Roth conversions.  Hope it helps.    

[schildi]

Yeah, I agree with tallguy. Not worth it if you have pre-tax money in an IRA. Doesn't apply to 401k though, having money in a 401k is fine and won't affect the BD Roth.

[tallguy]

Dec 2, 2023 15:23:45 GMT -5 schildi said:

Yeah, I agree with tallguy. Not worth it if you have pre-tax money in an IRA. Doesn't apply to 401k though, having money in a 401k is fine and won't affect the BD Roth.

That does make it really nice if your 401k plan allows incoming transfers from an IRA.  Normally it is not really a good idea, but it can get you around the pro-rata rule if you would otherwise be stymied by it.  Dependent on the plan rules, of course.

[schildi]

Dec 2, 2023 15:40:57 GMT -5 tallguy said:

Dec 2, 2023 15:23:45 GMT -5 schildi said:

Yeah, I agree with tallguy. Not worth it if you have pre-tax money in an IRA. Doesn't apply to 401k though, having money in a 401k is fine and won't affect the BD Roth.

That does make it really nice if your 401k plan allows incoming transfers from an IRA.  Normally it is not really a good idea, but it can get you around the pro-rata rule if you would otherwise be stymied by it.  Dependent on the plan rules, of course.

I wasn't really referring to 401k incoming transfers, never done that. But I agree, that would be a nice thing.
Was just saying that having money in a 401k doesn't affect ones ability to do the BD Roth. Having money in a Trad IRA does, as you have correctly pointed out! 👍🏻

[tallguy]

Dec 2, 2023 19:22:22 GMT -5 schildi said:

Dec 2, 2023 15:40:57 GMT -5 tallguy said:

That does make it really nice if your 401k plan allows incoming transfers from an IRA.  Normally it is not really a good idea, but it can get you around the pro-rata rule if you would otherwise be stymied by it.  Dependent on the plan rules, of course.

I wasn't really referring to 401k incoming transfers, never done that. But I agree, that would be a nice thing.
Was just saying that having money in a 401k doesn't affect ones ability to do the BD Roth. Having money in a Trad Roth does, as you have correctly pointed out! 👍🏻

Right, and I was just pointing out for other readers that there is a possible solution to the pro-rata rule problem for those affected by it.  Didn't necessarily refer to your situation.

[schildi]

Dec 2, 2023 20:03:38 GMT -5 tallguy said:

Dec 2, 2023 19:22:22 GMT -5 schildi said:

I wasn't really referring to 401k incoming transfers, never done that. But I agree, that would be a nice thing.
Was just saying that having money in a 401k doesn't affect ones ability to do the BD Roth. Having money in a Trad Roth does, as you have correctly pointed out! 👍🏻

Right, and I was just pointing out for other readers that there is a possible solution to the pro-rata rule problem for those affected by it.  Didn't necessarily refer to your situation.

Makes sense! 👍🏻
Thanks for clarifying.

Correction to my post: "Trad IRA", not "Trad Roth" lol.