Wifes Simple IRA and Trad to Roth IRA conversion

[RothExcessPast]

Starting next year I was planning on both my wife and I to contribute $7,000 each to a Traditional IRA and then convert it to a Roth IRA due to income limits of the Roth IRA. After doing some reading it seems this is not an option since she contributes to a 408(p) Simple through work. Is that the case?

If she can't do the conversion, then can I do a backdoor Roth conversion since we file married or would I not have the option?

I understand the Simple and Trad are two separate IRA account types so could we both contribute to a Trad IRA and just not do conversions to Roth IRA?

[dmertz · Accepted solution]

She can do the conversion, but it will be largely taxable with a substantial portion of her basis in nondeductible traditional IRA contributions remaining with her traditional IRAs (including SEP and SIMPLE IRAs; SEP and SIMPLE IRAs are types of traditional IRAs).

Nothing about your wife's retirement accounts affects the taxability of your Roth conversion.

The limits on regular personal contributions to traditional IRAs are separate from the limits on contributions to SEP and SIMPLE IRAs (although salary deferrals to a SIMPLE IRA reduce one's compensation available to support a regular traditional IRA contribution).  Additions to SEP and SIMPLE IRAs just make an individual covered by a workplace retirement plan which can limit the deductibility of a traditional IRA contribution

[RothExcessPast]

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@dmertz wrote:

She can do the conversion, but it will be largely taxable with a substantial portion of her basis in nondeductible traditional IRA contributions remaining with her traditional IRAs (including SEP and SIMPLE IRAs; SEP and SIMPLE IRAs are types of traditional IRAs).

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At the moment she only contributes a small amount to her 408p, approximately $6,000 for the year. Neither of us would be able to to do a deductible contribution since she has the 408p and I contribute to a pre-tax 457b so it would all be after tax money contributed to the Trad IRA.

From what I gather of your reply would $6,000, of the available $7,000, be taxed on her conversion amount? So essentially $6,000 taxed twice, once from paycheck and again from conversion. Am I reading and thinking correctly?

[dmertz]

There is no double taxation.  Basis in nondeductible traditional IRA contributions that remains with your wife's traditional IRAs after any particular distribution (such as a Roth conversion) will eventually be applied proportionately to future traditional IRA distributions.  Some basis always remains to be applied to future distributions until the individual's balance in traditional IRAs becomes zero at the end of some year.

[RothExcessPast]

Ok, got it. Basically the left over earnings on the interest is taxed, usually paid out at the end of the month. I know that you earn a few dollars in the few days money sits in a money market account to settle in the Trad IRA before the conversion and you have to pay tax on that small amount when you convert it.