When to do a Roth IRA conversion, the pro-rata and aggregation rules, spousal conversions, Roth contributions and more.
- (00:23) Can I Do a Spouse to Spouse Roth Conversion?
- (02:11) Should I Go All Roth Contributions and Should I Start Converting Now?
- (08:28) How Much Can I Contribute to a Roth If My Income is $125K?
- (11:52) When Should I Do Roth Conversions and How Much?
- (16:23) When Is It Prudent to do a Roth Conversion?
- (19:47) Clarifying the Roth Conversion Aggregation Rule
- (24:52) Calculating MAGI for Roth Contributions
Resources mentioned in this episode:
DOWNLOAD THE WHITE PAPER: Roth IRA Basics Guide
LISTEN | YMYW Podcast #251: Should You Convert to Roth IRA All At Once or Over Time?
LISTEN | YMYW Podcast #255: Breaking Down the Confusing Roth 5-Year Clock Rules
LISTEN | YMYW Podcast #249: What’s the Break-Even on a Retirement Roth IRA Conversion?
Today on Your Money, Your Wealth®, wall-to-wall Roth talk: when it makes sense to convert, the Mega Backdoor Roth conversion strategy, the pro-rata and aggregation rules, Roth contributions, and plenty of giggling and nonsense in between and in the Derails. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Can I Do a Spouse to Spouse Roth Conversion?
Joe: John from Washington State. He goes “Hey guys. Enjoy the podcast while I walk my dog.” What kind of dog I wonder he’s got.
Andi: Man, first you want to know where people are and then you want to know what their dog is.
Joe: Well I want to know what the hell they’re doing why they’re listening to this. He’s walking his dog.
Al: What’s the dog’s name?
Joe: Yeah. I mean is it a big dog? Small? Is he going to a dog park? Or is it just like in the morning? Is it- You know, I don’t know. I’d just like to get in the listener’s mind.
Al: Got it.
Joe: They’re getting into our minds. I would like to get into theirs. “Question. Can I convert funds from my rollover IRA to my wife’s Roth IRA? I’ve always converted to my own Roth but never hers. What do you think? Oh, John, you’re a sweetheart. Thinking about the little honey on his with the dog. He’s walking the dog and he’s like ‘you know what? I want to do a conversion for my honey’. Maybe this Valentine’s Day.
Al: I want her to have the money.
Joe: This Valentine’s Day it’s gonna be like ‘this is a gift that’s going to keep giving. Guess what Babe? I converted some money into your Roth.’
Al: That’s right. ‘We’re not going out to dinner, no flowers.’ But she gets a Roth fund.
Joe: – ‘you get a little bit of Roth.’ Sorry to ruin your Valentine’s Day plan, John. No, you can’t.
Al: It’s got to be in your own Roth.
Joe: Yeah it’s got to be in your own Roth. You gotta stay selfish there. Because IRA stands for individual retirement account. There are no joint accounts.
Joe: And you can’t commingle.
Al: Now you can put her as beneficiary.
Al: If you pass away she gets it anyway.
Joe: If she had an IRA, she could convert her IRA into her Roth IRA.
Al: Yeah she could. It has to be the same individual.
Joe: Yes. You can’t convert yours into your wife’s.
Joe: Or she couldn’t convert her big pot of money into his.
Joe: Is that better?
Should I Go All Roth Contributions and Should I Start Converting Now?
Joe: We got Jim from Cincinnati, Ohio. He writes in. “Hello Joe, Big Alan, Andi. Thank you for your podcast. I found you on YouTube and started listening to your podcast driving to work and back.”
Andi: What kind of car?
Joe: What color is it? What’s the gas mileage?
Al: What year is it?
Joe: All right, enough. See, I like- it’s become his morning routine. So Jim thank you. So now I could picture Jim driving in his car in the morning. And you know he’s listening to us right now in Cincinnati driving to work.
Al: But what if it’s a convertible and he’s got the top down? He can hardly hear us.
