I have rollover IRA & HSA accounts all pre tax from previous employeer, cannot invest in Roth IRA becoz of salary limit. Can I invest in Tradtional IRA w/o any tax issue?

[B-GBPEC]

Based on my understanding, the Traditional IRA contribution limit for 2024 is $7,000. I want to ensure there are no pro-rata rules or other restrictions that could prevent me from contributing or complicate my taxes, especially since I have a Rollover IRA with pre-tax funds from a previous employer and a current 401(k) with both pre-tax and post-tax contributions within the yearly limit. I would appreciate your guidance. Thank you.

[VolvoGirl]

Not sure of your question.  Do you want to convert your rollover accounts to a ROTH IRA?   I’ll page @dmertz he knows more about it.

[B-GBPEC]

Thanks for your reply. No I want to check if I can invest in transitional Ira for year 2024. 

Based on my understanding, the Traditional IRA contribution limit for 2024 is $7,000. I want to ensure there are no pro-rata rules or other restrictions that could prevent me from contributing or complicate my taxes, especially since I have a Rollover IRA with pre-tax funds from a previous employer and a current 401(k) with both pre-tax and post-tax contributions within the yearly limit.

[Opus 17]

Ignore the HSA.  You can spend it for medical expenses even if you are no longer eligible to make contributions.  

A "rollover IRA" (because you terminated employment and rolled over a 401k or 403b into an IRA) is treated for tax purposes like any other IRA.  There is nothing special about it.

So, you now have an IRA with what can only be pre-tax funds, because the funds were originally contributed tax-free to a workplace plan.

Also, note that IRA means "individual retirement arrangement".  You only have one arrangement, no matter how many different accounts at different brokers you might have.   And since all IRAs are combined for tax purposes, you can make contributions to this IRA or to another account at the same or different custodian, it makes no difference.

What does make a very great difference is whether you can take a tax deduction for your contributions.  That depends on your income and other situations, see this page https://www.irs.gov/retirement-plans/ira-deduction-limits

If you can take a tax deduction, then any contributions you make are tax deductible, all your IRA funds are pre-tax, and all future withdrawals are taxable.  If you can't take a tax deduction, then you create an after-tax basis in your IRA.  That leads to complications when converting or withdrawing, as you must follow the pro rata rule.  You will get a form 8606 if you file a tax return with non-deductible contributions, that establishes your after-tax basis, and you need to keep that form to refer to it in any future year when you make additional non-deductible contributions, conversions, or withdrawals.

[B-GBPEC]

Thank you @Opus 17 in my case its post tax non deductable traditional IRA. So based this there should not be any problem with investing into traditional IRA even with rollover IRA account. The only thing is, when I withdraw the money it will calculate the taxes based on Pro rata rule as this will have post tax and pre tax. As long as I file 8606 every year it should not cause any issue. Right?

[Opus 17]

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@B-GBPEC wrote:

Thank you @Opus 17 in my case its post tax non deductable traditional IRA. So based this there should not be any problem with investing into traditional IRA even with rollover IRA account. The only thing is, when I withdraw the money it will calculate the taxes based on Pro rata rule as this will have post tax and pre tax. As long as I file 8606 every year it should not cause any issue. Right?

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Sorry,, that doesn't make sense.

If you had after-tax dollars in a workplace plan from a previous employer, it is required that money be rolled over into a Roth IRA, while any pre-tax funds are placed in a traditional IRA.  (When you rollover a workplace plan into an IRA, the plan must split the pre- and post-tax amounts.  This is unlike the pro-rata rule for an IRA to IRA rollover or conversion.)

So I don't see how a workplace rollover can result in a traditional IRA with an after-tax basis.  

I think we need more facts, and I will also page the best expert on the board to review @dmertz 

[B-GBPEC]

Thank you for your reply. please let me clerify - Rollover IRA is from previous employeer 401k which is all pre tax where investment into traditional IRA is personal account which has only post tax contribution. 

[dmertz · Accepted solution]

B-GBPEC, your understanding is correct.  Since your traditional IRA contribution will be nondeductible, you'll need for file Form 8606 to report the nondeductible contributions.  You'll also need to file Form 8606 whenever you make any subsequent traditional IRA distribution, Roth conversion, or distribution from a Roth IRA if the distribution is nonqualified.  There is nothing particularly complicated about Form 8606 calculating the taxable and nontaxable portions of a distribution.  To fully document your basis in nondeductible traditional IRA contributions you'll want to retain all of the Form 8606 that you ever file (even if you purge other parts of your tax returns after some time).

[B-GBPEC]

Thank you @dmertz @Opus 17 @VolvoGirl  for your guidance!! 

[Opus 17]

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@B-GBPEC wrote:

Thank you for your reply. please let me clerify - Rollover IRA is from previous employeer 401k which is all pre tax where investment into traditional IRA is personal account which has only post tax contribution. 

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OK, yes, that makes perfect sense.  You have a traditional IRA at bank 1 that contains pre-tax funds (originally from work), and another traditional IRA at bank 2 that contains non-deductible funds. 

At this point, there is nothing special about the IRA at bank 1.  The fact that funds originally came from the employer really has no bearing going forward, it's just an IRA.  You could add new contributions to that account or to a new account, there is no tax benefit to keeping pre- and post-tax funds separate.  Although for your own convenience you can certainly keep them separate.

As @dmertz  says, you can contribute up to the $7000 limit of non-deductible funds to any traditional IRA account, you just have to do the bookkeeping on form 8606, including when you withdraw in retirement.  The one thing to remember is that all traditional IRA accounts are combined for tax purposes.  

[fanfare]

Many taxpayers don't want the hassle of maintaining Form 8606 for the rest of their life, or liquidation of all Traditional IRAs.  whichever comes first, or regret it when they find out after the fact.

Generally, Backdoor Roth IRA only works (tax free) when your Traditional IRA starts at-0- and ends at -0-.

OR

retirement benefits of moving IRA funds from Traditional to Roth IRA diligently over time can outweigh the paperwork hassles.

This is your choice.

@B-GBPEC