My wife and I each have used monthly direct deposits to max out our Roth IRAs each of the last few years. In March of this year my wife got a new job with a substantial pay increase that took us from slightly below the beginning of the Roth contribution phase out all the way past the maximum MAGI for any Roth contributions. We immediately stopped our automatic Roth contributions. I knew we'd need to do something about the already-contributed money, but I left that as a problem for the future.
Fast forward to the future and I think I know what we need to do, but I'd like some confirmation that I'm on the right track. I'd like to both withdrawal our respective excess 2021 direct contribution amounts and associated earnings from our Roths, and then also contribute maximum ($6k) each to a traditional IRA and then convert/transfer that to our existing Roth IRAs ("backdoor Roth"). Ideally I'd do this before the end of calendar year 2021 to make tax prep easier.
I have never had a traditional IRA, so I opened one up with the same company I have my Roth. My wife has an old Rollover IRA with about $20k. In preparation for the backdoor Roth move, she has moved all of that pre-tax money from the Rollover IRA to her current employer's 401k, leaving her with $0 in pre-tax IRA money. She also opened up a new traditional IRA with the same company as her Roth, because I couldn't tell if a Rollover IRA would work for the backdoor IRA process.
OK, all that being said, I think my steps are:
1) withdrawal our excess Roth contributions and associated earnings
2) contribute $6k to our traditional IRAs, putting the money in a non-earning holding position
3) immediately (within a few days?) convert everything in our traditional IRAs to our existing Roth IRAs
My understanding is:
1) we'll owe taxes and possibly 10% early withdrawal penalty on the earnings on the excess contributions since we're not 59.5 years old
2) my wife's transfer of the money in her rollover IRA to her 401k (both pre-tax) leaving her with $0 in pre-tax IRA money means she won't owe any taxes on the backdoor IRA conversion.
How long do I need to wait between contributing to the traditional IRA and converting that to Roth?
Am I missing or overlooking anything? Any gotchas?