Joe: Well now he rolls that stuff up when he’s got Your Money, Your Wealth® on.
Al: All the way up so he can hear every word.
Joe: “The content has been very helpful. I’m 47 and contemplating some changes in my retirement. I don’t plan on retiring until 62. My company just started offering a Roth 401(k) option. Up until now nearly all my contributions to retirement have been pre-tax. So I have $288,000 in a rollover IRA pre-tax from a previous 401(k); $253,000 pre-tax in a current 401(k) and $28,000 in a Roth IRA.” Very cool. So what is he got $300,000, $400,000, $500,000, $600,000 roughly. At 47 years of age. That’s awesome Jim. “I’m currently putting as much as I can afford to put into my 401(k). So he’s putting in $33,750. So $19,500 pre-tax and he’s got an after-tax component in the 401(k) plan.
Al: Oh, I like that. What are you going to say about that? I’ll let you get to that.
Joe: “My company matches 6%.” So he’s putting in $33,000, $34,000, company’s putting in another $13,000. “I also do a backdoor Roth of $6000 each year for my wife. Since I have that large IRA, I don’t do the backdoor Roth for me but rather do after taxes on my 401(k) and then convert that to a Roth. I’m in a 24% tax bracket. Now that you got the backstory finally here are my questions.” Hey Jim, real quickly though with this, you have the rollover IRA of $288,000. You could roll that into your current 401(k) plan. And then do a backdoor Roth IRA plus the backdoor Roth from the 401(k).
Al: Yeah I like that idea.
Joe: You could do a mega backdoor with a 401(k) and a baby backdoor with the Roth IRA.
Joe: Question number one Al. He goes. “I’m thinking about going to all Roth and after-tax contributions into my 401(k) going forward and taking the $390 dollar hit each month which I can afford to do. What do you think of that?” I don’t know. I think I like the Roth IRA backdoor mega backdoor Roth first. You’re 47 years. Try that. I mean versus going all Roth. I think you would accomplish the same thing without having to pay the extra tax there.
Al: I thought you’re going to say the opposite because you’re always like, you always like Roth.
Joe: I do. I mean personally, if I was Jim, I would do the Roth. But let’s take baby steps here.
Al: Baby steps. You are in the 24% bracket which is a higher bracket. However, it’s lower likely than your bracket is going to be in 2026 when the tax rates revert back to the higher amounts. And who knows what it will be in the future. So it’s kind of with the Roth conversion you’re sort of gambling a bit as the current tax rate versus future. But Joe, you are right. And for Jim’s purpose, you get a lot of money into the Roth without really paying any tax.
Joe: “Second question is, I donate a lot of money to the church each year so I like the idea having some pre-tax money in retirement using those donations once in retirement. But I’m thinking about starting to convert the pre-tax monies to Roth to the top of the 24% tax bracket in the coming years. Keep in mind my company matches 6% will keep pre-tax money building the 401(k). Is it smart for me to do conversions now? Or save the money as cash to pay the tax on conversions and use that to live on when I retire at 62? Then do the rule conversions from 62 to 70 when I use the cash to live on? Which way would result in the highest net after-tax dollars?” Well, I don’t know. You’ve got to look at the time value of money again Jim. Because the sooner you convert the compounding of that tax-free is pretty powerful. So you just have to look at brackets just like Al said. 24% tax bracket is probably going to be in a low bracket comparatively that you’re 47 years old. You’re going to work for another 15, 16, 17 years. You already have $6??,000. So that’s $600,000 is going to be $1,200,000. $2,???,000-
Al: With all the contributions and growth on that-
Joe: $2,000,000 or $3,000,000?
Al: Over $2,000,000.
Joe: So you want to get as much balance as you possibly can and the sooner that you do it the better off that you’re going to be.
Al: Because all that future growth is tax-free in the Roth.
Joe: You’re not going to feel the tax burden. “One note. I’m somewhat concerned of the majority of younger folks wanting free healthcare and free education. And when you look at other nations that have this, their tax rates are 55% to 65%. And these younger folks getting to vote I really-”
Al: getting to voting age?
