IRA Roth IRA Strategies 2

Question 1

What is a 'mega backdoor Roth' strategy?

Accepted Answer

Making after-tax 401(k) contributions above the normal limit and rolling them to a Roth IRA or converting in-plan

Answer

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?

Accepted Answer

Moving pre-tax funds from a traditional IRA or employer plan to a Roth IRA, triggering ordinary income tax on the converted amount

Answer

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)?

Accepted Answer

No, the Tax Cuts and Jobs Act of 2017 permanently eliminated recharacterizations of conversions

Answer

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?

Accepted Answer

The requirement that each Roth conversion must be held five years before earnings can be withdrawn tax-free and penalty-free

Answer

Each Roth conversion has its own five-year holding period before the converted earnings can be withdrawn without penalty, though the tax-free treatment of earnings depends on the overall Roth account being aged 5 years.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?

Accepted Answer

When you expect to be in a higher tax bracket in retirement

Answer

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.

IRA - Individual Retirement Account Practice Test

IRA - Individual Retirement Account Practice Test

IRA Roth IRA Strategies 2