IRA Roth IRA Strategies 2 — Questions and Answers
Question 1: What is a 'mega backdoor Roth' strategy?
- Contributing the maximum to a Roth IRA every year for multiple decades
- Making after-tax 401(k) contributions above the normal limit and rolling them to a Roth IRA or converting in-plan (Correct answer)
- Rolling a SEP-IRA to a Roth IRA
- Combining multiple Roth IRAs to maximize returns
Correct answer: Making after-tax 401(k) contributions above the normal limit and rolling them to a Roth IRA or converting in-plan
The mega backdoor Roth allows after-tax 401(k) contributions (beyond normal limits) to be converted to Roth status, potentially adding tens of thousands in Roth savings annually.
Question 2: What is a Roth IRA conversion and what tax event does it trigger?
- Moving money from a Roth IRA to a traditional IRA, tax-free
- Moving pre-tax funds from a traditional IRA or employer plan to a Roth IRA, triggering ordinary income tax on the converted amount (Correct answer)
- A tax-free exchange between two Roth IRAs
- An automatic annual conversion based on income
Correct answer: Moving pre-tax funds from a traditional IRA or employer plan to a Roth IRA, triggering ordinary income tax on the converted amount
A Roth conversion moves pre-tax funds to a Roth IRA, and the converted amount is included in ordinary income in the year of conversion.
Question 3: Can a Roth IRA conversion be reversed (recharacterized back to a traditional IRA)?
- Yes, within 60 days
- Yes, by October 15 of the following year
- No, the Tax Cuts and Jobs Act of 2017 permanently eliminated recharacterizations of conversions (Correct answer)
- Only if the account lost value
Correct answer: No, the Tax Cuts and Jobs Act of 2017 permanently eliminated recharacterizations of conversions
The Tax Cuts and Jobs Act of 2017 eliminated the ability to recharacterize (undo) Roth conversions, making conversions permanent.
Question 4: What is 'Roth IRA seasoning' and why does it matter for Roth conversions?
- The process of diversifying Roth IRA investments over time
- The requirement that each Roth conversion must be held five years before earnings can be withdrawn tax-free and penalty-free (Correct answer)
- The annual contribution review process
- A strategy for increasing Roth contributions each year
Correct answer: The requirement that each Roth conversion must be held five years before earnings can be withdrawn tax-free and penalty-free
Each Roth conversion has its own five-year holding period before the converted earnings can be withdrawn without penalty, though the tax-free treatment of earnings depends on the overall Roth account being aged 5 years.
Question 5: When is a Roth conversion strategy most advantageous?
- When you expect to be in a higher tax bracket in retirement (Correct answer)
- When you are in the highest tax bracket currently
- When you have no traditional IRA balance
- When the stock market is at an all-time high
Correct answer: When you expect to be in a higher tax bracket in retirement
Roth conversions are most beneficial when current tax rates are lower than expected future rates, allowing you to pay tax now at a lower rate and enjoy tax-free growth.
Question 6: What is a 'Roth IRA ladder' strategy?
- Investing in bonds of different maturities inside a Roth IRA
- Doing annual Roth conversions and waiting five years to access each year's converted principal penalty-free before age 59½ (Correct answer)
- Opening multiple Roth IRAs at different institutions
- Gradually increasing Roth contributions each year
Correct answer: Doing annual Roth conversions and waiting five years to access each year's converted principal penalty-free before age 59½
A Roth conversion ladder involves converting pre-tax funds annually, waiting five years for each conversion, then accessing that principal tax-free and penalty-free before age 59½.
IRA Roth IRA Strategies 2
What is a 'mega backdoor Roth' strategy?