Joe: I was getting fired up there.
Al: Yeah you were.
Joe: I was trying to be like Jim in Cincinnati driving on his morning commute. Listening to this and just getting outraged. “- I really think we will see these items pass and our current tax rates will skyrocket. Thank you for answering my question. I think this will be helpful to many of your listeners in my age bracket.” Well, Jim, you’re in my age bracket. You’re a little older than me. Little wiser it sounds like too. But yeah, I believe tax rates could go up. They could blow up and so you just answered your own question.
Al: Yeah. So if that’s what you believe, then go all Roth on everything.
How Much Can I Contribute to a Roth If My Income is $125K?
Joe: We got another one. James from San Diego. James is “currently 69 YO, years old, and retired. For 2018 tax year my combined retirement pay included Social Security of- was $74,000.” I am currently 69 retired. Oh, my combined retirement paid including Social Security was $74,000. “My spouse is 61 years old and currently still working. Her net income for 2018 was $100,000. She intends to partially retire from full-time work at the age of 67 and intends to draw Social Security at that age. IRS Form 1040, Line 10 of 2018 taxable income is $125,000. Am I still allowed to contribute to a Roth IRA? If so what is the maximum amount? I’ve been slowly converting my IRA to Roth each year. I also intended to convert my IRA annuity of $35,000 to Roth and that will mature, August of this year, 2020. Thank you for your reply.” All right couple of things James. Taxable income is the number that you want to look at in regards to how much money you convert because that tells you what taxable- what tax bracket that you’re in. And if you’re filing as- a joint return at $125,000, you’re in the 22% tax bracket. So you have room in the 22% tax bracket to do a conversion. Which he’s going to do with $35,000 of his annuity. So with that being said his taxable income will be, $170,000?
Al: Let’s see, where are we? $125,000 plus $34,000?
Joe: Yeah, $35,000.
Al: We’ll call it $160,000.
Joe: What did I say? $170,000.
Joe: $160,000. Sorry about that. $160,000, you’re still going to be in the 22% tax bracket.
Al: Kind of near the top of that but that’s a great place to be.
Joe: So your modified adjusted gross income is what you need to look at in regards to making Roth IRA contributions. So you have retirement income James, and your wife has earned income. So yes, you can make a Roth IRA contribution based on your wife’s earned income but it’s not based on taxable income. It’s based on MAGI, modified adjusted gross income.
Al: Right. So that’s the $100,000 plus the $74,000 without regard to the Roth conversion.
Joe: And so that would give- the threshold for Roth contribution for 2020 is what-
Al: And then it phases out at $206,000. So the $74,000 that’s your income from Social Security retirement and $100,000 from your wife’s makes $174,000 assuming that’s all the income you have. Then at $174,000 is below $196,000. So you could use- You could both do a $6000 Roth contribution.
Joe: So James do the conversion of the $35,000 of the annuity, get that into the Roth. I would probably blow out of that- maybe it’s a fixed annuity. Who cares? I won’t get on that.
Al: Oh boy, yeah that’s good.
Joe: And then do the conversion, you stay in 22% tax bracket, you can also do full contributions for you and your spouse in the Roths.
Al: And I’m going to say that one more time just for clarity. So the $35,000 Roth conversion does not count as far as modified adjusted gross income for this calculation. Which is why we said you have $174,000 of income and it’s below the $196,000. You don’t have to add the Roth conversion to that.
Joe: Perfect. All right. Thanks so much for the question, James. Hope that helps.
When Should I Do Roth Conversions and How Much?
Joe: OK. We got Wayne from Florida. He writes in. “Hi, I’m retired in Florida at age 69, my wife 65. She’s still working and loving it. I have $400,000 in a tax-deferred IRA and wondering about starting a Roth conversion. No required minimum distributions taken yet; wife’s yearly wage $80,000. Retirement horizon unknown. Investment rental income, no mortgage, of $19,000. He’s got $50,000 in a nice little cash nest egg. Social Security benefits at age 70 will be $40,000. Wife’s Social Security starting at 66 will be $20,000. I don’t see time period yet where Roth conversion would be optimal. Any suggestions?” Okay. Wife is making $80,000 a year. They have an investment property that’s $20,000, so now I’m at $100,000 of income, Al, are you following me here?
Al: I’m with ya.
Joe: OK. So he’s not taking Social Security. She’s not taking Social Security yet. So at $100,000 minus $25,000, call it $75,000 taxable income.
Al: Ok, I’ll go with that.
Joe: $75,000 taxable income. Wayne, you are in the 12% tax bracket for at least another $5000 roughly. Give or take.
Al: Around $80,000 is where it goes to the 22% bracket. Which I guess based upon Social Security and your required minimum distributions I’m not sure how much your wife has in her accounts-
Joe: So he’s 69. He’s going to turn 72. Let’s see $400,000. He’s not going to need it. So- I don’t know that could- let’s just say it doesn’t grow at all.
Al: Yeah. So RMD is $16,000.
Al: Call it $20,000 just to- even number.
Joe: -just to round it up.
Joe: But wife is loving the work. So now she’s still making $80,000. Wayne’s gonna collect his Social Security of $40,000. Now he’s at $120,000. And then you got the RMD of $20,000. And then he’s also got another $20,000 so add to $40,000, so he’s at $160,000 of income. At $160,000 of income minus $25,000, you’re in the 22% tax bracket.
Al: Which will be 25 under that current tax law as it’s scheduled to go back to the old rates in 2026.
Joe: So what do you think Wayne? Hopefully, you did the math and said ‘you know what, maybe a conversion at least to the top of the 12% makes sense.’
Al: Yeah. Which might be only about $5000.
Joe: If you want to go to the top of the 22% that probably makes sense because the RMD is going to be taxed at 22% anyway. That’s going to go to 25. So if the wife is going to continue to work then that’s your strategy. If she’s going to retire then you would hold off because that $80,000 is going to come off- at least you would do this year to the top of the 12%.
Al: At a minimum.
Joe: At a minimum. Next year if she’s still working then you’re like – then you’ve got to- there are some questions. Do you want to convert to the 22% or not? Because I still think over time I mean let’s see $40,000, $50,000, $60,000, $70,000, $80,000. Now you’ll be at $80,000 so yeah. I mean it’s mostly going to be in the 15% tax bracket. So that’s the math you got to do Wayne, Hopefully, that helps out. Plus you don’t pay state tax in Florida which over here in California we pay about 13%. So I’d just convert it all.
Al: Not really.
Joe: It would be cheaper than what we pay. Hopefully, that answers your question. Thanks.
Roth IRAs and contributions and conversions and rules and limits can be really confusing, so in the podcast show notes I’ve linked to some basic helpful resources. Click the link in the description of your podcast app and learn the difference between a traditional IRA and a Roth IRA, the basics of the Roth IRA, and listen to previous YMYW podcast episodes that explain the Roth 5 Year clock rules, the break-even on doing a Roth conversion, and whether to convert all at once or over time. Since the fellas talk Roth conversions all the time, it might be a good idea to sign up for the podcast newsletter right there from the show notes too so new episodes are emailed to you every week. And don’t forget to click Ask Joe and Big Al On Air in the podcast show notes to send in your money questions and to tell us what you think of the show.
Joe: We haven’t got a 1- star complaint in a week. So I appreciate that folks.
Andi: Actually since yesterday, we’ve gotten six 5-stars.
Joe: Six 5-stars.
Andi: Somebody loves us.
Al: Best week ever.
Joe: 6 5-stars. I think I might have to have a Coors Lite to celebrate that.
Al: You know what? I’ll join you. What the heck.
Joe: All right. Last week we had the 1-star. Said that we giggled too much or said we had too much fun talking about finance.
Al: They didn’t like- what was the outtakes? Or what’s it called?
Joe: They never said anything about the Derails. You guys are assuming that.
Andi: He was taking about giggling. You spent that whole time giggling your butts off.
Joe: Have you ever listened to Alan? I say one thing, he giggles. He’s very happy.
Al: Yeah. I try to be- try to be positive. The world needs more positivity and humor.
Joe: Cause you’re on Prozac or something.
Al: It’s the best.
When Is It Prudent to do a Roth Conversion?
Joe: So Tom.
Al: He replied to the Podcast Newsletter.
Joe: So I guess we email these out. So you can get the podcast right in your email.
Al: Oh wow. That’s amazing.
Joe: And so he writes, “What are the circumstances when it’s prudent to do a Roth conversion?”
Andi: That’s it.
Joe: Good question.
Al: That’s kind of open-ended. But I mean basically-
Joe: When isn’t it prudent, Al?
Al: Well it’s not prudent when you’re in a really high tax bracket. Let’s say you’re in a low bracket or same bracket as what you are going to be in retirement. I’d say it’s time to consider. You would actually stretch that a little bit but I would say that’s my basic answer. And when it’s not prudent is like- let’s use an example. Where you leave your job and you got some kind of severance or some kind of retirement payout or vacation payout. And you left your job right at year-end. So you basically have a year and a half or 2 years of pay all in one year; you’re in a higher bracket. Probably don’t want to do Roth conversion that year but you probably do want to do it the next year if you fully retire and your income’s lower. It depends upon your income level now in this current tax year versus other years.
Joe: When is it not to do a Roth conversion or a Roth contribution? Or is it- what is this Roth-
Joe: I mean you just have to do some planning Tom. You take a look at what tax bracket that you’re in now. And then you try to forecast as best you can in the future of what you believe in your own assumptions what tax rates are going to be. No one can predict the future. Al and I have no idea where tax rates are going to go. They are pretty low at this point. So can they go lower? Sure. Can they go a lot higher? Sure. But just giving you the diversification that you need to have a little bit of money and pre-tax vs. Roth versus brokerage accounts I think is prudent. So if you don’t have a Roth you might want to look at it depending of course on your tax bracket. So if you’re in a super high tax bracket now it might not make sense. But I know a lot of people that are in very high tax brackets that put all their money in Roths.
Al: Yeah. There are justifications for doing that. I’m just suggesting if you’re in a high bracket now and lower bracket later, it’s not a good time. I got another thought. Which is sometimes people in high brackets still do a little tiny Roth conversion just to start their 5-year clock. How about that?
Andi: That’s a strategy I had not heard before. So thank you for that.
Al: Just do $100.
Joe: Hey thanks for replying to the podcast newsletter Tom.
Clarifying the Roth Conversion Aggregation Rule
Joe: “This is a question for Andi, Joe and Big Al.” Well, who else would be answering questions?
Andi: He didn’t actually send it through the “Ask Joe and Big Al’. He sent it through the ‘Contact Us’ form. So just in case one of the advisors picked it up and went, ‘why would I be asked this question?’
Joe: Got it.
Al: And see Andi was his first billing. So you read it. And let’s let Andi answer it.
Andi: Ha ha.
Joe: He goes “Yes this is Rob who works in Hollywood. Thanks for all of your great info and all the fun that you guys bring to your shows. Don’t get mad, but I have one more Roth conversion question in regards to the aggregation rule. I have about $220,000 in tax-deferred IRAs. Let’s say that I open a traditional IRA and put it in $2200 to use to convert to a Roth. Just using this number as it’s 1% of the total. The money that I’m putting into the traditional IRA is from my paycheck which has already been taxed. So when I convert this $2200 they will tax me on 99% of the money because of the aggregation rule. So hasn’t this $2200 been double-taxed? Or does my tax-deferred IRA now have 1% as a Roth? It’s like I have to add this $2200 as income twice on my tax returns. But it really isn’t new money that hasn’t already been taxed once. I hope this question makes sense to you.” OK. Let’s break this down a little bit. So he’s trying to do a backdoor Roth IRA conversion. So Rob is killing it in Hollywood with all his direction- director opportunities and the Head and Shoulders commercials are taking off.
Al: That’s right. So he wants to get some money into the Roth- his income is too high to do a Roth contribution.
Joe: So there’s a strategy where you can put money into an IRA. That’s after-tax and then convert. Because it’s already been taxed, the IRS is not going to tax you again.
Al: So they call that a backdoor Roth contribution.
Joe: So as long as you’re any age now, you can make an IRA contribution as long as you have earned income.
Al: You used to have to be below 70 and a half. Now anyone can. So I’m getting close.
Joe: Yes you are. You can still do backdoor.
Al: I’m actually pretty far away.
Joe: So the question- But here’s the catch with that strategy is that there’s pro-rata and aggregation rules. And so what pro-rata and aggregation rules is that let’s say Rob here opens up another IRA and he puts $2200 into that IRA. It’s after-tax dollars. He goes ‘well since I’ve already been taxed on it I got $2200 in the IRA. I’m going to convert it to a Roth, not pay any tax and have the $2200 sitting in the Roth. Makes sense. However the IRS has no, you already have another IRA of $220,000 so your $2200 is only part of that same IRA. Even though let’s say he opened up at another custodian with a totally different account number.
Al: So that’s what’s confusing to folks because I opened up a separate IRA just for this backdoor Roth. IRS says we don’t care. We’re gonna take all your IRAs as if they were one. That’s the aggregation rule.
Joe: And so you’re saying all right well I got $2200 but I have $220,000 so that’s 1% of the total amount I have in IRAs. The IRS looks at that and says if you want to do a conversion you can- by all means.
Al: Do it. We like that.
Joe: But you’re gonna be taxed on the conversion via the pro-rata rule. And the pro-rata is that 1% is non-taxable, 99% is taxable. So if he converts $1, $.99 is going to be taxable, $.01 is going to be tax-free. So he’s saying well this is BS.
Al: It seems like I’m getting double taxed.
Joe: I’m getting double taxed. You got to convert the whole $220,000 to feel the $2200 that’s tax-free.
Al: True. And I’ll say it another way. So $2200- if you do a conversion of $2200. That means $22. So that is tax-free. But you still have $2178. $2178 of tax basis in your IRA. And next time you convert it’ll be another 1% t-x free. So you will eventually get all caught up
Joe: And you just have to convert everything to get caught up.
Al: So that’s why we don’t recommend this strategy. So a workaround is if you are involved in a company that has a 401(k), you roll your IRA into the 401(k). Now you no longer have IRAs and so then you can do this backdoor Roth without this problem.
Joe: The aggregation rules do not apply to 401(k)s, just IRAs.
Al: That seems kind of weird but that’s true. It doesn’t apply to 401(k)s, 403(b)s, TSP plans and the like.
Joe: Hopefully that helps Rob. By all means, keep writing. And if you got questions, hopefully, our answer made sense to you.
Calculating MAGI for Roth Contributions
Joe: We got Ken from New Hampshire. “Hi Joe, Big Al and Andi, the adult in the room.”
Andi: Ha ha.
Joe: Oh, whatever.
Andi: Thank you, Ken.
Joe: Because we giggle all the time.
Al: Because we giggle way too much.
Joe: I know.
Al: Like teenagers.
Andi: Oh people give me-
Joe: We’re just like a bunch of punks.
Andi: People talk about me giggling all the time anyway. They say that I laugh fake at you guys.
Joe: Annoying. It’s a very annoying laugh.
Al: It’s a fake laugh.
Joe: No I wrote that in. Because I’m afraid to face you. “I’ve been listening for almost a year now and caught up on the podcast.” God, I still don’t understand how people can do that to themselves. “I’m going to start working my way backwards.” Trust me they get a lot worse. I would just stop there and just go forward.
Al: That’s no guarantee forward’s any better actually.
Joe: Exactly. “I love the entertainment and information. Something I’ve had a difficult time understanding is how to calculate the MAGI, Modified Adjusted Gross Income, on my joint tax return with my wife. We were very lucky to receive a bit of money from my company being bought out and I’ve had to hit the brakes on making Roth IRA contribution because I believe we exceeded the max joint income limit. We use the standard deduction and I think for 220 we’ll be below the limit if we’re subtracting the standard deduction.”
Andi: That was for 2020.
Joe: Yes for 2020.
Andi: You said 220.
Joe: I said 2020.
Andi: You want me to roll it back?
Al: Fact check.
Joe: Yeah. Year 220. Don’t worry about it. “But without that, we’re definitely above the limit. Estimating we hit close to $220,000 for this year. I don’t want to miss the opportunity to contribute throughout the year if I can. But also don’t want to have to make excess contribution withdrawals next year if it turns out I’m over the limit. Would greatly appreciate your explanation on how I can make a best estimation of this year’s modified adjusted gross income based on last year’s income plus company purchase proceeds. Thank you very much.”
Al: Modified adjusted gross income for purposes of a Roth contribution. So first of all when you’re married, if you make less than $196,000 with this calculation you can do a full Roth contribution. And if you’re over $206,000, you can’t do any. Then there’s a phase-out period. So the way that you calculate this is if you want to start with last year, you start with last year’s adjusted gross income and you would add back tax-free interest if you have any. So that would be added to that. And then you would subtract out if you had done any Roth conversions. So that’s not part of this calculation. So then that’s kind of your starting point. And then you just add any extra income that you have this year and see if you’re below $196,000.
Joe: So if you’re at $220,000 – he’s thinking taxable income vs. adjusted gross income.
Al: Yeah probably.
Joe: So your taxable income is basically your gross income plus any adjustments, added or subtracted. So subtractions would be 401(k) contributions, things like that, HSA contributions, anything that you’re your Section 125 plans, blah blah blah, add back interest dividends. And then so you look at your adjusted gross income but then you take your deductions. So you either itemize your deductions or you take the standard deduction. And then after you itemize or take the standard that’s where you get to taxable income. So your taxable income tells you what tax bracket that you’re in. But it doesn’t tell you if you qualify for a Roth IRA contribution. So you look at taxable income when you decide how much money that you want to convert, taking money from an IRA or 401(k) and converting it to a Roth. But the IRS looks at modified adjusted gross income and the modifications are different for all sorts of things. For Roth contributions the biggest modification is Roth conversions.
Al: And by the way that’s line 6, adjusted gross income, line 6 of your 2018 tax return.
Joe: So Ken, congratulations on getting a little bit of a nest egg. But that’s probably capital gains tax; maybe some of its ordinary income depending on how that deal was structured. So that would count against your modified adjusted gross income. And if you’re over $203,000 or $206,000-
Joe: – $206,000 of a modified adjusted gross income or adjusted gross income you’d no longer qualify for contributions.
Al: You might be able to do a backdoor Roth.
Joe: You might be able to a-
Al: Like we just talked about.
Joe: So if you don’t have any other IRAs you could then do the IRA contribution and then convert it directly into a Roth IRA. So probably that might be your best option. He’s still working so he could put the IRAs that he does have into his 401(k). That would eliminate the aggregation pro-rata rules. So Ken I think that was probably- that might be a better option. If you’re confused on the backdoor Roth, we have a white paper I believe on it. Don’t we? We get so much stuff on our website with Roth IRAs. I guarantee you I probably did something on it. Go to Your Money Your Wealth.com. In the search bar just click on Backdoor Roth. And then if you get a weird picture-
Al: You got the wrong site. You got another one.
Joe: You got the wrong site. That’s it for us, for Andi Last, Big Al Clopine, I’m Joe Anderson. We’ll see you next week, folks. The show is called Your Money, Your Wealth®.
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